[Federal Register Volume 62, Number 140 (Tuesday, July 22, 1997)]
[Notices]
[Pages 39352-39383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19082]
[[Page 39351]]
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Part IV
Office of Management and Budget
_______________________________________________________________________
Draft Report to Congress on the Costs and Benefits of Federal
Regulations; Notice
Federal Register / Vol. 62, No. 140 / Tuesday, July 22, 1997 /
Notices
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OFFICE OF MANAGEMENT AND BUDGET
Draft Report to Congress on the Costs and Benefits of Federal
Regulations
AGENCY: Office of Management and Budget, Executive Office of the
President.
ACTION: Notice and request for comments.
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SUMMARY: OMB requests comments on the attached Draft Report to Congress
on the Costs and Benefits of Federal Regulations. The draft report is
divided into four chapters. Chapter I sets the context and provides the
background for the next three chapters. Chapter II presents OMB's best
estimate of the total costs and benefits of Federal regulation. Chapter
III provides data on the costs and benefits of each of the economically
significant regulations reviewed by OMB under Executive Order 12866 in
the last year. Chapter IV provides recommendations aimed at further
developing the information, methodologies, and analyses necessary for
improving the efficiency, effectiveness and soundness of regulatory
programs and program elements.
DATES: To ensure consideration of comments as OMB prepares this Draft
Report for submission to Congress on or before September 30, 1997,
comments must be in writing and received by OMB no later than September
1, 1997.
ADDRESSES: Comments on this Draft Report should be addressed to John F.
Morrall III, Office of Information and Regulatory Affairs, Office of
Management and Budget, NEOB, Room 10235, 725 17th Street, N.W.,
Washington, D.C. 20503.
Comments may also be submitted by facsimile to (202) 395-6974, or
by electronic mail to [email protected] (please note that ``1'' in
``A1'' is the number one and not the letter ``l''). Be sure to include
your name and complete postal mailing address in the comments sent by
electronic mail. If you submit comments by facsimile or electronic
mail, please do not also submit them by regular mail.
Electronic availability and addresses: This Federal Register Notice
is available electronically from the OMB Homepage on the World Wide
Web: ``http://www.whitehouse.gov/WH/EOP/OMB/html/fedreg.html.''
FOR FURTHER INFORMATION CONTACT: John F. Morrall III, Office of
Information and Regulatory Affairs, Office of Management and Budget,
NEOB, Room 10235, 725 17th Street, N.W., Washington, D.C. 20503.
Telephone: (202) 395-7316.
SUPPLEMENTARY INFORMATION: Congress directed the Office of Management
and Budget (OMB) to prepare a Report to Congress on the Costs and
Benefits of Federal Regulations. Specifically, under Section 645 of the
Treasury, Postal Services and General Government Appropriations Act,
1997 (Pub. L. 104-208), the Director of OMB is to submit to Congress,
no later than September 30, 1997, a report that, in summary, provides
(1) estimates of the total annual costs and benefits of Federal
regulatory programs, (2) estimates of the costs and benefits of each
rule that is likely to have a gross annual effect on the economy of
$100,000,000 or more in increased costs, (3) an assessment of the
direct and indirect impacts of Federal rules, and (4) recommendations
from OMB and a description of significant public comments to reform or
eliminate any Federal regulatory program that is inefficient,
ineffective, or is not a sound use of the Nation's resources.
The attached document is a draft of this report to Congress. OMB is
to provide public notice and an opportunity to comment on the report
before it is submitted to Congress no later than September 30, 1997.
Issues for Comment
Accordingly, OMB seeks comments on all aspects of the attached
draft report, but in particular is interested in comments and
suggestions pertaining to the following:
1. The validity and reliability of the quantitative and qualitative
measures of the costs and benefits of regulations in the aggregate, as
well as of the individual regulations issued between April 1, 1996, and
March 31, 1997, discussed in the attached draft report;
2. The discussion of the direct and indirect effects of regulation;
3. Any additional studies that might provide reliable estimates or
assessments of the annual costs and benefits, or direct and indirect
effects, of regulation in the aggregate or of the individual
regulations that are discussed in the draft report; and
4. Programs or program elements on which there is objective and
verifiable information that would lead to a conclusion that such
programs are inefficient or ineffective and should be eliminated or
reformed.
Sally Katzen,
Administrator, Office of Information and Regulatory Affairs.
Draft Report to Congress on the Costs and Benefits of Federal
Regulations
Introduction
The Federal Government affects the lives of its citizens in a
variety of ways--through taxation, spending, grants, and loans, and
through regulation. Over time, regulation has become increasingly
prevalent in our society, and the importance of our regulatory
activities cannot now be overstated.
Both proponents and opponents of regulation have resorted to grand
characterizations of either the benefits or the costs of regulation,
without much substantiation and very little agreement on the underlying
facts. In order to help further the debate on the nation's regulatory
system, Congress adopted Section 645 of the Treasury, Postal Services
and General Government Appropriations Act, 1997 (Pub. L. 104-208) on
September 30, 1996. Section 645(a) directs the Director of the Office
of Management and Budget to submit to Congress, no later than September
30, 1997, a report that provides--
``(1) estimates of the total annual costs and benefits of Federal
Regulatory programs, including quantitative and nonquantitative
measures of regulatory costs and benefits;
``(2) estimates of the costs and benefits (including quantitative
and nonquantitative measures) of each rule that is likely to have a
gross annual effect on the economy of $100,000,000 or more in increased
costs;
``(3) an assessment of the direct and indirect impacts of Federal
rules on the private sector, State and local government, and the
Federal Government; and
``(4) recommendations from the Director and a description of
significant public comments to reform or eliminate any Federal
regulatory program or program element that is inefficient, ineffective,
or is not a sound use of the Nation's resources.''
The request for this report reflected a consensus that it could be
productive to assemble the information available, and acknowledge the
data gaps and the limits of the information at hand, all for the
purpose of improving the quality of the debate. The goals of this
statutory charge are worthwhile and important, but also very ambitious.
Having spent a considerable amount of time, we must acknowledge at the
outset that what we
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present is neither a complete response to the mandate, nor in many
respects as much as we would have liked to have done had we had more
time and resources. But it is, we believe, a useful step in the process
and will enable, we hope, a more constructive dialogue on this issue.
To be more specific, we found enormous data gaps in the information
available on regulatory benefits and costs. Accurate data is
particularly sparse on benefits, a fact that has been noted often by
commentators in the literature and analysts in the field. We were not
surprised by this finding. First, the limited quantified or monetized
data is partly a result of the obvious technical difficulties, many of
which we will discuss below (e.g., the problem of establishing
baselines or valuing qualities not generally traded in the
marketplace). Just as important, however, are the significant
``cultural'' or ``philosophical'' barriers to reducing values,
equities, and a myriad of physical or emotional effects to dollars and
cents. There are few agreed upon conventions for doing this, and
agencies are understandably reluctant to spend scarce time and
resources on what may be perceived as a not very informative exercise.
This is compounded by the belief of some that it is morally or
politically difficult or wrong to engage in such seemingly uncaring
calculations. Some also fear a tyranny of numbers--that is, ``if it is
quantified, the decision will necessarily be determined solely by the
numbers.'' Their understandable response is not to quantify or
monetize.
Nevertheless, the fact remains that explicitly quantifying and
monetizing benefits and costs significantly enhances the consideration
of alternative approaches to achieving regulatory goals, ultimately
producing more benefits with fewer costs. As explained more fully
below, President Clinton's Executive Order 12866, ``Regulatory Planning
and Review,'' recognizes and incorporates this principle, requiring
agencies to quantify both costs and benefits to the best of their
ability and to the extent permitted by law. This report takes up the
challenge of the Executive Order and Section 645 and candidly presents
the available information on both the total costs and benefits of
regulation and the costs and benefits of the recent major individual
regulations. We hope that this is just the beginning of an important
dialogue to improve our knowledge about the effects of regulation on
the public, the economy, and American society.
This document is only a draft of our report. Section 645(b)
requires the Director of OMB to provide public notice and an
opportunity to comment on the report before it is submitted to Congress
at the end of September 1997. Accordingly we seek comments on all
aspects of this document, but in particular are interested in comments
and suggestions pertaining to the following:
The validity and reliability of the quantitative and
qualitative measures of the costs and benefits of regulations in the
aggregate, as well as of the individual regulations discussed;
Our discussion of the direct and indirect effects of
regulation;
Any additional studies that might provide reliable
estimates or assessments of the annual costs and benefits, or direct
and indirect effects, of regulation in the aggregate or of the
individual regulations issued between April 1, 1996, and March 31,
1997, that we discuss; and;
Programs or program elements on which there is objective
and verifiable information that would lead to a conclusion that such
programs are inefficient or ineffective and should be eliminated or
reformed.
All comments received will be carefully considered in preparing the
final report that will be submitted to Congress.
The draft report is divided into four chapters: chapter I sets the
context and provides the background for the next three chapters. It
discusses the development of our regulatory system and demonstrates the
breadth of activity that is called regulation, which ranges from
economic regulation such as price supports of agricultural products to
social regulation such as the protection of workers and the
environment. It tracks the use of benefit-cost analysis to evaluate
specific regulations, with the recognition of the limits of
quantification and its permitted use under the law. Chapter I concludes
by presenting the outline of the ``best practices'' guidance that the
current regulatory review program under Executive Order 12866 uses in
conducting economic analyses and estimating costs and benefits of
economically significant regulations.
In accordance with Section 645(a)(1), chapter II presents our best
estimate of the total costs and benefits of Federal regulation. We use
a well recognized, peer reviewed study (Hahn and Hird 1991) for the
costs and benefits of regulations as of 1988, supplemented by an
Environmental Protection Agency (EPA) report to Congress (Cost of Clean
1990); we then add information about costs and benefits from agency
regulatory impact analyses (RIAs) for regulations that have been issued
since 1988. In almost all cases, the RIAs have gone through notice and
comment and been reviewed by OMB for accuracy and reliability. The
figures derived are approximately $200 billion in annual costs and $300
billion in annual benefits for environmental and social regulation and
about $90 billion in annual costs and nominal benefits for economic
regulation. While this information is useful, we cannot over emphasize
the limitations of these estimates for use in making recommendations
about reforming or eliminating regulatory programs. As discussed in
this chapter, aggregate estimates of the costs and benefits of
regulation offer little guidance on how to improve the efficiency,
effectiveness or soundness of the existing body of regulation. This
chapter also discusses the possible indirect effects of regulation on
the economy as directed by Section 645(a)(3) and concludes that the
effects are ambiguous theoretically, not well understood empirically,
and offer little content for making recommendations about regulatory
policy.
In fulfillment of Section 645(a)(2), chapter III provides data on
the costs and benefits of each of the economically significant
regulations reviewed by OMB under Executive Order 12866 over the period
from April 1, 1996, to March 31, 1997. These data were developed by the
agencies as required by the Executive Order. For the most part, these
data were subject to notice and public comment and reviewed by OMB. We
conclude that although the agency analyses described in Chapter III
provide much useful information on Federal regulatory programs and
provisions of regulations, there should be further improvement in
providing high quality data and analyses before decisions about
modifying regulatory programs can be made.
Chapter IV provides recommendations aimed at further developing the
information, methodologies, and analyses necessary for improving the
efficiency, effectiveness and soundness of regulatory programs and
program elements as required by Section 645(a)(4). We also propose
several ways for the agencies and OMB to work together to improve the
quality of the data and analysis found in the economic impact studies
submitted to OMB under Executive Order 12866, including ``best
practices'' training sessions and interagency peer reviews of selected
regulatory programs.
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Chapter I. The Role of Economic Analysis in Regulatory Reform
1. Federal Regulatory Programs
The regulatory programs that exist today are the product of many
different forces, often operating independently of one another, but
with the support--over many decades--of both major political parties in
both the Legislative and Executive branches.
The History of Major Regulatory Programs
Federal regulation as we know it began in the late 19th century
with the creation of the Interstate Commerce Commission, which was
charged with protecting the public against excessive and discriminatory
railroad rates. The regulation was economic in nature, setting rates
and regulating the provision of railroad services. Having achieved some
success, this administrative model of an independent, bipartisan
commission, reaching decisions through an adjudicatory approach, was
used for the Federal Trade Commission (FTC) (1914), the Water Power
Commission (1920) (later the Federal Power Commission), and the Federal
Radio Commission (1927) (later the Federal Communications Commission).
In addition, during the early 20th century, Congress created several
other agencies to regulate commercial and financial systems--including
the Federal Reserve Board (1913), the Tariff Commission (1916), the
Packers and Stockyards Administration (1916), and the Commodities
Exchange Authority (1922)--and to ensure the purity of certain foods
and drugs, the Food and Drug Administration (1931).
Federal regulation began in earnest in the 1930s with the
implementation of wide-ranging New Deal programs. Some of the New Deal
economic regulatory programs were implemented by the Federal Home Loan
Bank Board (1932), the Federal Deposit Insurance Corporation (FDIC)
(1933), the Commodity Credit Corporation (1933), the Farm Credit
Administration (1933), the Securities and Exchange Commission (SEC)
(1934), and the National Labor Relations Board (1935). In addition, the
jurisdiction of both the Federal Communications Commission (FCC) and
the Interstate Commerce Commission were expanded to regulate other
forms of communications (e.g., telephone and telegraph) and other forms
of transport (e.g., trucking). In 1938, the role of the Food and Drug
Administration (FDA) was expanded to include prevention of harm to
consumers in addition to corrective action. The New Deal also called
for the establishment of an agency to enforce the Fair Labor Standards
Act of 1938 in the Department of Labor, which is now called the
Employment Standards Administration.
A second burst of regulation began in the late 1960s with the
enactment of comprehensive, detailed legislation intended to protect
the consumer, improve environmental quality, enhance work place safety,
and assure adequate energy supplies. In contrast to the pattern of
economic regulation adopted before and during the New Deal, the new
social regulatory programs tended to cross many sectors of the economy
(rather than individual industries) and affect industrial processes,
product designs, and by-products (rather than entry, investment, and
pricing decisions).
The consumer protection movement of that era led to creation in the
then newly formed Department of Transportation (DOT) of several
agencies designed to improve transportation safety. They included the
Federal Highway Administration (1966), which sets highway and heavy
truck safety standards; the Federal Railroad Administration (1966),
which sets rail safety standards; and the National Highway Traffic
Safety Administration (1970), which sets safety standards for
automobiles and light trucks. Regulations were also authorized pursuant
to the Truth in Lending Act, the Equal Credit Opportunity Act, the
Consumer Leasing Act, and the Fair Debt Collection Practices Act. The
National Credit Union Administration (1970) and the Consumer Product
Safety Commission (1972) were also created to protect consumer
interests.
In 1970, the Environmental Protection Agency (EPA) was created to
consolidate and expand environmental programs. Its regulatory authority
was expanded through the Clean Air Act (1970), the Clean Water Act
(1972), the Safe Drinking Water Act (1974), the Toxic Substances
Control Act (1976), and the Resource Conservation and Recovery Act
(1976). This effort to improve environmental protection also led to the
creation of the Materials Transportation Board (1975) (now part of the
Research and Special Programs Administration in the DOT) and the Office
of Surface Mining Reclamation and Enforcement (1977) in the Department
of the Interior (DOI).
The Occupational Safety and Health Administration (1970) was
established in the Department of Labor (DOL) to enhance work place
safety. Major mine safety and health legislation had been passed in
1969, following prior statutes reaching back to 1910. Enforcement
responsibility now lies with the Mine Safety and Health Administration,
also in the DOL. The Pension Benefit Guaranty Corporation and the
Pension and Welfare Administration were established in 1974 to
administer and regulate pension plan insurance systems.
Also in the 1970s, the Federal Government attempted to address the
problems of the dwindling supply and the rising costs of energy. In
1973, the Federal Energy Administration (FEA) was directed to manage
short-term fuel shortage. Less than a year later, the Atomic Energy
Commission was divided into the Energy Research and Development
Administration (ERDA) and an independent Nuclear Regulatory Commission
(NRC). In 1977, the FEA, ERDA, the Federal Power Commission, and a
number of other energy program responsibilities were merged into the
Department of Energy (DOE) and the independent Federal Energy
Regulatory Commission.
Another significant regulatory agency, the Department of
Agriculture (USDA) (1862), has grown over time so that it now regulates
the price, production, import, and export of agricultural crops; the
safety of meat, poultry, and certain other food products; a wide
variety of other agricultural and farm-related activities; and broad-
reaching welfare programs. Agriculture regulatory authorities have
changed over time, but now include the U.S. Forest Service (1905), the
Natural Resources Conservation Service (1935), the Farm Service Agency
(1961), the Food and Consumer Service (1969), the Agricultural
Marketing Service (1972), the Federal Grain Inspection Service (1976),
the Animal and Plant Health Inspection Service (1977), the Foreign
Agricultural Service (1974), the Food Safety and Inspection Service
(1981), and the Rural Development Administration (1990).
In addition to the regulatory agencies listed above, most
Departments and agencies also issue regulations that affect the public
in a variety of ways such as:
Eligibility standards and documentation requirements for
government benefit programs, i.e., USDA's Food and Nutrition Service,
Health and Human Services' (HHS) Health Care Financing Administration,
Housing and Urban Development's (HUD) Federal Housing Administration,
DOL's Employment and Training Administration, and DOI's Bureau of
Indian Affairs as well as Veterans Affairs, Education, the Department
of
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Defense, and the Social Security Administration;
Use and leasing requirements for Federal lands and
resources, i.e., USDA's Forest Service and DOI's Bureau of Land
Management and National Park Service; and
Revenue collection requirements, i.e., Treasury's Internal
Revenue Service, Customs Service, and Bureau of Alcohol, Tobacco and
Firearms.
The consequence of the long history of regulatory activities is
that Federal regulations now affect virtually all individuals,
businesses, State, local, and tribal governments, and other
organizations in virtually every aspect of their lives or operations.
Some rules are based on old statutes; others on relatively new ones.
Some regulations are critically important (such as the safety criteria
for airlines or nuclear power plants); some are relatively trivial
(such as setting the times that a draw bridge may be raised or
lowered). But each has the force and effect of law and each must be
taken seriously.
The Nature of Regulation
It is conventional wisdom that competition in the marketplace is
the most effective regulator of economic activity. Why then is there so
much regulation? The answer is that markets are not always perfect and
when they are not, society's resources may be imperfectly or
inefficiently used. The advantage of regulation is that it can improve
resource allocation or help obtain other societal benefits. For
example, consider the following situations:
--Certain markets may not be sufficiently competitive, thus potentially
subjecting consumers to the harmful exercise of market power (such as
higher prices or artificially limited supplies). Regulation can be used
to protect consumers by regulating prices charged by natural monopolies
or preventing firms from restricting competition through mergers,
collusion or creating entry barriers.
--In an unregulated market, firms and individuals may impose costs on
others--including future generations--that are not reflected in the
prices of the products they buy and sell. They may pollute streams,
cause health hazards, or endanger the safety of their workers or
customers. Regulation can be used to reduce these harmful effects by
prohibiting certain activities or imposing the societal costs of the
activity in question on those causing the harm. One goal of regulation
is to induce private parties to act as they would if they had to bear
the full costs that they impose on others.
--Similarly, in an unregulated market, firms and individuals may not
have incentives to provide individuals with accurate or sufficient
information needed to make intelligent choices. Firms may mislead
consumers or take advantage of consumer ignorance to market unsafe or
risky products. Regulation may be needed to require disclosure of
information, such as the possible side effects of a drug, the contents
of a food or packaged good, the energy efficiency of an appliance, or
the full cost of a home mortgage.
--Even when consumers have full information, the Government may wish to
protect individuals, especially children, from their own actions.
Regulation may thus be used to restrict certain unacceptable or harmful
practices such as substance abuse.
--Regulation can also be beneficial in achieving goals that reflect our
national values, such as equal opportunity and universal education, or
a respect for individual privacy.
There are also many potential disadvantages of regulating--to the
Government, to those regulated, and to society at large--that can give
rise to significant costs.
--The direct costs of administering, enforcing, and complying with
regulations may be substantial. Some of these costs may be borne by the
Government, while others are paid for by firms and individuals,
eventually being reflected in the form of higher prices, lower wages,
and foregone investment, research, and output.
--There are also disadvantages of regulation that are difficult to
measure, such as adverse effects on flexibility and innovation, which
may impair productivity and competitiveness in the global marketplace,
and counterproductive private incentives, which may distort investment
or reduce needed supporting activities.
In short, regulations (like other instruments of government policy)
have enormous potential for both good and harm. Well-chosen and
carefully crafted regulations can protect consumers from dangerous
products and ensure they have information to make informed choices.
Such regulations can limit pollution, increase worker safety,
discourage unfair business practices, and contribute in many other ways
to a safer, healthier, more productive, and more equitable society.
Excessive or poorly designed regulations, by contrast, can cause
confusion and delay, give rise to unreasonable compliance costs in the
form of capital investments, labor and ongoing paperwork, retard
innovation, reduce productivity, and accidentally distort private
incentives.
The only way we know to distinguish between the regulations that do
good and those that cause harm is through careful assessment and
evaluation of their benefits and costs. Such analysis can also often be
used to redesign harmful regulations so they produce more good than
harm and redesign good regulations so they produce even more net
benefits. The next section describes how regulatory analysis has
evolved to do just that.
2. Development of the U.S. Regulatory Analysis Program
As discussed above, the late 1960's and early 1970's marked a
period in U.S. history of major expansion of health, safety and
environmental regulation. Numerous new government agencies were set up
to protect the American workplace, the environment, highway travelers,
and consumers. As with almost every political development, the
significant growth in the amount and kinds of regulation created a
counter political development that ultimately produced a companion
program to evaluate the regulatory system.
The Nixon and Ford Review Programs
The Nixon Administration established in 1971 a little known review
group in the White House called the ``Quality of Life Review'' program.
The program focused solely on environmental regulations to minimize
burdens on business. These reviews did not utilize analysis of the
benefits and costs to society. The controversy that resulted from the
program began a debate about both Presidential review of regulations
and the use of benefit-cost analysis that would continue for two
decades and to some extent continues today.
Soon after Gerald Ford became President in 1974, he held an
economic summit that included top industry leaders and economists to
seek solutions to the stagflation and slow growth that the nation was
then facing. Out of that summit came proposals to establish a new
government agency in the Executive Office of the President, called the
Council on Wage and Price Stability (CWPS), to monitor the inflationary
actions of both the government and private sectors of the economy. It
also led President Ford to issue Executive Order 11821, requiring
government agencies to prepare inflation impact statements before they
issued costly new regulations. The innovative aspect
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of the Ford program was the creation of a specific White House agency
to review the inflationary actions, mainly regulations, of other
government agencies. CWPS was staffed primarily by economists drawn
from academia and had little authority beyond the influence of public
criticism.
The economists at CWPS quickly concluded that a regulation would
not be truly inflationary unless its costs to society exceeded the
benefits it produced. Thus the economists turned the inflation impact
statement into a benefit-cost analysis. This requirement, that agencies
do an analysis of the benefits and costs of their ``major'' proposed
regulations--generally defined as having an annual impact on the
economy of over $100 million--was adopted in modified form by each of
the four next Presidents.
The Administrative Procedure Act requires agencies to give the
public and interested parties a chance to comment on proposed
regulations before they are adopted in final form. The agency issuing
the regulation must respond to the comments and demonstrate that what
it is intending to do is within its scope of authority and is not
``arbitrary or capricious.'' CWPS used this formal comment process to
file its critiques of the agencies' economic analyses of the benefits
and costs of proposed regulations. CWPS would also issue a press
release summarizing its filing in non-technical terms. The CWPS
analyses attracted considerable publicity. But while this system was
effective in preventing some unsupportable regulations from becoming
law, it had little success in preventing the issuance of poorly thought
out regulations that had strong interest group support.
Nevertheless, one of the legacies of this approach was that it
slowly built an economic case against poorly conceived regulations,
raising interest particularly among academics and students who began to
use the publicly available analyses in their textbooks and courses.
When benefit-cost analysis was first introduced, it was not welcomed by
the political establishment, especially the lawyers and other non-
economists who comprised many agencies and congressional staffs. But
over time, as these analyses became standard fare in textbooks, the
value and legitimacy of benefit-cost analysis became evident, and it
slowly gained acceptance among the public.
The Carter Review Program
After President Carter came to office in 1977, the regulating
agencies argued that the Executive Office of the President should not
have a role in reviewing their regulations. On the other hand, the
President's chief economic advisers argued that a centralized review
program based on careful economic analysis was necessary to assure that
regulatory burdens on the economy were properly considered and that the
regulations that were issued were cost effective. Rapidly escalating
inflation in 1978 convinced President Carter of the need to act. In
March of 1978, he issued Executive Order 12044, ``Improving Government
Regulations.'' It established general principles for agencies to follow
when regulating and required regulatory analysis to be done for rules
that ``may have major economic consequences for the general economy,
for individual industries, geographical regions or levels of
government.''
President Carter also set up a new group, called the Regulatory
Analysis Review Group (RARG), with instructions to review up to ten of
the most important regulations each year. The RARG was chaired by the
Council of Economic Advisors (CEA) and was composed of representatives
of OMB and the economic and regulatory agencies. It relied on the staff
of CWPS and the CEA to develop evaluations of agency regulations and
the associated economic analyses and to place these analyses in the
public record of the agency proposing to issue the regulation. The
analyses were reviewed by the RARG members and reflected the views of
the member agencies, including the agency that proposed the regulation.
In this way, the Carter Administration helped to institutionalize
both regulatory review by the Executive Office of the President and the
utility of benefit-cost analysis for regulatory decision makers. Also,
in an important legal ruling, the U.S. Court of Appeals for the
District of Columbia in Sierra Club v. Costle (657 F. 2d 298 (1981))
found that a part of the President's administrative oversight
responsibilities was to review regulations issued by his subordinates.
The Reagan/Bush Reform Effort
During the Presidential campaign of 1980, the issue was not whether
to continue a regulatory review oversight program, but whether to
strengthen it. President Reagan had made regulatory relief one of his
four pillars for economic growth--in addition to reducing government
spending, tax cuts, and steady monetary growth. He specifically used
the term ``regulatory relief'' rather than ``regulatory reform'' to
emphasize his desire to cut back regulations, not just make them more
cost effective. One of his first acts as President was to issue
Executive Order 12291, ``Federal Regulation'' (February 17, 1981).
The Reagan regulatory oversight program differed from the Carter
Program in a number of important respects. First, it required that
agencies not only prepare cost-benefit analyses for major rules, but
also that they issue only regulations that maximize net benefits
(social benefits minus social costs). Second, OMB, and within OMB the
Office of Information and Regulatory Affairs (OIRA), replaced CWPS as
the agency responsible for centralized review. Third, agencies were
required to send their proposed regulations and cost-benefit analyses
in draft form to OMB for review before they were issued. Fourth, it
required agencies to review their existing regulations to see which
ones could be withdrawn or scaled back. Finally, President Reagan
created The Task Force on Regulatory Relief, chaired by then-Vice
President Bush, to oversee the process and serve as an appeal mechanism
if the agencies disagreed with OMB's recommendations. Together these
steps established a more formal and comprehensive centralized
regulatory oversight program.
In 1985, President Reagan issued Executive Order 12498,
``Regulatory Planning Process,'' that further strengthened OMB's
oversight role by extending it earlier into the regulatory development
process. The Order required that agencies annually send OMB a detailed
plan on all the significant rules that they had under development. OMB
coordinated the plans with other interested agencies and could
recommend modifications. It also compiled these detailed descriptions
of the agencies' most important rules--usually about 500--in one large
volume called the Regulatory Program of the U.S. Government.
The Bush Administration continued the regulatory review program of
the Reagan Presidency. Nonetheless, the pace of new health, safety, and
environmental regulations that had begun to increase at the end of the
Reagan Administration continued during the first two years of the Bush
Administration. In 1990, President Bush responded to expressions of
concern about increasing regulatory burdens by returning to the
approach used by the Reagan Task Force on Regulatory Relief. Vice
President Quayle was placed in charge of a task force--now called the
Competitiveness Council--whose mission was to provide regulatory
relief.
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The Clinton Review Program
On September 30, 1993, President Clinton issued Executive Order
12866, ``Regulatory Planning and Review.'' The Order reaffirmed the
legitimacy of centralized review but reestablished the primacy of the
agencies in regulatory decision making. It retained the requirement for
analysis of benefits and costs, quantified to the maximum extent
possible, and the general principle that the benefits of intended
regulations should justify the costs. In addition, while continuing the
basic framework of regulatory review established in 1981, it made
several changes in response to criticisms that had been voiced against
the Reagan/Bush programs.
One of the changes was to focus OMB's resources on the most
significant rules, allowing agencies to issue less important
regulations without OMB review. OMB had been reviewing about 2,200
regulations per year with a staff of less than 40 professionals. This
change enabled OMB to add greater value to its review by focusing on
the most important rules.
A second change was the establishment of a 90-day period for OMB
review of proposed rules. Executive Order 12291 contained no strict
limit on the length of review, and some reviews had dragged on for
several years before resolution. The Clinton Executive Order also set
up a mechanism for a timely resolution of any disputes between OMB and
agency heads.
A third change was to increase the openness and accountability of
the review process. All documents exchanged between OIRA and the agency
during the review are made available to the public at the conclusion of
the rulemaking. The Executive Order also requires that records be kept
of any meetings with people outside of the Executive branch on
regulations under review by OMB, that agency representatives be invited
to attend the meetings, and that all written communications be placed
in the public docket and given to the agency.
OMB has produced three reports on its implementation of this
Executive Order. On May 1, 1994, OMB published a six month assessment
of the Executive Order that the President had requested when he issued
the Order (Report to the President On Executive Order No. 12866, 1994).
The report concluded that many initial improvements in the regulatory
review system had been made, but that in some areas it was taking
longer to show results than expected. Among other things, the report
documented that the new Executive Order was resulting in increased
selectivity. The 578 rules reviewed by OMB over the six-month period
was about one half the rate of review under the previous Executive
Order. Freeing up limited staff resources to concentrate on the more
significant rules resulted in a higher percentage of changes to the
rules reviewed. Second, the new time limits for OMB review were for the
most part being met. Of the 578 reviews completed in the first six
months of the Executive Order, only three had gone beyond 90 days and
those delays were requested by the agencies. Third, the report
concluded that the new requirements for openness and accountability
were being met. During the six-month period, 36 meetings were held with
outsiders about specific rules under review. These meetings were
disclosed to the public and agency representatives were always invited.
In October 1994, OIRA produced a second report entitled, The First
Year of Executive Order No. 12866, that basically confirmed the
findings of the first report. The number of significant rules that OIRA
was reviewing fell to a rate of about 900 per year, 60 percent lower
than the 2200 per year average reviewed under the previous Executive
Order, and the number of rules that were changed continued to increase.
About 15 percent of the rules were ``economically significant''--
meaning in general that the regulation was expected to have an effect
on the economy of more that $100 million per year. The 90-day review
period was generally observed, and there were about 70 meetings during
the first year, to which agency representatives were invited. The
report concluded that the new openness and transparency policy had
served to defuse, if not eliminate, the criticism of OIRA's regulatory
impact analysis and review program.
The third report, More Benefits Fewer Burdens: Creating a
Regulatory System that Works for the American People, was issued in
December 1996. The report provided a series of examples of how the
agencies and OMB had worked together to produce regulations that
adhered to the principles of Executive Order 12866. The examples were
organized around six broad themes, several of which emphasize economic
analysis and efficiency:
Properly identifying problems and risks to be addressed,
and tailoring the regulatory approach narrowly to address them;
Developing alternative approaches to traditional command-
and-control regulation, such as using performance standards (telling
people what goals to meet, not how to meet them), relying on market
incentives, or issuing nonbinding guidance in lieu of rules;
Developing rules that, according to sound analysis, are
cost-effective and have benefits that justify their costs.
Consulting with those affected by the regulation,
especially State, local, and tribal governments;
Ensuring that agency rules are well coordinated with rules
or policies of other agencies; and
Streamlining, simplifying, and reducing burden of Federal
regulation.
The report included examples of incremental improvements in the
regulatory systems across the government. Although few major
eliminations or reforms of regulatory programs were listed, the sum of
the improvements indicated that significant benefits were attained with
lower costs. A key recommendation of this report was the continued use
by the agencies, and vigorous promotion by OMB, of the principles of
the Executive Order.
An appendix to More Benefits Fewer Burdens contained information on
the costs of regulations issued between 1987 and 1996, which we use
below to estimate the aggregate costs of regulation. Another appendix
included a discussion of regulatory reform legislation that President
Clinton had supported and was passed by Congress during the three-year
period, including three statutes that require agencies to follow
certain procedures and/or consider various economic impacts before
taking regulatory action: the Unfunded Mandates Reform Act of 1995, the
Paperwork Reduction Act of 1995, and the Small Business Regulatory
Enforcement Fairness Act of 1996.
3. Basic Principles for Assessing Benefits and Costs
In order to help agencies prepare the economic analyses required by
Executive Order 12866 or the various statutes enacted by the Congress
in the last few years, OMB developed, through an interagency process, a
``Best Practices'' manual that was issued on January 11, 1996. Best
Practices sets the standard for high quality economic analysis of
regulation--whether in the form of a prospective regulatory impact
analysis of a proposed regulation, or in the form of a retrospective
evaluation of a regulatory program. The principles that are described
in detail in Best Practices are summarized here because they can serve
as an introduction to how we have evaluated the studies on the costs
and benefits of regulation discussed in the following chapters. We
discuss those principles in Best
[[Page 39358]]
Practices that are general in nature, then those that pertain to
benefits, and then those that pertain to costs.
General Principles
Costs and benefits must be measured relative to a baseline.
Typically, this baseline is constructed to reflect policy in the
absence of the regulation being evaluated, consistent with pending
government actions, and applied equally to benefits and costs. In some
instances where the likelihood of government actions is uncertain,
analysis with multiple baselines is appropriate.
Costs and benefits should be presented in a way to maximize their
consistency or comparability. Costs and benefits can be monetized,
quantified but not monetized, or presented in qualitative terms. A
monetized estimate is one that either occurs naturally in dollars
(e.g., increased costs by a business to purchase equipment needed to
comply with a regulation) or has been converted into dollars using some
specified methodology (e.g., the number of avoided health effects
multiplied by individuals' estimated willingness-to-pay to avoid them).
A quantitative estimate is one which is expressed in metric units other
than dollars (e.g., tons of pollution controlled, number of endangered
species protected from extinction). Finally, a qualitative estimate is
one which is expressed in ordinal or nominal units or is purely
descriptive. Presentation of monetized benefits and costs is preferred
where acceptable estimates are possible. However, monetization of some
of the effects of regulations is often difficult, if not impossible,
and even the quantification of some effects may not be easy. As
discussed below, aggregating costs and benefits is particularly
difficult, if not impossible, where they are not presented in
consistent or comparable units.
An economic analysis cannot reach a conclusion about whether net
benefits are maximized--the key economic goal for good regulation--
without consideration of a broad range of alternative regulatory
options. To help decision-makers understand the full effects of
alternative actions, the analysis should present available physical or
other quantitative measures of the effects of the alternative actions
where it is not possible to present monetized benefits and costs, and
also present qualitative information to characterize effects that
cannot be quantified. Information should include the magnitude, timing,
and likelihood of impacts, plus other relevant dimensions (e.g.,
irreversibility and uniqueness). Where benefit or cost estimates are
heavily dependent on certain assumptions, it is essential to make those
assumptions explicit, and where alternative assumptions are plausible,
to carry out sensitivity analyses based on the alternative assumptions.
The large uncertainties implicit in many estimates of risks to
public health, safety or the environment make treatment of risk and
uncertainty especially important. In general, the analysis should fully
describe the range of risk reductions, including an identification of
the central tendency in the distribution; risk estimates should not
present either the upper-bound or the lower-bound estimate alone.
Those who bear the costs of a regulation and those who enjoy its
benefits often are not the same people. The term ``distributional
effects'' refers to the distribution of the net effects of a regulatory
alternative across the population and economy, divided in various ways
(e.g., income groups, race, sex, industrial sector). Where distributive
effects are thought to be important, the effects of various regulatory
alternatives should be described quantitatively to the extent possible,
including their magnitude, likelihood, and incidence of effects on
particular groups. There are no generally accepted principles for
determining when one distribution of net benefits is more equitable
than another. Thus, the analysis should be careful to describe
distributional effects without judging their fairness.
Benefits
The analysis should state the beneficial effects of the proposed
regulatory change and its principal alternatives. In each case, there
should be an explanation of the mechanism by which the proposed action
is expected to yield the anticipated benefits. As noted above, an
attempt should be made to quantify all potential real benefits to
society in monetary terms to the maximum extent possible, by type and
time period. Any benefits that cannot be monetized, such as an increase
in the rate of introducing more productive new technology or a decrease
in the risk of extinction of endangered species, should also be
presented and explained.
The concept of ``opportunity cost'' is the appropriate construct
for valuing both benefits and costs. The principle of ``willingness-to-
pay'' captures the notion of opportunity cost by providing an aggregate
measure of what individuals are willing to forgo to enjoy a particular
benefit. Market transactions provide the richest data base for
estimating benefits based on willingness-to-pay, as long as the goods
and services affected by a potential regulation are traded in markets.
Where market transactions are difficult to monitor or markets do
not exist, analysts should use appropriate proxies that simulate
willingness-to-pay based on market exchange. A variety of methods have
been developed for estimating indirectly traded benefits. Generally,
these methods apply statistical techniques to distill from observable
market transactions the portion of willingness-to-pay that can be
attributed to the benefit in question. Contingent-valuation methods
have become increasingly common for estimating indirectly traded
benefits, but the reliance of these methods on hypothetical scenarios
and the complexities of the goods being valued by this technique raise
issues about its accuracy in estimating willingness to pay compared to
methods based on (indirect) revealed preferences.
Health and safety benefits are a major category of benefits that
are indirectly traded in the market. The willingness-to-pay approach is
conceptually superior, but measurement difficulties may cause agencies
to prefer valuations of reductions in risks of nonfatal illness or
injury based on the expected direct costs avoided by such risk
reductions. The primary components of the direct-cost approach are
medical and other costs of offsetting illness or injury; costs for
averting illness or injury (e.g., expenses for goods such as bottled
water or job safety equipment that would not be incurred in the absence
of the health or safety risk); and the value of lost production.
Values of fatality risk reduction often figure prominently in
assessments of government action. Reductions in fatality risks as a
result of government action are best monetized according to the
willingness-to-pay approach for small reductions in mortality risk,
usually presented in terms of the value of a ``statistical life'' or of
``statistical life-years'' extended.
It is important to keep in mind the larger objective of
consistency--subject to statutory limitations--in the estimates of
benefits applied across regulations and agencies for comparable risks.
Failure to maintain such consistency prevents achievement of the most
risk reduction from a given level of resources spent on risk reduction.
Costs
The preferred measure of cost is the ``opportunity cost'' of the
resources used or the benefits forgone as a result of the regulatory
action. Opportunity costs include, but are not limited to, private-
[[Page 39359]]
sector compliance costs and government administrative costs.
Opportunity costs also include losses in consumers' or producers'
surpluses, discomfort or inconvenience, and loss of time. The
opportunity cost of an alternative also incorporates the value of the
benefits forgone as a consequence of that alternative. For example, the
opportunity cost of banning a product (e.g., a drug, food additive, or
hazardous chemical) is the forgone net benefit of that product, taking
into account the mitigating effects of potential substitutes. All costs
calculated should be incremental--that is, they should represent
changes in costs that would occur if the regulatory option is chosen
compared to costs in the base case (ordinarily no regulation or the
existing regulation) or under a less stringent alternative. As with
benefit estimates, the calculation of costs should reflect the full
probability distribution of potential consequences.
An important, but sometimes difficult, problem in cost estimation
is to distinguish between real costs and transfer payments. As
discussed below, transfer payments are not social costs but rather are
payments that reflect a redistribution of wealth. While transfers
should not be included in the estimates of the benefits and costs of a
regulation, they may be important for describing the distributional
effects of a regulation.
Chapter II. Estimates of the Total Annual Costs and Benefits of Federal
Regulatory Programs
1. Overview
This chapter discusses the total annual costs and benefits of
existing Federal regulatory programs called for by Section 645(a)(1).
Before doing so, however, it is important to place the subject in
perspective. First, we need to keep in mind the discussion in chapter I
on best practices for estimating costs and benefits. Second, it is
important to ask: What public policy purposes do aggregate estimates
serve? And, in particular: In what ways can these estimates help
support the recommendations to reform the regulatory system required of
the Director by Section 645(a)(4)? Clearly, knowing the costs and
benefits of proposed regulatory actions and their alternatives,
including the alternative of no action, enables policy officials to
make decisions that improve society's well being. But for reasons
discussed below, knowing the total costs and total benefits of all of
the many and diverse regulations that the Federal government has issued
provides little specific guidance for regulatory decisions.
For example, four possible outcomes can result from totaling up the
costs and benefits of all existing Federal regulations:
(1) High costs and high benefits.
(2) High costs and low benefits.
(3) Low costs and high benefits.
(4) Low costs and low benefits.
Given the intensity of the debate over regulatory reform,
categories (3) and (4) are not likely outcomes of careful and fair
accounting. A priori, it is not clear which of the remaining two
categories is most likely. But does it matter? In each case, the policy
guidance would be the same. Real economic improvement comes from
expanding those significant regulatory programs that provide benefits
that are greater than costs and contracting those programs that provide
benefits that are less than costs. The substance is in the details, not
in the total.
The implication of this discussion is that an excessive amount of
resources should not be devoted to estimating the total costs and
benefits of all Federal regulations. To the extent that the costs and
benefits of specific regulatory programs can easily be combined, some
indication of the importance of regulatory reform can be inferred by
the magnitude of these estimates, but knowing the exact amounts of
total costs and benefits, even if that were possible, adds little of
value.
This proposition is important because it is extremely difficult, if
not impossible, to estimate the actual total costs and benefits of all
existing Federal regulations with any degree of precision. There are at
least two types of intractable problems that make this so.
The Baseline Problem
In order to estimate the impact of regulations on society and the
economy, one has to determine the counterfactual--that is, how things
would have been if the regulation had not been issued. In other words,
what is the baseline against which costs and benefits should be
measured? With respect to estimating total costs and benefits of all
Federal regulations, the baseline problem has several dimensions.
First, it is impossible to determine the true counterfactual, since
it never happened. What would have happened in the absence of
regulation can only be an educated guess. Furthermore, the greater the
hypothesized difference between reality and the counterfactual, the
more problematic the exercise. For example, some estimates of the total
cost of regulation include the cost of compliance with our tax system.
But to twist a phrase, one can no more easily imagine a world without
taxes than one can imagine a world without death. It is also difficult
to imagine a world without health, safety, and environmental
regulation. Could a civil society even exist without regulation? In
other words, what do we use as the baseline for a world without any
regulation?
Second, even disregarding the problem of modeling large changes,
there are significant difficulties in determining the counterfactual
for individual regulations that one could begin to aggregate. One can
survey firms and other regulated entities on their expected compliance
costs either ex ante, before the regulation is implemented, or ex post,
after the regulation has gone into effect. For both types of studies,
the problem of potential bias must be kept in mind. It is often alleged
that strategic behavior may color both regulators' and the regulated's
estimates of the cost of regulation (Hahn and Hird 1991, Hopkins 1991,
and Hahn 1996). Agencies are generally advocates of their programs and
businesses generally are not in favor of regulation. In the ordinary
course, therefore, the best studies are ex post studies done by
individuals who do not have vested interests, but do have reputations
as objective analysts to uphold.
Often only ex ante cost estimates are available, but even if firms'
or agencies' estimates are unbiased at the time, technological change
or ``learning-by-doing'' may result in those estimates overstating
compliance costs (Hahn and Hird 1991 and Hahn 1996). In fact, there is
much evidence that competition among regulated firms often reduces
expected compliance costs once real time and effort is directed at the
problem (Office of Technology Assessment 1995).
While ex post studies are likely to be more accurate than ex ante
studies because firms should by then have had experience with actual
regulatory compliance costs, ex post cost estimates have their own
problems. Properly done they are likely to be resource and time
intensive. Firms do not usually keep their cost accounting estimates
according to what regulations are driving them. Thus, when surveyed,
firms have to reconstruct causality. A recent General Accounting Office
(GAO) report details the difficulties the GAO had in trying to
determine the total cost of Federal regulation by surveying a sample of
firms. The firms reported great difficulty in estimating their own
costs of compliance because they could not easily separate Federal from
State and local regulation and because they
[[Page 39360]]
did not keep records on incremental costs of regulation (See GAO 1996,
pp. 49-51). Some studies have attempted to address this problem
reasonably successfully by comparing the results of different degrees
of regulation in different localities or time periods.
Moreover, virtually all of the studies of the costs of regulation
produced to date are measuring the expenditures of firms required (ex
ante or ex post) by regulation, whereas the cost to society of
regulation should be measured by the change in consumer and producer
surplus associated with the regulation and with any price and/or income
changes that may result (Cropper and Oates 1992). At one extreme,
ignoring the consumer surplus loss produced by a ban understates costs
to society because although no compliance expenditures are required,
consumers can no longer buy the product. At the other extreme,
calculating compliance expenditures based on pre-regulation output
overstates costs because if the firm raises prices to cover compliance
costs, consumers will shift to other products, which reduces their
welfare losses (Cropper and Oats 1992, p. 722).
A third problem relates to the economy and the appropriateness of
the baseline for the purpose for which it is expected to be used. If
the objective is to reduce the burden of existing regulation, even ex
post evaluation surveys may be inadequate for they would reflect the
cost of gearing up to comply, not the cost saving of no longer having
to comply with a given regulatory program. While the former is relevant
for deciding whether to regulate, the latter would be the relevant
concept if one is considering reducing regulation. There is also the
dynamic nature of the economy, whereby technological advances over time
are likely to reduce the start-up cost of compliance the firm
originally faced. In addition, sunk costs, such as specialized capital
costs and the cost of changing procedures already in place, make the
cost savings from eliminating regulation less than the cost of
complying with those regulations. Very few studies exist, especially
for health, safety and environmental regulation, that attempt to
determine the cost savings that would result from reducing or
eliminating existing regulation.
It is important to note that this dynamic nature of the economy may
affect the estimation of benefits as well as costs. Technological
improvements could reduce predicted benefits. For example, medical
progress can reduce the future benefits estimated for health, safety
and environmental regulations, just as productivity improvements in
manufacturing reduces the costs of compliance of some regulations. New
drugs or medical procedures can reduce the benefits of regulations
aimed at reducing exposure to certain harmful agents such as an
infectious disease or even sunlight. Regulations aimed at increasing
the energy efficiency of consumer products or buildings may see their
expected benefits reduced by new technology that reduces the cost of
producing energy. Furthermore, productivity improvements lead directly
to higher incomes, which lead people to demand better health and more
safety. Business responds to these demands by providing safer products
and workplaces, even in the absence of regulation. Individuals with
rising incomes may also purchase or donate land to nature conservancies
to provide ecological benefits. Yet as on the cost side, the baseline
that is used is almost always the status quo, not what is likely to be
true in the future.
Fourth, the construction of a baseline may be complicated where, as
frequently occurs, there are several causes of the change in behavior
attributed to a Federal regulation. State and local regulations may
also require some level of compliance. The tort system, voluntary
standards organizations, and public pressure also cause firms to
provide a certain degree of public protection in the absence of Federal
regulation. As GAO points out, determining how much of the costs and
benefits of these activities to attribute solely to Federal regulation
is a difficult undertaking (GAO 1996). Adding to the complexity, the
degree to which these other factors cause firms and other regulated
entities to provide safe and healthful products and workplaces and
engage in environmentally sound practices changes over time, generally
increasing with increasing per capita incomes and knowledge about cause
and effect.
Thus, although the National Highway Traffic Safety Administration
has significantly increased the safety of automobiles, it is not likely
that if the agency's regulations were eliminated the automobile
companies would discontinue the safety features that had been mandated.
Consumers demand safer cars than they used to and automobile companies
are concerned about product liability. This same phenomenon exists with
the environment, although probably to a lesser extent. Environmentally
responsible behavior has become good for the bottom line. One paper
company interviewed by GAO said that it would have incurred a
substantial amount of its compliance costs even if there were no
regulations, simply as good business practices (GAO 1996, p. 51). Over
time, this ``rising baseline'' phenomenon reduces the true costs of
health, safety, and environmental regulations. Estimates of the
aggregate costs of regulations that include the unadjusted cost
estimates from aging studies are thus likely to be overestimates of the
real costs of those regulations.
The Apples and Oranges Problem
The studies that have attempted to tote up the total costs and
benefits of Federal regulations have basically added together a diverse
set of individual studies. Unfortunately, these individual studies vary
in quality, methodology, and type of regulatory costs included. Thus we
have an apples and oranges problem, or, more aptly, an apples, oranges,
kiwis, grapefruit, etc., problem.
Part of the problem arises because of the nature of regulation
itself. There are over 130,000 pages of regulations in the Code of
Federal Regulations, with about 60 Federal agencies issuing regulations
at the rate of over 1,800 per year. For our purposes, a ``regulation''
or ``rule'' means an agency statement of general applicability and
future effect, which the agency intends to have the force and effect of
law, that is designed to implement, interpret, or prescribe law or
policy or to describe the procedure or practice of an agency. Clearly,
``regulation'' encompasses a lot of territory. The Hopkins series of
studies (1991, 1992, 1995, 1996), which are the latest attempts to
aggregate the costs of all regulations for which estimates are
available and which we discuss in detail later, include five major
categories of regulation:
Environmental. As the EPA points out, the true social cost of
regulations aimed at improving the quality of the environment are
represented by the total value that society places on the goods and
services foregone as a result of resources being diverted to
environmental protection. (Cost of a Clean Environment, pp. 1-2 to 1-
3.) These costs include the direct compliance costs of the capital
equipment and labor needed to meet the standard, as well as the more
indirect consumer and producer surplus losses that result from lost or
delayed consumption and production opportunities resulting from the
higher prices and reduced output needed to pay for the direct
compliance costs. In the case of a product ban or prohibitive
compliance costs, almost all of the costs represent consumer and
producer surplus losses. Most of the cost estimates used in this report
do not
[[Page 39361]]
include consumer and producer surplus losses because it is difficult to
estimate the demand and supply curves needed to do this type of
analysis.
Further indirect effects on productivity and efficiency result from
these price and output changes as they filter through other sectors of
the economy. According to EPA in the Cost of Clean report, recent
research indicates that compliance cost estimates may understate
substantially the true long-term costs of pollution control (p. 1-3).
The estimates used in this report do not include these indirect and
general equilibrium effects.
The benefits of environmental protection are represented by the
value that society places on improved health, recreational
opportunities, quality of life, visibility, preservation of ecosystems,
biodiversity, and other attributes of protecting or enhancing our
environment. As discussed in chapter 1, the value is best measured by
society's willingness to pay for these attributes. Because most types
of improvements in environmental quality are not traded in markets,
benefits must be estimated by indirect means using sophisticated
statistical techniques that generally make benefit estimation more
problematic than cost estimation.
Although the EPA issues the great majority of environmental
regulations, DOI, DOT, and the DOE, among others, also issue rules
aimed at improving the environment.
Other Social. This category of regulation includes rules designed
to advance the health and safety of consumers and workers, as well as
regulations aimed at promoting social goals such as equal opportunity
and equal access to facilities. They are often lumped together with
environmental regulation in the category of ``Social Regulation.''
Social regulation is mainly concerned with controlling the harmful or
unintended consequences of market transactions, such as air pollution,
occupationally induced illness, or automobile accidents. These
consequences are commonly called ``negative externalities'' and
regulation designed to deal with them attempts to ``internalize'' the
externalities. This can be done by regulating the amount of the
externality, e.g., banning a pollutant or limiting it to a ``safe''
level, or by regulating how a product is produced or used. The
techniques and methodological concerns involved in the estimation of
the social costs and benefits generated by these rules are similar to
those involved in the estimation of costs and benefits of environmental
regulation discussed above.
Economic. Economic regulation is so-called because it directly
restricts firms' primary economic activities, e.g., its pricing and
output decisions. It may also limit the entry or exit of firms into or
out of certain specific types of businesses. The regulations are
usually applied on an industry basis such as banking, trucking, or
securities. In the United States, much of this type of regulation at
the Federal level is administered by what are referred to as
``independent'' commissions, e.g., the FCC or the SEC, whose members
are appointed but not removable without good cause by the President.
The economic loss caused by this type of regulation results from the
higher prices and inefficient operations that often result when
competition is prevented from developing.
The costs of such regulation are usually measured by modeling or
comparing specific regulated sectors with less regulated sectors,
estimating the consumer and producer surplus losses that result from
higher prices and lack of service, and estimating the excess costs that
may result from the lack of competition. In contrast to social
regulatory cost estimates, these estimates are mainly indirect costs.
Economic regulation, including antitrust, may produce social
benefits when natural monopolies are regulated to simulate competition
or when firms are prevented from anticompetitive collusion and mergers.
In a dynamic economy, however, the dollar amount of such economic
efficiency benefits are thought to be small (Hahn and Hird 1991). Much
of the motivation for economic regulation is based on equity and
fairness considerations, but often it is based on enhancing one group
at the expense of another. These considerations are not social costs or
benefits, but do need to be factored into regulatory decisions.
Transfer. As discussed in chapter 1, transfers are payments from
one group in society to another and therefore are not real costs to
society as a whole. One person's loss is another person's gain.
Examples of transfers include payments to Social Security recipients
from taxpayers and the higher profits that farmers receive as a result
of the higher prices consumers must pay for farm products limited by
production quotas. Nevertheless, Hopkins (1991) includes transfer costs
in the total cost of regulations. He does place them in a separate
category and points out that they are different from the real social
costs that result from economic efficiency losses. As discussed in
Chapter 1, OMB's guidance states that transfers should not be added to
the cost and benefit totals included in regulatory assessments but
should be discussed and noted for policymakers.
Process. Process costs, according to Hopkins, are the
administrative or paperwork costs of filling out government forms such
as income tax, immigration, social security, etc. Although there are
benefits to the services that these government programs provide and
some minimum amount of process cost is necessary to deliver these
services, it makes little sense to try to place a separate value on
administration. Rather, process costs should be viewed as a ``cost of
doing business'' that should be minimized for a given level or quality
of service.
Adding these various categories together, as Hopkins and others
have done, does two things. It produces large numbers and it creates
confusion. It produces large numbers by including ``costs'' that are
not normally considered as part of the regulatory reform debate. For
example, costs such as the burden of filling out income tax forms or
doing the paperwork needed to get visas, passports, small business
loans, and veterans benefits are not what one usually thinks about when
worrying about the cost of regulation. Nor do we usually think that the
income gained by farmers from price support programs or the increased
sales by domestic businesses as a result of trade protection are costs
of regulation. Congress did not seek oversight of these types of costs
when, in the last Congress, it debated legislative proposals for
comprehensive regulatory reform, such as S. 343 and H.R. 9, or when it
passed the Unfunded Mandate Reform Act of 1995 or the Small Business
Regulatory Enforcement Fairness Act of 1996.
Adding these categories of regulation together with health, safety
and environmental regulation also creates confusion because the
appropriate policies to reduce any adverse effects from these programs
are very different. To reduce price supports, modify international
trade protectionism, and minimize non-cost-effective health, safety,
and environmental regulation would take very different paths. Lumping
them together does not enlighten the search for appropriate reforms.
In sum, adding up the costs and benefits of the various regulatory
programs may give us a rough estimate of the magnitude of the impact of
regulatory activities on the economy and make it clear that regulation
plays an important role in our economy. Indeed, we can use the total
cost figures to begin to track the extent of this activity relative to
other aggregate data.
[[Page 39362]]
For example, our calculations indicate that regulatory costs are about
4% (3.8%) of GDP in 1997. We have also looked at 1988, and found that
regulatory costs were then roughly the same percentage. From this
comparison, we can say that there has been no material growth in the
cost of regulation relative to the size of the economy in the last
decade.
However, these data provide little useful information about what to
do next. If what is intended is to make regulation more efficient, one
needs to estimate the incremental costs and benefits of individual
regulations, or specific provisions of individual regulations, on a
case-by-case basis. If what is intended is to reduce the burden of
existing, health, safety and environmental regulation, one needs to
estimate how firms would react to the removal of requirements, not how
they acted when the requirements were originally imposed. If what is
intended is to improve the cost-effectiveness of new regulations, one
needs to know what factors are preventing future regulations from being
more cost-effective. But none of this information is found in the
aggregate estimates of the costs and benefits of regulation done to
date.
2. Our Estimates of the Costs and Benefits of Existing Regulations
To meet the requirements of Section 645(a)(1), we surveyed the
existing literature on the total costs and benefits of regulation,
supplementing it with information we have obtained from reviewing
regulatory impact analyses over the last ten years under Executive
Orders 12291 and 12866. Our review of the literature revealed only one
comprehensive study that attempted to estimate the total costs and
benefits of all Federal regulations (Hahn and Hird 1991). Hahn and
Hird's estimates were peer reviewed and published in one of the top
economics/legal journals specializing in regulatory issues, the Yale
Journal on Regulation. In addition, EPA issued a report to Congress at
about the same time known as the Cost of Clean report (EPA 1990). The
Cost of Clean report is recognized as the most thorough and careful
attempt to estimate the compliance cost of environmental regulation
published to date.
The Hahn and Hird study compiled cost and benefit estimates from
over 25 studies published mostly by academics in peer reviewed
journals, e.g., Hufbauer (1986) for international trade, Wenders (1987)
for telecommunications, Gardner (1987) for agricultural price supports,
Morrison and Winston (1986 and 1989) for airlines, Crandall (1986) for
highway safety, and Crandall (1988), Denison, (1979), and Viscusi
(1983) for Occupational Safety and Health. It should be noted that
although all of these studies are generally recognized as the best
available, they are not without shortcomings. For example, the Crandall
(1988) and Denison (1979) studies relied upon for the cost of OSHA
regulations used survey data that included expenditures that firms
would have made on safety in the absence of OSHA regulation.
The Cost of Clean report's estimates of costs are based on annual
survey data from the Department of Commerce's ``Pollution Abatement and
Control Expenditures'' (PACE) reports, regulatory impact analyses of
major EPA regulations, and special analyses by EPA program offices or
contractors. The PACE report surveys, which were conducted through
1994, but discontinued thereafter, cannot be used without careful
adjustments because they contain pollution control expenditures that
are not Federally mandated. EPA is continuing efforts to review the
costs and benefits of certain of its regulatory programs. It has
completed reports on drinking water (EPA 1993) and surface water (EPA
1995) and is presently working on a report required by the Clean Air
Act Amendments of 1990 on the costs and benefits of the Clean Air Act,
which it plans to submit to Congress in October of 1997. A draft of
this report indicates that some of the numbers we report below may be
understated (EPA 1997).
In addition, we used information about the costs of major
regulations reviewed by OMB under Executive Order 12291 and 12866,
which were recently published by OMB in More Benefits Fewer Burdens
(1996). (We include the cost of rules published in 1987 and 1988 to
allow for a lag between publication of the rule and the expenditure of
funds for compliance.) The rules included are generally all final rules
with annual costs of $100 million or more issued by Executive Branch
agencies, which we believe capture at least 90 percent of the costs
added by all rules. The cost estimates themselves are agency estimates
that have gone through OMB review and the Administrative Procedure Act
requirements for notice and comment by the public.
Total Costs
Using the estimates for Federally mandated regulatory costs from
the Cost of Clean report (1990, Table 8-9D) for environmental
regulation and Hahn and Hird's estimates for other social regulation
for a 1988 base, we added the cost of all major regulations reviewed by
OMB under Executive Orders 12291 and 12866 and issued by the agencies
between 1987 and 1996. The following table shows our calculations for
the costs of social regulations:
Table 1.--Estimates of the Annual Cost of Social Regulation for 1997
[Billions of 1996 dollars]
----------------------------------------------------------------------------------------------------------------
Environmental Other social Total social
----------------------------------------------------------------------------------------------------------------
1988 Baseline:
(EPA, Hahn and Hird)........................................ 101 35 136
Cost of rules 1987-96 (OMB)................................. 43 19 62
-----------------------------------------------
Total for 1997............................................ 144 54 198
----------------------------------------------------------------------------------------------------------------
While our estimates do not include the costs of regulations with
costs below $100 million and there is a possibility that agencies
understate the costs of proposed rules (Hopkins, 1992, p. 13), we
believe that, if anything, the estimates overstate actual direct costs
because of the rising baseline phenomenon discussed above. For example,
as a sensitivity analysis, it does not seem implausible that, for
environmental and other social regulations over ten years old, no more
than half of compliance costs would likely be saved if these Federal
regulations magically disappeared over night. The automobile companies
are not likely to make their cars less safe or less fuel efficient.
Similarly, the great majority of firms are not likely to stop
controlling asbestos and cotton dust
[[Page 39363]]
fibers or lead dust and benzene emissions in the workplace if these
regulations were abolished. Nor would the judicial tort system likely
tolerate increased levels of harmful pollution or harmful products. If
this scenario is correct, then the cost of social regulation in 1997
would fall to $130 billion (136/2+62=130), or $93 billion for
environmental regulations and $37 billion for other social regulation.
To the cost estimates for environmental and other social
regulation, we must add the costs of the other types of regulation,
i.e., economic and process regulation. We use the Hahn and Hird
estimate for the efficiency cost of economic regulation for 1988.
Because the great majority of these regulations are issued by
independent regulatory agencies (e.g., the FCC, the FTC, the SEC, the
FDIC and the NRC that were not required under Executive Orders 12291 or
12866 to submit information on benefits and costs of regulations to
OMB, we did not have our own data to update the 1988 baseline. Instead,
we relied on a study by Hopkins (1992) who derived an estimate of $81
billion for the efficiency costs of economic regulation for 1997.
Hopkins made several additions to Hahn and Hird to update economic
regulation costs to 1997: $10 billion for surface transportation costs,
$5 billion for the Jones Act, and $5 billion for banking regulations
(p. 27). We have no basis to question these estimates and therefore
have included them. On the other hand, we do not include Hopkins'
estimate of the transfer costs of economic regulation, because, as
noted above, we do not believe that transfers are costs that should be
included in total cost of regulation estimates. In addition, we do not
include the process or paperwork cost estimated by Hopkins and others
(Hopkins 1991 and 1992 and Weidenbaum and DeFina 1978) because these
costs are for the most part already included in cost estimates supplied
by the agencies and reviewed by OMB. However, there are costs of
paperwork imposed by the independent agencies that should be added.
According to OMB's latest Information Collection Budget, the burden
hours of paperwork imposed by the independent agencies was about 390
million hours (or about $10 billion in costs using a $26.50 per hour
estimate to take into account the fact that these agencies' paperwork
often require some professional expertise to fill them out). Since
these costs are mostly for economic regulation (the NRC paperwork is
only two percent of the total), we add the $10 billion to the $81
billion estimate for the cost of economic regulation.
Our best estimate of the total cost of regulation for 1997 is thus
the following:
Table 2.--Estimate of the Annual Total Cost of Regulation for 1997
[Billions of 1996 dollars]
------------------------------------------------------------------------
------------------------------------------------------------------------
Environmental.............................................. 144
Other Social............................................... 54
Economic................................................... 91
------------
Total.................................................. 289
------------------------------------------------------------------------
Total Benefits
Aggregating benefits from individual regulations poses special
problems even beyond those discussed above for aggregating costs. There
are several important limits to such an exercise. First among these is
uncertainty. Because so much of the uncertainty in possible benefit
estimation is unknown, and so little is known about the relationships
among benefit estimates of different regulations, analysts have
virtually no basis for aggregating benefits in a manner that might
preserve information about the likely distribution of aggregate
benefits.
Second, as noted above, benefits, like costs, may be presented as
monetized, quantified, or in narrative forms. For a variety of reasons,
many of them understandable, if not legitimate, agencies often do not
express beneficial effects in monetizable terms that can easily be
aggregated. What is being described may not be readily amenable to
quantification or monetization (e.g., the value of greater national
security or of increased individual privacy), or the agency may have
chosen not to develop monetized estimates because of resource or time
constraints. Moreover, while some of the effects are present as
quantified estimates, these cannot be summed if they are not expressed
in common units. Of course, when effects are not expressed in
quantitative terms, this aggregation problem is even more acute. We can
only conclude that estimates of the total benefits of regulation will
be understated by an unknown amount until all significant benefits are
monetized.
Because of the difficulty of estimating benefits, there are very
few studies that attempt to estimate the total benefits as well as
costs of regulation. Indeed the only study that has attempted to
estimate the total benefits of all regulations is the study by Hahn and
Hird that we relied upon for the 1988 cost baseline. Hahn and Hird
present the following broad range of estimates of the annual benefits
of regulation in billions as of 1988, which we have converted to 1996
dollars using the CPI:
Table 3.--Hahn and Hird's 1988 Benefit Estimates
[Billions of 1996 dollars]
------------------------------------------------------------------------
Low High
------------------------------------------------------------------------
Environmental............................... 21.8 179.3
Other Social................................ 33.5 60.3
Economic.................................... 0 0
---------------------------
Total................................... 55.3 239.6
------------------------------------------------------------------------
Note that while Hahn and Hird do not include any benefits from economic
regulation (on the grounds that they are negligible in most cases),
they state that the regulation of natural monopolies and antitrust can
theoretically produce efficiency gains (p. 253). When Hahn and Hird
take the midpoints of their benefit and cost estimates, they find net
benefits of regulation of about $2 billion, which leads them to
conclude that ``* * * net benefits of social regulation are positive
but small.'' (p. 253, f. 74).
Since the Hahn and Hird study, the only systematic study of the
benefits together with the costs of major social regulations, of which
we are aware, is a study by Hahn, published jointly by Oxford
University Press and the AEI Press in 1996. In that study, Hahn
reviewed the regulatory impact statements required by Executive Orders
12291 and 12866 for major regulations produced by agencies between 1990
and mid-1995. Hahn accepted the agency estimates of benefits at face
value, used consensus estimates from the academic literature to value
the benefits (e.g., the Viscusi 1992, estimate for a ``statistical
life'') and used consistent assumptions across agencies to produce
monetized benefit estimates (pp. 214-217). He found that 54 regulations
had produced almost $500 billion in benefits in present value
(discounting at 5 percent and using his middle value consensus
estimates) (p. 218). Hahn also calculated that these regulations
produced $220 billion in net costs (gross costs minus any costs savings
produced by regulation).
Unfortunately, we do not have enough information to convert Hahn's
present value estimates to annual estimates so that we could compare
them to our annual cost estimates presented above. However, we can use
Hahn's benefit/cost ratio ($500b/$220b) or 2.5, assume that it holds
for the full period since 1988, and calculate an aggregate benefit
estimate. It should be noted , however, that Hahn believes his
aggregate net benefit estimates `` * * * are likely to
[[Page 39364]]
substantially overstate actual net benefits'' (p. 224). Both our
estimates and Hahn's estimates would most likely include almost the
same set of regulations issued between 1990 and 1995 because we both
attempted to be exhaustive in our cost collection effort. According to
our sample, about 80% of the costs of social regulation issued between
1989 and 1996 were issued between 1990 and 1995. Assuming that in 1988,
social regulation produced net benefits of $2 billion as Hahn and Hird
suggest, and using Hahn's benefit-cost ratios for environmental (1.4)
and other social regulation (5.3), we calculate that the benefits of
regulation in 1996 were as follows, and we present our cost estimates
for comparison:
Table 4.--Estimates of the Total Annual Benefits and Costs of Regulation
for 1997
[Billions of 1996 dollars]
------------------------------------------------------------------------
Benefits Costs
------------------------------------------------------------------------
Environmental................................. 162 144
Other Social.................................. 136 54
Economic...................................... 0 91
-------------------------
Total..................................... 298 289
------------------------------------------------------------------------
As explained above, these are very rough estimates, probably
overstating both the benefits and costs, and viewed alone not very
informative. The total numbers on costs and benefits indicate that
regulation has produced about as much in benefits as in costs, but this
is because economic regulation produces negligible benefits.
Disaggregating the totals a little reveals that ``Other Social''
regulation produces very large net benefits, but if one digs into both
the Hahn and Hird, and Hahn studies in greater detail, it becomes clear
that most of the benefits of this category are produced by highway
safety regulation. Hahn and Hird state that they found very little
``credible evidence'' that as of 1988, OSHA regulations had produced
any significant benefits (275-276), although Hahn's 1996 study found
that OSHA regulations had produced over $50 billion (present value) in
net benefits by 1995.
Hahn makes clear that even though his study found that the 53
regulations issued between 1990 and 1995 produce very large net
benefits, only 23 would ``pass'' a cost-benefit test. He also points
out that if the rules that had not passed the test had not been issued,
net benefits would have been $115 billion, or about 40 percent greater
(p. 221). He also finds that all safety regulations have benefits
greater than costs, and that regulations based on the Clean Air Act and
the Safe Drinking Water Act had positive net benefits (p. 221) (which
is corroborated by the EPA Drinking Water study (1993)). An analysis of
the costs and benefits of regulations based on other regulatory
programs produced mixed results. The message is clear: the policy
content is in the details.
3. Other Estimates of the Total Costs of Regulation
As noted, the estimates of total costs and benefits that we have
provided overstates, we believe, both the benefits and most certainly
the costs of regulation. Nonetheless, our cost estimates are
substantially less than other numbers that are often cited and have
gained a certain credibility in the debate. We would note that, apart
from the Hahn and Hird study we used, all other estimates of total
costs do not present benefit estimates. We believe that presenting
costs without benefits is not very informative and potentially
misleading. In any event, some explanation of the difference between
our numbers and other numbers that have been cited is appropriate.
According to a 1995 report to Congress by the Small Business
Administration's (SBA) Office of Advocacy, there are estimates of the
total cost of regulation generated by the Heritage Foundation as high
as $810 billion to $1.7 trillion for 1992 with benefits reportedly
netted out. We cite this study because it is the largest estimate of
the costs of regulation that we are aware of. Our reference to it
should not be construed as any endorsement of it; indeed, it has not
been peer reviewed, it has not been published in a reputable journal,
and most importantly, the basis for the estimate has not been made
publicly available. Our own view is that the numbers are either wrong
or are measuring something other than what we are talking about.
On the other hand, there is a series of Hopkins studies of the
total cost of regulation (1991, 1992, 1995, and 1996), which is both
well known and better documented. The Hopkins estimates have also
received attention from the Congress. A recent GAO study, Regulatory
Reform: Information on Costs, Cost-Effectiveness, and Mandated
Deadlines for Regulation (1995), was asked to focus on the Hopkins
study because of its prominence and the fact that it was the only game
in town.
Hopkins relied on the paper by Hahn and Hird (1991) that provided
estimates of the costs and benefits of economic and social regulation
for 1988, on the 1990 study by the EPA, The Cost of a Clean, and
various reports from OMB: The Information Collection Budget (various
years)--that is, the same materials that we used for our 1988 cost
baseline. Hopkins also reviewed two earlier attempts at adding up the
total costs of regulation as of 1976-77 by Weidenbaum and DeFina (1978)
and Litan and Nordhaus (1983) to make estimates of the trend in total
regulatory costs over this decade. He also projected cost to the year
2000, based on estimates from the Cost of Clean, extrapolations of past
trends, and some educated guess work about the future costs of
compliance with regulations required by statutes such as the Clean Air
Act Amendments of 1990 and the Americans with Disabilities Act of 1990.
Because we focus our attention on the state of regulation as of 1997,
we do not directly critique the earlier studies by Weidenbaum and
DeFina or Litan and Nordhaus, nor do we discuss Hopkins' extrapolations
beyond 1997.
Hopkins' cost estimate for 1997 (presented by us in 1996 dollars
using the CPI), is as follows:
Table 5.--Hopkins' Estimate of the Annual Costs of Regulation
[Billions of 1996 dollars]
------------------------------------------------------------------------
------------------------------------------------------------------------
Environmental.............................................. 185
Other Social............................................... 62
Economic: Efficiency Costs................................. 81
Economic: Transfer Costs................................... 148
Process.................................................... 232
------------
Total.................................................. 708
------------------------------------------------------------------------
One important problem with these estimates is that, with the
exception of the Process estimate, they are based on individual studies
that were published, for the most part, between 1975 and 1990 and then,
as mentioned above, extrapolated to 1997 based on the Cost of Clean
cost projections for future years for environmental regulation and his
own ad hoc ``guesstimates'' (his words ( 1991, p. 11)) for other social
and economic regulation. Note that although we also use data from 1988
and earlier, his approach differs significantly from ours. Rather than
extrapolation, we used timely information supplied by the agencies over
the period 1987 to 1996 that was subject to notice and public comment
and OMB review to update the estimates on benefits and costs to 1997.
Ideally, to get a realistic picture of the total costs of regulation,
one needs to do a comprehensive study of all regulatory costs facing
the economy at a given point in time. But that would be prohibitively
expensive and, as pointed out above, ex post surveys of the costs of
existing regulations have their own problems.
[[Page 39365]]
A second problem relates to the appropriateness of Hopkins'
adjustments. Specifically, Hopkins' adds to EPA's Cost of Clean report
(the 1988 base), $10 billion for the Clean Air Act Amendments, $8
billion for Superfund/RCRA, and $1 billion for several DOT
environmental regulations. It is not clear, however, how these figures
are derived. Similarly, Hopkins' estimate for ``other'' social
regulation costs starts with Hahn and Hird (as we did), but adds an
additional $1 billion and an assumed rise of 5% percent per year for
OSHA regulations, and adds $4 billion for the new universal
accessibility standards, $500 million for food labeling regulations,
$200 million for energy conservation standards, and $1.6 billion for
clinical lab regulations. These amounts are taken from a combination of
agency and industry sources, although again it is not clear how the
specific numbers were derived.
As noted above, we used Hopkins' updates for the changes in
economic costs to 1997. Moreover, we added $10 billion to his estimate
of the cost of economic regulation to account for the paperwork costs
imposed by the independent agencies. But we did not include Hopkins'
estimate of transfer costs. Hopkins acknowledges that transfers are
exchanges of funds from one group to another, but he argues that the
existence of transfers creates real social costs because they give rise
to ``rent-seeking behavior.'' (``Rent seeking behavior'' is behavior
that attempts to capture or create excess profits usually by
influencing government actions, such as regulations.) He states that
the existence of transfers creates real costs that exhausts the amount
of the transfer as interest groups and their lobbyists, lawyers and
experts campaign for those funds (p. 29). We believe that Hopkins has
the causality wrong. Rather than the existence of a transfer program
causing rent-seeking behavior, rent-seeking behavior causes the
transfer. It is the possibility that rent-seeking behavior may result
in a gain that causes special interests to form and campaign for
special treatment. The transfer program does not have to exist, just
the possibility that one could be set up. Thus to the extent that rent-
seeking behavior imposes real costs on society, those costs would be
more appropriately attributable to our democratic political system than
to a particular regulation.
We also believe that Hopkins' has overstated the costs of process
regulation, which for the most part either represents double counting
or more appropriately belongs elsewhere. Most of Hopkins' estimate is
based on the burden hour estimates reported in OMB's annual Information
Collection Budgets (various years ) of the time it takes the public to
comply with information requests made or generated by the Federal
government. He multiplies burden hours by $26.50 per hour (in 1996
dollars), an estimate of the public's opportunity cost for filling out
forms and gathering information. While average private nonagricultural
hourly earnings was $11.82 in 1996 (less than 45 percent of the number
he used), Hopkins argues that his time cost estimate is not too high
because about 85 percent of the burden hour estimate is from the
Treasury Department, much of which represents the time it takes high
priced tax accountants to fill out income and corporate tax forms.
We believe the paperwork costs of the tax code should not be
included in an estimate of the total cost of regulation. First, filling
out tax forms is not the result of ``regulations'' but rather of the
tax code itself, with most regulations merely providing interpretations
and clarifications of tax law. Second, Hopkins assumes a zero
baseline--that is, he implicitly assumes that replacing the revenue
generated by the present tax code could be done with no record keeping
or reporting costs. The implicit baseline is a world without taxes.
Third, reforming the tax code is an entirely different public policy
area than regulation, and lumping the two together, especially when the
tax numbers are so large relative to social and economic regulatory
costs, just confuses the issue.
Hopkins has removed the cost of procurement paperwork, such as that
imposed by DOD and GSA, based on an OMB estimate that in 1990 the
procurement paperwork burden was about 30 percent of the total non-tax-
related paperwork. He correctly points out that those costs are mostly
paid by taxpayers through higher procurement costs, and thus it would
be double counting to include them as private sector regulatory costs.
However, most of the remaining paperwork costs also represent double
counting, because the estimates of regulatory costs for individual
social and economic regulations that he uses already include these
costs as a cost of compliance. Specifically, the compliance cost
estimates submitted to OMB and included in our estimate for the cost of
social regulation include associated paperwork costs. Although Hopkins
admits the likelihood of double counting, he dismisses it because ``the
dominance in this category of tax-related paperwork suggests this is
not likely a serious problem'' (1991, p. 14). But once tax-related
paperwork is removed, it becomes a serious problem.
Hopkins also adds to his process costs estimates $10 billion in
1997 as the amount that State and local government spent to comply with
Federal mandates. However, we cannot determine a clear basis for his
estimate. Because our approach of adding the costs of all social
regulations issued since 1987 should capture State and local regulatory
costs, there should not be a special provision for State and local
mandates.
The final piece of Hopkins' process cost estimate is an estimate of
how much more overhead the U.S. multi-payer health care system
generates than Canada's single-government-payer system. His argument
here is that because the United States has less regulation, it has
higher regulatory costs. It is certainly true that regulation can
improve efficiency, but it seems disingenuous to argue that because
regulations have not mandated a single payer system or restricted
private payment systems, etc., regulatory costs are increased. These
increased cost estimates (Woolhandler and Himmelstein, 1991), if they
are true (they are controversial), are more properly treated as
benefits of regulation (or of a government program), not as costs of
not regulating. Additionally, as discussed above, including these costs
confuses the regulatory reform debate.
In sum, in our view, Hopkins' total cost estimate is about 240%
greater than ours because he includes inappropriate transfers and
process costs and less accurate estimates of the growth of social
regulation since 1988.
4. Assessment of the Direct and Indirect Impact of Federal Rules
A proper assessment of the costs and benefits of regulation would
have to take into account both the direct and indirect impact of
regulation on the economy. As reported above, our estimate of the
direct effect is that, in the aggregate, the net benefits of regulation
issued to date is positive. The few studies that have attempted to
determine the indirect effects of regulation on productively and
welfare have found significant indirect effects, implying that the
direct effects reported above are significant understatements of the
full costs of regulation (Hazilla and Kopp 1990 and Jorgenson and
Wilcoxen 1990). However, as Hahn and Hird (1991) point out, it is not
clear how to evaluate these studies and others like them, which are
based on huge, complex and often proprietary models of the U.S.
economy. This makes it almost impossible to validate the
[[Page 39366]]
models or to view the assumptions on which they are based.
These studies have another major problem because they only take
into account indirect cost effects and do not include the indirect
beneficial effects that may result from better health and safer lives.
Yet it is generally agreed that healthier people tend to work harder
and longer and save and invest more, thereby increasing the growth of
the economy. Therefore, without knowing what the indirect and general
equilibrium benefits of regulation are, one should not draw conclusions
by only looking at the indirect costs. Models that take into account
the indirect benefits and general equilibrium effects of longer life
spans, higher levels of environmental quality, and more equal
opportunities remain to be developed.
The best survey of what we know about the full range of indirect
costs and benefits of social regulation was recently published in one
of the leading economic journals: the Journal of Economic Literature
(Jaffe, Peterson, Portney, and Stavins 1995). Although concentrating on
environmental regulation, their discussion should apply to health and
safety regulation as well because they are similar in their economic
effects and the direct costs of health and safety regulation are only
about one third the amount of environmental regulation. The authors
conclude from a survey of the literature that environmental regulation
has little impact on ``competitiveness as measured by net exports,
overall trade flows, and plant location decisions (p. 157), `` modest
adverse impacts on productivity'' (p. 151) and ``significant dynamic
impacts * * * in the form of costs associated with reduced investment''
based on computable general equilibrium models (p. 151). However, they
also point out that, for the most part, these estimates do not take
into account the feedback effect from improvements in the environment
(p. 153).
Jaffe et al. also examine the contention that environmental and
other social regulation may actually enhance economic growth and
competitiveness by stimulating improvements in productivity as firms
compete among themselves to comply with regulations in the least cost
way. We discussed this proposition above as a reason why the actual
costs of compliance ex post often turns out to be less than predicted
ex ante. Several authors have extended this proposition beyond the ad
hoc to include the economy as a whole (Porter 1991 and Gardiner 1994).
This line of reasoning claims that the country that leads in
environmental protection will gain a lasting comparative advantage in
international trade in the supplier industries because of having been
the ``first mover'' into an area that other countries must follow.
We are cautious about extending such claims to the economy as a
whole. To be sure, certain sectors benefit and we may even develop a
comparative advantage in them, but other sectors must invariably lose
their comparative advantage because resources are drawn from them and
comparative advantage is by definition a relative phenomenon. Jaffe, et
al., (p. 157) conclude:
Thus, overall, the literature on the ``Porter hypothesis''
remains one with a high ratio of speculation and anecdote to
systematic evidence. While economists have good reason to be
skeptical of arguments based on nonoptimizing behavior where the
only support is anecdotal, it is also important to recognize that if
we wish to persuade others of the validity of our analysis we must
go beyond tautological arguments that rest solely on the postulate
of profit-maximization. Systematic empirical analysis in this area
is only beginning, and it is too soon to tell if it will ultimately
provide a clear answer.
We agree with this statement and hope that this report stimulates
``systematic empirical analysis'' in this area, as well as work on as
the broader issue of how to improve the estimation of the costs and
benefits of regulatory programs discussed in this report.
Chapter III. Estimates of Benefits and Costs of ``Economically
Significant'' Rules
1. Scope
In this chapter, we examine the benefits and costs of ``each rule
that is likely to have a gross annual effect on the economy of
$100,000,000 or more in increased costs,'' as required by Section
645(a)(2). We have included in our review those final regulations on
which OIRA concluded review during the 12-month period April 1, 1996,
through March 31, 1997. We chose this time period to ensure that we
covered a full year's regulatory actions as close as practicable to the
date our report is due, given the need to compile and analyze data and
publish the report for public comment. In addition, we thought it would
be useful to adopt a time period close to that used for the annual OMB
report required by the Unfunded Mandates Reform Act of 1995.
The statutory language categorizing the rules we are to consider
for this report is somewhat different from the definition of
``economically significant'' rules in Executive Order 12866 (Section
3(f)(1)). It also differs from similar statutory definitions in the
Unfunded Mandates Reform Act and Subtitle E of the Small Business
Regulatory Enforcement Fairness Act of 1996--Congressional Review of
Agency Rulemaking. Given these varying definitions, we interpreted
Section 645(a)(2) broadly to include all final rules promulgated by an
Executive branch agency that meet any one of the following three
measures:
Rules designated as ``economically significant'' under
Section 3(f)(1) of Executive Order 12866;
Rules designated as ``major'' under 5 U.S.C. 804(2)
(Congressional Review Act);
Rules designated as meeting the threshold under Title II
of the Unfunded Mandates Reform Act (2 U.S.C. 1531-1538).
We did not include rules issued by independent regulatory agencies
because we do not review their rules under Executive Order 12866. In
any case, we believe that few of their individual regulations meet the
statutory criteria of Section 645(a)(2).
During the time period selected, OIRA reviewed 41 final rules that
met these criteria. (Table 6.) For 9 of these 41 final rules, OIRA also
reviewed a proposed rule during the time period. (OIRA reviewed 13
additional proposed rules that met one or more of the three criteria
listed above.) 1 Of the 41 final rules, USDA submitted 12;
HHS submitted 8; EPA submitted 7; and the remainder were from the
Departments of the Commerce (1), Housing and Urban Development (2),
Interior (2), Justice (1), Labor (2), and Transportation (3), and the
Social Security Administration (2). Also included is one multi-agency
rule from HHS, DOL, and Treasury. These 41 rules represent about 15% of
the final rules reviewed by OIRA during this period, and less than 1%
of all final rules published in the Federal Register between April 1,
1996, and March 31, 1997. Nevertheless, because of their greater scale
and scope, we believe that they represent the vast majority of the
costs and benefits of new Federal regulations during this period.
---------------------------------------------------------------------------
\1\ These proposals include several particularly significant
proposals reviewed by OIRA: EPA's two proposals in November 1996 to
revise the National Ambient Air Quality Standards for Particulate
Matter and Ozone; EPA's proposal in the summer of 1996 expanding the
industries covered by the Toxic Release Inventory; and FDA's January
1997 proposal regarding Animal Proteins Prohibited in Ruminant Feed.
These proposals are not discussed because they were not yet final
during the time frame on which we are reporting.
[[Page 39367]]
Table 6.--Economically Significant Final Rules
[4/1/96-3/31/97]
------------------------------------------------------------------------
-------------------------------------------------------------------------
Department of Agriculture
Foreign Agriculture Service:
CCC Supplier Credit Guarantee Program
Dairy Tariff-Rate Import Quota Licensing
Farm Service Agency:
1995-Crop Sugarcane and Sugar Beet Price-Support Loan Rates
Farm Program Provisions of the 1996 Farm Bill
Peanut Poundage Quota Regulations--7 CFR Part 729 (Interim Final)
Conservation Reserve Program--Long Term Policy
Federal Crop Insurance Corp.:
Catastrophic Risk Protection Endorsement
General Administrative Regulations--Subpart T
Animal and Plant Health Inspection Service: Karnal Bunt
Food Safety and Inspection Service: Hazard Analysis and Critical Control
Points
Food and Consumer Service:
Certification Provisions (Mickey Leland Childhood Hunger Relief
Act), Food Stamp Program
Child and Adult Care Food Program: Targeting of Day Care Home
Reimbursements (Interim Final)
Department of Commerce
Bureau of Export Administration: Encryption Items Transferred from the
U.S. Munitions List to the Commerce Control List
Department of Health and Human Services
Health Care Financing Administration:
Limits on Aggregate Payments to Disproportionate Share Hospitals
Hospital Inpatient Prospective Payment Systems FY 1997 Rates
Medicare Revisions to Policies Under Physician Fee Schedule 1997
Requirements for Physician Incentive Plans in Prepaid HCOs
Individual Market Health Insurance Reform (Interim Final)
Food and Drug Administration:
Food Labeling Nutrition Labeling, Small Business Exemption
Medical Devices: CGMP Quality Systems Regulation
Sale and Distribution of Tobacco
Department of Housing and Urban Development
Office of Housing:
Single-Family Mortgage Insurance (Interim Final)
Sale of HUD-Held Single-Family Mortgages
Department of Interior
Fish and Wildlife Service:
Migratory Bird Hunting--Final Frameworks Early Season
Migratory Bird Hunting--Final Frameworks Late Season
Department of Justice
Immigration and Naturalization Service: Inspection and Expedited Removal
of Aliens (Interim Final)
Department of Labor
Employment Standards Administration: Service Contract Act Standards for
Federal Service Contracts
Occupational Safety and Health Administration: Methylene Chloride
Department of Transportation
National Highway Traffic Safety Administration:
Occupant Crash Protection (Airbag Depowering)
Light Truck Corporate Average Fuel Economy MY 1999
Federal Railroad Administration: Roadway Worker Protection
Environmental Protection Agency
Office of Solid Waste and Emergency Response:
Accidental Release Prevention--112(r)
Financial Assurance for Local Gov't. Owners of MSW Landfills
Office of Air and Radiation:
Deposit Control Gasoline
Acid Rain Phase II NOX
Federal Test Procedure Revisions
Voluntary Standards for Light Duty
Vehicles (49-State)
Office of Prevention, Pesticides, and Toxic Substances: Lead-Based Paint
Activities in Target Housing
Social Security Administration
Cycling Payment of Social Security Benefits
Determining Disability for Individuals Under Age 18 (Interim Final)
Common Rule--Health and Human Services/Labor/Treasury: Health Insurance
Portability of Group Health Plans (Interim Final)
------------------------------------------------------------------------
[[Page 39368]]
2. Overview
As noted in chapter I, Executive Order 12866 ``reaffirms] the
primacy of Federal agencies in the regulatory decision-making process''
because agencies are given the legal authority and responsibility for
rulemaking under both their organic statutes and certain process-
oriented statutes, such as the Administrative Procedure Act, the
Unfunded Mandates Reform Act, and the Small Business Regulatory
Enforcement Fairness Act. The Executive Order also reaffirms the
legitimacy of centralized review generally and in particular review of
the agencies' benefit-cost analyses that are to accompany their
proposals. The Executive Order recognizes that in some instances the
consideration of benefits or costs is precluded by law. For example,
the National Ambient Air Quality Standards under the Clean Air Act are
to be health-based standards set by EPA solely on the basis of the
scientific evidence. In addition, under the Clean Water Act,
technology-based standards must be established without regard to
benefits. A variation is the Occupational Safety and Health Act, where
health standards must be based on significant risks to the extent they
are economically and technologically feasible. However, the Executive
Order requires agencies to prepare and submit benefit-cost analysis
even if those considerations are not a factor in the decision-making
process. Again, it is the agencies that have the responsibility to
prepare these analyses, and it is expected that OIRA will review (but
not redo) this work.
Reviewing for this report the benefit-cost analyses accompanying
the 41 final rules listed in Table 6, we found a wide variety in the
type, form, and format of the data generated and used by the agencies.
For example, agencies developed estimates of benefits, costs, and
transfers that were sometimes monetized, sometimes quantified but not
monetized, sometimes qualitative, and, most often, some combination of
the three. Generally, the boundaries between these types of estimates
are relatively well-defined.
As discussed above, all monetized estimates are, by definition,
given in dollars and permit ready comparison and aggregation. Monetized
estimates of effects are what is most generally thought of as the basis
of benefit-cost analysis. Even when such figures are available,
however, care must be taken when interpreting them because they depend
for comparability on a number of distinct elements. Specifically,
monetized estimates consist of: (1) the dollar value itself; (2) the
base year of the dollar used; (3) the initial year in which the effects
occur; (4) the final year after which the effects disappear; (5) the
discount rate used (whether explicitly or implicitly) to convert future
into current values (or vice versa); and (6) the format in which the
monetized value is represented.
Format means the characterization of the monetized or quantified
effects over time. In the rules on which we are reporting, we found
that agencies used a variety of formats:
1. Annualized values, which spread out variable effects into yearly
sums that are financially equivalent to the actual temporal schedule,
regardless of how ``lumpy'' it might be;
2. Present values, which convert over time into an immediate lump-
sum;
3. Constant annual values, in which effects have been estimated (or
are assumed) to be fixed each year over the time horizon in which the
regulation applies;
4. Other formats, such as varying annual values or values reported
only for selected years, which can be converted into annualized or
present value format under certain specified conditions and
assumptions; and
5. Unknown formats, which cannot be interpreted without additional
information.
From the perspective of benefit-cost analysis, annualized and
present value formats are always preferred because they permit
aggregation and comparisons within and across regulatory actions.
Constant annual values are slightly less desirable insofar as they
require the additional step of discounting to permit such aggregation
and comparison. Constant annual values are typically found in monetized
cost estimates involving federal budget outlays, and in quantified
benefit estimates where agencies have chosen not to discount;
aggregation and comparison within and across regulations generally
cannot be performed without a common discounting methodology. Where an
agency's estimation methodology follows an unknown format, further
research needs to be performed to ascertain how to convert or
reconstruct annualized or present value estimates.
Quantified estimates may take the form of a variety of different
units, but they share in common a numeric measure. Generally,
quantified estimates of benefits, costs, and transfers must be
interpreted with the same elements noted above in mind. The most
important difference, of course, is that quantified estimates are
expressed in units other than dollars. Such estimates may be aggregated
only if they are presented in the same or similar units. Also, a
quantified estimate should identify the applicable time period (e.g.,
tons of pollution controlled per year, number of endangered species
protected from extinction per decade). Quantified estimates that lack
reference to the time periods to which they apply may be highly
misleading, and should be converted to similar time periods to be
comparable. Indeed, even when estimates of similar type include
explicit reference to their underlying time periods, care must be taken
when aggregating or comparing them because of the risk of summing
estimates based on different time periods or inconsistent base years.
In contrast, qualitative estimates may not have any units at all,
or they may be expressed in units that do not lend themselves to simple
comparisons. As has often been observed, it is more frequently the case
that costs are monetized and benefits are more often quantified or
presented in qualitative form. Qualitative effects should be evaluated
in terms of their uniqueness, reversibility, timing, and geographic
scope and severity. These effects are the most difficult to interpret,
and this may lead some to give them short shrift. The fact that an
effect has not been monetized or quantified does not, however,
necessarily mean that it is small or unimportant. In discussing
agencies' descriptions of qualitative effects, we use the first year in
which such effects are expected to occur where it can be determined.
Qualitative effects must be used with care for other reasons as
well. Because they tend to be general and descriptive, they may be
broader than the incremental effects of the particular regulation being
analyzed. For example, in developing a rule designed to address a
particular safety problem, an agency may describe the extent of the
problem--that is, so many persons injured per year from this particular
cause. While important in estimating the benefits of the rule, this
figure itself is not a benefit estimate unless and until it is linked
to the likely effectiveness of the proposed rule. Finally, qualitative
estimates cannot be aggregated at all because they do not contain units
that permit arithmetic operations. In addition, not infrequently they
fail to contain relevant information about the period of time during
which they apply.
Cost-effectiveness measures and break-even analyses, which are
frequently used in regulatory analyses, are not equivalent to either
monetized or quantified estimates. Unlike benefits and costs, which are
expressed with
[[Page 39369]]
time as the explicit or implicit denominator, cost-effectiveness
estimates (e.g., dollars per ton of pollution controlled) are expressed
in terms of cost per unit of benefit--that is, as ratios in which
``cost'' is the numerator and ``benefit'' is the denominator.
Frequently, such estimates are quite useful, particularly when
comparing alternative methods of achieving a predetermined objective.
Nevertheless, cost-effectiveness estimates cannot be compared with
either cost or benefit estimates, nor can they themselves be aggregated
in any manner.
Similarly, break-even analyses reveal the minimum level of benefits
necessary for net benefits to be positive. For example, if a regulation
is estimated to prolong one ``statistical life'' at a cost of $X
million, break-even analysis reveals that if society's willingness-to-
pay to prolong one statistical life is greater than $X million, then
the benefit of the regulation exceeds its cost. Likewise, if we know
that society's willingness-to-pay to prolong one statistical life is $X
million, and that the regulation will cost $X million then break-even
analysis reveals that benefits exceed costs if more than one
statistical life is saved. While this form of analysis is often useful
to decision makers, it does not address either the absolute or marginal
magnitude of benefits and costs.
3. Benefits and Costs of Economically Significant Final Rules
A. Social Regulation
Of the 41 rules reviewed by OIRA, 22 represent major new regulatory
initiatives requiring substantial additional private expenditures and/
or providing new social benefits. (See Table 7). EPA issued 7 of these
rules; USDA issued 4; HHS and DOT each issued 3; and the remaining 5
were spread among DOC, DOI, DOJ, and DOL. Agency estimates and
discussion are presented in a variety of ways, ranging from an
extensive qualitative discussion of benefits, e.g., USDA's rules
implementing the 1996 Farm Bill, to a more complete benefit-cost
analysis, e.g., the HHS rule on the Sale and Distribution of Tobacco.
Benefits Analysis. Of the 22 rules listed in Table 7, agencies
provided monetized benefit estimates in 8 cases. Monetized benefit
estimates included items such as: (1) FDA's estimated $275 to $360
million per year in annualized cost savings from its deregulatory food
labeling rule (these are savings in the costs associated with
compliance with labeling requirements on low-volume products that FDA
estimated would be enjoyed by small businesses); (2) FDA's estimated
$9.2 to $10.4 billion per year reduced incidence of morbidity and
mortality from its rule restricting cigarette sales and marketing; (3)
EPA's estimated $174 million per year in reduced damage to chemical and
other facilities from its accidental release prevention rule; and (4)
USDA's estimated $2 billion per year in the value of improved soil
productivity, water quality, and wildlife from rules implementing its
Conservation Reserve Program.
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An innovative feature of FDA's estimate for monetized benefits from
the tobacco rule is explicit recognition of the increases in longevity,
the timing of these increases, and their value. In part of its benefits
analysis, FDA estimated more than 900,000 years of life would be gained
by each cohort (about 4 years per would-be smoker). FDA discounted
these life-years to account for the delay associated with smoking
related health effects, and then monetized the life-years gained at
$117,000 per life-year, an estimate derived from academic literature.
In 6 cases, agencies provided benefit estimates that were
quantified but not monetized. These included: (1) OSHA's estimated 31
cancer cases per year avoided and 3 deaths per year avoided from acute
central nervous system effects and carboxyhemoglobinemia from its
methylene chloride rule; (2) NHTSA's estimated 83 to 101 fatalities
prevented and 5,100 to 8,800 fewer serious injuries (primarily to
children) over the lifetime of one model year's vehicles from its
airbag depowering rule; and (3) EPA's estimated number of tons of
hydrocarbons, carbon monoxide, and nitrogen oxide emissions which it
expected would be reduced annually from several of its rules. In one
case, the medical device rule, FDA provided some of its benefit
estimates in monetized form; other benefits were quantified.
In a number of cases where agencies reported monetized or
quantified benefit estimates, they also provided a qualitative
description of unquantified effects. For example, DOT discussed the
possibility that its railroad worker protection rule could increase the
carrying capacity of the nation's railroads and boost railroad employee
morale. OSHA reported that its methylene chloride rule would lower
exposure for as many as 30,000 to 54,000 workers, reducing the risk of
adverse central nervous system effects (other than death) of
carboxyhemoglobinemia every year. FDA reported that its medical device
rule would yield additional benefits in the form of fewer injuries in
other less severe categories (that were not quantified by the FDA),
reduced inconvenience to users and/or patients, and reduced burden on
medical personnel in terms of having to repeat treatments, replace
devices, and complete the paperwork and reporting associated with
medical device failures. EPA reported that the accidental release
prevention rule would result in efficiency gains by providing the
public with additional information on accident prevention plans for
manufacturing facilities and by improving the transfer and adoption of
new technologies between industries.
Finally, in 8 cases, agencies reported neither monetized nor
quantified benefit estimates. In some (but not all) of these cases, the
agency provided a qualitative description of benefits. For example,
USDA's analysis of the 1996 Farm Bill program rules included a
qualitative discussion of the benefits of increased efficiency due to
the additional flexibility the rule provided for farmers to decide
which crops to plant. In its rule establishing training requirements
for lead abatement contractors, workers, etc., EPA discussed in
qualitative terms the value to consumers of being able to purchase
abatement services of reliable quality.
Cost Analysis. In 17 of the 22 cases, agencies provided monetized
cost estimates. These include such items as: (1) USDA's estimated $900
million per year in consumer ``deadweight'' losses from restrictions on
farm output under its Conservation Reserve Program; (2) EPA's estimated
$138 million per year for gasoline detergent additives under its
deposit control gasoline rule; and (3) OSHA's estimated $101 million
per year to reduce occupational exposures to methylene chloride. For 2
deregulatory rules--FDA's food labeling rule and EPA's municipal solid
waste landfill financial assurance rule--agencies' monetized cost
estimates were very small or zero.
In 4 of the 22 cases, agencies provided estimates of non-monetized,
quantitative effects that were intended to better inform decision
makers, but which were not identified as benefit or cost estimates per
se. For example, NHTSA estimated that its airbag depowering rule would
result in 50 to 431 more fatalities and an increase of 171 to 553
serious chest injuries (primarily to adults not wearing seatbelts) over
the lifetime of one full model-year of vehicles, and DOI estimated that
duck hunters spend over $400 million per year on duck-hunting
activities.
Seven (7) of these 22 rules have positive net monetized benefits--
that is, the estimated monetized benefits exceed the estimated
monetized costs of the rules. For example, FDA estimated its tobacco
rule would result in $9 to 10.2 billion per year in net benefits
(benefits minus costs). EPA estimated its Accidental Release Prevention
rule would generate $77 million per year in net benefits. For the
remaining 15 rules, agency analysis did not provide enough information
to allow an estimate of net benefits. Five (5) of the rules provided
quantified estimates of the expected benefits in terms of tons of
emissions reduced or injuries avoided; but in those cases, the agencies
did not assign values to these effects. Five (5) additional rules
identified qualitative benefits associated with the rule; but in these
cases, the agencies did not develop any quantified estimates of the
likely magnitude of these effects. Finally, in 5 cases, we classified a
rule as economically significant although little economic data on the
effects of the rule existed. These deserve comment.
USDA Karnal Bunt: Karnal bunt is a fungal disease that infects
wheat, and during the past year was closely controlled to prevent
potential losses in wheat exports. Fear of widespread Karnal bunt
infestation led USDA's Animal and Plant Health Inspection Service
(APHIS) to take several emergency quarantine actions beginning in March
1996. The quarantine severely restricted the movement of wheat grown in
Arizona, two counties in Southern California, New Mexico, and portions
of west Texas. It also directed the plowing under of several thousand
acres of wheat and instituted mandatory disinfection procedures for
combines and wheat handling equipment. APHIS instituted these
procedures on an emergency basis to prevent the spread of the disease.
These restrictions were known to be expensive, but estimates of how
expensive were not developed at the time the actions were taken.
In October 1996, APHIS issued the rule included on Table 7, which
continued the quarantine and its restrictions, and established
provisions for compensating wheat farmers and handlers who suffered
losses. The rule was designated economically significant because,
although economic data were not then available, both agency and OIRA
staff agreed that the impacts associated with the rule were
significant. For the same reason, it was designated ``major'' under
SBREFA. While needing to issue this rule promptly APHIS agreed that it
would conduct a Regulatory Flexibility Analysis and an economic
analysis. In an analysis developed after the time period of our report,
USDA estimated one-year costs totaling about $42 million. The Federal
government paid $24 million to affected parties to compensate for these
losses. However, the Department acknowledged that other potentially
significant costs had not been formally estimated. The Department
estimated the benefits of the rule to be approximately $2 billion--
based upon the potential loss of export markets if our trading partners
chose not to buy U.S. wheat--clearly making it an economically
significant rule.
[[Page 39379]]
DOI Migratory Bird Hunting (2 rules): These are unusual rules in
that they are permissive rather than restrictive--that is, migratory
bird hunting is prohibited absent these annual regulations which allow
hunting, setting bag limits and other controls on both early and late
season hunts. Thus the rules permit spending rather than requiring the
expenditure of private resources. DOI reports that the National Survey
of Fishing, Hunting, and Wildlife Associated Recreation indicated that
expenditures by migratory bird hunters (exclusive of licenses, tags,
permits, etc.) totaled $686 million in 1991. Based on this estimate,
DOI estimated expenditures by duck hunters would be over $400 million
per year in 1995. However, this figure is not a social benefit in the
commonly used sense of the term.
DOT Light Truck CAFE: Each year DOT must establish a Corporate
Average Fuel Economy (CAFE) standard for light trucks, including sport-
utility vehicles and minivans, (DOT also sets a separate standard for
passenger cars). For the past two years, however, appropriations
language has prohibited NHTSA from spending any funds to change the
standards. In effect, Congress has frozen the light truck standard at
its existing level of 20.7 miles per gallon (mpg) and has prohibited
NHTSA from analyzing effects at either 20.7 mpg or alternative levels.
Although benefits and costs are not estimated, DOT's experience in
previous years indicates that they may be substantial. Over 5 million
new light trucks are subject to these standards each year, and the
standard, at 20.7mpg, is binding on several manufacturers; some are
just above the standard and at least one is currently below 20.7 mpg.
Because of these likely substantial effects, the rule was designated as
economically significant even though analysis of the effects was
prohibited by law.
DOC Encryption: Commerce's encryption rule allows the exportation
of more effective encryption products, subject to certain conditions
such as the development of a key management infrastructure. Although
quantitative estimates are not available, the rule is economically
significant, because, as commerce's analysis notes,
The initiative addresses important foreign policy and national
security concerns identified by the President. Export controls on
cryptographic items are essential to controlling the spread abroad
of powerful encryption products which could be harmful to critical
U.S. national security, foreign policy and law enforcement
interests. This initiative will preserve such controls and foster
the development of a key management infrastructure necessary to
protect important national security, foreign policy and law
enforcement concerns.
(61 FR 68573).
Aggregate Effects. As noted above in chapter II, the substantial
limitations of the available data on the benefits and costs of this set
of rules make it virtually impossible to develop an aggregate estimate
of benefits and costs for even a single year's regulation. First, there
are no quantified or monetized estimates for 6 of the rules. In
addition, since many effects are not expressed in monetized terms,
there is a problem of apples and oranges in aggregating estimates.
Eight (8) of the rules listed in Table 7 have quantified estimates of
significant effects. Some of the quantified effects--premature deaths
and serious injuries avoided--are not unique to these rules but rather
are frequently identified in the RIAs for a variety of rules, and other
agencies have assigned monetized estimates to these outcomes. In any
event, the different quantitative effects cannot be summed because they
are not expressed in common units. Finally, when effects are only
described in a qualitative way, the aggregation problem becomes all the
more problematic.
Because of the substantial variation in the presentation of agency
estimates and the differences in their discussion of benefits and
costs, Table 8 takes some initial steps in presenting agency estimates
in a more consistent way. This presentation re-formats the monetized
benefit and cost information on a rule-by-rule basis to enhance their
comparability. One key factor involves discounting where the timing of
effects matters. In order to make the agency estimates more consistent,
we performed some basic adjustments to agency estimates. For example,
the FRA presented monetized benefit and cost numbers in the form of a
present value over 10 years ($240 million in benefits and $229 million
in costs). We converted these to equal annual payments of $33 million
and $32 million respectively, using the 7 percent discount rate FRA
used to generate the present value estimates. We performed a similar
procedure for EPA's Lead-Based Paint rule, using the 3 percent discount
rate the agency used in calculating the rule's $1.114 billion present
value cost over 50 years. In the case of EPA's Federal Test Procedure
rule, the agency reported emission reductions for only four specific
years (2005, 2010, 2015, and 2010); in order to facilitate comparisons
with other emission-reducing rules, we used a linear interpolation
procedure to infer emission reductions in the interim years, and then
generated an equivalent annual stream of emission reductions.
Table 8.--Summary of Agency Estimates for Final Rules
[4/1/96-3/31/97]
----------------------------------------------------------------------------------------------------------------
Other quantitative
Agency/rule Benefit estimate Cost estimate effects
----------------------------------------------------------------------------------------------------------------
USDA:
1996 Farm Bill
Farm Program Conservation..... $2 Billion/Yr............. $900 Million/Yr
Reserve Program............... (1997-2002)............... (1997-2002)..........
Karnal Bunt................... (\1\)
Hazard Analysis and Critical $.065-2.43 Billion/Yr..... $88-106 Million/Yr
Control Points.
Commerce:
Encryption Items Transferred .......................... $1.4 Million/Yr
from the U.S. Munitions List
to the Commerce Control List.
Health and Human Services:
Food Labeling/Nutrition $275-360 Million/Yr....... $4 Million/Yr \2\
Labeling: Small Business
Exemption.
Medical Devices: Quality $29 Million/Yr; 44 deaths $82 Million/Yr
Systems Regulation. and 484-677 serious
injuries avoided/Yr.
[[Page 39380]]
Restriction on Sale and $9.2-10.4 Billion/Yr \3\.. $180 Million/Yr...... $160 Million/Yr in
Distribution of Tobacco. reduced house fire
damage.
Interior:
Migratory Bird Hunting (Early
Season Frameworks).
Migratory Bird Hunting (Late
Season Frameworks).
Justice:
Inspection and Expedited .......................... $235 Million/Yr
Removal of Aliens.
Labor:
Methylene Chloride............ 31 Cancer Cases/Yr; 3 $101 Million/Yr...... 30,000 to 54,000 workers
Deaths/Yr from acute protected from central
central nervous system nervous system effects
effects. and episodes of
carboxyhemoglobinemia.
Transportation:
Airbag Depowering............. 83-101 fatalities and $0................... Increases of 50-431
5,100-8,800 serious fatalities and 261-842
injuries prevented over serious chest injuries
lifetime of one full over lifetime of one
model year's vehicles. full model year's
vehicles.
Light Truck CAFE Model Year
1999.
Roadway Worker Protection..... $33 Million/Yr............ $32 Million/Yr
EPA:
Accidental Release Prevention. $174Million/Yr............ $97 Million/Yr
Financial Assurance for $105 Million/Yr........... $0
Municipal Solid Waste
Landfills.
Deposit Control Gasoline...... 25,000 tons hydrocarbons; $138 Million/Yr Average savings of 64
474,000 tons carbon average (1997-2000). million gallons of
monoxide; 95,000 tons gasoline/Yr (1995-2001).
nitrogen oxides average
annual emission
reductions (1997-2001).
Acid Rain Phase II NOX 890,000 tons nitrogen $204 Million/Yr
Controls. oxide annual emission
reduction.
Federal Test Procedure 41,280 tons hydrocarbons; $199-245 Million/Yr.. $202 Million/Yr in
Revisions. 2,580,000 tons carbon potential fuel savings.
monoxide; 218,582 tons
nitrogen oxides
annualized emission
reductions.
Voluntary Standards for Light- 279 tons hydrocarbons; $600 Million/Yr
Duty Vehicles. 3,756 tons carbon
monoxide; 400 tons
nitrogen oxides DAILY
emission reductions in
2005.
Lead-Based Paint Activities in .......................... $33 Million/Yr \4\
Target Housing.
----------------------------------------------------------------------------------------------------------------
\1\ Agency performed analysis after the fact and released it after 3/31/97.
\2\ Maximum first-year cost; expected to decline thereafter.
\3\ Benefits and cost at 7% discount rate. FDA also provided estimates at 3%.
\4\ Using EPA's 3% discount rate.
Any comparison or aggregation across rules must also consider a
number of factors which the presentation in Table 8 does not address.
First, for example, these rules may use different baselines in terms of
the regulations and controls already in place, the initial year for the
rule, and the time period over which the rule was considered to be
effective. In addition, these rules may well treat uncertainty in
different ways. In some cases, agencies may have developed alternative
estimates reflecting upper and lower bound estimates. In other cases,
the agencies may offer a mid-point estimate of benefits and costs, and
in some cases the agency estimates may reflect only upper bound
estimates of the likely benefits and costs. Also, in order for
comparisons or aggregation to be meaningful, benefit and cost estimates
should correctly account for all substantial effects of regulatory
actions, including potentially offsetting effects, which may or may not
be reflected in the available data.
A final reason that any regulatory accounting effort has limits is
the treatment of the effects of regulations on distribution or equity.
None of the analyses addressed in this report provide quantitative
information on the distribution of benefits or costs by income
category, region, or any other factor. As a result, there is no basis
for quantifying distributional or equity impacts.
Transfer Regulations
Of the 41 rules listed in Table 6, 19 were rules necessary to
implement Federal budgetary programs. (See Table 9.) The budget outlays
associated with these rules generally provided ``transfers'' or reduced
transfers to program beneficiaries. Of the 19, 8 are USDA rules that
implement federal appropriations regarding agricultural and food stamp
policies; 7 are HHS and SSA rules that implement Medicare, Medicaid,
and Social Security policy; 2 are HUD rules associated with Federal
mortgage protections; 1 is a DOL rule
[[Page 39381]]
associated with Federal service contracts; and 1 is a joint HHS,
Treasury, and DOL action setting standards for health insurance
portability group health plans.
Table 9.--Transfer Rules
------------------------------------------------------------------------
-------------------------------------------------------------------------
Department of Agriculture:
Commodity Credit Corporation Supplier Credit Guarantee Program
Dairy Tariff-Rate Import Quota Licensing
1995-Crop Sugar Cane and Sugar Beet Price-Support Loan Program
Peanut Poundage Quota Regulations
Catastrophic Risk Protection Endorsement
General Administrative Regulations * * * Subpart T
Food Stamp Program Certification Provisions
Child and Adult Care Food Program: Day Care Home Reimbursements
Housing and Urban Development:
Single-Family Mortgage Insurance
Sale of HUD-Held Single-Family Mortgages
Labor:
Service Contract Act Standards for Federal Service Contracts
Health and Human Services:
Limits on Aggregate Payment to Disproportionate Share Hospitals
Hospital Inpatient Prospective Payment Systems (FY 1997)
Medicare Revisions to Policies Under Physician Fee schedule 1997
Requirements for Physician Incentive Plans in Prepaid Health Care
Organizations
Individual Market Health Insurance Reform: Portability from Group to
Individual Coverage
Social Security Administration:
Cycling Payment of Social Security Benefits
Determining Disability for Individuals Under Age 18
Multi-Agency Common Rule--HHS/Treasury/Labor: Interim Rules for Health
Insurance Portability for Group Health Plans
------------------------------------------------------------------------
The transfers arising from these programs represent payments from
one group to another (often from the Federal government to program
beneficiaries, but also within beneficiary groups and from recipients
back to taxpayers) that redistribute wealth; they are not social costs
(or social benefits) and do not directly reflect the ``opportunity
cost'' of resources used or benefits foregone. Social costs may arise
indirectly from these transfers, however, because they must be financed
through mechanisms--for example, income and payroll taxes--that affect
the use of real resources. Similarly, social benefits may arise from
these transfers if the beneficiaries realize marginal benefits from the
payments that are greater than the loss for those who finance the
payments (i.e., taxpayers).
Estimates of the magnitude of the social costs and benefits
associated with these rules are typically not available. As a practical
matter, the transfers arising form these rules are a product of the
Federal program authorization and budget appropriations processes, and
the social costs involved are generally viewed as subsidiary to the
transfers involved. For these reasons, the Best Practices document
specifically notes that instead of a complete benefit-cost analysis, a
different form of regulatory analysis may be appropriate for
regulations implementing these Federal programs.
Chapter IV. Recommendations
This report is to include ``recommendations from the Director of
OMB and a description of significant public comments to reform or
eliminate any Federal regulatory program or program element that is
inefficient, ineffective, or is not a sound use of the Nation's
resources'' (Section 645 (a)(4)). As indicated in the Introduction, we
are soliciting comment on a wide range of issues related to our
discussions of the methodology we use in evaluating total annual
benefits and costs of Federal regulatory programs; estimates of the
benefits and costs of ``economically significant'' or ``major'' rules;
and direct and indirect impacts of Federal rules on the private sector
and governmental bodies. We are also seeking comment on regulatory
programs or program elements that are ``inefficient, ineffective, or *
* * not a sound use of the Nation's resources.''
As we indicated in chapter II, the current state of knowledge of
benefits and costs of Federal regulatory programs is limited, although
growing. While some aggregate estimates of the benefits and costs of
Federal regulations have been made based on adding the results from
various studies, these aggregate estimates are best viewed as valiant
first attempts to summarize existing knowledge. They may be viewed as
general indicators of the importance of regulation to the American
people and to the economy, but not as guides to specific regulatory
reforms.
Although many difficult methodological problems have yet to be
solved, we presented in chapter II our own aggregate estimates of the
costs and benefits of regulation to further the discussion and generate
comments that we hope will lead to better estimates. Except for the
consensus among economists that there appear to be little long run
economic benefits from most economic, as opposed to environmental and
other social, regulation, we do not believe that the existing evidence
on aggregate costs and benefits rises to the level that would support a
recommendation to eliminate any regulatory programs. Virtually all of
the evidence discussed above is based either on estimates for proposed
regulations or on dated studies of existing regulations. These data are
not appropriate for determining whether existing regulations should be
repealed or significantly modified because of the sunk cost and rising
baseline problems discussed above. Before supportable recommendations
are made to eliminate existing regulatory programs or elements of
programs, empirical evidence based on analytical techniques designed to
solve the methodological problems discussed above must be developed. We
are interested in receiving studies and suggestions for methodological
approaches appropriate for evaluating existing regulations in
[[Page 39382]]
order to develop the strong empirical evidence necessary to propose
supportable recommendations for eliminating or reforming regulatory
programs.
Chapter III points out that we also need better evidence for
determining whether proposed regulations are cost-effective and produce
the greatest net benefits. Agencies have had difficulties generating
sufficient data to make these determinations for individual
regulations. In some instances, there are significant technical
problems to assessing costs and, in particular, benefits. In other
instances, the ability of the government to conduct analysis is limited
by factors that direct use of limited agency resources--for example,
statutory and judicial deadlines--forcing agency action within time
frames that preclude adequate analysis. In some other instances, it is
not at all clear that given limited financial and human resources,
additional analysis would be useful. Finally, there are occasionally
emergencies that demand swift federal action, where the public expect
their elected officials to respond as best they can without the delay
that careful analysis would entail.
In summary, based on our discussion and findings in chapters I, II
and III above, we see three major themes:
Our estimates of the total costs and benefits of
regulation in the $300 billion (4 % of GDP) range clearly indicate that
regulation is important in providing both health, safety, and
environmental benefits and a well functioning economy.
It is very difficult to draw strong conclusions about how
to improve regulatory policy from macro data on benefits and costs.
Micro data on individual regulations are needed.
Although considerable progress has been made in providing
micro data in advance of regulatory proposals and in developing best
practice guidance, further progress is needed to continue improving
regulatory decisions. Specifically, we need to ensure that the quality
of data and analysis used by the agencies improves, that standardized
assumptions and methodologies are applied more uniformly across
regulatory programs and agencies, and that data and methodologies
designed to determine whether existing regulations need to be reformed
is developed and used appropriately.
Consequently, at this stage, we do not believe substantial economic
evidence exits on which to base proposals for major reforms or
eliminations of social regulatory programs or their elements. We
specifically solicit comment on such programs or program elements on
which members of the public may have information that would lead to a
conclusion that such programs are inefficient or ineffective and should
be eliminated or reformed. In particular, we solicit studies or
comments on studies that provide strong, objective and verifiable
evidence on the true social benefits and costs of eliminating or
reforming specific regulatory programs or their elements using
appropriate methodology.
We are proposing for comment the following recommendations designed
to improve the quality of data and analysis on individual regulations
and on regulatory programs and program elements as a first step toward
developing the evidence needed to propose major changes in regulatory
programs.
OIRA should lead an effort among the agencies to raise the
quality of agency analyses used in developing new regulations by
promoting greater use of the Best Practice guidelines and offering
technical outreach programs and training sessions on the guidelines.
An interagency group should subject a selected number of
agency regulatory analyses to ex post disinterested peer review in
order to identify areas that need improvement and stimulate the
development of better estimation techniques useful for reforming
existing regulations.
OIRA should continue to develop a data base on benefits
and costs of major rules by using consistent assumptions and better
estimation techniques to refine agency estimates of incremental costs
and benefits of regulatory programs and elements.
OIRA should continue to work on developing methodologies
appropriate for evaluating whether existing regulatory programs or
their elements should be reformed or eliminated using its Best
Practices manual as the starting point.
OIRA should work toward a system to track the net benefits
(benefits minus costs) provided by new regulations and reforms of
existing regulations for use in determining the specific regulatory
reforms or eliminations, if any, to recommend.
Regulation and regulatory reform have the potential to do much good
for society or much harm. The key to doing the former is having the
information and analysis necessary for wise decision-making. The steps
outlined above are aimed at continuing our efforts to improve our
ability to make better regulatory decisions.
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[FR Doc. 97-19082 Filed 7-21-97; 8:45 am]
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