[Federal Register Volume 63, Number 158 (Monday, August 17, 1998)]
[Notices]
[Pages 44034-44099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21938]



[[Page 44033]]

_______________________________________________________________________

Part III





Office of Management and Budget





_______________________________________________________________________



Draft Report to Congress on the Costs and Benefits of Federal 
Regulations; Notice

  Federal Register / Vol. 63, No. 158 / Monday, August 17, 1998 / 
Notices  

[[Page 44034]]



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: The Office of Management and Budget (OMB) requests comments on 
the attached draft report to Congress on the costs and benefits of 
Federal regulations. The draft report is divided into an introduction 
and four chapters. The introduction sets the context and provides the 
background for the next four chapters. Chapter I presents OMB's best 
estimate of the total costs and benefits of Federal regulatory programs 
and discusses several retrospective studies of specific regulatory 
programs to gain insight on how actual costs and benefits of 
regulations may differ from the effects predicted prior to regulation. 
Chapter II 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 III provides additional data on 
the costs and benefits of the economically significant regulations 
reviewed by OMB from April 1, 1995 through March 31, 1998. Chapter IV 
discusses how OMB implemented last year's recommendations and presents 
the Administration's proposal to restructure and deregulate the 
electricity sector.

DATES: To ensure consideration of comments as OMB prepares this draft 
report for submission to Congress on or before September 30, 1998, 
comments must be in writing and received by OMB no later than September 
16, 1998.

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, NW., 
Washington, DC 20503.
    Comments may also be submitted by facsimile to (202) 395-6974, or 
by electronic mail to [email protected]. (Please note that the 
``l'' 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 submit them by regular mail also.
    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, NW., Washington, DC 20503. 
Telephone: (202) 395-7316.

SUPPLEMENTARY INFORMATION: Congress directed OMB to prepare a report to 
Congress on the costs and benefits of Federal regulations. 
Specifically, under section 625 of the Treasury and Government 
Appropriations Act, 1998 (Pub. L. 105-61), the Director of OMB is to 
submit to Congress, no later than September 30, 1998, 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, 1998.

Issues for Comment

    Accordingly, OMB seeks comment on all aspects of the attached draft 
report, particularly comments and suggestions pertaining to the 
following:
     The validity and reliability of our new estimates of the 
costs and benefits of regulations in the aggregate, as well as by 
regulatory program or program element;
     Our discussion of the methodological problems of 
estimating the costs and benefits of existing rules, e.g., the baseline 
and comparability problems and complications introduced by using 
prospective studies to evaluate existing programs; and difficulties 
reconciling quantitative and qualitative estimates of costs and 
benefits;
     Our review of several case studies of the costs and 
benefits of existing regulations and the lessons we draw from them;
     Any additional studies that might provide reliable 
estimates or assessments of the annual costs and benefits, or direct 
and indirect effects on the private sector, State and local government, 
and the Federal Government, of regulation in the aggregate or of the 
individual regulations that we discuss;
     Our approach to estimating the costs and benefits of the 
individual regulations issued between April 1, 1995, and March 31, 
1998, 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.
Bruce McConnell,
Acting Administrator, Office of Information and Regulatory Affairs.

Draft Report to Congress on the Costs and Benefits of Federal 
Regulations

Introduction

    The Office of Management and Budget issued its first report to 
Congress on the costs and benefits of Federal regulations on September 
30, 1997. Section 625 of the Treasury and Government Appropriations 
Act, 1998 (P.L. 105-61) directs OMB to issue a second regulatory 
accounting report. The requirements of the report are the same as those 
of last year. Section 625(a) directs the Director of the Office of 
Management and Budget to submit to Congress, no later than September 
30, 1998, a report that provides:

    ``(1) Estimates of the total annual costs and benefits of 
Federal regulatory programs, including quantitative and non-
quantitative measures of regulatory costs and benefits;
    ``(2) Estimates of the costs and benefits (including 
quantitative and non-quantitative 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.''

    In last year's report we indicated that a complete accounting of 
total costs and benefits of Federal regulation was a difficult 
undertaking. The 1997 report was our effort to begin an incremental 
process which we believe will lead to improved information on the 
effects of regulations, and will help solve the many methodological 
problems associated with this exercise. This year's report builds on 
last year's work. In particular, we have additional data to

[[Page 44035]]

supplement our discussion of the aggregate costs and benefits of 
regulation and expand our database of costs and benefits of individual, 
major rules from one year (1997) to three years (1996 to 1998). In 
addition, we have more experience in dealing with the methodological 
problems.
    One fact has not changed since the first report. There are still 
enormous data gaps in the information available on regulatory benefits 
and costs. Although accurate data is still sparse and agreed-upon 
methods for estimating many effects are still lacking, we have made 
significant progress in improving these estimates, especially for the 
major rules of the last three years. As we stated last year, explicitly 
quantifying and monetizing benefits and costs significantly enhances 
our ability to compare alternative approaches to achieving regulatory 
goals, ultimately producing more benefits with fewer costs. 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. We continue to recognize that significant 
regulatory costs and benefits may not be quantifiable, but may have to 
be described in qualitative terms. All information, both qualitative 
and quantitative, contributes to our understanding of the effects of 
regulation.
    This year's report presents new information on both the total costs 
and benefits of regulation and the costs and benefits of major 
individual regulations. We hope to continue this important dialogue to 
improve our knowledge about the effects of regulation on the public, 
the economy, and American society.
    This document is a draft of our report. Section 625(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 1998. Furthermore, the final report is to contain a 
description of significant public comments. 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 our new estimates of the 
costs and benefits of regulations in the aggregate, as well as by 
regulatory program or program element;
     Our discussion of the methodological problems of 
estimating the costs and benefits of existing rules, e.g., the baseline 
and comparability problems and complications introduced by using 
prospective studies to evaluate existing programs;
     Our review of several case studies of the costs and 
benefits of existing regulations and the lessons we draw from them;
     Any additional studies that might provide reliable 
estimates or assessments of the annual costs and benefits, or direct 
and indirect effects on the private sector, State and local government, 
and the Federal Government, of regulation in the aggregate or of the 
individual regulations that we discuss;
     Our approach to estimating the costs and benefits of the 
individual regulations issued between April 1, 1995, and March 31, 
1998, 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. In accordance with 
section 625(a)(1), chapter I presents our best estimate of the total 
costs and benefits of Federal regulation. It builds on chapter II of 
last year's report presenting updated and more detailed estimates of 
the total annual costs and benefits of major Federal regulatory 
programs.1 In particular, this year we present more 
categories of regulatory costs and benefits than last year and use our 
own estimates based on agency data of costs and benefits of individual 
rules issued over the last three years (April 1, 1995 to March 31, 
1998) to update the aggregate estimates. We also chose this year to 
provide ranges of costs and benefits rather than point estimates to 
emphasize the uncertainty embodied in the estimates.
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    \1\ Chapter I of last year's report discussed the role of 
economic analysis in regulatory reform. We discussed the growth and 
nature of regulation, the development of the U.S. regulatory 
analysis and review program and the basic principles that should be 
used in assessing regulatory costs and benefits. We did not repeat 
that discussion this year but it is still useful for understanding 
the context of this year's report. (See OMB 1997 or http://
www.whitehouse.gov/WH/EOP/OMB/html/rcongress.htm).
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    As we did last year, we use the study by Hahn and Hird (1991) for 
the costs and benefits of regulations as of 1988, supplemented by an 
Environmental Protection Agency (EPA) Cost of a Clean Environment 
report to Congress (1990). We also use a new (1997) retrospective EPA 
report to Congress (The Benefits and Costs of the Clean Air Act, 1970 
to 1990). Because there are no studies comparable to the Hahn and Hird 
or the EPA retrospective studies for the regulations issued after 
1988,2 we use information about costs and benefits from 
agency prospective regulatory impact analyses (RIAs) to account for the 
major regulations that have been issued since 1988. In almost all 
cases, the RIAs have been subject to notice and comment and have been 
reviewed by OMB. This year we have systematically started to improve 
the consistency of the agency estimates and to show monetized estimates 
of benefits where appropriate and feasible. We have completed this 
analysis for the last three years and plan to complete additional years 
in the future.
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    \2\ EPA's Clean Air Act report covers effects through 1990. 
However, for the annual estimates that appear in table 1 and in the 
text, we have, in consultation with EPA staff, adjusted EPA's 
estimates to reflect only effects as of 1988.
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    The new estimates range from $170 billion to $224 billion in annual 
costs and $258 billion to about $3.55 trillion in annual benefits for 
social, i.e., health, safety, and environmental regulation. Using the 
ranges to reflect the substantial uncertainty in the estimates, 
quantified (and monetized) net benefits could be as low as $34 billion, 
or as high as $3.38 trillion. The main reason why these estimates are 
different from last year, especially on the upper end of the range of 
benefits, is that we have incorporated retrospective estimates from a 
recent EPA report on the benefits and costs of the Clean Air Act. This 
report, discussed in detail in chapter I, estimates the benefits of the 
Clean Air Act at up to $3.2 trillion. Three new regulations also 
included in the estimates (EPA's revised particulate matter and ozone 
primary National Ambient Air Quality Standards and OSHA's respirator 
rule) are estimated (using midpoints) to provide approximately $35 
billion in benefits per year. While this information is useful, we 
still believe that the limitations of these estimates for use in making 
recommendations about reforming or eliminating regulatory programs are 
severe. 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 regulations.
    Chapter I also discusses the impacts of other types of regulation 
and regulatory-like activities and reviews several estimates of the 
aggregate costs of regulation as well as several retrospective case 
studies. Estimates of

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the impacts of economic efficiency losses, disclosure regulation, 
economic transfers, tax compliance costs, Federal on-budget regulatory 
expenditures, and the possible indirect effects of regulation on the 
economy as directed by section 625(a)(3) are also presented and 
discussed.
    In fulfillment of section 625(a)(2), chapter II provides data from 
the agencies 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, 1997, to March 31, 1998. The 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 also examined the reports on major rules that GAO 
provides to Congress for the independent agencies not subject to 
Executive Order 12866; however, these generally were not of sufficient 
detail or quality to provide much useful information for the purposes 
of this report. Finally, this chapter also highlights examples where 
agencies have done a particularly exemplary job of following the 
guidance in the Best Practices 3 document, which is on our 
web site at http://www.whitehouse.gov/WH/EOP/OMB/html/miscdoc/
riaguide.html.
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    \3\ OMB published in 1996 a document that describes ``Best 
Practices'' for preparing the economic analysis called for by 
Executive Order 12866 for significant regulatory actions. This 
document represents the culmination of a two-year effort by an 
interagency group to review the state of the art for economic 
analyses required by the Executive order.
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    Chapter III provides estimates of the costs and benefits for the 
economically significant/major rules issued between April 1, 1995 and 
March 31, 1998, for which we were able to estimate costs and benefits. 
The estimates that we present in chapter III for regulations issued 
during these three years are either straightforward agency estimates, 
or estimates that we calculated using a consistent methodology and 
value estimates used by the agencies for other regulations or in some 
cases found in the academic literature. We estimate annual costs of 
major rules for these three years to be about $28 billion while annual 
benefits range from $30 to $97 billion.
    Chapter IV discusses how we implemented last year's 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 625(a)(4). We discuss how the agencies and OMB worked together 
to improve the quality of the data and analysis found in the economic 
impact studies submitted to OMB under Executive Order 12866, and in 
particular how we promoted the use of the Best Practices guidance 
document. Finally, also in fulfillment of section 625(a) (4), we 
present a discussion of the Administration's proposal to restructure 
and deregulate the electricity sector.

Chapter I: Estimating the Total Annual Costs and Benefits of 
Federal Regulatory Programs

A. Overview

    By using new data from agency regulatory impact analyses that 
accompany regulations, this chapter builds on chapter II of last year's 
report (OMB 1997) to present updated and more detailed estimates of the 
total annual costs and benefits of Federal regulatory programs. We also 
discuss and present quantitative estimates where available of indirect 
impacts and other effects of regulation and related Government 
policies. Finally, several retrospective studies of specific regulatory 
programs are reviewed to gain insight on how the actual costs and 
benefits of regulations may differ from the effects predicted prior to 
regulation.
    We respond to the comments we received on last year's report in 
several ways. First, we present more details by regulatory program and 
build on agency analyses to monetize benefits estimates. Second, we 
review the analyses from independent agencies and present more 
systematic data on the costs and benefits of economic regulation, tax 
compliance costs, transfers, Federal regulatory expenditures, and 
indirect impacts. Finally, our review of several important 
retrospective studies responds to important methodological issues 
raised regarding the use of prospective studies to estimate the costs 
and benefits of existing regulations.
1. Estimation Problems
    Before proceeding with our new estimates, we reiterate and 
reemphasize the methodological concerns and caveats that were discussed 
in last year's report. These concerns remain of critical importance. It 
remains extremely difficult, if not impossible, to estimate the actual 
total costs and benefits of all existing Federal regulations with any 
degree of precision. There is a variety of estimation problems for both 
individual estimates and aggregate estimates.
    In order to estimate the impact of regulations on society and the 
economy, one has to determine 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, what would have 
happened in the absence of regulation can only be an educated guess 
since it never happened. Furthermore, the greater the regulatory 
change, the more problematic the exercise. For example, the assumptions 
of welfare economics, upon which benefit-cost analysis is based, hold 
only for marginal changes in economic activities. The larger the 
changes, the less sure we are of the predictions. In other words, we 
can be more confident in our estimates of the costs and benefits of a 
small change in the level of automobile emissions permitted than in the 
costs and benefits of all Clean Air Act regulations and still more 
confident than in estimates of the costs and benefits of all 
regulations issued by the Federal Government since the early 1900s. If 
we use as a baseline a world with no regulation, one can reasonably 
argue that the benefits of regulation must clearly swamp any likely 
cost.
    Even disregarding the problem of modeling large changes, there are 
significant difficulties in determining the counterfactual or baseline 
for individual regulations that one could begin to aggregate. One can 
survey firms and other regulated entities on their expected compliance 
costs either prospectively, before the regulation is implemented, or 
retrospectively, after the regulation has gone into effect. For both 
types of studies, the problem of potential estimation bias must be kept 
in mind since regulators and regulatees may have different interests in 
the outcomes. The problem of bias is potentially greater for 
prospective studies because both the baseline and the regulatory 
effects must be predicted while for retrospective studies only the 
baseline or counterfactual must be predicted. In the ordinary course, 
therefore, the best estimates of the costs and benefits of regulation 
are likely to be retrospective studies done by individuals who do not 
have vested interests, but do have reputations as objective analysts to 
uphold.
    To make matters even more complicated, a third type of study is 
actually needed before recommendations can be made to eliminate or 
modify regulatory programs. That is a hybrid study

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somewhere between pure prospective and pure retrospective. The ideal 
hybrid study would be a retrospective study of the existing regulation 
with prospectively estimated costs and benefits of eliminating or 
modifying it. A hybrid study is needed because ``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. Furthermore, on the 
benefit side there appears to exist an asymmetry between giving someone 
a benefit and taking it away. Studies have shown that people are 
willing to pay less for a benefit than what they are willing to accept 
in return for its loss. In other words, once people have attained safer 
jobs or cars, or cleaner air or water, they appear willing to pay more 
for keeping such benefits than they were willing to pay to attain them. 
Very few studies of health, safety, and environmental regulation have 
attempted to estimate the actual cost savings and benefit losses that 
would result from reducing or eliminating an existing 
regulation.4
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    \4\ Note that the problem of bias may be the greatest in this 
case because often both the regulators and the regulatees will 
prefer the status quo, i.e., regulation. This appears to be the 
lesson from the Occupational Health and Safety Administration's 
(OSHA) reconsideration of the cotton dust standard during the Reagan 
Administration. After opposing the regulation at the proposal stage 
during the Carter Administration, the industry did not support the 
Reagan Administration's proposal to withdraw it. (See Viscusi 1992).
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    Further, virtually all of the studies of the costs of regulation 
produced to date measure the expenditures of firms required 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 on the sale of a product 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 and thereby 
reduce their welfare losses (Cropper and Oats 1992, p. 722).
    Another problem is the fact that many studies that we rely on for 
cost and benefit estimates are dated. Over time the dynamic nature of 
the economy may affect the estimation of both benefits and costs. 
Technological improvements are often cited as the reason that predicted 
costs of compliance often turn out to be less than actual costs (Office 
of Technology Assessment 1995). Less well noted, however, is that 
technological progress also takes place on the benefit side. For 
example, medical progress can reduce the future benefits estimated for 
health, safety and environmental regulations, just as productivity 
improvements in manufacturing reduce 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. 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, rather than what is 
likely to be true in the future.
    It is often difficult to attribute changes in behavior to specific 
Federal regulations apart from the many other motivating factors. In 
addition to overlapping Federal regulations, often from different 
agencies, e.g., environmental issues may be regulated by the 
Environmental Protection Agency (EPA), the Department of Agriculture 
(USDA), the Department of Energy (DOE), the Department of the Interior 
(DOI), the Department of Commerce (DOC) and the Department of 
Transportation (DOT), state and local regulations also require 
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 the General 
Accounting Office (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 (NHTSA) has 
significantly increased the safety of automobiles, it is not likely 
that if the agency's regulations were eliminated the automobile 
companies would discontinue all the safety features that have been 
mandated. Consumers are demanding safer cars and automobile companies 
are concerned about product liability. This same phenomenon is taking 
place in the environmental area. Environmentally responsible behavior 
is good for the bottom line. Over time, this ``rising baseline'' 
phenomenon, if correct, should reduce the true costs and benefits of 
health, safety, and environmental regulations. Estimates of the 
aggregate costs and benefits of regulation that include unadjusted 
estimates from aging studies are thus likely to overestimate the 
current costs and benefits of those regulations.
    Yet another problem may be termed the ``apples and oranges 
problem.'' The attempts to aggregate the total costs and benefits of 
Federal regulations have simply added together a diverse set of 
individual studies. Unfortunately, these individual studies vary in 
quality, methodology, and type of regulatory costs included. In 
addition to using different assumptions about baselines and time 
periods problems discussed above, the studies use different discount 
rates, different valuations for the same attribute, and different 
concepts of costs and approaches to dealing with uncertainty, to 
mention a few. Furthermore, the possibility of interaction effects 
between the tens of thousands of regulations is not addressed.
    A final reason that any regulatory accounting effort has limits is 
the lack of information on the effects of regulations on distribution 
or equity. None of the analyses addressed in this report provides 
quantitative information on the distribution of benefits or costs by 
income category, geographic region, or any other equity-related factor. 
As a result, there is no basis for quantifying distributional or equity 
impacts.
2. Types of Regulation
    Because there are so many different types of Federal regulations, 
it is useful to break this heterogeneous body up into categories. As we 
did last year we describe five commonly used categories.
    Environmental. The true social cost of regulations aimed at 
improving the quality of the environment is represented by the total 
value that society places on the goods and services foregone as a 
result of resources being diverted to environmental protection.

[[Page 44038]]

(EPA's Cost of a Clean Environment, pp. 1-2, 1-3.) These social 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 from lost or delayed consumption and production 
opportunities due to 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 include consumer and producer surplus losses 
because it is difficult and often impractical to estimate the demand 
and supply curves needed to do this type of analysis.
    Further indirect effects on productivity and efficiency result from 
price and output changes that spread through other sectors of the 
economy. Estimates of compliance costs likely understate substantially 
the true long-term costs of pollution control.5 The 
estimates used in this report do not include these indirect and general 
equilibrium effects.
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    \5\ See Jaffe, Peterson, Portney, and Stavins' survey (1995), p. 
153.
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    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. This value is best measured by society's willingness-to-
pay (WTP) for these attributes. Because most types of improvement in 
environmental quality are not traded in markets, benefits must be 
estimated by indirect means using sophisticated statistical techniques 
or ``contingent valuation'' survey methods that generally make benefit 
estimation more problematic than cost estimation.
    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, 
equal access to facilities, and protection from fraud and deception. 
They are often lumped together with environmental regulation in the 
category of ``Social Regulation.'' Social regulation is mainly 
concerned with controlling or reducing 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 regulating how a product is produced or used. Social 
regulation may also require the disclosure of information about a 
product, service, or manufacturing process where access to inadequate 
or asymmetric information may place consumers, citizens, or workers at 
a disadvantage. 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. In the results 
that we report below, we further break ``Other Social'' into three 
categories: transportation, labor and other regulations. The third 
category includes food and drug safety, energy efficiency, and quality 
of medical care regulations.
    Economic. Economic regulation restricts firms' primary economic 
activities, e.g., their pricing and output decisions. It may also limit 
the entry or exit of firms into or out of certain specific types of 
businesses. Such regulations are usually applied on an industry wide 
basis, e.g., agriculture, trucking, or communications. In the United 
States, this type of regulation at the Federal level has often been 
administered by ``independent'' commissions, e.g., the Federal 
Communications Commission (FCC), the Securities and Exchange Commission 
(SEC), or the Federal Energy Regulatory Commission (FERC), whose 
members are appointed but not removable without good cause by the 
President. The economic losses caused by this type of regulation result 
from the higher prices and inefficient operations that often occur 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 are estimates of mainly indirect 
costs.
    Economic regulation may produce social benefits when natural 
monopolies are regulated to simulate competition. Although Hahn and 
Hird (1991) argue that the dollar amount of such efficiency benefits 
are small in a dynamic and technologically vibrant economy, their 
judgment is an educated guess based on a reading of recent history, 
rather than the result of an empirical study. It appears to be based 
largely on the widely accepted view that the U.S. economy has become 
more competitive over time, with fewer long-lasting natural monopolies, 
and on the observation that much of the motivation for economic 
regulation is to enhance one group at the expense of another. But even 
though monopoly power may not be long lasting in a dynamic U.S. 
economy, it does exist at a given point in time.6
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    \6\ We are not including antitrust activities such as preventing 
the formation of monopolies through mergers or anticompetitive 
behavior in our definition of economic regulation. Clearly this type 
of Government policy creates important social benefits.
---------------------------------------------------------------------------

    Moreover, while Hahn and Hird (1991) define economic regulation as 
including only regulation of entry, output, and prices, in practice 
they appear to lump all Federal regulation of banking and other 
financial institutions, as well as consumer protection regulation 
through mandated disclosure requirements, into the ``economic 
regulation'' category of their cost estimates. In our view, chartering, 
branching, interest rate, and activity regulation are the only major 
categories of banking regulation that conform to the definition of 
economic regulation used here. The other categories are ``safety-and-
soundness'' regulation and ``consumer information and protection'' 
regulation, both of which fit more logically into the ``other social 
regulations'' category used in this study (White 1991, pp. 32-33). 
Consideration of this definitional issue is important because the type 
and magnitude of benefits associated with the different categories of 
banking regulation differ greatly. In particular, while costs may 
exceed benefits for some types of economic regulation (entry, output, 
and prices), safety-and-soundness regulation is essential to a well 
functioning financial system and thus fully justifies the cost (White 
1991), and the consumer protection regulation applicable to banking is 
similar to consumer protection information for other industries where 
there is general agreement that the benefits exceed the costs.
    Transfer. As discussed in OMB's Best Practices document, transfers 
are payments from one group in society to another and, therefore, are 
not real net costs to society as a whole. Nonetheless, the consequences 
for individuals can be very significant. One person's loss is another 
person's gain. Examples of transfers include payments to Social

[[Page 44039]]

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. Our guidance document states 
that transfers should not be added to the cost and benefit totals 
included in regulatory assessments but should be discussed and noted 
for policy makers.
    Process. Process costs are the administrative or paperwork costs of 
filling out Government forms such as income tax, immigration, social 
security, procurement, etc. The majority of process costs is due to 
program administration, Government procurement, and tax compliance, 
which do not fall into either the social or economic regulatory 
categories. Some of these, such as procurement costs, are reflected in 
the Federal budget as greater fiscal expenditures and care must be 
taken not to count them twice. Process costs can be viewed as part of 
the costs of providing Government services or collecting revenues that 
should be minimized for a given level or quality of service or revenue. 
We break these types of costs into further categories and discuss their 
effects in more detail below.

B. New Estimate of the Costs and Benefits of Existing Social 
Regulations

    Several commentators on last year's report called for more detail 
on the costs and benefits of regulatory programs. It is important to 
note that, as was the case last year, this section includes only 
estimates of costs and benefits that have been quantified and 
monetized. As we discuss elsewhere in this report, the fact that an 
effect has not been monetized or quantified does not necessarily mean 
that it is small or unimportant.
    Last year we broke out costs and benefits of existing social 
regulations into two categories: environmental and other social (OMB 
1997, table 1). This year we have been able to further subdivide other 
social into three categories: labor, transportation, and other social 
regulation, mainly regulations from HHS, DOE, and USDA. We were able to 
do this by further utilization of the results of the 1991 article by 
Hahn and Hird and the 1996 book by Hahn as well as the Cost of a Clean 
Environment report (EPA 1990), and by making new estimates of the costs 
and benefits of regulations issued over the last three years (April 1, 
1995 to March 31, 1998), which we derive in chapter III using data from 
the Regulatory Impact Analyses submitted by the agencies to OMB under 
E.O. 12866. We have also incorporated EPA's recently published report, 
The Benefits and Costs of the Clean Air Act, 1970-1990 (EPA 1997), 
hereafter referred to as the ``Section 812 Retrospective.'' In 
addition, we examined data submitted to GAO by the independent agencies 
over the last two years under the Congressional Review Act for major 
rules. In order to estimate aggregate regulatory costs and benefits, we 
combine three data sources covering three time periods--pre-1988, 1988 
to 1994, and 1995 to 1998.
    Since Hahn and Hird provide cost and benefit estimates for more 
than two categories of social regulations, we were able to expand our 
estimate detail from two categories last year to four this year. We 
were limited to four categories because the cost data we relied upon to 
fill the gap between the 1988 Hahn and Hird data and our cost and 
benefit estimates starting in 1995, (from the 1996 OMB report, More 
Benefits, Fewer Burdens) contain only the four categories listed above. 
We also use additional information on the distribution of benefits that 
we did not use last year. Last year we used Hahn and Hird's conclusion 
that ``the net benefits of social regulation are positive but small'' 
(p. 253) to estimate that the costs and benefits of both environmental 
and other social regulations were approximately equal. They came to 
this conclusion by taking the midpoint of their ranges for costs and 
benefits. However, as we pointed out last year, there is much 
uncertainty associated with these estimates. Moreover, we were 
criticized for presenting point estimates when ranges would have been 
more appropriate (Hahn 1998). This year we have elected to present 
ranges both for the base case and later for our estimates of the costs 
and benefits of the regulations that have been issued since the base 
period. Table 1 shows these cost and benefit estimates derived from 
Hahn and Hird for the four regulatory program areas as of 
1988.7 Table 1 also includes new estimates from the Section 
812 Retrospective.8
---------------------------------------------------------------------------

    \7\ We do not repeat the discussion of the derivation and the 
qualifications of these estimates that appeared in last year's 
report. We refer the reader to that discussion (OMB 1997 pp. 27-33) 
for this information. Suffice it to say here that we realize, as 
several commenters have pointed out, that there are gaps and 
weaknesses in underlying studies that Hahn and Hird rely on for 
their estimates and that not all the costs and benefits of social 
regulation are captured in these estimates. We hope in future years 
to fill in the gaps and use more accurate, up-to-date studies for 
our estimates when such studies become available.
    \8\ Table 1 (and all succeeding tables mentioned in the text) 
can be found in sequential order at the end of this report.
---------------------------------------------------------------------------

    The addition of the Section 812 Retrospective significantly changes 
the upper bound benefit estimate for environmental regulation, i.e., 
more than 15 times the upper bound of the Hahn and Hird study. As we 
outlined at the beginning of this chapter, there are a number of 
critical estimation problems that must be confronted in developing 
benefit and cost estimates. The available studies, such as the Hahn and 
Hird study and the Section 812 Retrospective, also have had to confront 
these problems and each study has had to make difficult choices. As a 
result, there are advantages and disadvantages that attend each of 
these studies. The EPA estimates of $378 million to $3.2 trillion per 
year are substantially larger than the estimates presented by Hahn and 
Hird. The Hahn and Hird estimates were based on a 1982 study by Freeman 
that provided a synthesis of the available benefits literature. These 
estimates do not reflect the benefits associated with Clean Air Act 
initiatives in the 1980s, e.g., EPA's lead phasedown program. They also 
do not reflect the recent literature suggesting an association between 
exposure to fine particulate matter and premature mortality. In 
addition, the 1982 Freeman estimates were based on actual air quality 
improvements over the 1970s, i.e., they did not attempt to account for 
the benefits associated with preventing degradation in air quality.
    The Section 812 Retrospective estimates were developed through an 
EPA Science Advisory Board peer review process. It presents a more 
comprehensive set of the benefits and costs under the Clean Air Act 
over the period from 1970 to 1990; for example, it includes regulatory 
actions taken during the 1980s. In addition, these estimates also 
include the benefits and costs of preventing any deterioration in air 
quality and reflect the benefits and costs of all air pollution control 
efforts, not just the Federal Clean Air Act. Our detailed discussion in 
section D below presents a more complete description of the Section 812 
Retrospective and identifies some key uncertainties and assumptions 
underlying the benefit estimates that may have an important effect on 
the magnitude of these estimates.
    To get the costs of existing regulations as of 1997, last year's 
report added to the 1988 base the costs of the major regulations 
reviewed by OMB between 1987 and 1996 as estimated from the RIAs 
agencies provided OMB under Executive Order 12866 and its predecessor 
Executive Order 12291 (OMB 1996). To estimate benefits, last year we 
used benefit/cost ratios for environmental and other social regulation 
calculated from Hahn (1996), who estimated benefits and costs of

[[Page 44040]]

agency rules from 1990 to mid-1995, for a subset of our rules, to 
estimate benefits that correspond to our rules. We then added that 
total to the benefit estimate as of 1988 from Hahn and Hird. This year 
we improve on that exercise by using benefit/cost ratios from Hahn 
(1996) for environmental, transportation, labor, and other social 
regulation to estimate benefits for rules issued between 1987 and 
1995.9 For the rules issued from 1995 through the first 
quarter of 1998, we used information from agency-supplied RIAs modified 
for consistency with Best Practices as appropriate and extended to 
provide more monetized estimates of benefits and costs using consensus 
value estimates used by the agencies or found in the literature. These 
calculations are shown and explained in chapter III. Our latest 
estimates are shown in table 2.
---------------------------------------------------------------------------

    \9\ Admittedly this is a crude estimation procedure because 
Hahn's inventory of rules begins in 1990 and ours extends back to 
1987. Consequently, we are assuming that the relationship between 
costs and benefits that Hahn found for the later period extends back 
three years. Still, we know of no other approach to fill this gap in 
the data until RIAs for these years are re-examined.
---------------------------------------------------------------------------

    Table 3 combines the results from tables 1 and 2 to present our new 
estimates for the existing costs of social regulation as of the first 
quarter in 1998. It shows that health, safety and environmental 
regulation produces between $34 and $3.38 trillion of net benefits per 
year.
    We must underline the uncertainty of these estimates. They are 
useful primarily for drawing general conclusions about categories of 
regulations that should be corroborated by additional data and 
analysis. As specific values, however, they are fraught with 
uncertainties. As discussed above, the baseline, apples and oranges, 
and other methodological problems significantly reduce the likelihood 
that these findings are robust. In addition to these problems, we are 
also concerned that as the aggregate categories are divided into 
smaller parts, the accuracy of the estimates may weaken because it is 
less likely that randomly distributed errors in the data and analysis 
even out. Furthermore, one must be doubly careful about drawing 
conclusions from these results because these estimates are average 
benefits and costs for aggregates of existing regulations, not the 
incremental costs and benefits that are required to be able to make 
reliable recommendations to improve specific regulatory programs or 
regulations. Also note that these estimates are a combination of the 
1988 baseline estimates, which are mostly from retrospective studies, 
and the 1988 to 1998 estimates that are from the prospective studies 
for individual rules. How well the cost and benefit estimates of 
prospective studies predict actual costs and benefits is a question 
that has not been answered. In section D of this chapter, we review the 
evidence from several case studies that might shed light on this 
question. Where we can make direct comparisons between prospective and 
retrospective analyses, we find that both costs and benefits were 
sometimes overestimated by prospective studies. In other instances, 
costs were underestimated.
    Finally regarding the utility of these estimates for making 
recommendations for changes in regulatory programs, it bears repeating 
that the actual costs and benefits of a regulation or regulatory 
program are not the appropriate calculation. Rather, before a 
recommendation is made to repeal or modify a regulation or regulatory 
program, the necessary question is: ``What would be the incremental 
costs and benefits of repealing the regulation or regulatory program.''

C. Other Regulatory Impacts

    Despite the weaknesses in the estimates of the costs and benefits 
of social regulation, the estimates of the costs and especially the 
benefits of the other types of regulation are even more problematic. In 
last year's report, we made the assumption that the costs and benefits 
of fundamentally different types of regulations and government policies 
could be aggregated and displayed in one table, with caveats. In doing 
this, however, we were adding regulatory programs together that had 
quantified costs and unquantified benefits with regulatory programs 
that had quantified costs and quantified benefits. We also added 
together the direct compliance costs of social regulation with the 
indirect, mostly consumer surplus, losses of economic regulation. 
However, direct compliance costs may have significantly different long 
run effects than indirect consumer surplus losses. We have concluded 
this year that such totals are more misleading than helpful, even with 
extensive explanation of the absent benefit estimates and the apples 
and oranges and other problems. To prevent confusion, this year we are 
presenting the estimates separately in table 4.
    Table 4 presents a list of the other types of regulation or 
regulatory-like activities. In some cases we do not agree that these 
activities are true regulations or should be considered in the same 
category with what we have classified as social regulation. However, 
this wide range of activities was noted by several commenters who urged 
us to include them in this year's report. Table 4 also lists costs and 
benefits, and is followed by a discussion of each.
1. Efficiency Losses From Economic Regulation
    In last year's report, we presented an estimate that the efficiency 
costs of economic, i.e., price and entry, regulation amounted to about 
$71 billion. This is based on an estimate by Hopkins (1992) of $81 
billion, which we adjusted downward by $10 billion to account for the 
deregulation and increase in competition that has occurred in the 
financial and telecommunications sectors since Hopkins' estimates were 
made in 1992. Our estimate has recently been corroborated by analysis 
in a recent, comprehensive two volume Organization for Economic 
Cooperation and Development (OECD) report, OECD Report on Regulatory 
Reform (OECD 1997), which attempts to estimate the benefits of further 
economic deregulation of five sectors of the economy (electricity, 
airlines, trucking, telecommunications, and retail and wholesale 
distribution) for five countries (the U.S., Japan, Germany, France, and 
the U.K.). Adding up any remaining benefits from deregulating these 
sectors and using a macroeconomic model to simulate the economy-wide 
effects on GDP, the OECD estimated that U.S. GDP would increase by 0.9 
percent from these actions. This estimate implies that the current 
costs of regulation in these sectors is $68 billion (0.9 percent of 
1996's GDP of $7.6 trillion). Although the two estimates are not 
strictly comparable, because our estimate of $71 billion includes 
import restrictions and the OECD estimate does not and our estimate is 
only for Federal regulation and the OECD estimate includes State and 
local as well as National, the two estimates are close enough to be 
mutually supportive.
    There appear to be no reliable quantified estimates of the total 
benefits of economic regulation. We pointed out last year that price 
regulation of natural monopolies does have the potential to provide 
consumer surplus benefits. However, most economists believe that few 
natural monopolies, except perhaps in local distribution markets, have 
long staying power because of the globalization of markets and rapidly 
changing technology. Over time both the benefits and costs of 
regulation (assuming regulation does not change) are eroded by changes 
in technology and adaptive behavior, i.e., the rising baseline 
phenomenon discussed above.

[[Page 44041]]

The static welfare benefits of economic regulation are not likely to be 
long lasting in a dynamic world. The OECD report also implies that few 
benefits are produced by sectoral entry restrictions. The report points 
out that the loss of universal service may be a concern, but states 
that methods besides regulation, e.g., targeted subsidies, can be 
adopted to provide services to worthy entities less able to pay full 
costs. In table 4 we enter under the benefits of economic regulation 
the term ``expected to be small.''
    Last year, we received comments from several independent economic 
regulatory agencies suggesting that we had not emphasized the potential 
benefits of economic regulation enough. The comments made good points. 
Economic regulatory agencies are producing significant benefits. 
However, these benefits do not flow from their imposing new 
restrictions on entry. Rather, the benefits stem from their efforts to 
open up markets and promote competition, which often means preempting 
State competition or correcting past mistakes. In other words, some 
agencies view the reduced costs created by deregulating as a benefit of 
regulation. The correct view is determined by the baseline. Is the 
baseline the existing patchwork of State and Federal regulation, which 
has produced artificially constructed telecommunications and financial 
services firms, or the more competitive environment that most likely 
would have existed if we had not had these restrictions? There is no 
inconsistency in saying that economic regulation has produced few 
significant benefits, as Hahn and Hird (1992) state in summarizing the 
consensus view of economists on this subject, and saying that economic 
regulatory agencies are currently providing important benefits to 
society by promoting competition.
    The OECD study points out the important role that regulators have 
in smoothing the transition toward a more competitive environment. 
Regulators must carefully consider the issues of stranded capital 
costs, unemployment, and universal service as competition is 
introduced. However, the long run benefits of reform appear to have 
been worth the transitional costs. The OECD study points out that the 
US's regulatory reform efforts have already produced major benefits, 
especially compared to the other major industrial countries. The study 
estimates that the average GDP gain for the other seven countries from 
deregulation of the five sectors would be 4.7 percent, ranging from 3.5 
percent for the U.K. to 5.6 percent for Japan. The 4.7 percent of GDP 
estimate would be equivalent to $360 billion if applied to U.S. GDP. 
The study also points out that a significant portion of the 0.9 percent 
remaining benefits for the U.S. is likely to be achieved by regulatory 
reform efforts already underway because of the Telecommunications Act 
of 1996 and the early State efforts at electricity restructuring. 
Clearly economic deregulation does not imply that the economic 
regulatory agencies' jobs are done.
2. Disclosure Regulation
    A second type of regulation often mixed in with economic regulation 
is information disclosure. There is a strong consensus among economists 
that regulations requiring the disclosure of information about the 
price and quality of products and services can produce significant 
benefits for consumers and improve the functioning of markets when this 
information would not otherwise be available. Our estimate, based on 
burden-hour calculations for the independent regulatory agencies, e.g., 
SEC, FCC, FTC, reported in OMB's Information Collection Budget for FY 
1998 (272 million hours) and Hopkins' opportunity costs of time 
estimate ($26.50 per hour), is that disclosure costs are about $7 
billion. Although benefits have not been quantified, we expect that 
they are significantly greater than $7 billion.
3. Transfers From Economic Regulation
    Economic regulation often produces income transfers from one group 
to another. These transfers are not social costs or benefits; they 
neither create new net benefits for society nor reduce society's scarce 
resources. Consequently benefit-cost analysis is not appropriate or 
meaningful for evaluating transfer programs. As the Best Practices 
document makes clear, distributional analysis, which should be part of 
the economic assessment, is the proper method of analyzing transfers. 
Table 4 includes an estimate for transfers based on the Hopkins 
approach that assumes that the transfers created by economic regulation 
are about twice the economic efficiency loss. The estimate is $140 
billion (two times $70 billion), which we enter in both the costs and 
benefits columns.
    Although as one commenter pointed out (Hopkins 1997), transfers may 
be associated with real lobbying costs, this fact of life does not 
justify equating transfer costs with social costs. Lobbying goes on for 
all sorts of Government policies including expenditure, tax, and 
regulatory policies whether they exist or not, which are impossible to 
measure separately. For example, lobbying goes on in an attempt to 
impose regulations that do not now exist and therefore have no 
efficiency costs. In this case, the multiple of two times the 
efficiency loss would estimate social costs of zero. The best approach 
to including these types of costs is by directly estimating the costs 
of lobbying rather than using a multiple of economic efficiency losses. 
Once that is done it is not clear how to evaluate the social benefits 
of lobbying, which clearly produces benefits because at least some 
amount of lobbying, i.e., citizen participation, is a necessary part of 
a democratic government.
4. Tax Compliance
    Last year we stopped short of including tax compliance costs and 
transfer costs in the totals. Although we were criticized for that 
(Hopkins 1997 and Dudley and Antonelli 1997), other commenters (Hahn 
1998) agreed with us that such data should be reported, but not 
included in the totals. As we pointed out in last year's report, a 
major reason for not including tax compliance costs in our totals, 
despite their real nature and obvious concern to the public, is that it 
would be misleading to add these types of costs to the totals without 
accounting for the fact that taxes are necessary for the basic 
functions of government. Cost-effectiveness analysis, not benefit-cost 
analysis, is the appropriate way to evaluate the efficiency of tax 
policy. In Table 4, we present an estimate of the paperwork costs of 
the tax code by multiplying the number of hours of tax preparation time 
required to file tax forms (5.3 billion in FY 1997) according to OMB's 
Information Collection Budget (OMB 1998) by an estimate of the 
opportunity costs of the average hour spent on the forms ($26.50) based 
on Hopkins (1991). That cost estimate is $140 billion. While we do not 
have quantitative estimates of the aggregate benefits of tax 
compliance, they are undoubtedly very large. Tax compliance is 
necessary for the whole range of services the government provides.
5. Federal Budgetary Expenditures
    Several comments also suggested that we report the Federal 
budgetary costs of regulation. These Federal expenditures include the 
costs of developing and issuing regulations and enforcing them once 
they are on the books. For many years, the Center for the Study of 
American Business at Washington University has compiled Federal 
Expenditures for the Regulatory Agencies of the U.S. Government. 
Douglas, Orlando, and Warren (1997) have produced the latest estimates.

[[Page 44042]]

Table 4 presents these estimates for both social and economic 
regulation.10 For benefits, we reproduce the quantified 
estimate of the net benefits for social regulation as shown above in 
table 3 and summarize the earlier discussion of qualitative benefits of 
economic regulation.
---------------------------------------------------------------------------

    \10\ Note that they do not consider the Internal Revenue Service 
to be a regulatory agency and therefore do not include it in their 
estimates. Their approach is consistent with ours and inconsistent 
with Hopkins (1997).
---------------------------------------------------------------------------

6. Welfare Effects
    A final category of regulatory effects, which several commenters 
suggested we include in our estimates, is the indirect or full welfare 
impacts of regulation. The estimates presented above for social 
regulation are mostly estimates of direct compliance costs. However, as 
our Best Practices document points out, the proper concept of the cost 
of regulation is the best estimate of the value of the opportunity 
foregone as a result of the imposition of the regulation. The 
opportunity costs are likely to be greater than direct compliance 
costs. In addition to the consumer surplus losses that result when 
compliance costs drive up prices and reduce consumption of the goods 
and services produced by the regulated entity, there may be secondary 
effects on other markets, which reduce consumer welfare. The effects 
result because regulation increases the overall costs of consumption 
relative to output and reduces investment and productivity. These 
effects can only be estimated with a computable general equilibrium 
model that traces the myriad interrelationships that make up the modern 
economy. Unfortunately the results of these models are highly dependent 
on model specifications, which are not transparent to outside reviewers 
making it difficult to determine the reasonableness of model 
estimates.11
---------------------------------------------------------------------------

    \11\ See Hahn and Hird, pp. 244-246, for a discussion of these 
problems and several others.
---------------------------------------------------------------------------

    The two most well known models that have been used to estimate the 
general equilibrium effects apply to environmental regulation. These 
models find that by 1990 the social welfare effects were about twice 
the direct compliance cost effects (Hazilla and Kopp 1990 and Jorgenson 
and Wilcoxen 1990). In table 4 we present this estimate for 
environmental regulation but not for workplace and product regulation. 
The reasons are that the estimates were made for environmental 
regulation and there is no theoretical reason why the effect should be 
the same for the two types of regulation. This is because the benefits 
of environmental regulation generally flow to third parties not 
involved in the production of the regulated product, while the benefits 
of workplace health and safety regulation and product safety and 
energy-efficiency regulations mostly flow to parties that are part of 
the transaction (workers and consumers of the product). This factor 
causes the costs to the regulated firms to be less than the direct 
compliance costs because firms will likely eventually reap at least a 
portion of the benefits of the regulation through lower employee costs 
for workplace regulation and higher product quality for product safety 
and energy-efficiency regulation. If the actual costs of compliance to 
firms are less than the estimated direct compliance costs, the general 
equilibrium effects will also likely be smaller.
    The general equilibrium or secondary effects of the regulation on 
the benefit side are less well understood than they are for the cost 
side. But as discussed in last year's report, the health and safety 
benefits of regulation, in particular, should result in indirect 
welfare benefits for the economy. Because a healthier and longer-living 
population is likely to have a longer time horizon and more optimistic 
outlook, it is also likely to work more years more productively and 
save and invest more. These effects could very well expand economic 
activity and increase the standard of living significantly, especially 
in the long run.

D. Lessons Learned from Studies of Federal Regulation

    A review of several studies of the costs and benefits of regulation 
offers insights into both the actual effects of regulations and into 
the problems that attend any estimation of their benefits and costs. 
Below we discuss the two key studies underlying our estimate of the 
aggregate benefits and costs of environmental regulation and a new 
study by Robert Hahn of 106 regulations using prospective estimates of 
costs and benefits published by the agencies at the time the final 
rules were issued (Hahn forthcoming). We also review two additional 
retrospective studies that compare the actual and predicted costs and 
benefits of regulation.
    First, as noted earlier, EPA recently published its Section 812 
Retrospective study of the costs and benefits of the Clean Air Act, as 
required by section 812 of the Clean Air Act of 1990. It estimated that 
the present value of benefits of the Clean Air Act regulations issued 
between 1970 and 1990 is $22.2 trillion (central estimate, 1990$). 
Publication of the Section 812 Retrospective provides an opportunity to 
compare it with the Hahn and Hird study, which served as the basis for 
our estimates in last year's report.
    Hahn's study expands on his earlier one, which we used in section 2 
in our aggregate estimate to cover the years 1987 to 1994 (Hahn 1996). 
The 106 final regulations with both costs and benefits in the new study 
were issued between 1982 and mid-1996 by EPA, OSHA, NHTSA, HHS, HUD, 
and USDA. Hahn uses consensus estimates to value reduced units of 
pollution and increased life-years to calculate benefits of health, 
safety and environmental regulation. He takes as given the quantity 
estimates of benefits and the monetized estimates of costs found in the 
agency-produced regulatory impact analyses. He also converted to 
constant 1995 dollars and used a 5 percent discount rate to put costs 
and benefits in a consistent present value framework. Hahn estimated 
that the net present value of benefits of the 106 regulations is about 
$1.6 trillion. However, he also found that not all agency rules 
provided net benefits. In fact, less than half of all final rules 
provided benefits greater than costs. The main reason for his large 
estimate of net benefits and relatively poor performance for many 
individual regulations was that a few rules provided most of the net 
benefits. NHTSA's automatic restraints in cars and EPA's lead phasedown 
in gasoline provided just over 70 percent of total net benefits (Hahn 
forthcoming, p. 15).
1. EPA's Retrospective Report to Congress on the Benefits and Costs of 
the Clean Air Act
    EPA's Section 812 Retrospective represents the culmination of a 
six-year effort by EPA. The Section 812 Retrospective also reflects, as 
required by section 812, peer review by an independent, external panel 
of economists, health scientists, and environmental scientists known as 
the Science Advisory Board Council on Clean Air Act Compliance Analysis 
(Council). The Council provided detailed review and guidance throughout 
each step of study design, implementation, and report drafting. The 
quality and reliability of the Section 812 Retrospective was addressed 
by the Council in its review closure letter by stating that the Council 
``finds that the Retrospective Study Report to Congress by the Agency 
is a serious, careful study and employs sound methods along with the 
best data available.'' 12 The Council further concluded that 
the Section 812

[[Page 44043]]

Retrospective's findings are ``consistent with the weight of available 
evidence.'' 13
---------------------------------------------------------------------------

    \12\ SAB Council, letter to EPA Administrator Browner, July 8, 
1997, p. 1.
    \13\ Ibid.
---------------------------------------------------------------------------

    The Section 812 Retrospective presents estimates of monetized 
benefits ranging from $6 to $50 trillion (present value in 1990$) over 
the period from 1970 through 1990, with a central estimate of $22 
trillion. Over this same period, the Section 812 Retrospective 
estimated direct compliance expenditures of roughly $0.5 trillion. The 
estimated net monetized benefits for the 1970 to 1990 period range from 
$5.1 to $48.9 trillion dollars, with a central estimate of $21.7 
trillion. The Section 812 Retrospective also notes that the monetized 
benefits estimate may understate benefits because a number of benefit 
categories were not quantified and/or monetized, e.g., air toxics 
effects and ecosystem effects. Table 5 presents the non-monetized 
benefits listed by the Section 812 Retrospective.
    While the findings of the Section 812 Retrospective suggest that 
the aggregate historical benefits of the clean air regulatory programs 
substantially exceed the aggregate costs, the Section 812 Retrospective 
itself provides the following cautionary note on page ES-10:

    Finally, the results of the retrospective study provide useful 
lessons with respect to the value and limitations of cost-benefit 
analysis as a tool for evaluating environmental programs. Cost-
benefit analysis can provide a valuable framework for organizing and 
evaluating information on the effects of environmental programs. 
When used properly, cost-benefit analysis can help illuminate 
important effects of changes in policy and can help set priorities 
for closing information gaps and reducing uncertainty. Such proper 
use, however, requires that sufficient levels of time and resources 
be provided to permit careful, thorough, and technically and 
scientifically sound data-gathering and analysis. When cost-benefit 
analyses are presented without effective characterization of the 
uncertainties associated with the results, cost-benefit studies can 
be used in highly misleading and damaging ways. Given the 
substantial uncertainties which permeate cost-benefit assessment of 
environmental programs, as demonstrated by the broad range of 
estimated benefits presented in this study, cost-benefit analysis is 
best used to inform, but not dictate, decisions related to 
environmental protection policies, programs, and research.

    In terms of our charge under section 625(a), we must also consider 
these new benefit and cost estimates in developing an overall estimate 
of the benefits and costs of Federal regulation. The magnitude of EPA's 
benefit estimate, $22 trillion over the 1970 to 1990 period, is very 
large. The expected value of the estimated monetized benefit for 1990 
is $1.25 trillion per year. This represents approximately 20 percent of 
total 1990 Gross Domestic Product and is comparable in magnitude to 
total 1990 U.S. expenditures on nondurable goods. There are several 
important elements of the analysis in the Section 812 Retrospective 
which deserve further discussion in order to understand the basis for 
the benefit estimates over the 1970 to 1990 period.14
---------------------------------------------------------------------------

    \14\ ``A final, brief interagency review, pursuant to Circular 
A-19, was organized in August 1997 by the Office of Management and 
Budget and conducted following the completion of the extensive 
expert panel peer review by the SAB Council. During the course of 
the final interagency discussions, it became clear that several 
agencies held different views pertaining to several key assumptions 
in this study as well as to the best techniques to apply in the 
context of environmental program benefit-cost analyses, including 
the present study. These concerns include: (1) The extent to which 
air quality would have deteriorated from 1970 to 1990 in the absence 
of the Clean Air Act, (2) the methods used to estimate the number of 
premature deaths and illnesses avoided due to the CAA, (3) the 
methods used to estimate the value individuals place on avoiding 
those risks, and (4) the methods used to value non-health related 
benefits. However, due to the court deadline the resulting concerns 
were not resolved during this final, brief interagency review. 
Therefore, this report reflects the findings of EPA and not 
necessarily other agencies in the Administration.'' See Section 812 
Retrospective, p. ES-2.
---------------------------------------------------------------------------

    (a) Establishing a baseline. The Section 812 Retrospective uses as 
a counter-factual ``baseline'' the modeled air quality in the United 
States over the 1970 to 1990 period for a scenario in which control 
technology and requirements are frozen at the levels mandated in 1970. 
It assumed that no additional air pollution controls would have been 
imposed by any other level of government or voluntarily initiated by 
private entities after 1970. The Section 812 Retrospective acknowledges 
that this is an obvious oversimplification and that, in fact, State and 
local governments as well as private initiatives were responsible for 
an important fraction of the estimated benefits and costs over the 
period from 1970 to 1990.15 At the same time, it notes that 
the Federal CAA played an essential role in achieving these results and 
leaves to others the question of parsing out the precise fraction of 
costs and benefits attributable to the Federal CAA.16
---------------------------------------------------------------------------

    \15\ Section 812 Retrospective, pp. 2-3.
    \16\ Ibid, p. 3.
---------------------------------------------------------------------------

    Because the modeled baseline includes significant growth in 
population, car and truck travel, and economic activity, there is a 
marked deterioration in baseline air quality over the period from 1970 
to 1990. While there is no direct sensitivity analysis of alternative 
baselines, the available documentation for the ``no control'' scenario 
suggests that a substantial fraction of the estimated benefits are 
attributable to the degradation in modeled air quality from 1970 
levels, rather than the result of an improvement in air quality from 
the levels that existed in the United States in 1970.17
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    \17\ Of course, any change in the baseline scenario would also 
require revision of the cost estimates. The Section 812 
Retrospective specifically notes that the ``no control'' scenario 
avoids the difficulties of sorting out the fraction of costs 
required to maintain an alternative baseline, such as maintaining 
air quality at 1970 levels. See Section 812 Retrospective, pp. 2-3.
---------------------------------------------------------------------------

    In any event, considerable uncertainty necessarily surrounds ``what 
would have happened'' over this 20-year period, rendering all attempts 
to construct aggregate benefit and cost estimates somewhat speculative.
    (b) Key benefit categories. The Section 812 Retrospective developed 
monetized benefit estimates for ten benefit categories, including 
mortality, hospital admissions, chronic bronchitis, soiling damage, and 
visibility. (See table 6.) As indicated by table 6, the monetized 
benefit estimates associated with reducing exposure to fine particulate 
matter (PM) account for 90 percent of the total estimated benefits. The 
discussion below discusses three key elements in developing benefit 
estimates associated with reductions in PM levels.
    (i) Uncertainties in magnitude and causation. The Section 812 
Retrospective describes some elements of the uncertainty in the 
estimates of health risks, focusing on those elements of uncertainty 
that are most readily quantifiable. For example, it addresses specific, 
quantifiable elements of the uncertainty in the benefits estimates 
through the use of a ``Monte Carlo'' analysis. It also presents a 
thoughtful, qualitative discussion of some of the uncertainties 
associated with the estimated mortality risk--for example, the effect 
of an historical trend in particulate matter levels and the effect of 
intercity movement of population on the concentration-response 
relationship.
    The Section 812 Retrospective offers little discussion, however, of 
the uncertainty associated with the critical question of the causal 
relationship between fine particulate matter levels and mortality. It 
observes that the Clean Air Scientific Advisory Committee has pointed 
out that a causal mechanism has not been clearly established. It 
concludes that ``the well-established correlation between exposure to 
elevated PM and premature mortality is sufficiently compelling to 
warrant an

[[Page 44044]]

assumption of a causal relationship and derivation of quantitative 
estimates of a PM-related mortality.'' 18
---------------------------------------------------------------------------

    \18\ Ibid., p. 34.
---------------------------------------------------------------------------

    The preamble to EPA's 1996 proposal to revise the National Ambient 
Air Quality Standard for Particulate Matter (PM NAAQS) discusses at 
greater length the difficulties associated with the interpretation of 
specific concentration-response relationships, pointing out that it is 
the most problematic issue in conducting risk assessments for PM-
associated health effects. These include: 19
---------------------------------------------------------------------------

    \19\ 61 FR 65650. The preamble to the final rule reaffirms these 
concerns by citing the proposal and a more complete discussion in 
the criteria document (chapters 10-13) and the staff paper (chapter 
IV). See 62 FR 38655 and 38656.
---------------------------------------------------------------------------

    (1) The absence of clear evidence regarding mechanisms of action 
for the various health effects of interest;
    (2) Uncertainties about the shape of the concentration-response 
relationships; and
    (3) Concern about whether the use of ambient PM2.5 and 
ambient PM10 fixed-site monitoring data adequately reflects 
the relevant population exposures to PM that are responsible for the 
reported health effects.
    (ii) Timing of effects. The Section 812 Retrospective assumed that 
reductions in ambient PM concentrations yield contemporaneous 
reductions in the mortality and chronic health risks associated with 
long-term exposure. Given that the concentration-response relationships 
in the underlying study are presumptively thought to be the result of 
long-term exposure, the assumption of a contemporaneous response--that 
is, a zero lag in the response--represents only one end in a range of 
possibilities. It is quite possible, however, that there is a lag in 
the changes in the risk of chronic health effects and mortality with 
changes in exposure to particulate matter. Other researchers (World 
Health Organization, 1996) have assumed the effect of particulate 
matter exposure does not begin until 15 years of exposure.20 
The incorporation of a latency period can have an important effect on 
the benefits estimate. The adoption of an alternative latency 
assumption of 15 years, for example, would reduce the estimated present 
value of the mortality benefits by a factor of two, given the discount 
rate of five percent used in the Section 812 Retrospective.
---------------------------------------------------------------------------

    \20\ Section 812 retrospective, p. D-17.
---------------------------------------------------------------------------

    (iii) Valuation of changes in health risk (``benefits transfer''). 
The Section 812 Retrospective also highlights the difficulties of 
transferring estimates from other settings to value the projected 
benefits of a regulatory initiative, e.g., changes in mortality risk. 
In valuing changes in mortality risk, EPA reviewed 26 studies to 
develop an estimate of the ``value of a statistical life'' based on the 
willingness-to-pay (WTP) of individuals to avoid small increases in 
mortality risk. Using a Weibull distribution to fit the estimates from 
these 26 studies, the Section 812 Retrospective estimated a mean value 
of $4.8 million per statistical life (with a standard deviation of $3.2 
million in 1990).21 This estimate reflects a WTP of $5 for a 
reduction in mortality risk of one in a million.
---------------------------------------------------------------------------

    \21\ Section 812 Retrospective, p.44.
---------------------------------------------------------------------------

    This estimate is derived from studies involving very small changes 
in mortality risk. However, the changes in mortality risk associated 
with changes in particulate matter exposure estimated in the Section 
812 Retrospective are roughly 10 to 100 times greater than the changes 
associated with these valuation studies. When the marginal valuation of 
$5 for a one in a million change in mortality risk is applied to the 
``no control'' scenario where modeled baseline mortality risk is on the 
order of 1 in a 1000, the resulting WTP estimates for changes in 
mortality risk represent a large share of each household's annual 
budget, i.e., household ability to pay. Since the total outlay for risk 
reduction represents a large share of the household budget, this 
situation is very different from that examined by the 26 valuation 
studies where the WTP estimates were a small fraction of household 
budgets.
    (c) Hahn and Hird's estimate for environmental benefits. For its 
environmental benefit estimate, the Hahn and Hird assessment relied on 
an analysis by Freeman conducted in the late 1970s (Freeman, 
1982).22 The Freeman analysis largely represented a 
synthesis of the best existing work of the 1970s. The analysis 
estimates air pollution control benefits for the year 1978, and water 
pollution control benefits for the year 1985. Hahn and Hird adjust the 
Freeman estimates to account for inflation; but these adjustments do 
not reflect other changes--for example, additional regulations--in the 
air pollution control program between 1978 and 1988 and in the water 
pollution program control between 1985 and 1988. For water pollution 
control benefits, the Freeman analysis may still represent the most 
comprehensive estimate available. There are, however, several elements 
of the Freeman analysis that deserve further discussion in order to 
understand the strengths and limitations of the benefit estimates used 
by Hahn and Hird.
---------------------------------------------------------------------------

    \22\ See Hahn and Hird (1991 pages 253, 273; Portney (1990) 
pages 54-60; Freeman (1990 in Portney (1990) page 123.
---------------------------------------------------------------------------

    (i) Establishing a baseline. As noted elsewhere in this report, 
choice of an analytic baseline can be difficult, since many options are 
available, and the preferred baseline may be unworkable due to the 
inadequacy of available data. In the Freeman analysis, different 
baselines were chosen for the air and water benefits analyses.
    The Freeman analysis evaluated the improvement in ambient air 
quality between 1972 and 1978, and did not consider the deterioration 
in air quality that might have occurred in the absence of air pollution 
regulations.23 In effect, the counterfactual baseline was 
assumed to be the level of air quality in 1972. As a result, the air 
quality improvements that were analyzed were much smaller than those 
incorporated in the CAA Section 812 Retrospective (EPA, 1997). 
Furthermore, the baseline used for the air benefits analysis was not 
consistent with that used for Freeman's cost analysis, which estimated 
all air pollution control costs.
---------------------------------------------------------------------------

    \23\ Implicitly, the Analysis assumed increased state, local, 
and private initiatives great enough to offset air quality 
deterioration due to increased economic activity, population growth, 
and vehicle-miles-traveled (VMT) by automobiles and trucks during 
the 1972 to 1978 period.
---------------------------------------------------------------------------

    The baseline used for the water analysis, on the other hand, 
assumed changing population and recreational participation rates 
between 1972 and 1985. The baseline used for the water benefits 
analysis was consistent with that used for Freeman's water pollution 
control cost analysis.
    (ii) Key benefit categories. Freeman's air pollution benefits 
analysis developed monetized benefit estimates for six categories: 
human health (mortality), human health (morbidity), soiling and 
cleaning, vegetation, materials, and property values. Approximately two 
thirds of the monetized benefits were for human health improvements, 
primarily reduced mortality incidence, due to reductions in ambient air 
concentrations of particulate matter and sulfur oxides. His analysis 
does not include any estimate of the benefits arising from reductions 
in airborne lead (Pb) concentrations, which were a significant source 
of air pollution control benefits found by later studies. The 
discussion below addresses 3 key factors to bear in mind when 
interpreting the primary benefit category, i.e., reduced mortality, 
found in the air benefits estimates of his analysis.

[[Page 44045]]

    1. Uncertainties in Magnitudes of Physical Effects: The Freeman 
analysis surveys seven studies from the 1970s which developed a dose-
response relationship between particulate matter and human 
mortality.24 Based on these studies, Freeman provides a 
range of possible results, with a ``best-guess'' estimate assumed to be 
at the midpoint of the range. Since 1978, a number of additional 
epidemiological studies have been completed on the relationship between 
particulate matter and human mortality rates. It does not reflect the 
advances in knowledge achieved in the 1980s and 1990s.
---------------------------------------------------------------------------

    \24\ Freeman (1982), pages 63-66. Five of the seven studies 
relied on the statistical work by Lave and Seskin from 1970, 1973, 
and 1977.
---------------------------------------------------------------------------

    2. Timing of Effects: The Freeman analysis assumed that reductions 
in ambient PM concentrations yield contemporaneous reductions in the 
mortality risks associated with exposure to PM. If one were to assume, 
for example, a significant lag, e.g., many years, between changes in 
exposure and changes in risk, then the mortality benefit estimates 
would be reduced.
    3. Valuation of Changes in Health Risk: The Freeman analysis 
assumed a value per statistical life (VSL) of $2.4 
million.25 Since 1978, there have been significant 
additional contributions to the economic literature on the value of 
mortality risk. After considering these more recent studies, the 
Section 812 Retrospective adopted a midpoint of $4.8 million ($1990) as 
a better estimate on the population's willingness-to-pay for reductions 
in mortality risk. Use of an alternative valuation for mortality risk 
would have a significant effect on the aggregate benefit estimate in 
the Freeman analysis.
---------------------------------------------------------------------------

    \25\ Freeman (1982), page 68. The estimate of $1 million in 1978 
is converted to 1996 using the CPI.
---------------------------------------------------------------------------

    Freeman's water pollution benefits analysis developed monetized 
benefits estimates for four categories: recreation, nonuse, commercial 
fisheries, and diversionary uses. Approximately half of the monetized 
benefits are attributable to recreation. This analysis is based on a 
number of studies carried out in the 1960s and 1970s, with benefits 
projected forward to reflect projected population and recreational 
participation rates in 1985. However, these estimates do not include 
benefits associated with the reduction in toxic loadings in waste water 
discharges, even though Freeman's cost estimates include ``substantial 
costs for the control of discharges of these substances'' (Freeman, 
1982). Benefits of non-point source pollution control also were not 
included. Benefits to new and existing recreational users for hiking, 
picnicking and nature observation that might result from improvements 
in water quality were also omitted because of the absence of data for 
these activities.
    (d) Summary assessment of Section 812 Retrospective. The discussion 
above illustrates the difficulty, which we emphasize throughout this 
report, of developing aggregate estimates of the benefits and costs of 
major Federal regulatory programs. The results obtained in both the 
Section 812 Retrospective and the Freeman analysis used by Hahn and 
Hird appear to be sensitive to choices made concerning the baseline for 
the analysis and the translation of the reduction of air pollution into 
human health benefits.
2. Two Other Retrospective Studies
    In general, retrospective studies are likely to provide more 
accurate results than prospective studies because there are fewer 
unknowns to deal with. Prospective studies must estimate what will 
happen as a result of a proposed regulation and compare it with what 
would happen without the regulation (the counterfactual). Retrospective 
studies only need to measure the actual and estimate the 
counterfactual. Below we discuss several case studies from the 
literature that compare retrospective studies with their respective 
prospective studies. NHTSA recently completed the third in a series of 
studies of its 1983 center high-mounted stop lamp regulation. In brief 
the studies found that although benefits exceeded costs, costs had been 
underestimated by a factor of two and that the effectiveness of the 
rule had been over estimated by a factor of seven in the prospective 
study. The second case study examines eight regulations issued by OSHA 
between 1974 and 1989 by drawing on an Office of Technology Assessment 
(1995) report and a book by Viscusi (1992) that examined the cost 
estimates and actual impacts of various OSHA regulations. The case 
studies reveal that in some cases the agency overestimated expected 
costs compared to the actual and in other cases it underestimated them. 
The OTA study itself concluded that the agency had a tendency to 
overestimate costs because of unanticipated improvements in compliance 
technology after the regulations were issued. However, as in the NHTSA 
example, the agency also appears to have overestimated the 
effectiveness of its rule, if not the benefits.
    (a) The Center High-Mounted Stop Lamp Case. A comparison of NHTSA's 
prospective with its retrospective analyses of its Center High-Mounted 
Stop Lamp (CHMSL) 26 regulation illustrates how the benefits 
and costs of a rule can be substantially different in practice than 
what one would have expected based solely on the prospective 
work.27 It further illustrates that early post-rule 
estimates may differ substantially from long-term estimates. In the 
case of the CHMSL rule, the Final Regulatory Impact Analysis (FRIA) in 
support of the rule made what appeared to be an overwhelming case that 
the rule would generate very large net benefits. The FRIA was based on 
substantial amounts of experimental data and for many years served as a 
model of an RIA that consistently employed sound benefit-cost analysis 
principles. Nevertheless, when compared with NHTSA's long-term 
evaluation, the FRIA overestimated the actual effectiveness (though not 
the consequent benefits) of CHMSLs by a factor of more than seven and 
underestimated the cost by a factor of more than two. Despite these 
revelations, however, the analyses continue to confirm that the rule 
generates positive net benefits, though not nearly as large as what one 
might have expected at the time the rule was proposed or even based on 
the early post-rule analyses.
---------------------------------------------------------------------------

    \26\ CHMSLs are the ``third tail light'' found on all new cars 
beginning with the 1986 model year. The purpose of CHMSLs is to 
reduce the time it takes for following drivers to react when drivers 
in front of them put on their brakes, allowing them to stop sooner 
and thereby avoid crashes (or reduce the speed at which impact 
occurs).
    \27\ Over the years, NHTSA has conducted a total of five 
distinct analyses of its rule. These include two prospective 
analyses (preliminary and final regulatory impact analyses) and 
three retrospective analyses.
---------------------------------------------------------------------------

    (i) 1980 and 1983 Regulatory Impact Analyses. In early 1981 NHTSA 
proposed to require CHMSLs. At that time the agency estimated in its 
Preliminary Regulatory Impact Analysis (PRIA) that the rule would 
reduce rear-end collisions by 35 percent (see table 7). NHTSA estimated 
this would lead to 1,511,000 fewer crashes per year once the entire 
passenger-car fleet was so equipped. NHTSA also estimated that an 
additional 1,339,000 crashes per year would be less severe than they 
otherwise would have been. The combined value of the savings in 
property damage would range from $1.3 to $2.3 billion per year. In 
addition, the PRIA estimated the rule would prevent 66,000 injuries and 
533 fatalities per year. NHTSA estimated the cost of the proposal at 
$49 million per year. Thus the analysis of the proposal held out the

[[Page 44046]]

promise of very large net benefits in property damage reductions 
alone.28
---------------------------------------------------------------------------

    \28\ Since the costs occur when the vehicles are manufactured 
and the benefits occur over the lifetime of the vehicle, it is 
inappropriate simply to subtract annual costs from benefits. Even 
after discounting, however, the PRIA estimates would yield net 
benefits of between $600 million and $1.3 billion annually in 
property damage alone.
---------------------------------------------------------------------------

    NHTSA completed its FRIA and published the final rule in 1983. In 
response to comments it received on the proposal and in light of some 
new evidence of the effectiveness of CHMSLs, NHTSA revised several 
components of its benefit estimates downward. The FRIA also included a 
somewhat refined cost estimate. The FRIA estimated the effectiveness of 
CHMSL at 33 percent. In order to provide a more ``conservative'' 
estimate of the benefits, NHTSA applied this effectiveness rate to a 
smaller proportion of rear-end crashes than in the PRIA.29 
In the FRIA, NHTSA also assumed a lower value of damage per crash 
avoided ($510 vs. $1,116 in the PRIA). The result of these and other 
related adjustments was estimates of 902,500 fewer crashes, $434 
million in reduced property damage, 40,000 fewer injuries and no 
estimate of reduced fatalities.
---------------------------------------------------------------------------

    \29\ For example, the estimate excluded rural accidents, which 
account for nearly one quarter of all accidents, because the test 
fleets were driven in urban areas only thus leaving NHTSA with no 
evidence that CHMSLs would be effective in rural settings. As NHTSA 
later discovered, the actual effectiveness was about the same 
between urban and rural settings.
---------------------------------------------------------------------------

    The effectiveness estimates were based on three separate 
experimental studies for which CHMSLs had been installed on fleets of 
taxis and telephone company passenger cars. The three studies covered 
over 3,000 vehicles and over 150 million vehicle miles. Nevertheless, 
as early as 1980, NHTSA recognized the possibility that the 
effectiveness estimate based on experimental studies may overstate the 
true effectiveness of CHMSLs if there is a ``novelty'' effect which 
caused following drivers to react more quickly than they would once 
CHMSLs became commonplace. The effectiveness estimate was critical to 
the decision to go forward with the rule because it underlies all 
components of the benefit estimates. To its credit, NHTSA committed at 
the time it proposed the rule to reassess the effectiveness after the 
fact, if NHTSA adopted a CHMSL requirement in a final rule.
    (ii) 1987, 1989, and 1998 retrospective studies. Since the rule 
became effective with the 1986 model year, NHTSA has conducted three 
analyses with the benefit of hindsight. The most important results of 
these studies are that: (1) The effectiveness of CHMSLs is considerably 
lower than NHTSA estimated in the PRIA and FRIA; (2) the effectiveness 
has fallen over time, though it now appears to have stabilized; (3) 
actual costs are about double those estimated in the RIAs; and, most 
importantly, (4) despite these findings, the rule still generates net 
benefits.
    In 1987, NHTSA conducted a preliminary evaluation of the 
effectiveness of production CHMSLs.30 It found an 
effectiveness of about 15 percent. Thus, even though the CHMSLs were 
installed in a small percentage of cars nationwide, i.e., when any 
``novelty effect'' would most likely occur, effectiveness was less than 
half of the estimates in the RIAs.
---------------------------------------------------------------------------

    \30\ This study did not attempt to evaluate the benefits in a 
broader sense or the costs.
---------------------------------------------------------------------------

    In 1989, NHTSA conducted the second of its retrospective studies. 
This study was based on 1987 data, by which time about one-fourth of 
the passenger car fleet was equipped with CHMSLs. By this time, the 
estimate of effectiveness had fallen again, to about 11 percent. 
Despite the drop in estimated effectiveness and a corresponding 
reduction in the number of accidents prevented compared with the FRIA, 
the estimated benefits of CHMSLs increased. The number of injuries 
prevented rose to between 79,000 and 101,000 and the estimate of 
property damage prevented increased to $774 million per year. At that 
time, NHTSA also concluded that CHMSLs were unlikely to prevent any 
fatalities. The reasons for the increase in the benefits estimate 
despite the reduction in effectiveness is due to three factors: (1) The 
retrospective estimate includes all accidents (not just urban ones); 
(2) the injury reduction estimate was based on actual crashes whereas 
the estimates in the RIAs were modeled based on estimates of the 
reduced speeds at which crashes that weren't avoided would occur; and 
(3) the actual value of property damage given an accident was much 
higher than NHTSA assumed in the FRIA. In other words, had NHTSA used 
the same methodology and data for the FRIA and the retrospective, each 
of the benefit categories would contain a value of about one-third of 
what the FRIA reported, as the difference in effectiveness rates would 
suggest.
    Earlier this year, NHTSA completed its long-term study of the 
benefits and costs of CHMSLs.31 This most recent estimate of 
the effectiveness of CHMSLs is 4.3 percent. NHTSA does not expect it to 
fall further since it has remained steady throughout the last seven 
years of data NHTSA has analyzed (1989 to 1995). Part of the decline in 
effectiveness between the 1989 study and this one is attributable to a 
further refinement in NHTSA's methodology which more accurately 
controls for vehicle age, which is a factor in rear-end crashes. (Had 
NHTSA used the same methodology in the 1989 study, the effectiveness 
would have been about 8.5 percent, rather than 11.3 percent, and the 
corresponding benefits would have been proportionately lower.) Thus, 
the long-term effectiveness of CHMSLs is about one-eighth of NHTSA's 
original estimate, while the costs are more than double. Even so, these 
estimates imply that the rule continues to produce net benefits, though 
not nearly as large as what NHTSA estimated prospectively.
---------------------------------------------------------------------------

    \31\ In the early 1990s, NHTSA extended the CHMSL requirement to 
include ``light trucks,'' i.e., minivans, sport-utility vehicles, 
and pickup trucks, which comprise about 40 percent of the fleet. The 
estimates in the long-term study include the effects on these 
vehicles as well. However, in order to facilitate comparisons with 
NHTSA's previous estimates which pertained to cars only, all 
aggregate estimates in this study have been reduced by 40 percent to 
reflect the effects on cars only.
---------------------------------------------------------------------------

    The FRIA included an aggregate cost estimate of $70 million ($7 per 
vehicle) in each of the first two years and $40 million ($4 per 
vehicle) each year thereafter. The retrospective analyses estimated the 
cost at $89 million (about $9 per vehicle) per year, or more than twice 
the long-term cost estimate in the FRIA.
    (iii) Lessons learned from CHMSLs. These analyses confirm what many 
believe: that benefits and costs are difficult to estimate 
prospectively. In this instance, the RIAs overstated the effectiveness 
of CHMSLs despite the advantage of substantial data from field 
experiments. The estimates of benefits in the FRIA were not nearly as 
large as those estimates presented in the PRIA. Nevertheless, the FRIA 
estimates overstated the effectiveness of the rule by a factor of more 
than seven. The changes in effectiveness estimates over time suggest 
that it is important to re-evaluate the effects of regulations, 
particularly where behavioral responses to the regulation may evolve 
over time.
    With respect to cost, even though the only cost component was a 
fairly simple piece of hardware, the FRIA estimate was less than half 
the actual cost. It is interesting that, in their comments on the 
proposed rule, the three domestic manufacturers estimated costs in the 
$8 to $15 range. The low end of this range was lower than NHTSA's 
actual (long-term retrospective) estimate and the high end was only 
slightly further from actual costs than the FRIA estimate.

[[Page 44047]]

    (b) Eight OSHA cases. The Office of Technology Assessment was asked 
by Congress in 1992 to examine how well OSHA had estimated the impacts 
of the regulations it had issued. OTA attempted to answer this question 
by comparing OSHA's prospective analysis of impacts with actual 
outcomes for a selective set of regulations. Although OTA did not 
directly attempt to estimate actual benefits, in some cases they can be 
inferred from the discussion and in other cases other information 
sources, e.g., Viscusi 1992, can be used. Because of funding 
constraints, three of the eight cases--vinyl chloride, cotton dust, and 
ethylene oxide--were chosen because existing studies had already been 
done. For the other five, new retrospective studies were commissioned.
    The eight cases examined exhibited a variety of outcomes. Table 8, 
based on our analysis of the report's findings as well as other 
information, shows that costs and benefits were both over-and 
underestimated and that benefits were sometimes overestimated by OSHA 
in its prospective analyses of the impacts of the rules. The 1974 
regulation of vinyl chloride is often cited as an example of an agency 
overestimating costs, although to be fair to OSHA the cost estimate was 
supplied by industry and OSHA at that time did not conduct its own 
economic analyses of prospective regulations. When cotton dust was 
issued four years later, the agency was conducting economic analyses 
for major rules. Cotton dust is also often cited as an example of the 
agency overestimating compliance costs. OSHA, itself, contracted for a 
retrospective study of the regulation five years after the rule was 
issued but before the final controls took effect. The study found that 
OSHA had earlier overestimated actual capital costs by a factor of five 
(Viscusi 1992). The later study also found that benefits had also been 
overestimated by at least two fold because of mistakes in methodology 
and overcounting of the number of exposed individuals.
    In the secondary lead smelters case, also issued in 1978, OSHA 
underestimated costs and overestimated benefits. The OTA report (p. 62) 
points out that as of 1995 secondary lead smelters were not able to 
comply with the engineering controls requirement to reduce air-lead 
levels to the permissible exposure limit because compliance was 
economically infeasible, i.e., costs had been underestimated. However, 
smelters had found less expensive and more direct ways than engineering 
controls to reduce blood-lead levels, the key health indicator and 
performance goal. In other words, reducing air-lead levels through 
engineering controls was not needed to attain the sought-after health 
benefits. The benefits of engineering controls had been overestimated.
    In the 1984 ethylene oxide regulation of hospitals, OTA found that 
OSHA had underestimated the costs of ventilation equipment but that 
hospitals had little trouble complying with the standard by other 
means. OTA found that overall hospitals spent more than expected, but 
that was because they brought exposure levels down significantly below 
the regulated level. On average, the agency had estimated costs about 
right.
    The agency appears to have overestimated costs by about a factor of 
two for metal foundries in its 1987 regulation of formaldehyde because 
firms used low-formaldehyde resins rather than the predicted 
ventilation controls to attain compliance.
    The next three case studies were for safety standards and the 
findings are difficult to summarize. The OTA study did not directly 
estimate costs or benefits for grain handling but found that the 
standard was economically feasible. The PSDI power presses and powered 
platforms rules were actually attempts at deregulation. In both cases 
the cost savings that were predicted failed to materialize because 
firms did not take advantage of the newly offered flexibility, 
presumably because the agency had underestimated the costs and/or 
overestimated the benefits of the flexibility. (See OTA 1995 p. 62.)
    Looking at this evidence, OTA concluded that OSHA tended to 
overestimate costs because new technology was often developed between 
the time the analysis was done, which in several cases was several 
years before the final rule was issued, and the compliance date. The 
report recommended that the agency consider the dynamic nature of 
technology including the possibility of ``regulation-induced 
innovation'' in order to set lower compliance levels (p. 11). However, 
there is an opportunity cost to forcing innovation that is being 
neglected. The resources that are directed at reducing compliance costs 
by developing new technologies have to be pulled from other projects, 
which presumably the company thought had a larger potential for payoff. 
Since adding another constraint to the economic system is not likely to 
increase the overall rate of technological progress for the economy, 
``regulation-induced innovation'' is not likely to be the ``win-win'' 
situation that the report suggests (p. 53).
    Taken as a whole, these retrospective studies show that OSHA has 
both underestimated and overestimated costs, sometimes by large 
amounts. At the same time, in instances where there are clear data, 
OSHA appears generally to have overestimated benefits. Although there 
are important cases of overestimating costs because technological 
progress and learning-by-doing over time reduced expected costs, it is 
not clear that agencies should compensate for this tendency by reducing 
costs estimates. These same factors may also lead to a tendency to 
overestimate benefits.

Chapter II: Estimates of Benefits and Costs of This Year's 
``Economically Significant'' Rules

A. 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, 1997, 
through March 31, 1998. This ``regulatory year'' is the same time 
period we chose for last year's report. 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'' 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)


[[Page 44048]]


This year we also include a discussion of major rules issued by 
independent regulatory agencies, although we do not review these rules 
under Executive Order 12866. This discussion is based on data provided 
by these agencies to the General Accounting Office (GAO) under the 
Congressional Review Act.
    During the regulatory year selected, OIRA reviewed 33 final rules 
that met the criteria noted above. Of these final rules HHS submitted 
10; EPA nine; USDA five; DOI and DOE two each; DOL, DOT, DOJ, and VA 
one each. In addition three agencies, DOL, HHS, and Treasury, worked 
together to issue one common rule. These 33 rules represent about 14 
percent of the 230 final rules reviewed by OIRA between April 1, 1997, 
and March 31, 1998, and less than one percent of the 4,720 final rule 
documents published in the Federal Register during this period. 
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. Overview
    As noted in chapter I of last year's report, 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 primary 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. A variation is the Occupational Safety and 
Health Act, where health standards must be based on reducing 
significant risks to the extent doing so is economically and 
technologically feasible. However, the Executive order requires 
agencies to prepare and submit benefit-cost analyses 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. The costs and benefits identified may be attributable solely to 
the regulation in question, where the agency has substantial 
discretion, or they may in fact be attributable just as much to the act 
of Congress that they are implementing.
    Reviewing for this report the benefit-cost analyses accompanying 
the 33 final rules listed in table 9, we found, as we did last year, 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.
2. Benefits and Costs of Economically Significant/Major Final Rules 
(April 1997 to March 1998)
    (a) Social Regulation. Of the 33 rules reviewed by OIRA, 22 are 
regulations requiring substantial additional private expenditures and/
or providing new social benefits.32 (See table 9). EPA 
issued nine of these rules; USDA three; HHS three; DOI and DOE two 
each; DOT and DOL one each; and HHS/DOL/Treasury jointly issued one 
rule. Agency estimates and discussion are presented in a variety of 
ways, ranging from a purely qualitative discussion, e.g., the benefits 
of EPA's toxics release inventory rule, to a more complete benefit-cost 
analysis, e.g., DOE's energy conservation standards for refrigerators 
and freezers.
---------------------------------------------------------------------------

    \32\ The other 11 are ``transfer'' rules.
---------------------------------------------------------------------------

    (i) Benefits analysis. Agencies monetized at least some benefit 
estimates in a number of cases including: (1) USDA's $2.41 billion over 
15 years from the effects of its environmental quality incentives 
program on net farm income, pollution damage reductions, and wildlife 
enhancements; (2) EPA's $12 to $57 million per year in terms of better 
water quality from its pulp and paper effluent guidelines rule; and (3) 
DOE's $7.62 billion over 30 years in energy savings from its energy 
efficiency rule for refrigerators and freezers.
    Of the 22 (non-transfer) rules listed in table 9, agencies 
monetized all the benefit estimates that they were able to quantify in 
eight cases. In five cases, agencies provided some of the benefit 
estimates in monetized and quantified form, but did not monetize other, 
important components of benefits. DOE's two energy efficiency rules 
monetized the value of energy savings and quantified, but did not 
monetize, the power plant emission reductions associated with the 
reduced energy consumption. DOL's respiratory protection rule monetized 
the out-of-pocket savings associated with its estimate of injury and 
illness reductions, but monetized neither the other aspects of those 
injuries and illnesses (such as pain and suffering) nor the fatalities 
avoided.
    In three cases, agencies provided quantified but not monetized 
benefit estimates. These included: (1) HHS's 297 to 1306 life-years 
extended as a result of its organ transplant rule; (2) EPA's 593,000 
tons of nitrogen oxide emission reductions per year from its highway 
heavy-duty engines rule; and (3) EPA's annualized emission reductions 
of 385,000 tons of nitrogen oxides, 6,000 tons of hydrocarbons and 
4,000 tons of particulate matter from its locomotives rule.
    Finally, in six cases, agencies reported neither monetized nor 
quantified benefit estimates. In many, though not all, of these cases, 
the agency provided a qualitative description of benefits. For example, 
HHS' animal feed rule discusses the potential benefits of avoiding an 
outbreak of ``mad cow'' disease, but does not estimate the probability 
of such an episode. EPA's analysis of its expansion of its toxic 
release inventory reporting rule includes a qualitative discussion of 
making these data available to the public.
    (ii) Cost analysis. In 19 of the 22 cases, agencies provided 
monetized cost estimates. These include such items as: USDA's estimate 
of $1.65 billion over 15 years for its environmental quality incentives 
program; DOL's estimate of $111 million per year for its respiratory 
protection rule; and EPA's estimate of $37 billion per year to achieve 
full attainment of its revised primary National Ambient Air Quality 
Standard for particulate matter. For three deregulatory rules--USDA's 
Sonoran pork and Argentinian beef rules and EPA's PCB disposal rule--
agencies' monetized cost estimates were small or zero.
    For the remaining three rules, the agencies did not estimate costs. 
These included DOI's two migratory bird hunting rules and NHTSA's light 
truck fuel economy rule.
    (iii) Net monetized benefits. Thirteen of these 22 rules provided 
at least some monetized estimates of both benefits and costs. Of those, 
six have positive net monetized benefits, that is, estimated monetized 
benefits that unambiguously exceed the estimated monetized costs of

[[Page 44049]]

the rules. For example, DOE's energy conservation standards for 
refrigerators and freezers will generate an estimated net benefit of 
$4.18 billion (present value) through 2030. EPA's PCB disposal rule 
will result in an estimated net benefit of about $161 million per year. 
Four rules resulted in negative net monetized benefits. These included 
DOL's respiratory protection rule and EPA's medical waste incinerator 
rule. Two rules resulted in monetized benefit estimates that were 
sufficiently uncertain as to include both possibilities (net benefits 
and net costs). For example, EPA's pulp and paper hazardous air 
pollutant rule was estimated to generate between $925 million in net 
benefits and $1.165 billion in net costs. Finally, one rule (USDA's 
Sonoran pork rule) was estimated to have $0 benefits and $0 costs.
    (iv) Rules with quantified effects of less than $100 million per 
year. Seven of the rules in table 9 are classified as economically 
significant even though they have no quantified effects that exceed 
$100 million in any one year. These deserve comment:
    USDA (2 Rules)--Importation of Pork from Sonora, Mexico, and Beef 
from Argentina: In 1997, USDA began implementing a new general policy 
allowing, under certain conditions, the importation of animal products 
from certain regions of countries shown to be free of pests. This 
policy was promulgated by rule on October 28, 1997 (62 FR 56000, 
56027), but was not designated as major because the Department 
concluded that analysis of the benefits and costs of the general policy 
was infeasible. Instead, the Department undertook to perform such 
analyses on each significant action implementing the general policy:

    Because this framework will not be fully implemented until we 
receive a new request to allow the importation of animals or animal 
products into the United States, and because we do not know the 
number or sources of requests we will receive in the future, we 
cannot estimate the economic impact of this rule as stipulated in 
E.O. 12866. We are therefore committed to performing a risk 
assessment and cost-benefit analysis on a case-by-case basis for 
each request we receive in the near future. [62 FR 56010]

The individual rulemakings concerning the importation of pork from 
Sonora, Mexico, and beef from Argentina represent the first two 
applications of this general regionalization policy and were analyzed 
as if they were ``major'' pursuant to this departmental commitment.
    HHS--Substances Prohibited in Animal Feed: FDA estimated that this 
rule will cost $53 million per year. It did not attempt to estimate the 
benefits to be expected from the rule because it was unable to estimate 
the probability of an outbreak of Bovine Spongiform Encephalopathy 
(``mad cow disease''). However, FDA did estimate that the consequences 
of an outbreak, should one occur, would be substantial. It estimated 
the losses from the destruction of exposed livestock would be about 
$3.8 billion.
    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 such 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 for duck hunters would be 
over $400 million per year in 1995. However, this figure is not in the 
commonly used sense a social benefit.
    DOE--Room Air Conditioners: This rule was proposed as part of a 
substantially larger rulemaking that included seven other types of 
household appliances, such as water heaters, fluorescent lamp ballasts, 
and mobile home furnaces. Energy efficiency standards for all eight 
combined clearly would have been economically significant. Even though 
the monetized effects of this rule are less than $100 million in any 
year, the annualized energy savings benefits (about $60 million per 
year) are substantial. This fact, combined with the rule's history led 
to the decision to maintain the ``economically significant'' 
designation.
    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 but is not required to revisit the standard each year.) 
For the past three years, however, appropriations language has 
prohibited NHTSA from spending any funds to change the standards. In 
effect, it 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 20.7 mpg, 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, we designated the rule as economically significant 
even though analysis of the effects was prohibited by law.
    (b) Transfer Regulations. Of the 33 rules listed in table 9, 11 
were rules necessary to implement Federal budgetary programs. The 
budget outlays associated with these rules are ``transfers'' to program 
beneficiaries. Of the 11, two are USDA rules that implement Federal 
appropriations language regarding home day care meal programs and 
agricultural policies; seven are HHS rules that implement Medicare and 
Medicaid policy; one is a DOJ rule regarding immigration policy; and 
one is a VA rule regarding compensation of veterans who have 
cardiovascular disabilities.
    (c) Major rules for independent agencies. Several commenters 
suggested that last year we omitted a major category of costs and 
benefits: the costs and benefits of major rules from the independent 
agencies. The General Accounting Office (GAO) is required to submit 
reports on major rules to the Committees of Jurisdiction in both houses 
of Congress under the congressional review provisions of the Small 
Business Regulatory Enforcement Fairness Act (SBREFA), including rules 
issued by agencies not subject to Executive Order 12866 (the so-called 
independent agencies). We reviewed the information on the costs and 
benefits of major rules contained in the GAO reports for the period 
April 1, 1996 to March 31, 1998. According to the GAO reports, five 
independent agencies issued 41 major rules during this period. The 
agencies are listed in table 10 along with a summary of the kinds of 
information provided by the agencies as summarized by GAO.
    Table 10 clearly reveals that the independent agencies provide 
relatively little quantitative information on the costs and benefits of 
regulations for major rules, especially compared to the agencies 
subject to E.O. 12866. Indeed, according to a recent GAO report, 
Regulatory Reform: Major Rules Submitted for Congressional Review 
During the First 2 Years, (April 24, 1998), the independent agencies 
themselves reported doing benefit/cost analyses for only eight, or 18 
percent, of the 44 major rules they submitted to GAO during this 
period. That compares to 72 out of 78 rules, or 92 percent, that

[[Page 44050]]

GAO examined for the agencies subject to Executive Order 12866. Table 
10 also shows that 12 of the 41 rules, or 29 percent, from independent 
agencies in our sample, which were all in the GAO sample, included some 
discussion of benefits and costs even though in some cases the agencies 
reported that they did not do a benefit cost analysis. However, table 
10 also reveals that only four of the 41 regulations had any monetized 
cost information and only one had any monetized benefit information.
    The one rule in table 10 that estimated both benefits and costs was 
an SEC rule amending the Investment Advisors Act of 1940 to exempt 
certain types of investment advisors from the prohibition of SEC 
registration as investment advisors. The SEC estimated benefits of $7 
million and costs of $930,000.The three other rules for which costs 
were estimated are the SEC's rule allowing electronic storage for 
brokers or dealer reporting, which the industry estimated would reduce 
costs by $160 million per year; a Federal Reserve Board (FRB) bank 
holding regulation that would reduce paperwork burden by $1.3 million 
per year; and an FCC regulation that requires that phones in most 
public facilities be hearing aid compatible with volume controls, which 
was estimated to increase the costs of a phone by from 50 cents to a 
dollar.
    The only estimate of costs or benefits of approximately $100 
million was the industry-supplied estimate of $160 million savings for 
the SEC's broker/dealer reporting rule. Since we have used a criterion 
of using only agency or academic peer reviewed estimates, we conclude 
that the 41 GAO reports contain no information useful for estimating 
the aggregate costs and benefits of regulations.
3. Best Practices and RIAs
    Based on a review of the 21 agency cost-benefit analyses for the 
period from April 1, 1996 to March 31, 1997, last year's report 
concluded that we need better information in order to determine whether 
proposed regulations produce the greatest net benefits. Based on a 
review of 22 additional agency analyses for the year from April 1, 1997 
to March 31, 1998, that conclusion still stands. Nevertheless, agencies 
are making significant efforts to apply the Best Practices principles 
in their RIAs. Below we discuss several examples of agencies' 
application of these principles to their analytical work.
    Serious deviations from Best Practices on any one criterion can 
dramatically diminish the usefulness of the analysis, or worse, lead to 
analytical results that distort the facts and ultimately result in 
regulatory decisions that are far from optimal. Because of the 
importance of ``getting it right,'' we thought it would be instructive 
to select several criteria from the Best Practices document and discuss 
some examples of how agencies properly applied them in their regulatory 
analyses:
     Quantification and monetization of estimates and treatment 
of qualitative estimates
     Determination of a consistent and reasonable baseline
     Evaluation of regulatory options
     Treatment of bias and uncertainty
     Treatment of future streams of benefits and costs
    (i) Quantification, monetization and treatment of qualitative 
estimates. All monetized estimates are, by definition, given in dollars 
and (unless there are overlapping effects of rules that are not 
accounted for) permit ready comparison and aggregation. Monetized 
estimates of effects are what is most generally considered 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; and (5) the discount 
rate used to convert future into current values (or vice versa).
    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 a 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 that 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.
    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.
    (ii) Baseline. One of the criticisms often cited in evaluating RIAs 
is the failure to use a consistent baseline against which to estimate 
both benefits and costs, or the failure to adopt a baseline that 
reflects current and future conditions (including current regulatory 
requirements). Using inconsistent or incorrect baselines will lead to 
biased estimates of benefits and/or costs. When this happens, the 
analysis may incorrectly make one or more of the various regulatory 
options appear reasonable or vice versa.
    The Best Practices document states that the baseline should be the 
best assessment of the way the world would look absent the proposed 
regulation. In addition, when more than one baseline appears reasonable 
or the baseline is very uncertain, the agency may choose to measure 
benefits and costs against multiple alternative baselines as a form of 
sensitivity analysis.
    In its analysis of the cost impacts for the final PCB disposal 
rule, for example, EPA considered three alternative baselines 
reflecting different interpretations of existing regulatory

[[Page 44051]]

requirements. EPA's preferred baseline scenario reflects EPA policy as 
it has evolved over the period since 1979 when EPA published an earlier 
final rule with regard to PCBs generally (although it does not reflect 
the special circumstances associated with the disposal of PCB-
contaminated ship hulls). A second baseline reflects a literal 
interpretation of the 1979 rule; a third alternative, the ``special 
circumstances'' baseline, reflects current EPA policy because the Navy 
is already disposing of ship hulls in a manner consistent with the new 
rule. Using these alternative baselines, EPA estimates that the final 
PCB rule would yield net cost savings ranging from $150 million for the 
special circumstances baseline to $740 million for a literal 
interpretation of the 1979 rule. The use of multiple baselines is 
informative because it illustrates that changes in EPA policy in 
implementing regulations can have a substantial effect on the cost of a 
regulatory program. In this case, in the years after EPA adopted a 
final disposal rule in 1979, changes in EPA policy--especially allowing 
the disposal of automobile ``shredder fluff'' in municipal landfills--
have operated to reduce the cost of the program by more than $500 
million per year.
    (iii) Regulatory options. The analysis should consider the most 
important alternative regulatory options in addressing the problem. 
Failure to do so may give the selected option the appearance of being 
the best alternative when in fact there are one or more others that 
result in higher benefits and/or lower costs and thus greater net 
benefits. It is critical that the alternatives analyzed be reasonable. 
Analyzing bogus or ``straw man'' options only exacerbates the problem.
    The analysis might consider, for example, the use of performance-
based standards, different levels of stringency, differential standards 
for different parts of the regulated population, and differential 
approaches for assuring compliance. If the proposed regulation is 
composed of a number of distinct provisions, it is important to 
evaluate the benefits and costs of the different provisions separately. 
Particularly in the case of alternative levels of stringency, the 
analysis should estimate the incremental benefits and costs of each 
option as compared with the next-less-stringent option.
    DOE's final rule setting new energy efficiency standards for 
refrigerators and freezers, for example, includes analysis of a 
comprehensive set of options. For each of eight classes of 
refrigerators, e.g., top-mounted freezer with automatic defrost, DOE 
estimated the benefits and costs of at least 12 alternative levels of 
performance standards. For one class, DOE analyzed 28 options. This 
extensive analysis of alternatives provided DOE with a very rich array 
of information on the relative effects of alternative standards. For 
example, DOE's analysis of over 20 alternative performance standards 
for one class of top-mounted refrigerators enabled it to select an 
option that resulted in per-unit net benefits more than $200 greater 
than for the least attractive option considered in the analysis.
    (iv) Bias and uncertainty. The analysis should address areas of 
uncertainty and potential bias. The analysis should also provide a 
clear discussion of the assumptions underlying the analysis and address 
the uncertainties that attend these assumptions. Sensitivity analysis 
helps to identify the truly critical assumptions, thereby enabling the 
analysts to focus their efforts on further refinements to the analysis 
in those areas.
    The Best Practices document states that where benefit or cost 
estimates are heavily dependent on certain assumptions, it is essential 
to identify these assumptions explicitly and to carry out sensitivity 
analyses based on alternative plausible assumptions.
    EPA's analysis for the two rules revising primary National Ambient 
Air Quality Standards (NAAQS) for ozone and particulate matter (PM) 
presents a plausible range for the benefits estimates; the range 
reflects alternative assumptions with respect to the estimates for 
specific benefit categories (EPA, RIA for PM and ozone primary NAAQS, 
pp. ES-9 and 10). For example, the analysis presents high and low ozone 
benefit estimates which reflect differences in the treatment of the 
possible effect of ozone on premature mortality. Similarly, the 
analysis presents high and low PM benefit estimates to reflect 
differences in the treatment of a possible threshold below which PM 
would have little or no effect on premature mortality.
    (v) Future streams of benefits and costs. As discussed above, care 
must be taken in comparing estimates of effects to assure that they are 
presented in a comparable time frame. This requires consideration of 
several factors: (1) The initial year in which the effects occur; (2) 
the final year after which the effects disappear; (3) the discount rate 
used to convert future into current values (or vice versa); and (4) the 
format in which the value is presented.
    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;
    (2) Present values;
    (3) Constant annual values; and
    (4) Other or unknown formats.
    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.
    The analysis should present a schedule of the stream of benefits 
and costs where there is a variation in benefits and costs over time or 
where they occur in different years, e.g., where there is a delay in 
the timing of benefits relative to the costs. These streams of benefits 
and costs should either be discounted to yield ``present value'' 
estimates or ``annualized'' to provide an estimate of annual benefits 
and costs in a typical year so that they can be considered in a 
comparable time frame. Failure to do so will bias the analysis in favor 
of alternatives that deliver benefits later or impose costs sooner.
    The Best Practices document refers to OMB Circular A-94 as the 
basic guidance on discount rates for regulatory analyses. As noted in 
the A-94 guidance, agencies may also present sensitivity analyses using 
other discount rates (with a justification for using these alternative 
rates).
    For example, EPA's analysis of its final rule setting both effluent 
limits for wastewater discharges and air toxic emission limits for pulp 
and paper mills developed present value estimates using discount rates 
of three and seven percent for benefit and cost streams over a 30 year 
period (EPA, Economic Analysis * * *, October 1997, pp.10-3 and 10-4). 
EPA phased in the recreational benefits over a two-year period (full 
value in year three and thereafter) and the health benefits over a five 
year period (full value in year six and thereafter). On the cost side, 
EPA

[[Page 44052]]

assumed the capital costs would be incurred in years one and twenty-one 
with operations and maintenance costs incurred in the second through 
thirtieth years. The analysis adopted the 7 percent discount rate in 
accordance with OMB guidance and used 3 percent, reflecting the social 
rate of time preference, to reflect the sensitivity of these estimates 
to alternative discount rates. The benefit estimates (including the 
lower absolute value of the bound negative benefit estimate) are 
roughly 50 percent larger and the costs are roughly 40 percent larger 
using a 3 percent discount rate vis-a-vis a 7 percent discount rate.
4. GAO Report
    A review completed by GAO looked at how well the regulatory impact 
analyses for 20 economically significant health, safety, and 
environmental regulations issued between July 1996 and March 1997 
followed our Best Practices guidelines (GAO 1998). For example, 
according to GAO, five of the 20 rules examined did not discuss 
alternatives, six did not assign dollar values to benefits, and one did 
not assign dollar values to costs--all practices recommended by our 
guidance (GAO, 1998). In addition, GAO found that the analyses differed 
in their treatment of assumptions and uncertainty. For example, 
agencies used various discount rates that ranged from 2.1 percent to 10 
percent, and for the six analyses that used an estimate for the value 
of a statistical life, the estimates ranged from $1.6 million to $5.5 
million. GAO does point out, however, that the Best Practices guidance 
does allow agencies flexibility to vary the assumptions to fit the 
circumstances of the specific rules, although GAO also points out that 
in many cases the agencies do not explain why they varied from Best 
Practice recommendations.
    On a more positive note, GAO also reported that according to agency 
officials, 12 of the 20 analyses were used to help identify the most 
cost-effective of several alternatives or to cost-effectively implement 
health-based regulations and that seven of the remaining analyses were 
used to define the scope and timing of implementation, document and 
defend regulatory decisions, and reduce health risks at feasible costs. 
Only one of the analyses played almost no part in regulatory decisions, 
and that was because the statute was too prescriptive to leave any 
discretion in implementing the regulation.
    As we stated last year:

    Although considerable progress has been made in providing micro 
data in advance of regulatory proposals and in developing the Best 
Practices 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 are developed and used appropriately.

Chapter III: Estimates of Benefits and Costs of ``Economically 
Significant'' Rules, April 1995-March 1998

    In last year's report, we recommended that OIRA continue to develop 
a data base on benefits and costs of major rules. This chapter seeks to 
respond to that recommendation by presenting the available benefit and 
cost estimates for individual rules from April 1, 1995 through March 
31, 1998. The summary of agency estimates for final rules from the 
current year (April 1, 1997 to March 31, 1998) is presented in chapter 
II, table 9. The summary of agency estimates for final rules from the 
preceding two years (April 1, 1995 to March 31, 1997) is presented in 
tables 17 and 18.
    In assembling agency estimates of benefits and costs, we have:
    (1) Applied a uniform format for the presentation of benefit and 
cost estimates in order to make agency estimates more closely 
comparable with each other, e.g., provided the benefit and cost streams 
over time, annualized benefit and cost estimates, etc., and
    (2) Monetized quantitative estimates where the agency has not done 
so, e.g., converted tons of pollutant per year to dollars.
    The adoption of a format that allows the presentation of agency 
estimates so that they are more closely comparable also allows, at 
least for purposes of illustration, the aggregation of benefit and cost 
estimates across rules. At the same time we caution the reader that 
agencies have used different methodologies and valuations in 
quantifying and monetizing effects and we have attempted to be faithful 
to the respective agency approaches. In this chapter, we also aggregate 
benefit and cost estimates for those Federal rules with significant 
quantified benefit and cost estimates.
    As noted in chapters I and II, the substantial limitations of the 
available data on the benefits and costs for this set of rules raise 
significant obstacles to the development of a meaningful aggregate 
estimate of benefits and costs for even a single year's regulations. 
For example, in many cases agencies identified important benefits of 
their rules that were not quantifiable. In such cases, we necessarily 
omitted them from the monetized estimates we develop in this chapter. 
To the extent that these benefits are substantial, the monetized 
estimates will understate the total value of the benefits. The 
discussion below addresses other limitations in the data and outlines 
the steps we have taken in an effort to overcome some of them.

A. Monetized Benefit and Cost Estimates for Individual Rules

    First, we have only included in this chapter those major rules with 
quantified estimates of benefits and costs. These include six rules 
from the 1995/96 period, 15 rules from the 1996/97 period, and 13 rules 
from 1997/98 period. We have excluded 13 rules without quantified 
estimates of either benefits or costs. (See table 11.) Six additional 
rules listed in table 12 have also been excluded from further 
discussion because only quantified cost estimates were available and/or 
there were only relatively small benefit and cost estimates.
    Second, for some of the remaining rules, agencies quantified 
estimates of significant effects, but did not assign a monetized value 
to these effects. Some of the quantified effects--for example, small 
changes in the risk of premature death or serious injury--are 
frequently identified as outcomes for a variety of rules. In a number 
of instances, though, agencies did assign monetized estimates to these 
outcomes.
    Differences in valuation across rules are often critical, 
particularly in comparisons between and among individual rules or 
programs. Furthermore, the different approaches in the quantification 
and monetization of these effects across agencies result in an ``apples 
and oranges'' problem in aggregating estimates; in particular, where 
effects have been quantified, but not monetized, the different 
quantitative effects cannot be summed because they are not expressed in 
common units. In order to address this problem, this section takes the 
additional step of assigning a monetized value in order to provide a 
more consistent set of estimates in those cases where agencies only 
quantified significant effects. We have not, however, attempted to 
quantify or monetize any qualitative effects identified by agencies 
where the agency did not at least quantify them.
    Agencies have, over the years, taken, and continue to take, several 
different approaches toward rules that affect small risks of premature 
death. In some cases, such as FDA's tobacco rule, agencies have 
quantified and monetized

[[Page 44053]]

these effects in terms of ``quality-adjusted statistical life years.'' 
In other cases, such as FRA's roadway worker protection rule, agencies 
have quantified and monetized these effects in terms of statistical 
lives. In still other cases, such as HHS's organ procurement rule and 
NHTSA's air bag depowering rule, agencies have quantified risks of 
death in terms of life-years or lives, but have not monetized them. 
Finally, in some cases, such as FDA's animal feed rule, the agency did 
not develop a quantified estimate of the rule's mortality effects.
    Estimates for the value of a statistical life varied across 
agencies. For the tobacco rule, FDA estimated benefits based on a value 
of $2.5 million per statistical life. For the roadway worker rule, FRA 
used $2.7 million per statistical life. For the upper-bound estimates 
of EPA's ozone and PM NAAQS rules, the agency used $4.8 million per 
statistical life; and for its mammography rule, FDA also used $5 
million per statistical life.33 Similarly, agency estimates 
for the value of a statistical life-year have also varied. FDA used 
$116,500 per life-year for its tobacco rule; EPA used $120,000 per 
life-year to produce its lower-bound estimates of benefits in its ozone 
and PM NAAQS rules; FDA used $368,000 per life-year in its mammography 
rule. As a general matter, we have deferred to the individual agency's 
judgment in this area. In cases where the agency both quantified and 
monetized fatality risks, we have made no adjustments to the agency's 
estimate.
---------------------------------------------------------------------------

    \33\ There is a relatively rich body of academic literature on 
this subject. The methodologies used and the resulting estimates 
vary substantially across the academic studies. Based on this 
literature, agencies have developed estimates they believe are 
appropriate for their particular regulatory circumstances.
---------------------------------------------------------------------------

    In cases where the agency provided only a quantified estimate of 
fatality risk, but did not monetize it, we have monetized these 
estimates in order to convert these effects into a common unit. For 
example, in the case of HHS's organ donor rule, the agency estimated, 
but did not monetize, statistical life-years saved, although it 
discussed HHS's use of $116,500 per life-year in other contexts. We 
valued those life-years at $116,500 each. For NHTSA's air bag 
depowering rule, we used a value of $2.7 million per statistical life. 
In cases where agencies have not adopted estimates of the value of 
reducing these risks, we used estimates supported by the relevant 
academic literature. For DOL's respirator rule, for example, we used $5 
million per statistical life. As a practical matter, the aggregate 
benefit and cost estimates are relatively insensitive to the values we 
have assigned for these rules because the aggregate estimates are 
dominated by the FDA tobacco rule and EPA's rules revising the ozone 
and PM primary NAAQS. Finally, we did not attempt to quantify or 
monetize fatality risk reductions in cases where the agency did not at 
least quantify them.

B. Valuation Estimates for Other Regulatory Effects

    The following is a brief discussion of our valuation estimates for 
other types of effects which agencies identified and quantified, but 
did not monetize.
     Injury. For the air bag depowering rule, we adopted the 
Department of Transportation approach of converting injuries to 
``equivalent fatalities.'' These ratios are based on DOT's estimates of 
the value individuals place on reducing the risk of injury of varying 
severity relative to that of reducing risk of death. For the two OSHA 
rules we used a ratio of 20 injuries per equivalent fatality.
     Change in Gasoline Fuel Consumption. We valued reduced 
gasoline consumption at $.80 per gallon pre-tax.
     Reduction in Barrels of Crude Oil Spilled. We valued each 
barrel prevented from being spilled at $2,000. This reflects double the 
sum of the most likely estimates of environmental damages plus cleanup 
costs contained in a recent published journal article (Brown and 
Savage, 1996).
     Change in Emissions of Air Pollutants. We used estimates 
of the benefits per ton for reductions in hydrocarbon, nitrogen oxide 
(NOX), sulfur dioxide (SO2), and fine particulate 
matter (PM) presented in EPA's Pulp and Paper cluster rule (October, 
1997). These estimates were obtained from the RIA prepared for EPA's 
July, 1997 rules revising the primary NAAQS for ozone and fine PM. We 
note that in this area, as in others, the academic literature offers a 
number of methodologies and underlying studies to quantify the 
benefits. There remain considerable uncertainties with each of these 
approaches. For each of these pollutants, we used the following values 
(all in 1996$) for changes in emissions: 34

    \34\ Where applicable, the lower (higher) end of the value 
ranges in all of the tables throughout this report reflect the lower 
(higher) values in these ranges.
---------------------------------------------------------------------------

Hydrocarbons: $519 to $2,360/ton;
Nitrogen Oxides: $519 to $2,360/ton;
Particulate Matter: $11,539/ton; and
Sulfur Dioxide: $3,768 to $11,539/ton.

    Third, in order to make agency estimates more consistent, we 
developed benefit and cost time streams for each of the rules. Where 
agency analyses provide annual or annualized estimates of benefits and 
costs, we used these estimates in developing streams of benefits and 
costs over time. Where the agency estimate only provided annual 
benefits and costs for specific years, we used a linear interpolation 
to represent benefits and costs in the in-between years. In the case of 
EPA's Federal test procedure rule, for example, the analysis reported 
emission reductions for only four years, i.e., 2005, 2010, 2015, and 
2020. We used linear interpolation to provide benefit and cost streams 
over the intervening years.
    In addition, agency estimates of benefits and costs cover widely 
varying time periods. For example, EPA's analysis for the pulp and 
paper effluent guidelines rules developed annualized benefit estimates 
for a stream of benefits over 30 years. Annualized cost estimates for 
this rule were based on installation of control equipment in the first 
year with full replacement of the control equipment in year 21 at the 
end of the 20-year useful life for the control equipment and operating 
and maintenance costs after the first year. USDA's analysis of the 
conservation reserve program provided annual benefit and cost estimates 
for the five-year period from 1997 to 2002. On the other hand, DOE's 
analysis of energy conservation standards for refrigerators and 
freezers evaluated a much longer time frame from 2000 to 2030, and 
EPA's analysis of its rule setting emission standards for new 
locomotives used a time frame of forty years (2000 to 2040).
    These differences in the time frames evaluated reflect specific 
characteristics of individual rules. The short time frame of USDA's 
conservation reserve program rule reflects, for example, the five-year 
legislative cycle of the farm bills. On the other hand, the longer time 
frames of DOE's refrigerators and freezers rule and EPA's new 
locomotives rule reflect the relatively long period required for 
turnover of the existing stock of equipment and replacement with 
equipment meeting the new standards. Because there are substantial 
differences in the time frame of analysis for these rules, we have 
decided--with the one exception of DOT's air bag depowering rule--to 
treat the benefit and cost streams as though all of these rules are in 
place through the year 2050. We made the one exception to this approach 
for DOT's air bag depowering rule because the rule automatically 
terminates at the end of five years. We believe that this is a 
reasonable treatment of the benefit and

[[Page 44054]]

cost streams because a number of these rules will not achieve their 
full effect for many years into the future. In addition, major 
regulatory programs tend to be long-lived and, thus, the adoption of a 
longer time horizon appears to be appropriate. This approach holds the 
baseline constant and does not consider, of course, the potential 
effect of a ``rising baseline'' as a result of technological change, 
cultural changes, etc. (See discussion in chapter I.)
    Finally, we have not made any changes to agency monetized 
estimates. To the extent that agencies have adopted different monetized 
values for effects, e.g., different values for a statistical life, or 
different discounting methods, these differences remain embedded in 
tables 13 through 15. Any comparison or aggregation across rules should 
also consider a number of factors which the presentation in tables 13 
through 15 does not address. First, for example, these rules may use 
different baselines in terms of the regulations and controls already in 
place. 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 midpoint 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.

C. Aggregation of Benefit and Cost Estimates Across Rules

    In table 16, we aggregated the estimates for individual rules from 
tables 13 through 15 by year. This approach yields ex ante estimates of 
the benefits and costs that Federal agencies expected from major rules 
issued in each of the last three years.
    We have several important observations to offer on these aggregate 
estimates. First, the 1996 HHS rule placing restrictions on the sale of 
tobacco and EPA's 1997 rules revising the NAAQS for ozone and 
particulate matter dominate the annualized and present value aggregates 
presented in table 16. Changes in estimation methodology for these 
rules, as reflected by the ``plausible range'' adopted by the analysis 
for the EPA NAAQS rules for ozone and particulate matter, will have a 
marked effect on the aggregated benefit and cost estimates for the 
rules published over the period from April 1, 1995 to March 31, 1998. 
By the same token, the aggregate estimates are not very sensitive to 
different approaches for the remaining rules.
    The presentation of these aggregates as annualized benefit and cost 
streams or as net present value estimates may obscure the actual timing 
of benefits and costs. In the case of the tobacco rule, for example, 
the annualized benefit estimates were estimated to be $9 to $10 billion 
per year. However, the health benefits associated with successfully 
reducing the number of young tobacco users will not begin to be 
realized until after 2015 because of the lag in the adverse effects 
associated with tobacco use.
    In addition, the benefits and costs of the revised ozone and 
particulate matter NAAQS will only be realized in the years after 2005. 
These estimates of ``out-year'' benefits and costs are also uncertain. 
EPA will complete its next periodic review of the particulate matter 
NAAQS, scheduled for 2002, before it begins implementation of the 
revised particulate matter NAAQS. If this review yields a ``mid-
course'' change in the standard, the estimates of benefits and costs 
could change. EPA has also expressed a continuing concern with the 
uncertainty of the full attainment cost estimates because EPA believes 
technological change over the next decade will yield lower-cost 
approaches that will achieve the revised NAAQS.
    Second, as noted above, there are significant methodological issues 
that need to be confronted when aggregating estimates from a set of 
individual rules (as presented in tables 13 through 15) in an effort to 
obtain an estimate of the total benefits and costs of Federal 
regulation. These issues include:
    (1) Adoption of a reasonable, consistent baseline (it is difficult 
to patch together a sensible baseline from the differing baseline 
scenarios adopted across rules).
    (2) The use of ex ante estimates (versus ex post estimates) of the 
benefits and costs of regulation, e.g., the reliance on ex ante 
estimates may well fail to reflect important changes in taste, 
innovation by the private sector, or changes in Federal/State/local 
regulation.
    (3) The ``apples and oranges'' problem associated with combining 
estimates from different studies, i.e., different measures of benefits 
and costs, double-counting of benefits and costs across related rules, 
differing approaches to uncertainty such as the use of upper-and lower-
bound estimates versus the use of an upper-bound only estimate, 
different discount rates, etc.
    Because of these concerns with aggregating the prospective benefit 
and cost estimates taken from the regulatory analysis for individual 
rules, we are interested in comments on:
    (1) The merits of aggregating prospective estimates from individual 
rules to obtain an aggregate estimate of the benefits and costs of 
Federal regulation.
    (2) The best approach to address the concerns with baseline, ex 
ante estimates, and the various ``apples and oranges'' problems 
identified above.
    A final reason that any regulatory accounting effort has limits is 
the lack of information on the effects of regulations on distribution 
or equity. None of the analyses addressed in this report provides 
quantitative information on the distribution of benefits or costs by 
income category, geographic region, or any other equity-related factor. 
As a result, there is no basis for quantifying distributional or equity 
impacts.

Chapter IV: Recommendations

    As with last year's report, this year's 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 625 (a)(4)). 
We are soliciting comments on a wide range of issues related to our 
discussion of the methodology used in evaluating total annual benefits 
and costs of Federal regulatory programs and on estimates of the 
benefits and costs of ``economically significant'' or ``major'' rules. 
In particular, we are soliciting comments on our approach to estimating 
the total costs and benefits of regulation by combining existing 
retrospective or ex post studies with agency-produced prospective or ex 
ante estimates; the best ways to deal with the baseline and apple and 
oranges problems discussed above; and whether we have missed important 
data sources that would fill in the gaps in our estimates. 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.''
    In chapter I we presented aggregate estimates of the costs and 
benefits of several categories of regulation to further the discussion 
and generate comments that we hope will lead to better estimates. 
However, these aggregate estimates are at best only general indicators 
of the importance of regulation undertaken thus far and not guides to 
future specific regulatory changes. We discussed at some length

[[Page 44055]]

the various shortcomings of these estimates, including the problem 
that, most of them are based either on dated studies of existing 
regulations or on estimates for proposed regulations.
    In chapter II, we presented the prospective cost and benefit data 
that the agencies had estimated for the major rules that they issued 
over the period April 1, 1997 to March 31, 1998. These data for 
individual regulations show that in many, but not all cases, agencies 
have done a good job following the recommendations of the Best 
Practices document. The overall picture remains one of slow but steady 
progress toward the Best Practices standards. In any case, even if Best 
Practices are fully adhered to in developing regulations, these 
prospective analyses alone would not be suitable for determining 
whether existing regulatory programs or program elements should be 
reformed or eliminated.
    In spite of these methodological difficulties, we believe that 
prospective studies such as those discussed in chapter II do provide 
useful general information about existing regulatory programs. In this 
spirit, we developed in chapter III cost and benefit estimates for a 
set of major regulations issued by the agencies over the last three 
years by using standardized assumptions and common values on benefits 
derived from agency practice and the academic literature. These values 
and assumptions are not necessarily appropriate for all individual 
regulations but when applied to a set of analyses offer additional 
general information about agencies' regulatory systems. We are still in 
the early stages of this process and seek comments on whether this line 
of analysis should be pursued. In summary, at this stage we do not 
believe it is appropriate to make recommendations on specific 
regulatory programs based on the incomplete and uneven data that we 
discuss at length above. We note, however, that agencies are continuing 
to reform and improve their regulatory programs. These specific efforts 
are described at length in the Regulatory Plan, published each fall 
with the Unified Agenda of Federal Regulatory and Derergulatory 
Actions.
    We have discerned some general themes during our review of the 
academic literature and analysis of data on the economic impacts of 
regulation. In particular, we note the general success of large scale 
regulatory reforms that have embraced industrial or business sectors. 
For example, the Federal government undertook reforms of the statutory 
and regulatory regimes that governed practices in the airline, 
trucking, and natural gas and oil markets in the 1970s and 1980s. The 
Clinton Administration has continued this work with regulatory reforms 
in banking, intrastate trucking, securities and financial services, 
pensions, and telecommunications. In many of these areas, the older 
regulatory schemes attempted to proscribe entry by firms into lines of 
business or to limit production for reasons other than health, safety, 
or environmental protection.
    Although there exist theoretical arguments that in the case of 
natural monopolies entry of new firms could increase costs to 
consumers, these arguments are based primarily on static models not 
appropriate for our current dynamic, technological world. The 
consistency of the movement toward regulatory reform over the past 25 
years is a tribute to the benefits that flow from opened markets. It 
appears that opening up markets to all qualified entities and 
individuals has been and continues to be a mainstay of regulatory 
reform. It is worth noting, however, that such regulatory reform does 
not mean the end of regulation. While outmoded regulatory programs are 
changed, new regulations are generally needed, particularly during 
transitions between the old and new systems, to open up markets and 
ensure that fair competition is maintained. For example, the 
Telecommunications Act of 1996 directs the FCC to establish the 
regulation that is needed to allow new entrants access to the local 
network in order to establish competition in local telecommunications 
markets. Without access to the local network, there would be little 
competition.

A. Electricity Restructuring

    A new regulatory area in which the Administration is recommending 
reform is the decades old system of electricity generation. The 
Administration has transmitted to Congress a bill that would 
restructure this industry and bring substantial savings to consumers. 
Economic forces are forging a new era in electricity prices, where 
electricity prices will be determined primarily by the market rather 
than by regulation. Under this new system, often called ``retail 
choice,'' consumers are allowed to choose their electricity supplier, 
much as they have chosen long distance telephone service for over a 
decade. Electricity policy is moving in this direction because 
subjecting utilities to competition will lead to increased efficiency 
in the industry and thus benefit the economy and the environment.
    In the past, electricity customers did not have the ability to 
choose their supplier. Instead, under State law, utilities generally 
were monopolies with both a right and responsibility to serve all 
consumers in a particular area. The State permitted the utility to 
charge customers a regulated rate for electric power based on the cost 
of producing such power plus a ``rate of return'' on investment. In 
general, the electric monopoly system has provided reliable power to 
electric consumers in the United States. However, a monopoly system has 
a fundamental weakness: it does not provide incentives to be cost-
efficient because a monopoly supplier does not have to compete and 
essentially has a guarantee that its costs will be recovered.
    Under electricity restructuring, competition will replace 
regulation as the primary mechanism for setting electricity generation 
prices. Utilities would be required to open up their distribution and 
transmission wires to all qualified sellers. The transmission and 
distribution of electricity would continue to be regulated because they 
will remain monopolies for the foreseeable future. The system would be 
restructured, not completely deregulated.
1. The Need for Federal Action
    The Administration's proposal respects the actions of those States 
which are in the process of implementing retail competition and seeks 
to build on, rather than disrupt, those efforts. Nevertheless, 
effective retail competition is unlikely to happen without Federal 
legislation. First, electrons do not respect State borders. 
Accordingly, as States remove the constraints of monopoly franchise 
territories, electricity markets will naturally become more 
regionalized.
    Only federal legislation can adequately address the needs of these 
regional markets. For example, to allow for effective and efficient 
competitive markets, FERC must have regulatory jurisdiction over all 
owners of transmission facilities. Currently, FERC has no regulatory 
authority to order open access to transmission facilities by municipal 
utilities, cooperatives, or federal power entities. Moreover, effective 
competitive markets require that FERC be given additional regulatory 
authority to require the formation of Independent System Operators and 
to address market power issues.
    The electric industry is also hampered by statutes which inhibit 
the development of competitive markets. The entire Federal electricity 
law framework dates from the New Deal and is premised upon State-
regulated monopolies rather than regional

[[Page 44056]]

competitive markets. Federal law should be updated so that it 
stimulates, rather than stifles, competition. For example, the Public 
Utility Holding Company Act, which regulates utility holding companies, 
and the ``must buy'' provision of section 210 of the Public Utility 
Regulatory Policies Act, which requires that utilities buy power from 
qualified cogenerators and small power producers, should be repealed.
    Finally, the States alone cannot obtain the full economic and 
environmental benefits of competition for American consumers. Without 
comprehensive Federal electricity restructuring legislation, neither 
State nor Federal regulators will have the necessary tools to ensure 
that regional electricity markets are truly competitive and operate as 
efficiently as possible. Moreover, absent a Federal role, there will be 
no assurances that support for renewable technologies and other 
important public purpose programs will continue absent a Federal 
program. Without such tools, electricity prices will likely be higher 
and the environmental gains which we expect under the Administration's 
plan will not be fully realized.
2. Benefits of Electricity Restructuring
    The Comprehensive Electricity Competition Plan embodies the overall 
agenda of the Clinton Administration to expand the economy and improve 
the environment. A more competitive electricity industry will provide 
large benefits to individual American consumers as well as being an 
overall boon to our economy. It will result in lower prices, a cleaner 
environment, greater innovation and new services, and a more reliable 
power supply grid. It will also save the government money.
    The Department of Energy estimates that retail competition will 
save consumers at least $20 billion a year on their electricity bills. 
This translates into direct savings to the typical family of four of 
$104 per year. Indirect savings, which would arise from the lower costs 
of other goods and services in a competitive market, are $128 per year 
for a typical family of four. Thus, total projected savings for such a 
family are $232 a year.
    Competition will also spark innovation in the American economy, 
creating new industries, jobs, products and services just as 
telecommunications reform spawned cellular phones and other new 
technologies. This will further strengthen our nation's position as the 
most vibrant and dynamic economy in the world.
    Major benefits will accrue to the Federal, State and local 
governments through lower electricity prices. Total government spending 
on electricity was $19.5 billion in 1995. With competition, these costs 
are likely to decline by at least 10 percent, a savings of close to $2 
billion year. This restructuring dividend will help governments 
maintain balanced budgets into the future while meeting critical public 
needs.
    Restructuring will also produce significant environmental benefits 
through both market mechanisms and policies that promote investment in 
energy efficiency and renewable energy. Competitive forces will create 
an efficient, leaner, and cleaner industry. For, example, DOE estimates 
that the Administration's plan will reduce greenhouse gas emissions by 
roughly 25 to 40 million metric tons in 2010. A generator that wrings 
as much energy as it can from every unit of fuel will be rewarded by 
the market. Today, a monopoly supplier recovers its costs regardless of 
whether it uses its power resources efficiently. Competition also 
provides opportunities for consumers to vote with their wallets for 
green power and facilitates the marketing of energy efficiency services 
along with electricity.
    Restructuring also makes possible the introduction of new policy 
mechanisms such as the renewable portfolio standard and enhanced public 
benefit funding, which will guarantee substantial environmental 
benefits notwithstanding market outcomes. The environmental benefits 
from the Administration's restructuring plan, which includes the 
renewable portfolio standard and the public benefit fund, will outweigh 
any negative effects associated with the demand increasing effects of 
lower prices or other factors.
    The Administration's proposal for electricity competition 
legislation reflect the need for the simultaneous calibration of many 
elements in an interconnected statutory framework in order to achieve 
the desired bottom line: achieving the economic benefits of competition 
in a manner that is fair and improves the environmental performance of 
the electricity industry.
    Our restructuring proposal is best understood in terms of five main 
objectives: (1) Encouraging States to implement retail competition; (2) 
protecting consumers by facilitating competitive markets; (3) assuring 
access to and reliability of the transmission system; (4) promoting and 
preserving public benefits; and (5) amending existing Federal statutes 
to clarify Federal and State authority.

B. Need for Further Methodological Progress: Steps Taken, Steps Needed

    Last year we made five recommendations 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:
     That OIRA lead an effort among the agencies to raise the 
quality of analyses used in developing new regulations by promoting 
greater use of the Best Practices guidelines and by offering technical 
outreach programs and training sessions on the guidelines;
     That an interagency group 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 more useful for assessing 
existing regulations;
     That OIRA 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;
     That OIRA 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 document as the starting point; and
     That OIRA 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.
    To implement these recommendations, we took several specific steps, 
which should be viewed as first steps in an ongoing effort:
     After the September 30, 1997 report was issued, we met 
with interested parties to hear their suggestions for implementing its 
recommendations and improving the next report. The interested parties 
included Congressional staffs, agency officials, academic experts, and 
the public at large at a well attended open meeting sponsored by the 
Brookings Institution and the American Enterprise Institute. We also 
put the report on the OMB home page at: http://www.whitehouse.gov/WH/
EOP/OMB/html/rcongress.htm and distributed hundreds of hard copies to 
the interested public. We also discussed the report with our regulatory 
counterparts

[[Page 44057]]

from other countries and with officials at the OECD studying regulatory 
reform. These discussions have been very helpful, and their influences 
are reflected in this year's report.
     On December 12, 1997, the Administrator of OIRA sent a 
memorandum to the Regulatory Working Group made up of the top 
regulatory officials of the key agencies, requesting that they give 
greater attention to the analysis of economically significant rules and 
to focus specifically on the Best Practices guidance. The memorandum 
also told the agencies of our intention to disaggregate further our 
total benefit and cost estimates and to provide more information on 
economically significant rules, including filling gaps by monetizing 
benefit estimates where the agencies had quantified but not monetized. 
We have followed up the memorandum with meetings of the Regulatory 
Working Group and discussions with individual agency officials that 
emphasized the importance of good analysis.
     We reviewed examples of ex post analyses, including those 
of NHTSA, OSHA, and EPA regulations. This review helped contribute to 
an investigation of the methodological problems associated with 
regulatory analysis.
     We convened a meeting of an Interagency Technical Working 
Group (ITWG) of staff from the major regulatory agencies co-chaired by 
CEA to examine the methodological issues raised in the first report, 
review existing regulatory analyses, and propose better estimation 
techniques useful in evaluating new and existing 
regulations.35 The group met several times a month 
throughout the first half of 1998, and invited individuals with 
recognized expertise to make presentations about estimation methods. 
The group heard presentations on methods of estimating the value of 
mortality risk reduction, the quantification of morbidity, the value of 
wetlands, and the value of changes in travel time. Materials used in 
these presentations are available in the OIRA public docket room. Based 
on these presentations, and its own discussions, the group considered 
the following recommendations to OMB in the context of OMB's report to 
Congress:
---------------------------------------------------------------------------

    \35\ It included representatives of DOE, Commerce, USDA, 
Treasury, HUD, Interior, Labor, NHTSA, Education, FDA, and EPA as 
well as CEA and OMB.
---------------------------------------------------------------------------

    (1) That OMB complete agency estimates of reductions in mortality 
risk by estimating the additional longevity, e.g., years of life 
gained, to complement conventional estimates of statistical lives 
saved, in instances where supportable methods exist.
    (2) That OMB complete agency estimates of small reductions in 
mortality risk by estimating the value of these changes using 
appropriate unit values from the literature on willingness-to-pay.
    (3) That OMB complete agency estimates of the value of reductions 
in morbidity, taking into account lags, e.g., ``latency'' periods, if 
any, in the realization of harm due to disease or injury, using a range 
of appropriate discount rates.
    (4) That OMB complete agency estimates of reductions in morbidity 
by estimating (1) the value of cases of disease or injury averted, 
where there are independent estimates of willingness-to-pay to reduce 
the risks of such disease or injury, and (2) where appropriate 
willingness-to-pay estimates are not available, an index of loss in 
function relative to death, such as a quality adjusted life-year 
approach.
    (5) OMB not generally assign values to agency estimates of changes 
in the quantity or quality of wetlands, without specific information 
justifying the appropriateness of the unit values to the wetlands 
affected, given the wide variety of wetlands.
    Recommendations (1) and (5) were adopted unanimously. Although the 
other recommendations enjoyed support from a majority of agencies, they 
were not supported unanimously. Another recommendation on the value of 
increases or decreases in travel time was discussed, but no 
recommendation has yet been made.
     As the report itself shows, we have begun to implement the 
recommendations that the ITWG discussed and considered in order to 
develop a data base on the costs and benefits of major rules using 
consistent assumptions and better estimation techniques to refine 
estimates of the incremental costs and benefits of regulatory programs 
and individual regulations. We hope this will enable us to move closer 
toward developing a system to track the net benefits provided by new 
regulations and reforms of existing regulation and for identification 
of specific regulatory reform proposals.
    Last year's report established a much needed baseline from which 
progress toward better data and methods regarding the impacts of 
Federal regulation can be measured. We indicated that this statutory 
charge was an ambitious one, but believe a good start was made. This 
year we report steady progress toward better data and improved 
analysis. We have refined the aggregate estimates of benefits and 
costs; made progress in establishing more consistent data for ongoing 
benefit-cost analyses; widened our own data base from one to three 
years; further analyzed and refined our understanding of methodological 
difficulties; and recommended reform in the electricity generation 
industry.
    We continue to view the task as a formidable one that must be 
approached with the expectation of a long steady movement forward. We 
believe this report represents a significant step down that path. We 
intend to continue these efforts to improve the quality of data and 
analysis needed to put us in a stronger position to continue to make 
more recommendations for regulatory reforms.

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[FR Doc. 98-21938 Filed 8-14-98; 8:45 am]
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