    [Senate Hearing 114-443]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-443

                        ACCOUNTING FOR THE TRUE COST OF
          REGULATION: EXPLORING THE POSSIBILITY OF A REGULATORY BUDGET

    =======================================================================

                                 JOINT HEARING

                                   before the

                            COMMITTEE ON THE BUDGET

                                    and the

                                  COMMITTEE ON
                   HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JUNE 23, 2015

                                   __________

            Available via the World Wide Web: http://www.fdsys.gov/

                           Printed for the use of the
            Committee on Homeland Security and Governmental Affairs

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            COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                        RON JOHNSON, Wisconsin Chairman
    JOHN McCAIN, Arizona                 THOMAS R. CARPER, Delaware
    ROB PORTMAN, Ohio                    CLAIRE McCASKILL, Missouri
    RAND PAUL, Kentucky                  JON TESTER, Montana
    JAMES LANKFORD, Oklahoma             TAMMY BALDWIN, Wisconsin
    MICHAEL B. ENZI, Wyoming             HEIDI HEITKAMP, North Dakota
    KELLY AYOTTE, New Hampshire          CORY A. BOOKER, New Jersey
    JONI ERNST, Iowa                     GARY C. PETERS, Michigan
    BEN SASSE, Nebraska

                        Keith B. Ashdown, Staff Director
                           Courtney J. Allen, Counsel
                       Satya P. Thallam, Chief Economist
                  Gabrielle A. Batkin. Minority Staff Director
               John P. Kilvington, Minority Deputy Staff Director
                 Katherine C. Sybenga, Minority Senior Counsel
                    Brian F. Papp, Minority Legislative Aide
                         Laura W. Kilbride, Chief Clerk
                       Lauren M. Corcoran, Hearing Clerk
                                     ------

                            COMMITTEE ON THE BUDGET

                       MICHAEL B. ENZI, Wyoming Chairman
    CHARLES E. GRASSLEY, Iowa            BERNARD SANDERS, Vermont
    JEFF SESSIONS, Alabama               PATTY MURRAY, Washington
    MIKE CRAPO, Idaho                    RON WYDEN, Oregon
    LINDSEY O. GRAHAM, South Carolina    DEBBIE STABENOW, Michigan
    ROB PORTMAN, Ohio                    SHELDON WHITEHOUSE, Rhode Island
    PATRICK TOOMEY, Pennsylvania         MARK R. WARNER, Virginia
    RON JOHNSON, Wisconsin               JEFF MERKLEY, Oregon
    KELLY AYOTTE, New Hampshire          TAMMY BALDWIN, Wisconsin
    ROGER F. WICKER, Mississippi         TIM KAINE, Virginia
    BOB CORKER, Tennessee                ANGUS S. KING., Jr., Maine
    DAVID A. PERDUE, Georgia

                     Eric Ueland, Republican Staff Director
         Susan Eckerly, Director of Regulatory Review Budget Committee
                    Warren Gunnels, Minority Staff Director

                                C O N T E N T S

                                     ------
    Opening statements:
                                                                       Page
        Senator Johnson..............................................     1
        Senator Enzi.................................................     3
        Senator Carper...............................................     5
        Senator Stabenow.............................................    17
        Senator Portman..............................................    22
        Senator Perdue...............................................    26
        Senator Ayotte...............................................    29
    Prepared statements:
        Senator Johnson..............................................    35
        Senator Carper...............................................    36
        Senator Enzi.................................................    38
        Senator Whitehouse...........................................    44

                                   WITNESSES
                             Tuesday, June 23, 2015

    Hon. Tony Clement, President of the Treasury Board, Government of
      Canada.........................................................     7
    Hon. Susan E. Dudley, Director, Regulatory Studies Center, and
      Distinguished Professor of Practice, George Washington
      University.....................................................     9
    Richard J. Pierce, Jr., Lyle T. Alverson Professor of Law, George
      Washington School of Law.......................................    11

                         Alphabetical List of Witnesses

    Clement, Hon. Tony:
        Testimony....................................................     7
        Prepared statement...........................................    46
    Dudley, Hon. Susan E.:
        Testimony....................................................     9
        Prepared statement...........................................    53
    Pierce, Richard J., Jr.:
        Testimony....................................................    11
        Prepared statement...........................................    65

                                    APPENDIX

    Response to post-hearing questions submitted for the Record
        Mr. Clement..................................................    69
        Ms. Dudley...................................................    75
        Mr. Pierce...................................................    85

                        ACCOUNTING FOR THE TRUE COST OF
          REGULATION: EXPLORING THE POSSIBILITY OF A REGULATORY BUDGET

                                  ----------

                             TUESDAY, JUNE 23, 2015

                                         U.S. Senate,
                               Committee on Homeland Security
                                      and Governmental Affairs,
                                                        Washington, DC.
        The Committees met, pursuant to notice, at 10:06 a.m., in
    room SD-G50, Dirksen Senate Office Building, Hon. Ron Johnson,
    Chairman of the Committee, presiding.
        Present: Senators Johnson, Enzi, Grassley, Portman, Ayotte,
    Lankford, Perdue, Ernst, Carper, Stabenow, Whitehouse, Warner,
    King, Heitkamp, and Peters.

                 OPENING STATEMENT OF CHAIRMAN JOHNSON

        Chairman Johnson. Good morning. This hearing will come to
    order.
        I want to welcome the witnesses. Thank you for your written
    testimony. I am looking forward to this hearing on really how
    do we come to grips with our regulatory burden in terms of some
    kind of regulatory budget, some kind of process for
    subtraction.
        Certainly one thing I have learned in my 4\1/2\ years here
    in Washington, D.C., is everything seems to be additive. And,
    of course, we have over the decades added layer upon layer upon
    layer--I could keep going--of law and rules and regulations,
    which are becoming quite burdensome.
        One of the things I am always trying to attempt to do is
    really grab America by the lapels so they understand the extent
    of this problem. And the problem with the regulations, unless
    you are on the front lines, unless you are a compliance officer
    in a business, unless you are an innovator, distracted from
    innovating and creating and building a business and creating
    jobs, distracted by the fact that you have to comply with layer
    upon layer of Federal and State regulations, you really do not
    understand really how corrosive and harmful all of this
    regulatory overreach has become in terms of growing the
    economy, allowing businesses that create products and services
    that we all actually do value, and as a result growing a
    business to create the kind of good jobs that we all are
    seeking for the American public.
        A couple ways I try and quantify it is we have had a number
    of studies that try and calculate what the cost of the
    regulatory burden is. We have had some estimates as high as $2
    trillion. Well, again, we are immune to these enormous numbers,
    so let me put that in perspective for folks.
        Only nine economies in the world are larger than $2
    trillion. Whether you completely buy into that figure, it gives
    you some measure of the depth, the size of the problem, the
    onerous nature of the regulatory burden.
        Another way of looking at this is, if you remember, in 2009
    during the debate over the health care law, I know that a lot
    of people are really concerned about the fact that we are
    spending one-sixth of our economy on health care--again, trying
    to heal ourselves, get well, cure diseases. That one-sixth of
    our economy is about $2.5 trillion. So, there is a lot of time
    and effort put into trying to contain and control $2.5 trillion
    worth of expenditure on health care. Where is the outrage,
    where is the sense of urgency to try and control a $2 trillion
    regulatory burden?
        Another way of kind of putting this in perspective is
    understanding how we create all these regulations. We do not
    seem to pass laws anymore in this Congress. What we do is we
    pass frameworks. Two examples: Both Dodd-Frank and Obamacare
    were somewhere between 350,000 and 380,000 words when they were
    enacted. This is about a year ago when I had my staff check
    into this. About a year ago, Dodd-Frank was already up to 15
    million words, about 43 times the size of the original
    legislation. Obamacare was over 12 million words, about 32
    times the size.
        So, again, I am just trying to put into context the extent
    of this regulatory burden because, again, unless you are one of
    those business owners or a compliance officer having to deal
    with complying with regulations, being distracted from your
    primary goal of growing a business, growing your organization,
    providing products and services we all want, we really do not
    understand collectively what this burden really is.
        So the purpose of this hearing is to lay out that reality
    and then start trying to grapple with some ways we can come up
    with a subtractive process as opposed to strictly additive. And
    we have a representative here from the Canadian Government that
    I think has come up with something that is certainly started, I
    think began in the United Kingdom (U.K.), a one-in/one-out
    rule. I mentioned that I would be all in favor of a one-in/ten-
    out rule, but I will be happy with incremental success. So we
    are looking forward to that kind of testimony.
        I do ask consent that my written statement be entered in
    the record.\1\
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Senator Johnson appears in the
    Appendix on page 35.
    ---------------------------------------------------------------------------
        With that, I will turn it over to our other Chairman,
    Senator Mike Enzi. This is a somewhat unusual hearing. We are
    combining our Senate Committee on Homeland Security and
    Governmental Affairs (HSGAC) together with the Budget
    Committee. Because these are sort of dual jurisdiction, we
    thought this was a pretty interesting hearing for all of our
    Members. Senator Enzi

                   OPENING STATEMENT OF CHAIRMAN ENZI

        Chairman Enzi. Thank you, Chairman Johnson, for hosting
    this hearing today, and, yes, I am told that it is historic.
    This is the first time that two committees have met together to
    do a topic on the same hearing at the same time in 20 years. So
    this saves us having to bring them in twice and do the same
    thing.
        Chairman Johnson. High efficiency.
        Chairman Enzi. Yes, which is what we are trying to get,
    more efficiency.
        Welcome to Minister Clement. Mr. Clement, we appreciate you
    taking the time out of your busy schedule to visit with us and
    share your success in addressing the regulatory burden in the
    economy of Canada, and I was impressed that you serve on the
    Treasury Board of Canada.
        Ms. Dudley and Mr. Pierce, welcome. We have kind of a
    common connection. You teach at the George Washington
    University (GWU). I went to the George Washington University.
        Last month, for the first time since 2001, Congress agreed
    to a joint 10-year Federal budget that put our Nation on a path
    to a balanced budget. According to the Congressional Budget
    Office (CBO), a balanced budget will boost the Nation's
    economic growth and will provide for more than 1 million
    additional new jobs over the next 10 years.
        The Budget Committee is now working to enforce the spending
    targets laid out in the budget to make sure we stay on that
    path. But we have no such accounting and enforcement system
    when it comes to the regulation side of the ledger. The absence
    of such a system for regulations is an increasingly odd
    deficiency. Why not also address an area of government that
    would have the biggest positive impact on the lives of
    hardworking Americans by making government less intrusive?
        We heard from Senator Johnson a little bit on what the
    costs are. I am going to cover those again and in addition,
    because I wondered what it costs to have America's growing
    regulatory burden. The burden of government continues to grow
    for each and every American. One study estimated that the
    regulatory burden in the United States cost more than $1,800
    billion in 2014 alone. Now, that is $1.8 trillion, but I prefer
    to call it ``$1,800 billion'' because that sounds like a bigger
    number than one of anything. And that was bigger than the
    entire gross domestic product (GDP) of India. This burden is
    dragging down our economy when we should be working to boost
    economic growth and help create more jobs.
        These regulations are particularly hurting small
    businesses, which traditionally are America's economic engine.
    Over the years, we have tried various reform mechanisms to
    control red tape. Dating back to the 1980s, the Executive
    Branch has tried to control the flow of government agency
    regulations through Executive Orders (EO) mandating regulatory
    impact assessments on major rules. Agencies are tasked with
    measuring the paperwork burden of legislation, and laws have
    been passed to assess the small business impact of legislation.
        I strongly support these efforts, but if you ask the
    average small business owner in Wyoming if red tape has been
    reduced, he or she would absolutely shake their head and say
    no.
        We have a lot of work to do because the regulations and the
    burden they place on each and every American keep growing. What
    can we do to help ease the regulatory burdens? Minister
    Clement, I am especially looking forward to hearing more about
    your successful Red Tape Reduction Plan in Canada. We have a
    regulatory accounting system in place here as part of the
    Office of Management and Budget (OMB) which is supposed to
    regularly report on the cost of major regulations. However,
    that report does not encompass the whole government, and it is
    not built into any type of regulatory measure reduction system.
    It is almost like watching a fire slowly burn down a house
    without calling the fire department.
        In particular, I am interested in how the one-for-one rule
    requires regulators to monetize and offset any increases in
    administrative burden that result from regulatory changes with
    equal reductions from existing regulations. I am excited about
    today's hearing in part because we are going to hear a fresh
    perspective from those who have waged successful campaigns
    against red tape. Under Mr. Clement's leadership, when it comes
    to lowering regulatory burdens, Canada has experienced annual
    estimated compliance savings of 290,000 hours. That is equal to
    more than 33 years. That is the time that individuals can use
    to grow their businesses or improve their work.
        This Congress has a number of measures pending that would
    address regulations. However, we need to explore better ways to
    actually measure their costs in order to find more effective
    controls and procedures for eliminating unneeded and redundant
    regulations.
        Can we make government more effective? We know that one of
    the best ways to balance our budget is to make our government
    more efficient and accountable. Scrutinizing the rules and
    regulations that are hurting hardworking Americans helps us do
    both. If we can do this, we start to see what is not working
    and eliminate those regulations while streamlining what is left
    to help make government more effective. If government
    regulations are not delivering results, they should be
    improved. And if they are not needed, they ought to be
    eliminated.
        It is time to prioritize and demand results to ensure that
    government works for the people instead of the people working
    for the government. Congress has a responsibility to help make
    it easier for hardworking Americans to grow their businesses or
    advance in their jobs instead of worrying about inefficient and
    ineffective regulations.
        True regulatory reform can help serve as a foundation for
    helping all Americans grow and prosper. There are many
    different options. That is why I look forward to this
    conversation, beginning with our work here today.
        Thank you, Mr. Chairman.
        Chairman Johnson. Thank you, Chairman Enzi.
        Senator Carper.

                  OPENING STATEMENT OF SENATOR CARPER

        Senator Carper. Thank you, Mr. Chairman. Both Mr. Chairmen,
    thank you both. And to our colleagues from the Budget
    Committee, great to be with all of you.
        Our friends from Canada, bienvenue. We are happy to see
    you. Thanks for joining us.
        And, Susan, wonderful to see you again. I have great
    memories of when you were part of the Bush Administration and
    wore the Office of Information and Regulatory Affairs (OIRA)
    hat, and it is great to see you again. Thank you for all your
    service to our country.
        And, Mr. Pierce, I am excited about your testimony and am
    looking forward to hearing about your points about it is
    important for us not to ignore the benefits that may flow from
    regulations as we look at the costs.
        But we are happy you are all here, and my colleagues have
    heard me say this more than they would want to admit, but I
    often say people who have our jobs, we do not create jobs.
    Mayors do not create jobs. Governors do not create jobs.
    Presidents do not create jobs. What we do is try to create a
    nurturing environment for job creation. And that consists of a
    lot of different things: access to capital; a world-class
    workforce; rule of law and public safety; robust, vibrant
    transportation systems; a predictable Tax Code; a bearable tax
    burden; and also common-sense regulations.
        Two days after Father's Day, I am channeling my Dad, now
    deceased, but he used to say to my sister and me when we were
    growing up--and you can probably remember stuff that your
    parents said to you when you were growing up. My Dad would say
    to my sister--and when we would do some bone-headed stunt. He
    was always saying, ``Just use some common sense.'' He said it a
    lot. He did not say it that nicely. And one of the things I
    took away from that was to use some common sense.
        I think part of the nurturing environment for job creation
    and job preservation is, frankly, if we are going to have
    regulations--and we need them--make sure we are using some
    common sense.
        Regulations can help consumers feel confident that the
    products they buy and use every day are safe. Thoughtful
    regulations provide businesses with the predictability that
    they need. They play a major role in our daily lives, and
    usually--not always, but usually in positive ways. Every time
    we go to the bank, every time we drive a car or take a breath
    of clean air or a drink of clean water, we are enjoying the
    benefits of regulations.
        Of course, the regulatory process can be cumbersome at
    times. We all know that by personal experience. Not
    infrequently, regulations do impose some additional costs and
    requirements on businesses and on others who must comply with
    them. But I disagree with those who think that we have to
    choose between regulation and having a robust, growing economy.
    I think we can have both, and the record would show even now,
    as we make changes in some of our regulations, we have been
    able to grow the economy finally pretty smartly.
        For example, common-sense, cost-effective regulations to
    address our Nation's environmental and our energy challenges
    help to reduce harmful pollutants and lower energy costs. They
    also help the economy by putting Americans to work in advanced
    manufacturing jobs to create new products.
        I like to say that many of the laws that we pass in
    Congress are kind of like a skeleton. The regulatory process
    sort of puts the meat on the bones in order to have a fully
    prepared body. But Congress cannot always include in
    legislation the minute details, so we must ensure that the
    regulatory process results in regulations that achieve the
    objectives laid out in the laws that we pass here. To that end,
    it is important that we conduct oversight of the regulatory
    process to try to reduce burdens and encourage transparency.
        As we work to reduce the burdens, however, let us not
    forget about the benefits that flow--and Mr. Pierce will make
    this point later on--the benefits that flow from most
    regulations. I worry that is the fatal flaw in many discussions
    of a ``regulatory budget'' or ``regulatory PAYGO'' that is the
    subject of today's hearing. Such a system does not account for
    the benefits that regulations can and oftentimes do provide.
        Excluding the benefits from the equation may lead to the
    repeal of a rule and a reduction in the burden it places on
    businesses. But doing so potentially ignores the much greater
    benefits, economic and otherwise, that rule could bring to
    society as a whole. And that would be a mistake.
        So I want to be honest with everybody, I have some concerns
    with the idea that an agency's ability to implement a new rule
    could depend on it repealing an older one first in order to
    meet its ``regulatory budget,'' when, in fact, the older
    regulation actually might still be necessary. Or maybe even
    worse, an agency may delay implementing a much needed rule
    because an offset cannot be found.
        For example, the Environmental Protection Agency (EPA)
    could be forced to choose between issuing the proposed Clean
    Power Plan rule to regulate carbon pollution or keeping the
    Mercury and Air Toxics rule to regulate mercury emissions. It
    does not make sense, at least not to me, to make the EPA choose
    which air pollutants to regulate to protect public health just
    to fit the restrictions of a regulatory budget.
        That said, though, I am a strong supporter of efforts to
    identify existing regulations that should be modified or
    repealed. I have been encouraged by the administration's work
    in this arena and by the personal commitment the President has
    shown to these efforts to conduct retrospective reviews.
        Let me close by saying this: Cass Sunstein--and, Ms.
    Dudley, I am not sure if Cass actually succeeded you or not in
    your post, but I think he did. Cass was asked by this
    President, the current President, to do a top-to-bottom review
    of all of our regulations, find out which ones still make
    sense, which ones should be changed, and which ones we ought to
    get rid of. And I think that kind of top-to-bottom review, not
    just at the beginning of an administration but throughout an
    administration, actually makes a whole lot of sense, too.
        Thanks, Mr. Chairman.
        Chairman Johnson. Thank you, Senator Carper.
        It is the tradition of this Committee to swear in
    witnesses, so if you will all stand and raise your right hand.
    Do you swear the testimony you will give before this Committee
    will be the truth, the whole truth, and nothing but the truth,
    so help you, God?
        Mr. Clement. I do.
        Ms. Dudley. I do.
        Mr. Pierce. I do.
        Chairman Johnson. Please be seated.
        Our first witness is the Honorable Tony Clement. Minister
    Clement is the president of the Treasury Board of Canada. Since
    2006, he has served as the Member of Parliament for the Ontario
    Riding of Parry Sound-Muskoka. In the House of Commons,
    Minister Clement has served on the front benches as both
    Minister of Health and Minister of Industry. In this capacity,
    Minister Clement heads the development and implementation of a
    cross-government review looking at transformational ways to
    support and deliver services to taxpayers in the most efficient
    and effective means possible. During his private sector career,
    Mr. Clement was a lawyer, business board member, and a small
    business owner and entrepreneur. Minister Clement.

     TESTIMONY OF THE HONORABLE TONY CLEMENT,\1\ PRESIDENT OF THE
                  TREASURY BOARD, GOVERNMENT OF CANADA

        Mr. Clement. Well, thank you very much, Chairman Johnson,
    Chairman Enzi, Ranking Members, and distinguished Members of
    this set of committees. Thank you so much for inviting me here
    today to be in Washington, D.C. It is such an honor to address
    a common issue of concern for both our countries--namely, the
    reduction of excessive Federal regulatory burden on our
    countries.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Clement appears in the Appendix
    on page 46.
    ---------------------------------------------------------------------------
        As you mentioned, Senator, my primary job was to do
    spending reviews, never the most popular man on the Hill when
    you are reducing budgets, but we were able to balance the
    Canadian Federal budget this year and actually have a small
    surplus, and that was a primary function of the Treasury. But I
    also had this other important function, which was to review our
    regulatory burden, particularly as it pertained to small
    business. And it is in that capacity that I worked through our
    Red Tape Reduction Action Plan, which culminated in a bill
    which passed Parliament just this past April, which dealt
    primarily with this one-for-one policy, making it not only just
    a policy of government but actually the law of the land. And
    that is making it one of the first pieces of legislation on
    one-for-one, as we call it, in the world of its kind.
        I wanted to quote the executive vice president of the
    Canadian Federation of Independent Business, Laura Jones, who
    said, and I quote: ``The effort to control red tape got a big
    boost . . . when C-21''--that was the one-for-one law--``became
    law. The stick-to-itiveness from the Prime Minister, Minister
    Clement and colleagues with respect to implementing the Red
    Tape Action Plan on behalf of small business deserves applause
    from all Canadians as it is critical to our economic well-being
    going forward.'' So that is how small business saw this.
        The one-for-one law has two key parts:
        First, it requires that regulatory changes which increase
    administrative burden costs be offset with equal reductions in
    administrative burden.
        Second, ministers of the Federal Government departments are
    required to remove at least one regulation each time they
    introduce a new one that imposes administrative burden costs on
    business.
        We, as I said, introduced this as a policy of government 3
    years ago. Over the first 2 years of the policy, we saw hard
    evidence that the rule was reducing the administrative burden
    on business.
        As of May 20 of this year, in fact, the rule has saved
    businesses about $32 million in administrative burden, and
    actually the hourly count now, Senator, is almost 750,000
    person-hours annually or nearly 85 years, reduced in time spent
    by businesses dealing with regulatory red tape. So those are
    encouraging results, and that is why we decided to enshrine the
    reduction of red tape in law.
        I also want to mention that this was also part of a
    cultural shift that we wanted to take place within our Federal
    regulatory system. We wanted to make sure that it was part of
    the culture of the place in Parliament, in our government, to
    look at how any regulation was impacting on society more
    generally, but particularly on small business. And that is what
    you do when you create a basic inventory of baseline regulatory
    requirements and Federal regulations, and then start to
    monetize the administrative burden on business.
        So we do have an administrative burden count, and that
    contributes to accountability and openness in the Federal
    regulatory system. And then we use what is called the
    ``standard cost model,'' where we calculate the administrative
    burden of these regulations under the one-for-one law. The
    standard cost model formula--and it is a formula--involves
    multiplying the wages times the hours times the number of
    businesses that are impacted by a proposed regulation to give
    an estimated cost of the burden of an administrative
    requirement on business. And that is an internationally
    accepted way to estimate the administrative burden costs to
    businesses resulting from information and reporting obligations
    including in the regulation.
        Further, to the counting and costing of Federal
    regulations, the Government of Canada committed to publicly
    report this information every year as part of efforts to
    maintain transparency in monitoring and reporting. And so by
    the end of 2014, the government had a calculated total of
    129,860 Federal requirements and regulations and related forms
    that could impact Canadian businesses across different sectors
    and industries.
        So let me just in the time I have available talk about how
    the rule works in practice. I will give you one example: Health
    Canada, which has reduced red tape burden by amending
    regulations to allow regulated pharmacy technicians to oversee
    the transfer of prescriptions from one pharmacy to another, a
    task that was previously restricted by regulation to the actual
    pharmacist. This enables pharmacists to spend more time
    providing advice to and serving customers while running their
    businesses. And just reducing that burden alone saved
    pharmacists $15 million a year.
        So this underscores the importance of reducing red tape for
    the small businesses, and, of course, those are the backbones
    of both of our economies.
        Just a little bit on process. We carried out extensive
    consultations starting in January 2011. Prime Minister Harper
    launched the Red Tape Reduction Commission. We held roundtables
    with businesses and business groups in 13 cities across Canada.
    We had 2,300 submissions. And that is where we came up with
    these ideas, including the one-for-one rule.
        I do not have to tell you that business owners felt
    regulators do not understand what entrepreneurs had to do to
    succeed and were actually making it harder for them to do so.
    And so we set out to reduce the burden on them.
        I think there is a lot of lessons for other countries,
    including the United States of America, and we certainly look
    forward to working with you on the Regulatory Cooperation
    Council, which is certainly a bi-national body where we can, in
    fact, impact change there as well.
        Thank you very much.
        Chairman Johnson. Thank you, Minister Clement.
        Our next witness is the Honorable Susan Dudley. Ms. Dudley
    is the Director of the George Washington University Regulatory
    Studies Center, which she established in 2009. From April 2007
    through January 2009, Professor Dudley served as the
    Presidentially appointed Administrator of the Office of
    Information and Regulatory Affairs, in the U.S. Office of
    Management and Budget. Prior to being the Administrator for
    OIRA, she directed the Regulatory Studies Program at the
    Mercatus Center at George Mason University and taught courses
    on regulation at the George Mason University School of Law.
    Professor Dudley.

       TESTIMONY OF THE HONORABLE SUSAN E. DUDLEY,\1\ DIRECTOR,
       REGULATORY STUDIES CENTER, AND DISTINGUISHED PROFESSOR OF
               PRACTICE, THE GEORGE WASHINGTON UNIVERSITY

        Ms. Dudley. Thank you very much, Chairman Johnson, Chairman
    Enzi, and distinguished Members of the Committee. I am very
    happy to be joining you today, and I appreciate the Committee's
    interest in exploring the possibility of a regulatory budget.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. Dudley appears in the Appendix on
    page 53.
    ---------------------------------------------------------------------------
        Like the spending programs embodied in the fiscal budget
    and supported by taxes, regulations provide benefits to
    Americans. But the costs associated with regulatory programs
    are not as transparent nor are they subject to the same checks
    and balances. As a result, it is often more politically
    desirable to accomplish policy objectives through regulatory
    tools rather than more direct spending tools. Not only are
    regulatory costs less visible, but they are often assumed to be
    borne by businesses even though individual consumers and
    workers ultimately shoulder them.
        In the United States, the development of individual
    regulations is constrained in three ways: by their enabling
    legislation, the notice and comment procedures of the
    Administrative Procedure Act (APA), and by executive
    requirements for benefit-cost analysis. Despite this, the scope
    and reach of regulations continue to grow, and with it concerns
    that we may be reaching a point of diminishing returns. The
    application of fiscal budgeting concepts to regulation holds
    the potential to bring more accountability and transparency to
    the regulatory process.
        The idea is not new. In 1980, President Carter's Economic
    Report of the President discussed proposals to--and I am
    quoting now--``develop a `regulatory budget,' similar to the
    expenditure budget, as a framework for looking at the total
    financial burden imposed by regulations, for setting some
    limits to this burden, and for making tradeoffs within those
    limits.'' So my written testimony summarizes some advantages of
    a regulatory budget and also some challenges, and I will just
    summarize those briefly.
        An advantage of a regulatory budget would be increased
    transparency regarding the private sector resources needed to
    achieve regulatory objectives. I think this is something that
    Mr. Clement mentioned in Canada, and it helps inform regulatory
    priorities and tradeoffs. This transparency would also
    strengthen political accountability and discipline. Expected
    benefits would be considered up front (when issuing new
    legislation or new regulations), at which point elected
    officials would consider how much achieving particular goals
    are worth.
        Resources would likely be better allocated because
    policymakers would have incentives to find the most cost-
    effective ways of achieving goals.
        A regulatory budget could impose internal discipline on
    regulatory agencies, perhaps lessening the need for case-by-
    case oversight. By allowing agencies to set priorities and make
    tradeoffs among regulatory programs, subject to a defined
    constraint, it might remove some of the contentiousness
    surrounding benefit-cost analysis and Presidential oversight.
        And, finally, a regulatory budget constraint would also
    encourage evaluation of existing rules' costs and effects, and
    both of you Chairmen mentioned that in your opening remarks.
    Despite broad support, initiatives to require ex post
    evaluation of regulations have met with limited success largely
    because they did not change the underlying incentives. If the
    issuance of new regulations were contingent on finding a
    regulatory offset, agencies would have incentives to evaluate
    how well existing programs are working.
        Now, despite these potential advantages, a regulatory
    budget would be challenging analytically. The task of gathering
    and analyzing information on the costs of all existing
    regulations in order to establish a baseline budget would be
    enormous and the resulting numbers probably not very reliable.
    Even defining what should be considered ``costs'' would be
    challenging. Estimating the opportunity costs of regulation is
    not as straightforward as estimating the fiscal budget outlays,
    where past outlays are known and we can predict future outlays
    with some accuracy.
        So an incremental approach, such as a ``regulatory PAYGO''
    or a one-for-one approach, would avoid some of these
    difficulties while retaining many of the benefits of a
    regulatory budget. Under such an approach, agencies would have
    to eliminate an outdated or duplicative regulation before
    issuing a new regulation of the same approximate impact. Unlike
    a regulatory budget, agencies would only have to estimate costs
    for regulations being introduced--which they should do anyway--
    and for offsetting regulations they would like to remove.
    Nevertheless, deciding what costs should be included in
    estimating budgets or offsets will necessarily be a matter of
    judgment.
        These problems are not insurmountable, as we can see from
    the experience in Canada and the United Kingdom and other
    countries that have addressed these issues and initiated
    successful reforms using regulatory offsets.
        While it will never be possible to estimate the real social
    costs of regulations with any precision, these approaches
    should provide incentives to improve our understanding of
    regulatory impacts--as Mr. Clement said, change the culture.
        A regulatory budget or a more modest regulatory PAYGO has
    the potential to impose discipline on regulatory agencies,
    generate a constructive debate on the real impacts of
    regulation, and ultimately lead to a more cost-effective
    achievement of policy priorities.
        So I will close with a quote from President Carter's 1980
    Economic Report: ``The Nation must recognize that regulation to
    meet social goals competes for scarce resources with other
    national objectives. Priorities must be set to make certain
    that the first problems addressed are those in which
    regulations are likely to bring the greatest social benefits.
    Admittedly, this is an ideal that can never be perfectly
    realized, but tools like the regulatory budget may have to be
    developed if it is to be approached.''
        So given the increase in regulatory activity in the 35
    years since those words were written, I appreciate the
    Committee's interest in exploring a budget now. Thank you.
        Chairman Johnson. Thank you, Professor Dudley.
        Our next witness is Professor Richard Pierce, Jr. Professor
    Pierce is the Lyle T. Alverson Professor of Law at George
    Washington University. He has taught and researched in the
    fields of administrative law and regulatory practice for 38
    years. He has published 125 scholarly articles and 20 books in
    those fields. His books and articles have been cited in
    hundreds of agency and court opinions, including over a dozen
    opinions of the U.S. Supreme Court. He is a member of the
    Administrative Conference of the United States. Professor
    Pierce.

       TESTIMONY OF RICHARD J. PIERCE, JR.,\1\ LYLE T. ALVERSON
      PROFESSOR OF LAW, GEORGE WASHINGTON UNIVERSITY SCHOOL OF LAW

        Mr. Pierce. I want to begin by thanking Chairmen Johnson
    and Enzi and Ranking Members Carper and Sanders, and the other
    distinguished Members of the Senate Committees on the Budget
    and on Homeland Security and Governmental Affairs for giving me
    the opportunity to testify today on possibility of a regulatory
    budget.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Pierce appears in the Appendix on
    page 65.
    ---------------------------------------------------------------------------
        I strongly support the idea of a regulatory budget, but it
    needs to be very carefully designed and implemented. As I will
    explain in a couple of minutes, we already have the functional
    equivalent of a regulatory budget that is well designed and
    well implemented. Indeed, it was implemented by Professor
    Dudley for 2 years recently during the Bush Administration.
        Now, there are versions of a regulatory budget that would
    harm the Nation. Any version that is based solely on the cost
    of a rule and ignores the benefits of a rule would harm the
    Nation. I share the views that President Reagan expressed when
    he issued Executive Order 12291. That Executive Order required
    each agency to use benefit-cost analysis to evaluate each rule
    the agency proposes to issue and to issue only those rules that
    will yield estimated benefits that exceed the estimated costs
    of the rule. President Reagan's Executive Order also gave the
    Office of Information and Regulatory Affairs, responsibility to
    review the benefit-cost analysis provided by each agency of
    each rule and to take such actions as are needed to ensure that
    each agency complies with that Executive Order.
        Every President since President Reagan has issued Executive
    Orders that reflect President Reagan's view that the cost of a
    rule alone is not an appropriate criterion to use in deciding
    whether the agency should issue the rule, and that the
    appropriate criterion is the net benefits of a rule to society.
    Those net benefits can only be estimated by subtracting the
    estimated cost of a rule from the estimated benefits of the
    rule. The benefits often include lives saved, injuries and
    illnesses avoided, and reductions in property damage.
        The importance of considering both the benefits and the
    cost of a proposed rule is illustrated particularly well by
    OIRA's most recent estimates of the aggregate costs and
    benefits of all of the rules reviewed by OIRA during the last
    10 years. As you know, OIRA is required to provide that report
    to the House and Senate annually.
        In the most recent such report, OIRA estimated that the
    costs of the rules that it had reviewed over the last 10 years
    were between $57 and $84 billion. That seems like a very large
    regulatory cost until you compare it with OIRA's estimate of
    the benefits of those rules. OIRA estimated the aggregate
    benefits as between $217 billion and $863 billion. So OIRA's
    estimates indicate that over that 10-year period of time, the
    aggregate benefits exceeded the aggregate costs by a factor of
    3 to 15 to 1.
        More recently, Presidents Clinton, Bush, and Obama have
    reinforced the principles underlying benefit-cost analysis by
    issuing Executive Orders that require agencies to review all of
    their existing rules, to identify those rules that impose costs
    that exceed the benefits they confer on society, and to begin
    the process of rescinding any rule that produces costs that
    exceed its benefits. Those Executive Orders are an excellent
    complement to the Executive Orders that forbid an agency from
    issuing a new rule unless its benefits exceed its costs. Those
    Executive Orders are estimated to provide cost savings of $20
    billion and 100 million hours of paperwork.
        When you combine the effects of the Executive Orders that
    forbid an agency from issuing a rule with costs that exceed its
    benefits with the effects of the Executive Orders that require
    agencies to identify and to rescind any existing rule with
    costs that exceed its benefits, you get a regulatory budget
    that maximizes the net benefits created by rules issued by
    Federal agencies by ensuring that the aggregate benefits of
    those rules exceed the aggregate costs of those rules. That is
    a sensible version of a regulatory budget that every year
    improves social welfare to the United States.
        I should add one other thing. This hearing is particularly
    timely. I expect that either today or tomorrow the U.S. Supreme
    Court is going to decide a case involving how to calculate
    costs and benefits,\1\ and I am going to be very interested, as
    I am sure Professor Dudley will, in how the Court addresses
    that issue.
    ---------------------------------------------------------------------------
        \1\ Mr. Pierce referred to an important case involving-benefit-
    cost-analysis that the Supreme Court was about to decide. The Court
    decided that case on June 29, 2015, in Michigan v. EPA. A five justice
    majority held that the term ``appropriate and necessary'' in the Clean
    Air Act could not reasonably be interpreted to allow the agency not to
    consider costs in its decisionmaking. The majority held that EPA must
    consider cost in some way. It vacated the rule that was before the
    Court based on the majority's conclusion that EPA has not considered
    cost at all. The four dissenting Justices agreed with the majority that
    it would be unreasonable for an agency to make a major decision without
    considering cost, but the dissenting Justices expressed the view that
    EPA had considered cost in making the decision before the Court.
    ---------------------------------------------------------------------------
        I want to thank you again for the opportunity to testify
    today, and I look forward to your questions.
        Chairman Johnson. Thank you, Professor Pierce.
        I will start the round of questioning with a question for
    Minister Clement. Minister Clement, how difficult has it been--
    because we have heard a number of people talk about the
    potential dangers of just having to eliminate a regulation if
    you are going to implement a new one. How difficult has it been
    in Canada for you to identify regulations to eliminate?
        Mr. Clement. Not that difficult at all, Senator. Of course,
    by requiring each department and agency to basically do an
    audit of what they had in stock as regulations on the books,
    that gave them an idea about which regulations were still
    meaningful in the 21st Century. And so as president of the
    Treasury Board, what we do at the beginning of every meeting is
    we have a ledger--because we are basically the board that does
    approve new regulations as well as looking at expenditures of
    government, and so at the start of each board meeting, we will
    have a ledger, and if there is a department or agency that is
    proposing a new regulation, rather, they also have a period of
    time during which they can find an out for the in that they are
    putting in. And so they are given a period of time in which to
    do that. They do not have to do that immediately because there
    might be some immediacy to the regulation. But within a defined
    period of time, within a 24-month period, they have to find an
    out.
        And so I keep a ledger of each regulatory department and
    agency, and so far there has been no issue. And, in fact, in
    some cases, in order to buildup some bandwidth for proposed new
    regulations that they are anticipating with their regulatory
    agenda, some departments and agencies remove regulations to
    create a credit for themselves, which they can then withdraw
    from at the appropriate time when they are creating new
    regulations.
        Chairman Johnson. So this really has created a cultural
    shift, a real discipline to the process. I think you mentioned
    in your testimony 129,000 different regulations in Canada. Is
    there any assessment as a result of this culture shift, this
    discipline, that would indicate how many of those are going to
    be potentially on the chopping block? How many of those 129,000
    might be eliminated? Do you have a feel for that?
        Mr. Clement. Well, we are not going to run out of time for
    those. This is going to be an ongoing exercise. And by culture
    shift--I am a politician as well. I have to get re-elected. And
    I have noticed--maybe this happens in other jurisdictions as
    well, but whenever there is an issue that comes to the fore, a
    media issue or what have you, people start to light their hair
    on fire and run around in circles in Ottawa and say, ``What do
    we do? We have this issue.'' And the normal go-to position had
    always been, ``Well, if we only pass this regulation, that
    issue will go away.''
        And what we have done is we have created a cost to that
    kind of thinking, because now they have to think about what
    regulations they want to remove from the books in order to pass
    that regulation, and there might be 15 other ways to solve the
    problem, the public policy problem that is exercising the minds
    of somebody or another, that do not involve regulating
    particularly on small businesses.
        And so what we have done is created a discipline within the
    system by adding to the internal cost of thinking about
    regulation that shifts them to find other ways to resolve the
    public policy issue that does not involve overregulation of
    small business.
        Chairman Johnson. So, again, in the past, everything in
    Canada, like in the United States, has been additive, and you
    have come up with a process for subtraction.
        Mr. Clement. Exactly right.
        Chairman Johnson. What a concept.
        Professor Dudley, you are certainly aware of the fact how
    challenging it is to calculate these costs benefits. In a
    perfect world, we would have perfect information on that. I am
    a little concerned in terms of how this administration has
    handled the calculation of benefits. In President Obama's
    Executive Order issued in 2011, his direction to OIRA, in terms
    of calculating the benefits, he included equity, human dignity,
    fairness, and distributive impacts. That seems to be a loophole
    in terms of calculating a benefit so you can drive a Mack truck
    through it. Can you just talk about the appropriateness of that
    type of loose language and how easy it becomes to certainly
    calculate benefits that far exceed costs?
        Ms. Dudley. Yes. In an ideal world, we would have all the
    information on the consequences of a regulation before we issue
    it--so both the costs and the benefits. There will be equitable
    impacts on the cost side; there will be efficiency impacts. So
    all those impacts would affect either side of the ledger. In an
    ideal world, we would have all that information before we made
    the decision. We will never have that.
        So I do have a concern that there is a greater emphasis on
    finding those indirect or other types of impacts on the benefit
    side of the ledger than on the cost side.
        Chairman Johnson. Has anybody really set about doing a
    study in terms of the opportunity cost on people who are trying
    to innovate, trying to produce products and services just in
    terms of--again, in Canada, they are taking the number of hours
    times number of businesses times wage rates to come up with a
    cost or kind of a defined formula. But, again, it is very
    difficult. Has anybody estimated just the opportunity costs of
    regulations on our economy?
        Ms. Dudley. There are some estimates, and I do not know how
    reliable they are. It is tricky to do. It is.
        Chairman Johnson. Professor Pierce, again, you were
    obviously--and, again, I agree. Cost-benefit analysis is
    exactly what you need to go through, but, again, it is
    difficult to come up with exactly those numbers. Do you know
    how many rules and regulations have actually been eliminated in
    the United States over the last 10 years?
        Mr. Pierce. No.
        Chairman Johnson. Is that something, do you think, that the
    Federal Government ought to keep track of?
        Mr. Pierce. Yes. I do not know whether Professor Dudley's
    office takes on that responsibility or not.
        Chairman Johnson. Professor Dudley.
        Ms. Dudley. As I think you mentioned, Professor Pierce. We
    are friends. We have to be careful to treat each other
    respectfully here. Each administration of the last three
    Presidents has required agencies to look back and try to remove
    them. I think there is some tracking of that, but I do not know
    how accurate or robust it is.
        Chairman Johnson. But, again, the fact of the matter is we
    have dramatically increased the number of rules, regulations,
    laws, but have not done a real good job of eliminating them,
    right? Once they are on the books, they just stick around
    there, and, it has been very difficult to remove them. Isn't
    that a basic fact? Professor Pierce.
        Mr. Pierce. I think there has been a net increase in the
    number of rules, but because of the way rules are issued, that
    means there has been a net increase in social benefits, because
    each of those rules had to go through the benefit-cost analysis
    and then review by OIRA. So if there has been--and I believe
    there has been--an increase in rules, that has been accompanied
    by an increase in net social benefits of regulation.
        Chairman Johnson. Again, my concern is there is always
    going to be a bias to overstate the benefits and understate the
    costs. Again, with this Executive Order, including equity,
    human dignity, fairness, distributive impacts, that is, again,
    a pretty large loophole. Chairman Enzi.
        Chairman Enzi. Thank you, Mr. Chairman.
        I hope all of you will accept written questions afterwards.
    This is being chaired by two accountants. For 14 years, I was
    the only accountant in the U.S. Senate. Now we have two, and it
    shifts the focus a little bit to some specific things. But I
    have noticed that if we ask the accounting questions, the
    people in the back all go to sleep. But it gives us good
    information, so we will be passing that on, too,
        Part of the purpose of this hearing is to figure out a way
    that we can do a lookback at what has already been done. When I
    was doing the budget, I discovered that we have 260 program
    authorizations that have expired, but we are still spending
    money on them. That is supposed to be the ability to spend
    money. And those 260 represent 1,200 programs of the Federal
    Government, and the cost is $293 billion a year. So I am trying
    to get them to go back and look at those programs and see if
    any of them are still worth doing. We are spending money on
    them, so we ought to do that.
        Well, in the regulatory area, we do not have that, and I am
    always concerned when we talk about the cost and the benefit,
    because I know, having been in small business, that when you
    get a new regulation, the cost is immediate, the benefits are
    over a period of time. And there is not any way for the small
    businessman to finance that cost on the front end to provide
    the benefits on the back end. So I am trying to figure out a
    way through that, and I hope all of you will think about that a
    little bit, because that will be in some of my written
    questions.
        I do like the approach that you can remove regulations in
    advance and get a credit. That would be an advantage of having
    one of these ledgers, and I am really excited about that.
        But for Minister Clement, you mentioned in the discussion
    of
    C-21, the one-for-one rule, that it is important that the
    weight of Parliament be behind the aspiration that goes along
    with the one-for-one rule. By doing so, it adds credibility and
    it requires government, the Executive Branch government as well
    as the parliamentary branch, to take it seriously. Our major
    regulatory review procedures are required by the Presidential
    Executive Orders. They are not in statute. Could you elaborate
    on what you meant by that and whether the codification of the
    Executive Orders would be necessary? I do not know if you do it
    through Executive Orders up there or not, but some elaboration
    on that?
        Mr. Clement. Thank you, Senator. I appreciate the
    opportunity to elaborate a little bit. Primarily, we have a
    fused political system, so the legislative branch and the
    executive branch are all obtained from the same Parliament. So
    I serve in Parliament as a legislator, but I am also a member
    of the executive council that is called ``the Cabinet.'' And so
    the regulatory authority is obviously through the executive
    branch, not the legislative branch. And it is through my
    position as president of the Treasury Board of Cabinet--it is a
    Cabinet committee--that reviews regulations usually on a weekly
    basis through an order, and counsel then agrees to that
    regulation. So that is the process.
        One thing I do want to mention, though, Senator, is the
    back-and-forth that we have now required so that when the
    executive branch is doing that, there is automatically a give-
    and-take with stakeholders--that is to say, small business
    owners or what have you. So under the plan that is the Red Tape
    Reduction Action Plan, each regulatory department and agency
    has to publish forward plans 2 years in advance of what types
    of regulations they are planning to look at so--because what I
    heard from small business owners--when I was a small business
    owner myself, I heard the same thing--it is not only the
    regulation itself; it is that it comes out of the blue. All of
    a sudden there is a new regulation that comes from Ottawa of
    which they were unaware, and now they have play catchup and
    spend hours of their compliance time trying to figure out the
    regulation and how it pertains to them and how do they comply.
        So by requiring the departments and agencies to publish
    that in advance--and there may be emergency situations and what
    have you, but, generally, publish in advance, it gives the
    small business owners a chance to either prepare for the
    regulation or to say to government, ``I know what you are
    trying to accomplish there, but here is a better way of
    accomplishing the same public policy goal that will not crush
    small business with its extra burden,'' and have that dialogue
    well ahead of the Executive Order that creates the regulation.
        The other thing I want to make clear is--because we are
    talking about costs and you Senators are from the accounting
    side in your previous world experience--the standard cost model
    is the process we use, which I said was internationally
    recognized, but we require the regulator, when it calculates
    the cost of the regulation, we require them to consult with the
    stakeholders, with the small business owners, and say, ``Here
    is what we think this regulation will cost. Do you have any
    comments?'' And it gives the small business community a chance
    to say, ``I think you are a bit off in that cost. We think it
    is Y, not X.'' And, again, you have that dialogue going prior
    to the regulation taking effect.
        So it is more or less a constant dialogue that we have set
    up here, and, again, that helps create a different culture in
    government where, quite frankly, a lot of people who are
    regulators in departments and agencies may never have had an
    experience as a small business owner and so are not really
    attuned to those issues until we have created this
    relationship.
        Chairman Enzi. Thank you. I will have some more questions
    on that, too, but I will move to Ms. Dudley. The 1990
    Regulatory Right to Know Act required the OMB to report to
    Congress on the cost of major regulation as part of its budget
    submission to Congress and offer recommendations for reform. As
    you pointed out in testimony, the OMB reports have been
    incomplete. From your experience as the OIRA Administrator, can
    you explain what this means and why--the ability of OIRA as an
    independent agency to get that regulatory baseline in the
    future?
        Ms. Dudley. Yes, thank you. The OIRA reports, the OMB
    reports, are incomplete in three main ways: they only look at
    major regulations; they do not look at the regulations of
    independent agencies, so the Federal Communications Commission
    (FCC) or the Consumer Financial Protection Bureau (CFPB) would
    not be covered; and--oh, well, I am trying to think of what my
    third one is. But there are three ways.
        Anyway, so, yes, those are not complete. Also, to a point
    that Senator Johnson was making in his last question, it is all
    based on agencies' estimates of the costs and benefits of their
    regulation. So it is that one-off.
        And if I could take a few more minutes, because I know--
    what Mr. Clement is talking about in Canada, the process for
    advance notice, we do all those things. We provide
    opportunities for advance notice. We have a regulatory plan.
    The one thing that we do not do that they are doing is there is
    no constraint on that, which is their one-for-one constraint.
        Chairman Enzi. Thank you. My time is up.
        Chairman Johnson. Thank you. Senator Stabenow.

                 OPENING STATEMENT OF SENATOR STABENOW

        Senator Stabenow. Well, thank you very much. We appreciate
    the testimony of all of you, and it is a pleasure to be at a
    joint Committee hearing.
        First, I am just curious. Minister Clement, in all the work
    that you are doing, how big is your office? How big is your
    staff? It sounds like you have got a pretty big operation
    going.
        Mr. Clement. Thank you, Senator. Just on the regulatory
    oversight staff, we have about 20.
        Senator Stabenow. Ah, very good. OK. Well, I did want to
    indicate to both of our Chairmen that when we talk about the
    process--and I am all for analyzing what works and what does
    not work--I do want to say on behalf of everybody on the
    Agriculture Committee--and I see Senator Grassley here--that
    when we did the farm bill, we did exactly what you are talking
    about. We actually eliminated 100 different authorizations or
    programs that did not work. We consolidated--we dealt with
    duplication. We cut $23 billion. I know it can be done because
    we did it on a bipartisan basis in the Agriculture Committee,
    and I would welcome that being done in every part of the
    Federal budget.
        I do think as a contrast, Mr. Chairman, that sequestration
    is exactly the opposite of that. It is random, across the
    board, no attention to what is important and what is not
    important, as opposed to looking at every program and
    determining value of what works and what does not work. So I
    hope in our budgeting process as we move forward we are
    actually going to be more rational and come together in a
    bipartisan way to be able to address what is really important
    for the country rather than--I think sequestration is a way of
    giving up our responsibility to make good judgments.
        I do also want to just stress that there is a value to the
    rule of law. I assume all of you would agree with that. I
    remember being in Moscow a few years ago, and they were
    lamenting there was not more American investment. And I went
    home to our great Michigan businesses and said, ``Are you
    considering investing there?'' And they said, ``Well, we do not
    have confidence in the rule of law there.'' So rules actually
    can create economic certainty for businesses.
        And being in Haiti a couple of years ago on a trip and
    talking to the President of Haiti, who was looking, again, for
    more Americans to come--I am sure he would welcome Canadians as

    well--what we heard was they bring the ship into the harbor;
    they cannot get the product off of the ship because of the
    graft and corruption and all the costs that it takes, because,
    again, there is no enforcement, there is no rule of law, there
    is no economic certainty.
        So in a strong economy, it is also true that having
    certainty, economic certainty, whether it is tax policy, not
    doing tax extenders at the last minute, I will say to all of us
    on the Finance Committee, so there is certainty is very
    important.
        I also want to just speak a moment about really the cost-
    benefit analysis of the tradeoff between making sure we are not
    burdening small businesses or large businesses, by the same
    token making sure we are smart in terms of preventing
    additional costs or the protection of all of us in terms of
    safety. All of us get on airplanes every week, and we have
    confidence that there is, in fact, airline safety, or we all
    know what needs to happen on train safety or automobile safety
    or what happens when we eat our food or breathe the air or
    drink the water and so on. And so there is an importance--and
    shared waters with Canada and Michigan, by the way, as we know,
    that we care deeply about together.
        So I did want to give another water analysis and just ask
    if any of you want to speak to, again, sort of the--Mr. Pierce,
    as you have, about the value--how we determine cost-benefit in
    terms of the public. When we think about preventing further
    costs by doing things up front, avoiding spending additional
    dollars on crises by doing things up front, and that relates to
    something that, again, we share with Canada, which is the Great
    Lakes.
        We know that because we have not paid attention to invasive
    species as we should, sea lamprey or addressing the treatment
    of power plants, the costs of that and what has happened
    because of zebra mussels and so on, all the economic losses,
    almost $6 billion from invasive species, that if we were smart
    about it and had gotten ahead of it, we would save a lot of
    money. We would save money for our businesses who are in the
    boating, tourism, fishing industries and so on. So that being
    smart about how we address regulations and investments can also
    save us dollars as we move ahead, and now we have these great
    big fish called ``Asian carp'' that we are deeply worried about
    getting into the Great Lakes. And, again, we may need some
    common-sense regulatory action to protect and make sure that we
    have a fishing industry, a boating industry, a Great Lakes for
    the future of the country and certainly of the region.
        So, Mr. Pierce, could you speak a little bit more
    specifically--you talked the most about the economic case for
    having common-sense regulation in terms of the value of how we
    look at these things, rather than all or nothing, which is what
    I worry about in the debate, unfortunately, here is that, all
    regulation is bad or all regulation is good. How do we evaluate
    this?
        Mr. Pierce. I cannot think of anything better than what we
    have been doing since President Reagan began the process. I
    think all we can do--certainly we never have perfect
    information. That is certainly true. As Professor Dudley has
    mentioned, it is very difficult to estimate both costs and
    benefits, but I do not know of anything better that we could do
    than use benefit-cost analysis, and we do that now. And I would
    be all in favor of extending it to agencies where it cannot be
    done right now, but that is a matter that requires statutory
    amendment.
        I do not know of any way to improve on what we are now
    doing. There is constant debate among economists, political
    scientists, and law professors about the best way to do this,
    and there is constantly changes being made. But whatever
    problems there may be in the estimation process, it is hard for
    me to imagine that they could be nearly enough to offset the 3
    to 15 times benefits versus costs. I mean, you would have to be
    really far off, OIRA would have to be very far off in its
    estimates of costs and benefits for us to have rules that in
    the aggregate cost more than their benefits.
        Senator Stabenow. Thank you.
        Thank you, Mr. Chairman.
        Chairman Johnson. Thank you, Senator Stabenow.
        I do want to just quickly make the point that I do not
    think anybody makes the point that, all regulations are bad. I
    think most of us think that regulations are very good and they
    provide a clean environment and worker safety. All those things
    are good, but there is a point of diminishing returns. I think
    we have to look to regulations and law to create certainty, but
    when we have so many laws, so many rules, so many regulations,
    when they are contradictory, when they are enforced at the
    discretion of regulatory agencies or prosecutors, you create a
    high level of uncertainty. So we have to take a look at that in
    a very open and honest measure, find out at what point do we
    hit that law of diminishing returns and where do we create even
    greater uncertainty and start having a negative economic
    impact. Senator Carper.
        Senator Carper. Thanks. I apologize for being out of the
    room for a while. On a separate track, the Environment and
    Public Works Committee (EPW) is rolling out a 6-year
    transportation plan for our country, and I have been part of
    that drafting, and I needed to be there to help with the
    rollout, and so I apologize for missing your testimonies, all
    of which I have read.
        I want to start, if I could, Mr. Pierce, with you and the
    idea--let us go back in time. You said it was Ronald Reagan who
    did--what did he do when he was President? Did he issue an
    Executive Order that said that when we are doing regulations,
    we have to look at cost and benefit? Was that his handiwork?
        Mr. Pierce. Yes. If you look at Order 12291--and it has
    been somewhat expanded and modified in various ways by each
    President, but the basics are still the same. The requirement
    is estimate benefits, estimate costs, and then choose--among
    alternative regulatory approaches, choose the one that produces
    the largest net benefits. That is the principle that President
    Reagan announced in Executive Order 12291.
        Senator Carper. OK.
        Mr. Pierce. Now, as Professor Dudley has pointed out, that
    cannot apply to all agencies in all circumstances because some
    agencies are not allowed to consider costs when they make
    decisions. But that is a function of their statutes. One of the
    decisions before----
        Senator Carper. EPA.
        Mr. Pierce [continuing]. The Supreme Court--it depends.
    There are many provisions of the Clean Air Act, the Clean Water
    Act. The Supreme Court\1\ will issue a decision either today or
    tomorrow about one of the most important provisions of the
    Clean Air Act and whether it allows an agency--and independent
    agencies are not covered by this, and, again, that is a
    function of legislation. And I believe Senator Portman has
    proposed a bill that would change that, and I think both
    Professor Dudley and I support that bill.
    ---------------------------------------------------------------------------
        \1\ Mr. Pierce referred to an important case involving-benefit-
    cost-analysis that the Supreme Court was about to decide. The Court
    decided that case on June 29, 2015, in Michigan v. EPA. A five justice
    majority held that the term ``appropriate and necessary'' in the Clean
    Air Act could not reasonably be interpreted to allow the agency not to
    consider costs in its decisionmaking. The majority held that EPA must
    consider cost in some way. It vacated the rule that was before the
    Court based on the majority's conclusion that EPA has not considered
    cost at all. The four dissenting Justices agreed with the majority that
    it would be unreasonable for an agency to make a major decision without
    considering cost, but the dissenting Justices expressed the view that
    EPA had considered cost in making the decision before the Court.
    ---------------------------------------------------------------------------
        So we would like to make this more complete, but it
    requires legislation.
        Senator Carper. All right. Thank you.
        I said when I was here earlier in my opening statement, I
    talked about my Dad. I talked about his invocation that we use
    common sense in our work. And when I think about it, I think
    what Ronald Reagan proposed all those years ago meets the
    commonsense test for me. What are the benefits? What are the
    costs? And figure out what is actually a good payoff. Most of
    the time that works. Not always. But, Professor Dudley, one of
    the problems with that, it is hard to estimate some of these
    costs, isn't it? It is hard to estimate some of these benefits.
    And we have to make, I guess, our best effort and get as close
    as we can, knowing that many of them will never be perfect. But
    what would you say about that? How hard is it to come up with
    these numbers?
        Ms. Dudley. It is hard, and the benefits tend to be more
    contentious, I think, than the costs, although that may be
    partly because we do focus more on direct costs.
        In terms of the net benefit test--and I do think if you do
    go forward with a PAYGO budget, we will need to think hard
    about exactly how to do that, what costs we do want to measure,
    whether it is a net cost or direct cost or what. But all of us
    in our lives, we always want to do more than we can, than we
    can afford to. We have budgets that constrain us. And so a net
    benefit test, it is--if we could measure everything perfectly,
    it would be sufficient. But as with us in our daily lives and
    with the fiscal budget, it is not sufficient.
        Do you mind if I take another minute?
        Senator Carper. No. Go ahead.
        Ms. Dudley. The Army Corps of Engineers (ACE) is one of the
    few agencies that for their on-budget programs has to do a
    benefit-cost test. But that is a test they have to do in order
    to spend money on a program, but it is not sufficient. They
    still are constrained by a budget because they will still have
    so many programs that they could do that would provide the
    Nation benefits than taxpayers would want to afford.
        Senator Carper. OK. Mr. Clement, the job that Professor
    Dudley used to hold is the head of what we affectionately call
    ``OIRA.'' The fellow who succeeded her, Cass Sunstein, as I
    mentioned, came along and said, at the urging of the President,
    ``Let us do a top-to-bottom review of our regulations, find out
    which ones are just fine, which ones need to be updated, which
    ones need to be modified and gotten rid of in some cases.''
        Do you all do that kind of thing up in Canada? Do you have
    that periodic review?
        Mr. Clement. Sure. Thank you, Senator, and----
        Senator Carper. Thank you for being here.
        Mr. Clement. Oh, it is my honor to be here. Thank you, sir.
        Senator Carper. Thank you to the folks in Canada for being
    such great partners and allies of ours. We think the world of
    our neighbors up north.
        Mr. Clement. We share a continent and many interests and
    values, absolutely.
        Senator Carper. Yes, we do.
        Mr. Clement. I had the honor of meeting Mr. Sunstein
    actually at the start of his mandate a few years ago, and we
    talked about our various regulatory initiatives, and we kept in
    touch for sure. And we do have a life cycle for regulations
    that was started in 2007, so there is a systematic periodic
    review over time in different sections year upon year of
    various regulations. So we do that on a regular, systematic
    basis, and it provides us with the understanding of which
    regulations are still relevant.
        As you can imagine, some regulations were more relevant in
    the early part of the 20th Century than in the early part of
    the 21st Century. One example I can give you of one of the
    regulations that was taken off the books was a Federal
    regulation of canoes and kayaks owned by commercial
    enterprises. Maybe there was a time when they had to have a
    register and had to pay a fee to register, but it really does
    not have a point in today's day and age. So we took that off
    the books, and that saved businesses about $500,000 in
    compliance costs. So we do that.
        If I could mention very briefly----
        Senator Carper. Just very briefly. I am almost out of time,
    please.
        Mr. Clement. OK. Well, then, I will leave it for another
    occasion, but thank you for----
        Senator Carper [Presiding.] Thanks so much.
        Let me just close with--I do not know what your approach is
    in Canada on this, but before our agencies issue regulations,
    we expect them to go out and say to those who are going to be
    regulated, ``What are your ideas? What do you think?'' And to
    use that input in order to create draft regulation, and then
    after that draft regulation is gathered, we print that, and we
    disseminate that and say, ``Now what do you think?'' So we ask
    for more comment, Sometimes there is not enough comment time.
        Recently, in one proposed reg, a bunch of us on one issue
    said, when we back to the regulation, ``How about some more
    time? That is not enough comment time.'' And so that is the
    approach that we use. Sometimes it helps us get it right the
    first time. But it is hard to get it right forever, and I think
    the idea of coming back and doing this revisiting from time to
    time, plus trying to do a better job on the cost-benefit, is
    helpful. But thank you for showing us how you do it up there,
    and we are just delighted that you are in our country.
        Susan, it is great to see you. Mr. Pierce, thank you so
    much. Rob Portman.

                  OPENING STATEMENT OF SENATOR PORTMAN

        Senator Portman. Thank you, Mr. Vice Chairman.
        Thanks to the witnesses for being here. I really appreciate
    the opportunity to talk about a topic near and dear to my
    heart, and I have a vote, so I am going to talk quickly and get
    some responses from these experts.
        Look, to me it is very simple. Congress can impose taxes on
    people, but so can the agencies, really, because it is much the
    same thing in terms of the costs for businesses. We had a town
    hall meeting last night, 25,000 Ohioans on a tele-town hall,
    and a small business owner called in, and he was there at 7:30
    at night and wanted to talk about regulations and just sort of
    the cumulative effect of regulations, and clearly it is an
    issue that we have made progress on, as Professor Pierce said,
    but there is more to do.
        One thing that is noteworthy, I think, is that when I had
    the honor of working with Professor Dudley when I was at the
    Office of Management and Budget, we put out an Executive
    Order--it was 13422--and it asked all the agencies to
    accumulate their costs and to report on those. That was
    rescinded in the Obama Administration as soon as President
    Obama was elected, and I think it should be restored because I
    think it makes sense. That aggregate cost issue--it was costs
    and benefits of regulations--would be a good starting point to
    talk about this budgeting because you do need better data. As
    Professor Dudley has said, it is not easy.
        The one thing that I thought was interesting today that
    came up was about the independent agencies, and talking about
    incremental steps, one certainly should be bringing the
    independent agencies more into our cost-benefit analysis. I do
    not know, Minister Clement, if you have this same issue, but we
    have executive branch agencies, of course, and independent
    agencies, and they are subject to different standards as to the
    Executive Order that Professor Pierce talked about. The
    independent agencies, by definition, are independent, and some
    of them require under the statutes that they implement to go
    through some analysis and some do not. And this is, I think, a
    good first step, again, toward a better budgeting or a better
    understanding of what the costs are.
        I guess I would like to ask, if I could, our witnesses
    about that, Professor Dudley and Professor Pierce. Senator
    Warner, who was here earlier, and I have reintroduced our
    legislation to ensure Federal agencies like the U.S. Securities
    and Exchange Commission (SEC) or the FCC and others--and, by
    the way, they are doing many more major rules than they used
    to, so it is a bigger problem than it used to be--they perform
    the kind of cost-benefit analysis other executive agencies must
    do, and OIRA would review their work, and I wondered if you
    could just go on the record, Professor Dudley and Professor
    Pierce, talking about why you think that is important.
        Mr. Pierce. I think it is important because I think all
    rules should be subject to the process of estimating benefits
    and estimating costs, and then we should only issue the ones
    that are likely to produce net benefits. And I do not see any
    reason why the independent agencies would be any different from
    the executive branch agencies in that respect. So for that
    reason, I sent your Committee a letter--I think it was about a
    week ago--in support of the bill that you and Senator Warner
    have introduced, and I gave some more explanation for my
    support of that in that letter. And if I remember right,
    Professor Dudley sent a similar letter about the same time.
        Ms. Dudley. Yes.
        Senator Portman. I think she used some of your same
    language.
        Ms. Dudley. Well, he is a brilliant administrative law
    expert, so it was----
        Senator Portman. Both of you, I really appreciate your
    support. And, Professor Dudley, you have been involved with
    this issue for a long time. Your thoughts on that?
        Ms. Dudley. Yes, regarding the letter, it was actually all
    the former OIRA Administrators of both parties who could sign
    the letter signed the letter. Some judges cannot. I think it is
    important for two things:
        As Professor Pierce said, there is really no reason not to
    do benefit-cost analysis to try to get the best understanding
    we can of the likely effects of a regulation before it goes
    into effect. Why would you not want to do that?
        But, second, the oversight that you provide for in your
    bill, the executive branch oversight I think is very valuable
    because it is more likely to keep the agencies accountable for
    doing that analysis well.
        Senator Portman. I am going to literally run, and I see the
    Chairman has returned to continue the hearing. But the other
    thing I just want to mention is the Regulatory Accountability
    Act is also legislation we introduced in the last Congress. We
    are still working on it for this Congress, and it has been
    bipartisan in the past, and it does very much of what Minister
    Clement talked about in terms of ensuring that the
    constituents--in other words, small businesses, for instance--
    are consulted ahead of time, requires more transparency and
    more consulting. It also deals with this issue of getting at
    the best way to achieve the results, so the least burdensome
    alternative is required. And I would hope that legislation as
    well could provide some of the baseline for beginning to think
    about this budget. You need to have better cost analysis and
    benefit analysis in order for it to work.
        Thank you all very much. Thank you, Mr. Chairman.
        Chairman Enzi [Presiding.] Thank you, and your vote is very
    much needed over there.
        For those of you who do not have a program and you cannot
    tell what we are doing without a program--and, oh, yes, that is
    right, we do not do a program--what we are voting on right now
    is the trade preference (TPA), and this is a cloture vote that
    passed with 61 votes last time. So it is being repeated because
    the House did not get it done in the form that we sent it over.
    So just one of the little complexities around here, but it is
    something everybody is intensely interested in and absolutely
    expected to vote on. So they are doing that, which leaves me
    with an extraordinary opportunity. I usually do not get to go
    twice, but I am going to get to today. So I will continue with
    some of the things that I had listed that I was curious about,
    which I still will not get through them all.
        When we were talking about the rules and regulations and
    whether--we did not really get into the Executive Orders.
    Executive Orders are different than regulation. We talked about
    how regulations have to go through this process of being
    reported, evaluated, and sent to different entities for
    evaluations and stuff. To my knowledge, that does not happen
    with an Executive Order. So for Professor Dudley and Professor
    Pierce, do you think that there ought to be some kind of a
    requirement for codification of Executive Orders with some kind
    of a sunset date if they are not codified?
        Ms. Dudley. Executive Orders can only affect the executive
    branch, and the next President can come in and with a stroke of
    a pen eliminate the Executive Orders.
        Chairman Enzi. That would be in 4 to 8 years, though, would
    it not?
        Ms. Dudley. Right. So with respect to the Executive Orders
    that Professor Pierce talked about that guide OIRA review, one
    of the drawbacks of those--in response to your earlier
    question, I said they do not cover independent agencies; they
    only look at major rules; and it is also not judicially
    reviewable. So codifying the Executive Orders for benefit-cost
    analysis, which, as Professor Pierce has said, have really been
    in effect since 1981 with some modest changes, I think that
    could be valuable because it would have that benefit-cost
    analysis cover independent agencies, and it would subject them
    to judicial review, which could be valuable. Plus it would put
    your imprimatur on it. It would show that Congress also
    believes that what Senator Stabenow was calling ``common-sense
    regulation'' is the practice that we would like.
        Chairman Enzi. I would encourage us to work together a lot
    more. Professor Pierce.
        Mr. Pierce. I agree completely with Professor Dudley. I
    think having all of this--every regulation go through the same
    process--if it is a major regulation, you do not want to take
    it down to things that are not major because cost-benefit
    analysis itself is quite expensive and resource-intensive, and
    it would not make sense. Requiring it for minor actions would
    not pass a cost-benefit test. It is certainly true that
    Executive Orders do not have to pass a cost-benefit test, but
    they cover so many different things that it is hard to imagine
    how you would apply cost-benefit analysis to all of them. And
    the ones we have discussed require cost-benefit analysis, so I
    do not--and every President has agreed that, with minor
    changes, they should remain in effect.
        I think one of the first things that a transition team
    does--in fact, they do it before the transition--is look at all
    of those Executive Orders and decide which ones they disagree
    with, and so far no President has disagreed with any of the
    Executive Orders we have discussed.
        Chairman Enzi. So you would not see any need for
    codification then of Executive Orders, particularly the ones
    that are going to have a lasting effect? Again, repeating that
    these do not go through the same process that a regulation goes
    through, meaning that they are put out in advance, that people
    can comment on them, that the comments are supposedly looked at
    and reviewed and even responded--there is even a requirement
    about responding to them, although I have seen some of the
    responses which say, ``No response necessary,'' which I do not
    really consider to be a response to my constituents who are
    writing in heartfelt comments about some regulation. But there
    is not that opportunity on an Executive Order.
        Mr. Pierce. That is true, but Executive Orders, as
    Professor Dudley noted, apply only to the executive branch. I
    mean, the President does not have the power to tell people
    outside the executive branch what to do, and his power to tell
    people within the executive branch what to do is limited by
    statute, and each of the Executive Orders that we have
    discussed begins with, ``To the extent permitted by law,'' and
    usually repeats that two or three other times in recognition
    that Congress can override anything that the President
    unilaterally says on these matters.
        Chairman Enzi. Unless the President has a majority in
    Congress. But at any rate, I think that some extra--we need to
    take an extra look at some of the Executive Orders,
    particularly as we wind down the last 6 months of anybody's
    administration. I noticed some of the ones coming through at
    the end of President Clinton's, and that was some effort to do
    ergonomics, and we do have some mechanism for reversing that,
    but it requires the signature of a President. But we changed
    Presidents and got the signature of a President.
        Going back to Mr. Clement, you have already implemented
    this Red Tape Reduction Plan this spring in law. Do you have
    plans to try and build on it? Do you have some successes so
    far? What are your plans with it now?
        Mr. Clement. Thank you, Senator. I think that is a very
    important question. We do plan to build on it. We continue to
    have a mechanism whereby stakeholders like small business
    organizations get to be part of the process by which we review
    how we are doing and make recommendations on how to proceed. So
    usually, my experience anyway in Ottawa has been when
    government is reviewing its activities, it reviews its own
    activities and says what a bang-up job it has done and produces
    a very nice report saying how wonderful everything has been.
        So what we did in this case was slightly different. I
    created a review committee to track each year our progress on
    reducing red tape, particularly for small business, and we
    invited the stakeholders in to the committee, so they are
    actually at the table with government doing an independent
    review that is chaired by a small business representative,
    doing an independent report card, as we call it, of government
    attempts to reduce red tape, particularly for small business.
    They publish that, and I then, as the spokesperson and the
    representative of the government, have to respond to that.
        So it is a very public process, and, quite frankly, their
    first report card from last year measured some successes, but
    also said there has to be some improvements in X or Y or Zed--
    that is how we say Z. And so, consequently, I was able to
    respond to that and say, ``Thank you for your points. We intend
    to do A, B, and C in order to respond to that.''
        So what I am trying to get across is it is an ongoing
    dialogue, and that is what makes it so powerful. And it is not
    just dependent upon me being, the Cabinet Minister in charge.
    If and when I go, the process of that continues, and I think
    that is very important.
        Chairman Enzi. Thank you. Senator Perdue.

                  OPENING STATEMENT OF SENATOR PERDUE

        Senator Perdue. Well, thank you, Mr. Chairman, and I really
    appreciate the witnesses' testimony here today and their
    willingness to help us out.
        I am just a business guy, and as an outsider looking at
    this process, my experience has been that nothing damages small
    businesses more than overregulation. I have been involved in
    small businesses. I have been blessed to be involved with some
    of our country's larger businesses. And I remember Sarbanes-
    Oxley and a few others, and now we are dealing with Dodd-Frank.
    It just seems to me that small businesses today in this
    recovery in the United States are really having trouble getting
    going, and they are, as we know, the employment engine behind
    our economy.
        As a matter of fact, 2 months ago, Goldman Sachs Global
    Investment Research Group published a report--I am sure you
    have seen it--calling this economy ``a two-speed economy.''
    Some large firms are prospering, outperforming market
    expectations. Meanwhile, employment and growth in small firms
    is substantially lacking industry averages and certainly larger
    companies.
        The most telling, though, is the number of small firms have
    declined in the last 5 years. This is the first time since
    1970. I am really troubled by that dynamic because I see it in
    my home State. I see it manifested from the workers of those
    small companies who are really burdened now by reduced working
    hours and so forth. So the people and families of Georgia are
    really hurting because of the overregulation. The No. 1 topic I
    hear when I travel back to my State among business people is
    that regulations are taking the life out of our free enterprise
    system.
        So with that, I just have a couple of questions. It just
    seems like, first of all, there are no innocent parties in
    Washington. This is not something that just happened. It has
    been ongoing for the last 50 years. But we now get to a point
    where it really is hurting our competitiveness around the
    world.
        As Justice Breyer said, ``well-meaning, intelligent
    regulators, trying to carry out their regulatory tasks
    sensibly, can nonetheless bring about counterproductive
    results. The single-minded pursuit of a particular goal results
    in regulatory action that imposes high costs, sometimes without
    achieving significant additional safety benefits.''
        It seems like we have gotten to the point now where our
    Federal Government wants regulators to take all the risk out of
    our lives at the expense of our free enterprise system.
        So the question I have--I have a couple. I understand that
    the regulations that we have in the United States are divided
    into four big categories: economic, environmental, tax, and the
    Occupational Safety and Health Administration (OSHA) and
    Homeland Security. The question I have is: Has there been any
    attempt to standardize an approach to this cost-benefit
    analysis approach across these regulatory agencies? And has
    there been an attempt to standardize how we calculate the costs
    these regulations bear from each of these categories. I will
    throw it to Professor Pierce first. I would like all the
    panelists to respond, if you will.
        Mr. Pierce. I think that there have been a lot of efforts
    of that type, Senator, and there is a professor who is on the
    University of Virginia faculty named Michael Livermore who has
    done a wonderful study of the way the cross-fertilization works
    between, for instance, OIRA and EPA, that each of them looks at
    the literature all the time, and then often EPA will hire
    consultants to help them figure out how to do this, and a lot
    of the methodology developed in a regulatory agency is shared--
    in fact, I think virtually all of it--with OIRA, and a lot of
    the methodology that OIRA wants agencies to use is shared with
    the agencies.
        Your reference to Sarbanes-Oxley, though, does take us back
    to most of those agencies are independent agencies. They are
    not subject to any of this. And so this excellent approach
    simply does not apply to some agencies.
        Senator Perdue. Could I add, as you mentioned Sarbanes,
    could I also ask you about CFPB since it is not under
    congressional oversight at this point?
        Mr. Pierce. It, too, is not subject to the requirement of
    conducting cost-benefit analysis to take a major action. So it
    is one of the many independent agencies that are not subject to
    the Executive Orders that Professor Dudley and I have discussed
    today.
        Senator Perdue. OK. Professor Dudley.
        Ms. Dudley. Yes, so I agree with your concern and with
    Professor Pierce's response. There are guidelines that have
    been adopted through notice and comment. They are long, they
    are hefty. They are generally recognized as solid guidance. But
    they are not always followed, and that is partly because there
    are statutes that preclude consideration of some important
    tradeoffs. So that is part of the problem. And independent
    regulatory agencies are not covered.
        If agencies do not do it well, they rarely face judicial
    review for that. There are some statutes that allow it, but the
    Executive Orders that require benefit-cost analysis are not
    judicially reviewable.
        So I think there are several reasons why you are right that
    agencies are not really doing as robust a benefit-cost analysis
    as they could, which might get back to Senator Enzi's
    suggestion that maybe we should be codifying the Executive
    Orders that require that type of analysis.
        Senator Perdue. Minister.
        Mr. Clement. Senator, I will just confine myself to a
    couple of basic points.
        One is Prime Minister Harper of Canada has called red tape
    the ``silent killer of jobs,'' and I think he is absolutely
    correct. That is why this was part of our previous election
    platform that we have implemented over the last 4 years to
    reduce that burden on small businesses.
        The other thing I would say is something that you already
    know, but that if you do not measure it, it does not count. In
    government, if you do not have a means by which you are
    assessing the costs and benefits, then it becomes just a moot
    debate. And so I do--certainly, my experience has been as we
    have measured this more and more closely and more and more
    precisely, it creates the dynamism necessary to actually get
    something done that is different.
        Senator Perdue. In Canada, have you guys been able to
    standardize across your various platforms as well?
        Mr. Clement. So we use something called the ``standard cost
    model,'' which is an internationally recognized calculation--it
    is a formula, basically, that assesses the administrative
    burden on business, looking at the number of hours it takes to
    fill out the forms times the number of people necessary to do
    so times the number of businesses affected. I am very much
    simplifying it, but that is the basis of it, and as I say, it
    is an internationally accepted methodology, and it seems to be
    working.
        Senator Perdue. Great. Thank you very much.
        Thank you, Mr. Chairman.
        Chairman Johnson [Presiding.] Thank you, Senator Perdue.
    Senator Ayotte.

                  OPENING STATEMENT OF SENATOR AYOTTE

        Senator Ayotte. Thank you, Chairman. I thank all of you for
    being here.
        I had a question about small businesses, and small
    businesses are obviously responsible--I happen to be married to
    a small business owner--for nearly two-thirds of job growth in
    this country, and I think the challenges for regulation has
    become even greater with small businesses. Their ability to
    move forward right now with 3,000 regulations currently in the
    workers, just even as a small business owner, knowing what
    those regulations are and how to apply them seems to me to be a
    big challenge in terms of wanting us to allow small businesses
    to drive growth. And I was wondering, Mr. Clement, how Canada
    has been successful at reducing the regulatory burden,
    particularly on the smaller businesses. And I would also ask
    Ms. Dudley as well, while you were OMB Administrator, what do
    you think in terms of dealing with small businesses that would
    be more effective? Minister Clement.
        Mr. Clement. Thank you, Senator. It is an honor to be here
    and to respond to your concerns. I have been mostly focusing my
    remarks on what we call the ``one-for-one rule'' for new
    regulations being put into place. An equal number or a larger
    number of regulations in terms of the administrative burden
    have to be removed from the books so the net impact on small
    business is either neutral or positive. And so that has been
    the focus of a legislative package that I had passed through
    Parliament earlier this year.
        We also do things, which I understand from the testimony
    are done here as well, forward regulatory plans so that each
    regulating department or agency has to project 2 years into the
    future and publish, ``Here is what we plan to do; here is what
    we think the impact on small business is going to be. Small
    Business, what do you say? Is this something that you can meet,
    or should we be changing our plans in some way to meet the
    public policy goal without creating the burden,'' and starting
    that dialogue early.
        Senator Ayotte. So 2 years in advance?
        Mr. Clement. Two years in advance, 24 months in advance.
        The other thing that we do was add what we call a ``small
    business lens'' to every regulatory package. I am president of
    something called the ``Treasury Board.'' We mostly cut budgets,
    but we also deal with regulations. And so when a regulatory
    proposal is put before us by a minister or by an agency or by a
    department, they have to include within that package of
    information the likely impact on small business in particular.
    And the reason that that is important is because what I have
    noticed over time is that, quite frankly, the public service
    they have a lot of knowledge and a lot of experience. Not many
    of them have been involved in small business. That has not been
    part of where they have come from or what they have learned or
    so forth. So to force them to actually have the dialogue with
    small business, say, ``How will this affect you?'' and then
    include that in the package means that I as a decisionmaker, an
    elected politician, a Cabinet minister, I am now aware of some
    of the costs associated with that reform package, that
    regulatory package to small business, and that makes me more
    sensitized to that impact.
        Senator Ayotte. I do not know if anyone wanted to add
    anything to that.
        Ms. Dudley. Yes, I can just talk a little bit about how it
    is done in the United States. You had asked what OMB's
    responsibility is. OMB is responsible for looking at small
    business impacts, working with the Small Business Office of
    Advocacy, and they both have statutory responsibilities under
    the Regulatory Flexibility Act and the Small Business
    Regulatory Enforcement Fairness Act. And some agencies
    actually--OSHA, EPA, and the Consumer Financial Protection
    Bureau have to have earlier advance notice and evaluation o the
    rules.
        Another thing----
        Senator Ayotte. Sorry to interrupt you. As I understand it,
    that is because the Regulatory Flexibility Act allows that. I
    actually have a bill to expand that across all agencies.
        Ms. Dudley. Yes, it was kind of started as a pilot, but,
    yes, it might be appropriate to expand it across agencies.
        Now, also, the Reg Flex Act under Section 610 requires
    agencies to look at the economic impact of their regulations on
    small businesses retrospectively every 10 years. They are
    supposed to evaluate whether there are ways to do that that is
    better for small businesses. That has not been effective. It
    just has not been effective, which is why I think some of the
    incentives that you all are talking about here could make that
    more--it would provide incentives to really look back. As Mr.
    Clement said, looking back alone, you did not change the
    culture until you added the incentive of the one-for-one.
        Senator Ayotte. How do we deal with this issue of cost-
    benefit analysis, cost impact? Because one of the feedbacks I
    get, particularly from smaller businesses, is that you can
    imagine that in a smaller business you do not have an army of
    lawyers and accountants, and, frankly, big business has an
    ability to comply with regulations in a way that small
    businesses do not, because they just do not have the personnel
    and people focusing on this. And I think sometimes, as I look
    at how the government does this cost-benefit analysis, it does
    not really truly take in the costs and the viability,
    especially on smaller entities. How can we improve that piece
    of it? Anyone who would like to weigh in.
        Mr. Pierce. As Professor Dudley described, we do a lot of
    that now. There are two statutes that require that. It is the
    responsibility, as I recall, of OIRA to administer those
    statutes.
        When you look at agency rules, many--in fact, I am pretty
    confident the vast majority have exceptions for small
    businesses. Now, there are a lot of problems with that because
    what happens a lot is that large businesses then try to game
    the system, and all of a sudden you discover that a large
    corporation has created 50 small businesses that they then say
    are--so it is actually quite difficult to try and figure out
    what businesses are subject to these exemptions, and you have
    to assume that there will be a lot of gaming of any exemptions
    by big business to get the advantages of the exemptions for
    small businesses. But we have a process now that applies to all
    of that, and it is required by law.
        Senator Ayotte. Well, my experience from hearing from folks
    on the ground is that that process is not fully effective, and
    almost like this idea that the people who are reviewing it and
    doing the cost-benefit analysis, they do not think about what
    it would take to be in this small business and do some of the
    things we are asking people to do. That is just feedback I hear
    from the ground, and, I hope my husband builds his small
    business, so I know how hard our small business owners are
    working just to survive every day.
        Mr. Clement. Senator, one of the things we do in Canada is
    this standard cod model where we actually involve the small
    business representatives in calculating the cost of the new
    proposed regulation on small business--How many hours does it
    take to comply? How long do they have to sit in their office
    filling out the forms? What is the opportunity cost of that?--
    as opposed to going out and creating wealth and working on
    their business.
        So we actually created a formula based on international
    practice to measure that cost of compliance, but it is not
    just, somebody in Ottawa in some office somewhere applying the
    formula. They have actually got to talk to the small business
    stakeholders to make sure the formula is being applied in the
    particular case of the proposed regulation in an appropriate
    manner.
        Senator Ayotte. All right. Thank you.
        Chairman Johnson. Professor Dudley, did you want to respond
    to Senator Ayotte? It looked like you might have.
        Ms. Dudley. Thank you very much. Yes, just one more point
    on that. Often the costs that really affect the small
    businesses, especially the innovators, they are not direct
    costs. They are hard to measure. And so if you are innovating
    some new ideas, you really cannot bring them to market without
    just selling your ideas to a larger company. So I think part of
    the problem is that those costs are just hard to measure.
        Chairman Johnson. Thank you, Professor Dudley and Senator
    Ayotte.
        Professor Pierce, you have been involved in this issue for
    quite a few years, I think my intro said for 38 years. From my
    standpoint, the reason you have the rule of law, one of the
    reasons, is to create certainty, to lay out the rules of the
    road, things like the Uniform Commercial Code--extremely
    valuable. You have, national standards to govern interstate
    commerce.
        Do you think the regulatory environment today creates a
    higher level of certainty than it did 38 years ago in your
    experience? Have we improved certainty?
        Mr. Pierce. That is a hard question to answer.
        Chairman Johnson. I can answer it.
        Mr. Pierce. I am not at all sure that we have.
        Chairman Johnson. Let me ask it a different way. Do you
    think it is easier or harder to start a company, to build a
    company, to create jobs? Is it easier or harder 38 years later?
        Mr. Pierce. I do not know.
        Chairman Johnson. Well, I can tell you, talking to
    countless business executives who have told me independently,
    they were coming up to me and saying, ``Ron, there is no way I
    could start my business and build it the way I have if I had to
    start it in this regulatory environment.'' And that is from
    multiple people, very successful, just taking a look at what is
    happening.
        Professor Dudley, it seemed like you wanted to weigh in on
    this.
        Ms. Dudley. I do not have statistics on it. I know surveys
    of small businesses say that it is harder, but I do not have
    data.
        Chairman Johnson. Mr. Clement, you were an entrepreneur
    yourself. Again, Canada is different than the United States. By
    the way, has anybody conducted a study in Canada in terms of
    the overall cost of the regulatory burden of your 129,000
    regulations, some estimate?
        Mr. Clement. So we have a study done by the Canadian
    Federation of Independent Business, which we rely on. They are
    an independent body representing small business owners in
    Canada, and their costing of the impact of regulation of all
    levels of government, not just the Federal level but
    provincial--we have a provincial like your State level--and
    then the local municipal level, is about $30 billion in the
    Canadian economy.
        Chairman Johnson. OK.
        Mr. Clement. So it is quite substantial, similar to what
    some of the numbers you were mentioning here in the United
    States of America. And, clearly, as Prime Minister Harper has
    said, that is the silent job killer that we have to start
    talking about and taking seriously.
        Chairman Johnson. It would be interesting to compare,
    because studies we have--Senator Enzi was talking about $1,880
    billion, or I like to say close to $2 trillion. So it would be
    real interesting to compare those different studies to find out
    what the real comparison is.
        Mr. Clement, you also made an interesting comment about the
    fact that regulators have never been involved in the private
    sector. I want you to expound on that a little bit more,
    because certainly that is what I find, too. I mean, if you do
    not understand the burden, if you are just here thinking of all
    these wonderful benefits of your agency's new regulation, you
    really do not have much sympathy for really the compliance
    burden, do you?
        Mr. Clement. Right. So in our case, Senator, what I can say
    is there is a little bit of entering and exiting the private
    sector world at the senior levels of the bureaucracy, but that
    is usually with larger businesses. That is certainly the
    evidence that I have found, is that they usually go to larger
    firms who have large compliance departments, armies of lawyers
    and accountants and what-not who can help the company deal with
    the compliance costs of doing business.
        It is not usual, at least in our political culture, for
    senior public servants or any public servants to back that
    experience with small business. I am not condemning them for
    that. It is just the way it is. And so what we have tried to do
    was at least sort of build that into the consultation process
    because it was not natural in the culture of the place before
    we started this initiative.
        And just to expound on it very briefly, we are legislators.
    We are legislators, and because I am part of the executive
    branch, we have the executive part of our business as well. So,
    the whole system is erected so that if you face a problem--
    which we all want to solve. That is why we are in politics in
    the first place. We want to solve problems and make sure our
    country does better. So the first go-to point is you either
    legislate or you regulate. That is kind of how the place was
    built.
        And so what we are trying to do is change the culture so
    that they realize that there are other mechanisms and tools
    available that maybe the only way, as Senator Stabenow--in some
    cases, the only way forward is legislation and regulation. I am
    not denying that. But in many cases, there are other more
    creative ways that can be found that can deal with the public
    policy issue that does not involve legislation and regulation.
    And we have to do more nudging and less using the hammer in all
    situations.
        Chairman Johnson. Trust me, the bias is toward addition,
    writing new--I mean, after all, we are legislators so we tend
    to legislate. So we need to have something subtractive.
        Chairman Johnson. Professor Pierce, you made an interesting
    comment about how, when we exempt small businesses from some of
    these regulations, then the large corporations game the system.
    Do you have any good example of that? Because I think we see
    that all the time.
        Mr. Pierce. I have seen many examples of it described in
    the literature. One that I recall offhand is FCC auctions where
    small businesses are given preferences, and then when you look
    at what the small business is, it is not so small. It has
    100,000 employees, and they have just created a subsidiary for
    the purpose of participating in the auction, getting the
    benefit.
        Unfortunately, we see the same kinds of problems fairly
    frequently with respect to preferences for minority-owned
    businesses and female-owned businesses. As soon as you provide
    any benefit, there are going to be people who hire good lawyers
    to figure out how to take advantage of the benefit, and that
    creates a real problem for you; it creates a real problem for
    the people who write the rules in the agencies. I do not have a
    real easy fix for that problem.
        Chairman Johnson. I think one of the things we have to do,
    if we are going to do a regulatory budget, is we have to
    calculate the cost of the unintended consequences, which is
    really kind of the definition of Washington, D.C.
        One last question for Professor Dudley. Because you have
    been involved in this issue for quite some time as well, and we
    have the Administrative Procedures Act. What is your sense in
    terms of Executives--Presidents--the executive branch following
    that Administrative Procedures Act? Is there greater compliance
    or less compliance? Or is it pretty much about the same?
        Ms. Dudley. I am not sure of the answer to that. I think it
    is about the same because it is required by law, and we are
    such a litigious society that if agencies do not follow the
    procedures and solicit notice and comment, they can be sued. I
    have seen a couple things lately I am very curious about. The
    trans fat announcement that was made just this week, I do not
    think that went through notice and comment. So there are some
    things that I am curious about, but----
        Chairman Johnson. We do know that President Obama's
    executive amnesty has been basically--there is a stay because
    he did not follow the Administrative Procedures Act as well, so
    there are certainly different examples of that.
        Chairman Enzi, do you have any further questions?
        Chairman Enzi. I have some questions that I will send in
    that will become a part of the record later, I hope.
        Chairman Johnson. OK.
        Well, with that, again, I just want to thank our witnesses
    for your taking the time, your thoughtful testimony, your
    thoughtful answers to our questions.
        This hearing record will remain open for 15 days until July
    8 at 5 p.m for the submission of statements and questions for
    the record.
        This hearing is adjourned.
        [Whereupon, at 11:55 a.m., the Committees were adjourned.]

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