Regulatory Accounting: Analysis of OMB's Reports on the Costs and
Benefits of Federal Regulation (Chapter Report, 04/20/1999,
GAO/GGD-99-59).

Issuing and enforcing regulations is a basic responsibility of
government, but the costs that nonfederal entities pay to comply with
federal regulations are not accounted for in the federal budget process.
Some researchers have pegged those costs at hundreds of billions of
dollars, and some estimates of aggregate benefits are even higher.
Congress, deciding that it needed more information on regulatory costs
and benefits, required the Office of Management and Budget (OMB) to
submit two successive annual reports to Congress providing (1) estimates
of the total annual costs and benefits of federal regulatory programs;
(2) estimates of the costs and benefits of each rule likely to have a
$100 million annual effect on the economy in higher costs; (3) an
assessment of the direct and indirect effects of federal rules on the
private sector, state and local governments, and the federal government;
and (4) recommendations to reform or eliminate any federal program that
is inefficient, ineffective, or not a sound use of taxpayer dollars.
This report describes, for each of these four requirements, how OMB
addressed the requirements in its 1997 and 1998 reports and the views of
noted economists on OMB's responses in these reports.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-99-59
     TITLE:  Regulatory Accounting: Analysis of OMB's Reports on the
	     Costs and Benefits of Federal Regulation
      DATE:  04/20/1999
   SUBJECT:  Reporting requirements
	     Federal regulations
	     Cost effectiveness analysis
	     Agency missions
	     Congressional/executive relations
	     Legislative bodies
	     Interagency relations

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GAO/GGD-99-59

REGULATORY ACCOUNTING

Analysis of OMB's Reports on the Costs and Benefits of Federal Regulation

United States General Accounting Office

GAO Report to Congressional Requesters

April 1999 GAO/ GGD- 99- 59

United States General Accounting Office Washington, D. C. 20548

Page 1 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

GAO

General Government Division

B- 281445 April 20, 1999 The Honorable Fred Thompson Chairman Committee on
Governmental Affairs United States Senate

The Honorable Ted Stevens Chairman Committee on Appropriations United States
Senate

The Honorable Tom Bliley Chairman Committee on Commerce House of
Representatives

The Honorable David McIntosh Chairman Subcommittee on National Economic
Growth, Natural Resources and Regulatory Affairs Committee on Government
Reform House of Representatives

The Honorable John B. Breaux United States Senate

This report responds to your requests that we provide information on the
Office of Management and Budget's (OMB) 1997 and 1998 reports to Congress
regarding the costs and benefits of federal regulations. Specifically, we
were asked to describe, for each of four statutory requirements, (1) how OMB
addressed the requirements in its reports and (2) the views of noted
economists in the field of cost- benefit analysis regarding OMB's responses
in these reports.

We are sending copies of this report to Senator Joseph I. Lieberman, Senator
Robert C. Byrd, Representative John D. Dingell, and Representative Dennis J.
Kucinich in their respective capacities as the Ranking Minority Members of
the Senate Committee on Governmental Affairs, the Senate Committee on
Appropriations, the House Committee on Commerce, and the House Committee on
Government Reform's Subcommittee on National Economic Growth, Natural
Resources and Regulatory Affairs. We are also sending copies to the
Honorable Jacob Lew, Director of OMB, and will make copies available to
others on request.

B- 281445

Page 2 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

If you have any questions about this report or would like to discuss it
further, please contact me on (202) 512- 8676. Major contributors to this
report are listed in appendix V.

L. Nye Stevens Director, Federal Management and Workforce Issues

Page 3 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Executive Summary

Page 4 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

The process of issuing and enforcing regulations is a basic tool of
government, but the costs that nonfederal entities pay to comply with
federal regulations are not accounted for in the federal budget process.
Some researchers have estimated those costs in the hundreds of billions of
dollars, and some estimates of aggregate benefits are even higher. Congress
decided that it needed more information on regulatory costs and benefits, so
it required the Office of Management and Budget (OMB) to submit two
successive annual reports to Congress providing (1) estimates of the total
annual costs and benefits of federal regulatory programs; (2) estimates of
the costs and benefits of each rule likely to have a $100 million annual
effect on the economy in increased costs; (3) an assessment of the direct
and indirect effects of federal rules on the private sector, state and local
governments, and the federal government; and (4) recommendations to reform
or eliminate any federal regulatory program or program element that is
inefficient, ineffective, or not a sound use of the nation's resources.

GAO conducted this review at the request of several Members of Congress.
GAO's objectives were to describe, for each of these four requirements, (1)
how OMB addressed the requirements in its 1997 and 1998 reports and (2) the
views of noted economists in the field of cost- benefit analysis regarding
OMB's responses in these reports.

Conceptually, cost- benefit analysis is a rigorous procedure of weighing the
costs and benefits of a proposed action and various alternatives and is
generally regarded as an important and useful tool in regulatory
decisionmaking. For nearly 20 years, both the executive and legislative
branches have required federal agencies to prepare cost- benefit analyses
for certain rules. Under Executive Order 12866, OMB reviews agencies'
regulations and associated cost- benefit estimates to ensure that the
regulations are consistent with applicable laws, the executive order's
principles, and the President's priorities.

The statutes requiring OMB to prepare its reports on regulatory costs and
benefits do not prescribe how those reports should be prepared, and no clear
legislative history exists to describe congressional intent. Some Members of
Congress expressed their individual views that OMB should simply compile
existing information about regulatory costs and benefits. However, other
Members of Congress said that OMB should prepare an independent assessment
of regulatory effects, not just report the results of agencies' cost-
benefit analyses. Purpose

Background

Executive Summary Page 5 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit
Reports

OMB's 1997 and 1998 reports contained some, but not all, of the elements
Congress required. OMB provided estimates of total regulatory costs and
benefits and provided estimates for some (but not all) $100 million rules
issued within particular 1- year periods. OMB's 1998 estimate of total
federal regulatory benefits was 12 times its 1997 estimate, driven almost
entirely by a 1998 Environmental Protection Agency (EPA) estimate of the
benefits associated with the Clean Air Act. However, OMB did not separately
assess the direct and indirect effects of federal regulations on various
sectors in either report. Also, although it discussed a proposal for
electricity restructuring and some previously announced agency initiatives
in its 1998 report, OMB did not provide any new recommendations to reform or
eliminate regulatory programs or program elements.

The cost- benefit analysis experts that GAO consulted were generally
critical of OMB's performance, with regard to three of the four statutory
requirements. The experts said OMB's 1998 upper- bound estimate of total
regulatory benefits was questionable or implausible, and they were
particularly critical of OMB's unadjusted use of EPA's Clean Air Act benefit
estimate. They also said OMB should not have simply accepted agencies' cost
and benefit estimates for the “major” and “economically
significant” rules and should have provided new regulatory reform
recommendations. However, the experts said they understood why OMB could do
little to discuss the other statutory requirement regarding indirect
regulatory effects on particular sectors. Overall, they said OMB should have
been more than a “clerk,” transcribing the agencies' and others'
estimates of costs and benefits. However, several of the experts also
recognized that, as part of the administration, OMB was politically
constrained from doing more than it did because providing independent
assessments would have required OMB to criticize positions approved by the
administration.

OMB has a responsibility to review agencies' estimates of regulatory costs
and benefits in rules and reports before they are published. However, after
their publication, those rules and reports become statements of
administration policy. It is politically difficult for OMB to provide an
independent assessment and analysis of the administration's own estimates in
a public report to Congress. If Congress wants an independent assessment of
executive agencies' regulatory costs and benefits, it may have to look
outside of the executive branch or outside of the federal government.

The first statutory requirement was that OMB provide estimates of the total
annual costs and benefits of federal regulatory programs. In its 1997
Results in Brief

Principal Findings

Executive Summary Page 6 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit
Reports

report, OMB estimated that the annual cost of federal regulations was $279
billion and estimated annual benefits at $298 billion. In its 1998 report,
OMB estimated annual regulatory costs at between $170 billion and $230
billion and estimated annual regulatory benefits at between $260 billion and
$3.5 trillion. The decrease in the cost estimate between 1997 and 1998 was
primarily because OMB did not include efficiency losses from economic
regulations in its 1998 summary table. Virtually all of the increase in the
benefits estimate was due to the inclusion of an EPA estimate of the
benefits associated with the Clean Air Act. The experts that GAO consulted
generally said that OMB's 1997 and 1998 cost estimates were reasonable, but
most of the experts said the upper- bound benefits estimate in the 1998
report was questionable or implausible. Most of the experts criticized OMB
for accepting agencies' cost and benefit estimates without adjustment or
standardization and were particularly critical of OMB's unadjusted use of
EPA's benefit estimate. However, most of the experts also said that OMB
faced political constraints in adjusting agencies' cost and benefits
estimates, noting that an independent assessment of those estimates would
potentially require OMB to criticize its own administration's policy
positions.

The second statutory requirement was that OMB provide estimates of the costs
and benefits of each rule likely to have a gross annual effect on the
economy of $100 million or more in increased costs. OMB interpreted this
requirement broadly to include rules that were “major” or
“economically significant,” even if they did not necessarily
result in $100 million in increased costs. However, OMB narrowly focused on
rules issued during specific 1- year periods and did not include rules
issued by independent regulatory agencies in its summary tables. Also, OMB
did not include all rules that met its criteria and did not provide cost-
benefit data for all of the rules it included. Most of the cost- benefit
experts that GAO consulted said OMB should have included rules from
independent regulatory agencies. Several experts also said OMB should not
have simply accepted the cost and benefit estimates provided by the
executive agencies, but some of them also recognized that it was politically
difficult for OMB to alter agencies' estimates in its report to Congress.

The third statutory requirement was that OMB provide an assessment of the
direct and indirect impacts of federal rules on the private sector, state
and local governments, and the federal government. Although OMB did not
separately assess the direct and indirect effects of federal regulation on
these sectors, OMB indicated that it believed it had discussed the direct
effects through the overall cost and benefit estimates that it provided in
relation to the first statutory requirement. OMB discussed the difficulty in

Executive Summary Page 7 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit
Reports

determining indirect regulatory effects in its first report but did not
provide any description of those effects in either report. The cost- benefit
analysis experts that GAO consulted were generally sympathetic toward OMB's
treatment of this requirement, describing it as a lower priority than the
other requirements and difficult for anyone to satisfy.

The fourth statutory requirement was that OMB provide recommendations 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. OMB's 1997 report contained no such recommendations, with OMB
stating that existing data were inadequate. The 1998 report contained an
endorsement of 10 previously announced regulatory or statutory changes and a
discussion of restructuring the electrical generation industry. All of the
cost- benefit experts were dissatisfied with OMB's response to this
requirement, and several said sufficient cost- benefit data existed to
support making some recommendations. However, several of the experts also
said that it was politically difficult for OMB to make recommendations to
Congress to eliminate or reform existing administration programs.

GAO is making no recommendations in this report. It is politically difficult
for OMB to provide Congress with an independent assessment of executive
branch agencies' regulatory costs and benefits. If Congress wants an
independent assessment, it may wish to consider assigning that
responsibility to an organization outside of the executive branch. That
organization could include a congressional office of regulatory analysis,
which would have to be established, or an organization outside of the
federal government.

GAO requested comments on a draft of this report from the OMB Director.
OMB's Office of Information and Regulatory Affairs (OIRA) said the report
raised a number of useful analytical issues regarding how regulatory costs
and benefits can most appropriately be estimated and reported. However, OIRA
stated that it disagreed fundamentally with several of the statements
attributed to the experts in the report, saying their comments reflect a
significant misunderstanding of OMB's role in developing, overseeing, and
coordinating the administration's regulatory policies. OIRA also said that
it had provided original estimates of regulatory costs and benefits, that
the EPA estimate of the benefits associated with the Clean Air Act had been
peer reviewed, and that it had provided Congress with the estimates that
Congress directed it to prepare. Recommendations

Matter for Congressional Consideration

Comments and GAO's Evaluation

Executive Summary Page 8 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit
Reports

GAO believes OIRA's comments buttress its conclusions and matter for
congressional consideration. It is politically difficult for OMB to disagree
publicly with agencies' statements of regulatory policy, particularly
because OIRA staff typically participates in developing those policies.

GAO also obtained the views of six of the seven cost- benefit experts that
it consulted on the draft report. The experts generally said the report
accurately reflected their statements, but some of them suggested particular
clarifications, which GAO has incorporated into this report where
appropriate.

Page 9 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Page 10 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Contents 4 Executive Summary 14 Background 15 Objectives, Scope, and
Methodology 23 Chapter 1

Introduction 27 OMB's 1998 Upper- Bound Benefits Estimate Was 12

Times the 1997 Estimate 27

Experts Said OMB Should Have Done More, but Political Environment Limits
OMB's Role

34 Chapter 2

Experts Questioned OMB's 1998 Estimate of Regulatory Benefits

39 OMB Provided Data for Only Certain Rules in Both

Reports 39

Experts Suggested Changes in OMB Major Rule Information

44 Chapter 3

OMB Did Not Provide Cost- Benefit Estimates for All $100 Million Rules

47 OMB Reports Contained Little Discussion of Third

Statutory Requirement 47

Experts Were Sympathetic to OMB's Treatment of Requirement

48 Chapter 4

OMB Did Not Separately Assess Direct and Indirect Impacts of Rules

49 OMB Provided No New Recommendations 49 Experts Criticized OMB, but Noted
“Constraints” 51 Chapter 5

Experts Criticized Lack of New Recommendations in OMB Reports

53 Matter for Congressional Consideration 56 Comments and Our Evaluation 56
Chapter 6

Conclusions

Contents Page 11 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Appendix I: Individual Views of Members of Congress Regarding Regulatory
Accounting Requirements

60 Appendix II: Biographical Information of Regulatory

Experts 65

Appendix III: Rules Meeting Specific Statutory Requirements for OMB's 1997
Report

69 Appendix IV: Rules Meeting Specific Statutory

Requirements for OMB's 1998 Report 73

Appendix V: Major Contributors to This Report 76 Appendixes

Table 2.1: Cost and Benefit Estimates From OMB's 1997 Report (in 1996
dollars)

30 Table 2.2: Cost and Benefit Estimates From OMB's 1998

Report 33

Table 3.1: Rules That Met OMB's Criteria but Were Not in OMB's 1997 Report

42 Table 3.2: Rules Meeting OMB's Criteria But Not Included

in the 1998 Report 44

Table III. 1: Rules Likely to Have Gross Impact On Economy of $100 Million
in Increased Costs

70 Table IV. 1: Rules Likely to Have Gross Effect on the

Economy of $100 Million in Increased Costs 74 Tables

Figure 2. 1: EPA's Section 812 Data Substantially Increased Upper- Bound
Benefit Estimate Between 1997 and 1998

34 Figures

Contents Page 12 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports
Abbreviations

AEI American Enterprise Institute CORA Congressional Office of Regulatory
Analysis EPA Environmental Protection Agency FCC Federal Communications
Commission HHS Department of Health and Human Services NPRM notice of
proposed rulemaking OIRA Office of Information and Regulatory Affairs OMB
Office of Management and Budget OSHA Occupational Safety and Health
Administration RISC Regulatory Information Service Center SBREFA Small
Business Regulatory Enforcement Fairness Act of 1996 SEC Securities and
Exchange Commission UMRA Unfunded Mandates Reform Act of 1995 USDA United
States Department of Agriculture

Page 13 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Chapter 1 Introduction

Page 14 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Regulations serve as the means by which statutory requirements are
implemented and specific requirements are established. Like taxing and
spending, the process of issuing and enforcing regulations is a basic tool
of government. Although the cost of operating federal regulatory agencies is
captured in the federal budget process, the budget does not reflect the
costs that nonfederal entities pay to comply with federal regulations. Some
researchers have estimated that the direct cost of complying with all
federal regulations is in the hundreds of billions of dollars. 1 Some
estimates of the benefits that federal regulations provide to society are
even higher than the costs. 2

Conceptually, cost- benefit analysis is a rigorous procedure that involves
weighing the costs and benefits of various alternatives to a proposed action
and underlies most if not all attempts to assess the cumulative effects of
regulations on society. 3 Both Congress and the executive branch have
required certain federal agencies to conduct cost- benefit analyses on their
most significant rules. Cost- benefit analysis is generally recognized as an
important and useful tool in making decisions about particular regulations.
However, applying cost- benefit analysis to major regulations can be a
complex and controversial undertaking. Also, there is disagreement regarding
the weight that the analyses should receive in the decisionmaking process.

Although cost- benefit analysis for a single rule can be controversial,
estimating the costs and benefits of all federal regulations can be even
more controversial. Some questions center on whether certain types of
regulatory costs or benefits should be included in the totals. Other
questions are even more basic, focusing on whether developing accurate
estimates of total federal regulatory costs and benefits is feasible or, if
so, how policymakers should use those estimates.

Congress decided that it needed more information on total regulatory costs
and benefits, so in 1996 and 1997 it required the Director of the Office of
Management and Budget (OMB) to submit reports to Congress providing (1)
estimates of the total annual costs and benefits of federal

1 See, for example, Thomas D. Hopkins, Regulatory Costs in Profile, Policy
Study 132, Center for the Study of American Business, August 1996. 2 For
example, in “Regulatory Reform: What Do the Government's Numbers Tell
Us?” in Risks, Costs, and Lives Saved (Washington, D. C.: The AEI
Press, 1996, pp. 208- 253), Robert W. Hahn states that “using
government agency data, it would appear that there is a present value of
about $280 billion in net benefits to government regulation” in the
areas of environment, health, and safety.

3 Cost- benefit analysis is also referred to as benefit- cost analysis and
regulatory impact analysis.

Chapter 1 Introduction

Page 15 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

regulatory programs; (2) estimates of the costs and benefits of each rule
likely to have a gross annual effect on the economy of $100 million in
increased costs; (3) an assessment of the direct and indirect effects of
federal rules on the private sector, state and local governments, and the
federal government; and (4) recommendations 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.” On
September 30, 1997, OMB published its Report to Congress On the Costs and
Benefits of Federal Regulations in response to the 1996 requirement. On
February 5, 1999, OMB published its second report to Congress in response to
the 1997 requirement. Both the OMB reports and the requirements that
generated them have been the subject of considerable controversy.

The federal government has long regulated economic activity, often through
independent regulatory agencies such as the Securities and Exchange
Commission (SEC) and the Federal Communications Commission (FCC). Social
regulation in such areas as environmental quality, workplace safety, and
consumer protection grew dramatically in the 1960's and 1970's with the
creation of such agencies as the Environmental Protection Agency (EPA) and
the Occupational Safety and Health Administration (OSHA). However, by the
1980's, concerns began to be raised about whether the benefits that these
regulations and regulatory agencies were attempting to achieve were worth
the costs associated with compliance.

Every president in recent years has taken steps intended to reduce the
burden of federal regulations. Those presidential initiatives often involve
OMB, whose stated mission is to help the president carry out his
responsibilities. For example, in 1981, President Reagan issued Executive
Order 12291, which required executive departments and agencies to prepare
cost- benefit analyses identifying the benefits, costs, and alternatives of
all proposed and final “major” rules, and to submit those
analyses to OMB. A major rule was defined in the executive order as any
regulation that was likely to result in (1) an annual effect on the national
economy of $100 million or more; (2) a major increase in costs or prices for
consumers, industries, governments, or geographic regions; or (3)
significant adverse effects on competition, employment or investments,
productivity, innovation, or the international competitiveness of U. S.
enterprises. The executive order also required agencies to submit all of
their proposed and final rules to OMB for review before being published in
the Federal Register to ensure consistency with administration policies. To
the extent permitted by law, the order said agencies should not issue
Background

Executive and Legislative Branch Efforts to Control Regulatory Burden

Chapter 1 Introduction

Page 16 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

regulations unless the potential benefits “outweigh” the
potential costs to society.

In 1993, President Clinton issued Executive Order 12866 revoking Executive
Order 12291 but reaffirming the legitimacy and basic framework of OMB's
regulatory review process. Like its predecessor, the executive order
explicitly excludes from OMB review regulatory actions issued by independent
regulatory agencies such as the FCC or the SEC. The order states that OMB's
review is “necessary to ensure that regulations are consistent with
applicable law, the President's priorities, and the principles set forth in
this Executive order,” and that OMB's Office of Information and
Regulatory Affairs (OIRA) is the “repository of expertise concerning
regulatory issues . . . .” The order also says OMB shall provide
guidance to the agencies and assist the President, the Vice President, and
other regulatory policy advisors to the President. Noting that some costs
and benefits are difficult to quantify, the order says agencies should adopt
regulations only if the benefits “justify” the costs. Also, one
of the order's stated objectives is “to reaffirm the primacy of
Federal agencies in the regulatory decision making process.”

Executive Order 12866 states that agencies should submit detailed
costbenefit analyses to OIRA for all economically significant regulatory
actions. The order defines an “economically significant”
regulatory action as one “that is likely to result in a rule that may
have an annual effect on the economy of $100 million or more or adversely
affect in a material way the economy, a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or State,
local, or tribal governments or communities.” The agency issuing the
regulation must submit an assessment, including the underlying analysis, of
the anticipated benefits associated with the action, the anticipated costs,
and the costs and benefits of reasonably feasible alternatives to the action
(e. g., economic incentives instead of “command and control”
regulations).

In January 1996, OMB issued guidance to federal agencies on “best
practices” for preparing cost- benefit analyses under Executive Order
12866. Developed by a group that was co- chaired by the OIRA Administrator
and a Member of the Council of Economic Advisors, the guidance says cost-
benefit analyses should be guided by the principles of full disclosure and
transparency regarding their data, models, and assumptions, but it allows
analysts to use their professional judgment in precisely how the studies
should be conducted. The guidance also says that agencies should focus on
incremental changes- i. e., the costs and benefits that are solely
attributable to the regulation at issue.

Chapter 1 Introduction

Page 17 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Congress has also taken steps intended to reduce regulatory burden through
oversight and increased analytical requirements. For example, Congress
passed the Regulatory Flexibility Act of 1980 (5 U. S. C. 601- 612), which
requires federal agencies to analyze the anticipated effects of rules they
plan to propose on small entities or they certify that the rules will not
have a “significant economic effect on a substantial number of small
entities.” Also in 1980, Congress passed the Paperwork Reduction Act,
which created OIRA within OMB to provide central agency leadership and
oversight of governmentwide efforts to reduce unnecessary paperwork burden
and improve the management of information resources. The act also made the
OIRA Administrator subject to Senate confirmation.

More recently, title II of the Unfunded Mandates Reform Act of 1995 (UMRA)
says that, unless otherwise prohibited by law, agencies must assess the
costs and benefits of any rule containing a federal mandate that may result
in the expenditure of $100 million or more in any 1 year by state, local,
and tribal governments, in the aggregate, or the private sector. 4 Also, the
congressional review provisions of the Small Business Regulatory Enforcement
Fairness Act of 1996 (SBREFA) require agencies to submit all of their rules
to Congress and us before they become effective. On the date of submission,
SBREFA also requires the agency issuing the rule to submit to us and make
available to each House of Congress a copy of any costbenefit analysis and
the agency's actions relevant to certain provisions of UMRA and other
analytical requirements. For “major” rules, 5 we are required to
provide a report to the committees of jurisdiction in each House within 15
calendar days, assessing the agency's compliance with required procedural
rulemaking steps.

Between 1994 and 1998, Congress considered a number of other bills that
would have increased requirements for agencies to conduct cost- benefit
analyses, but none of them were enacted. For example, the Regulatory
Improvement Act of 1998 (S. 981) would have required agencies to prepare,
among other things, a cost- benefit analysis and to place that analysis in
the rulemaking file before publishing a notice of proposed rulemaking (NPRM)
for any major rule. The bill also would have required agencies to prepare a
similar analysis before publishing the final rule. (In

4 However, our analysis of title II indicated that these requirements do not
apply to most economically significant rules. See Unfunded Mandates: Reform
Act Has Had Little Effect on Agencies' Rulemaking Actions (GAO/ GGD- 98- 30,
Feb. 4, 1998).

5 The statute defined a “major” rule in essentially the same
manner as Executive Order 12291. Copies of our major rule reports can be
obtained at www. gao. gov.

Chapter 1 Introduction

Page 18 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

March 1999, the Regulatory Improvement Act was reintroduced as S. 746, again
requiring cost- benefit analysis of major rules.)

Another bill introduced during the 105th Congress (H. R. 1704, 105th Cong.
2d Sess [1998]) would have established a “Congressional Office of
Regulatory Analysis” (CORA). The bill would have required CORA to
provide a report to the committees of jurisdiction in each House for each
major rule that would include an assessment of the issuing agency's
compliance with certain analytical requirements and an analysis of the
rule's benefits, costs, and net benefits. According to the bill, CORA would
allow the legislative branch to obtain accurate and reliable information on
which to base its decisions as it carried out its responsibilities for
congressional review under SBREFA. CORA would have also been required to
issue an annual report including estimates of total costs and benefits of
all existing and anticipated federal regulations. The bill's principal
sponsor said CORA was needed to provide Congress with independent analyses
of regulations and to supplement what she believed to be unreliable
information being provided by executive branch agencies. However, critics of
the proposal said it would duplicate functions preformed by agencies in the
executive branch.

One of the more recent regulatory reform initiatives has been a series of
requirements for an accounting of regulatory costs and benefits. Section
645( a) of the Treasury, Postal Services and General Government
Appropriations Act for fiscal year 1997, enacted on September 30, 1996,
required OMB to provide a report to Congress by September 30, 1997, that
included several specific elements:

(1) estimates of the total annual costs and benefits of federal regulatory
programs, including quantitative and nonquantitative measures of regulatory
costs and benefits;

(2) estimates of the costs and benefits (including quantitative and
nonquantitative measures) of each rule that is likely to have a gross annual
effect on the economy of $100 million 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
Congress Requires

Regulatory Accounting

Chapter 1 Introduction

Page 19 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

that is inefficient, ineffective, or is not a sound use of the nation's
resources.

Section 645( b) of the act directed OMB to obtain comments on the draft
report before submitting it to Congress. On July 22, 1997, OMB published the
draft report for comment, and on September 30, 1997, OMB issued its first
Report to Congress on the Costs and Benefits of Federal Regulation.

On October 10, 1997, OMB was required to produce a second report on the cost
and benefits of federal programs by September 30, 1998. The requirement was
in section 625( a) of the Treasury and General Government Appropriations Act
for fiscal year 1998 and contained the same four requirements that were in
section 645( a) of the 1997 act. OMB published a draft of the 1998 report in
the Federal Register on August 17, 1998, and established a 30- day comment
period. Because of requests from both the public and Members of Congress,
OMB extended the comment period until October 16, 1998. On February 5, 1999,
OMB published its second regulatory accounting report.

On October 21, 1998, legislation was enacted requiring regulatory accounting
for another year. Section 638 of the Treasury and General Government
Appropriations Act for fiscal year 1999 requires OMB to provide Congress
with a regulatory accounting statement and report for calendar year 2000
that is similar to the previous requirements. The statement and report are
to be submitted with the budget and the report is to include “an
estimate of the total annual costs and benefits . . . of Federal rules and
paperwork, to the extent feasible (A) in the aggregate; (B) by agency and
agency program; and (C) by major rule.” Section 638 also requires OMB
to issue guidelines to agencies standardizing agencies' measures of costs
and benefits and the format of their accounting statements. Finally, it
requires OMB to provide for independent and external peer review of the
guidelines and each accounting statement and associated report.

The regulatory accounting provisions that required OMB to provide the 1997
and 1998 reports to Congress have limited legislative histories. A Senate
Appropriations Committee report for the Treasury, Postal Service, and
General Government Appropriations Act for fiscal year 1997 stated that
“[ r] egulatory costs and benefits should be quantified to the extent
feasible and, where applicable, should be based on most plausible estimates.
Most of the needed information is already available to the OMB. Executive
Order 12866 requires cost- benefit analysis of significant rules, and
private studies are available.” These general comments are of limited
Views of Individual Members

Regarding Regulatory Accounting Requirements

Chapter 1 Introduction

Page 20 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

value in determining how Congress intended OMB to carry out its
responsibilities under the provision or what types of regulations OMB should
include in its reviews.

During consideration of the provision that established the first of these
regulatory accounting requirements, several Members of Congress expressed
their individual views regarding OMB's responsibilities to carry out this
provision in comments recorded in the Congressional Record. (See app. I for
a more complete discussion of these Members' comments.) Some of the Members
indicated that OMB should simply compile existing information about
regulatory costs and benefits. For example, during Senate consideration of
this provision, one Member said the sponsors of the amendment were aware of
OMB's resource constraints and intended that the report be based on a
compilation of existing information rather than new analysis.

However, other Members indicated that OMB should not simply rely on existing
cost and benefit information. For example, the principal sponsor of the
first regulatory accounting provision said “OMB should use the
valuable information already available, and supplement it where
needed” when preparing the estimates of total annual costs and
benefits. Subsequently, during the Senate debate, another Member said
“( w) here there are gaps, OMB must supplement existing
information.” He also said OMB should “quantify costs and
benefits to the extent feasible, and provide the most plausible
estimate.”

Several Members of Congress also commented on OMB's final and draft reports
in letters to the OMB Director, expressing their view that OMB should not
have simply relied on existing information to carry out its
responsibilities. For example, on October 29, 1997, the Chairmen of the
Senate Committees on Governmental Affairs and Appropriations said that OMB
should “exercise leadership to assure the quality and reliability of
information reported” by, among other things, providing an
“independent assessment” of the information provided by the
agencies. They also said OMB staff should be directed to “critique the
quality of the estimates provided to them, not to simply compile data
presented by the agencies.” On the same day, the Chairmen of the House
Committees on Commerce and Transportation and Infrastructure and the
Chairman of the House Committee on Government Reform and Oversight's
Subcommittee on National Economic Growth, Natural Resources, and Regulatory
Affairs wrote that “Congress expected OMB to assure the reporting of
meaningful information and provide an independent assessment of regulatory
effects,”

Chapter 1 Introduction

Page 21 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

not merely to perform the “ministerial function of reporting
information provided by other agencies.”

A number of organizations outside of the federal government are also
examining federal regulatory programs and issues. Some of these
organizations have taken public stands for or against federal regulatory
activity. Other organizations are affiliated with academic institutions or
public policy research organizations. For example, Carnegie Mellon
University, with the cooperation of the University of Washington, in
Seattle, WA, has established a Center for the Study and Improvement of
Regulation housed within its Department of Engineering and Public Policy.
According to its mission statement, the Center intends to combine studies to
obtain a deeper understanding of particular issues and synthesize research
to, among other things, (1) elaborate a framework for considering the risks
to health, safety, and the environment; and (2) help improve health, safety,
and environmental regulation at the federal, state, and local level. The
Center is funded by grants from the National Science Foundation and from
several corporations, foundations, and trade associations.

In 1998, the American Enterprise Institute (AEI) and the Brookings
Institution established a Joint Center for Regulatory Studies with four
primary missions:

ï¿½ to publish timely, objective analyses of a number of important regulatory
proposals before they are formally adopted;

ï¿½ to publish analyses of existing regulations and approaches to regulatory
reform, with recommendations for modifications (including proposals to
strengthen rules where the benefits appear to justify the costs as well as
proposals to eliminate or relax rules where the reverse may be true);

ï¿½ to publish essays that evaluate the impact of regulatory policies and
suggest ways to improve the regulatory process; and

ï¿½ to publish an annual report on the state of federal regulation, including
an independent assessment of both the total and marginal costs and benefits
of federal regulation, broken down into useful categories.

According to the Center's mission statement, both AEI and Brookings
“believe that the media and the policy community will look to the
Joint Center as an objective, highly respected source of information on
regulatory policy issues.” The Joint Center is funded solely by
foundation grants. Nongovernmental Groups

Also Study Federal Regulatory Programs

Chapter 1 Introduction

Page 22 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

We have issued a number of reports examining the costs and benefits of
agencies' rules and estimates of total regulatory costs. For example, in
April 1984, we said that cost- benefit analysis is a useful tool for
estimating the costs and benefits of various regulatory actions. 6 We also
said that its role might become increasingly critical because complying with
federal environmental regulations could mean billions of dollars in costs
and benefits. However, we also said that gaps in underlying scientific data,
legal restrictions, and EPA's partial implementation of Executive Order
12291 had hampered cost- benefit analysis.

In December 1993, we reported that none of the studies released by the
federal banking agencies and several of the major banking industry trade
associations provided a comprehensive discussion of regulatory burden or the
cost- benefit trade- offs associated with particular regulations. 7 We also
found that estimates of regulatory compliance costs reported in the industry
were of little value due to serious methodological deficiencies.

In March 1995, we reported that there was a great deal of uncertainty about
the costs and benefits of regulations, with estimates varying, depending on
assumptions about what constitutes regulatory cost. 8 For example, we noted
that many economists argue that economic “transfers,” such as
the added cost a consumer pays for goods in the marketplace because of
agricultural price supports, should not be included in aggregate cost
estimates. We also said that some economists are concerned about including
process costs because of measurement concerns and because any change
associated with this category may be difficult to achieve (since most of the
estimate derives from completing tax forms). Finally, although one
researcher estimated that total regulatory costs increased between 1977 and
1994, we noted that the percentage of the gross domestic product devoted to
the costs of federal regulations decreased during this period.

In November 1996, we concluded that, although perhaps not impossible, it is
very difficult to measure the incremental cost of all federal regulations on
individual businesses. 9 Therefore, we said, users of aggregate regulatory

6 Cost- Benefit Analysis Can Be Useful In Assessing Environmental
Regulations, Despite Limitations (GAO/ RCED- 84- 62, Apr. 6, 1984). 7
Regulatory Burden: Recent Studies, Industry Issues, and Agency Initiatives
(GAO/ GGD- 94- 28, Dec. 13, 1993). 8 Regulatory Reform: Information on
Costs, Cost- Effectiveness, and Mandated Deadlines for Regulations (GAO/
PEMD- 95- 18BR, Mar. 8, 1995). 9 Regulatory Burden: Measurement Challenges
and Concerns Raised by Selected Companies (GAO/ GGD- 97- 2, Nov. 18, 1996).
Our Previous Reports on

Regulatory Costs/ Benefits

Chapter 1 Introduction

Page 23 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

cost studies need to be aware of the inherent difficulties and assumptions
involved in producing such measures. We said questions need to be raised and
answered regarding which regulations are included in such studies and
whether they focus on incremental costs before policy makers use them to
make decisions.

In May 1998, we reported that some of the 20 economic analyses that we
reviewed did not incorporate the best practices set forth in OMB's guidance
and often did not disclose why the guidance was not followed. 10 We also
found that only 1 of the 20 analyses received an independent peer review.
Nevertheless, agency officials said the cost- benefit analyses played a
valuable role in regulatory decisionmaking.

Our objectives in this review were to describe, for each of the four
statutory requirements underlying OMB's 1997 and 1998 reports to Congress,
(1) how OMB addressed the requirements and (2) the views of noted economists
in the field of cost- benefit analysis regarding OMB's responses in these
reports. As noted previously, Congress required OMB to submit reports in
1997 and 1998 providing (1) estimates of the total annual costs and benefits
of federal regulatory programs; (2) estimates of the costs and benefits of
each rule likely to have a gross annual effect on the economy of $100
million in increased costs; (3) an assessment of the direct and indirect
effects of federal rules on the private sector, state and local governments,
and the federal government; and (4) recommendations 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.”

To describe how OMB addressed each of these four requirements, we analyzed
the reports' contents and interviewed officials from OIRA. Specifically, to
determine how OMB addressed the first statutory requirement, we reviewed
chapter II of the 1997 report and chapter I of the 1998 report, focusing on
such issues as the data sources and methodology used to prepare the two
reports. To determine how OMB addressed the second statutory requirement, we
reviewed chapter III of the 1997 report and chapter II of the 1998 draft
report as well as relevant tables and appendixes. In both reports, OMB
interpreted the statutory requirements to include all final rules on which
OIRA concluded its review in the 1- year time periods that OMB specified and
that were either (1) “economically significant” under Executive
Order 12866, (2) “major” under the

10 Regulatory Reform: Agencies Could Improve Development, Documentation, and
Clarity of Regulatory Economic Analyses (GAO/ RCED- 98- 142, May 26, 1998).
Objectives, Scope, and

Methodology

Chapter 1 Introduction

Page 24 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

congressional review requirements of SBREFA, or (3) met the threshold under
title II of the Unfunded Mandates Reform Act of 1995. To determine whether
OMB reported cost/ benefit information on all rules that met its own
criteria, we compared OMB's list to (1) our database of major rules
submitted pursuant to the congressional review provisions of SBREFA and (2)
a list of economically significant rules provided by the Regulatory
Information Service Center (RISC) for the same time periods. 11 To determine
which rules were “likely to have a gross annual effect on the economy
of $100,000,000 or more in increased costs,” we identified only those
rules in either databases that the agencies indicated had an annual
estimated cost of $100 million or more (excluding those rules that were
either “economically significant” or “major” because
they had benefits of $100 million or for other reasons).

To determine how OMB addressed the third requirement, we reviewed chapter II
from OMB's 1997 report and chapter I of its 1998 report. In both reports,
OMB stated that the direct impacts of the regulations were accounted for in
the total annual cost and benefit estimates, so we also reviewed those
sections of the reports. To determine how OMB addressed the fourth
requirement, we reviewed chapter IV of both the 1997 report and 1998
reports. We also examined the Unified Agenda of Federal Regulatory and
Deregulatory Actions to determine when the agency initiatives listed in
OMB's 1998 report were first announced. 12

To describe the views of noted economists in the field of cost- benefit
analysis regarding OMB's 1997 and 1998 reports and the four statutory
requirements, we first selected the experts with whom we wanted to consult.
We made our selections based on how frequently authors were cited in the
bibliographies of OMB's 1997 report and its August 1998 draft report and in
a computer- generated literature search of books and articles on cost-
benefit analysis. Then, based on a suggestion from OMB officials, we noted
which authors on this list participated on EPA's Science Advisory Board and
in developing the AEI publication, “Benefit- Cost Analysis in
Environmental, Health, and Safety Regulation: A Statement of

11 RISC works closely with OMB to provide information to the President,
Congress, and the public about federal regulatory policies. Its primary role
is to coordinate the development of the Unified Agenda of Federal Regulatory
and Deregulatory Action, a comprehensive listing of proposed and final
regulations.

12 The Unified Agenda is compiled by RISC for OIRA and has been published
twice each year since 1983. It is used to satisfy the requirements in the
Regulatory Flexibility Act and other requirements that agencies identify
rules that they expect to propose or promulgate.

Chapter 1 Introduction

Page 25 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Principles,” 13 and the AEI- Brookings Institution publication
“An Agenda for Federal Regulatory Reform.” 14

We developed a preliminary list of 12 experts, based on those who had the
most citations in the OMB reports and the literature search, had served on
the EPA panel, and/ or had helped develop the AEI and Brookings
publications. However, five of these experts declined to participate because
of time constraints or because they said they did not have expertise in the
areas covered by the OMB reports. The remaining seven experts that we
interviewed and their affiliations were the following:

ï¿½ Robert W. Crandall, Senior Fellow, Brookings Institution, Washington, D.
C.;

ï¿½ Robert W. Hahn, Director, AEI- Brookings Joint Center for Regulatory
Studies, Washington, D. C.;

ï¿½ Thomas D. Hopkins, Professor of Economics, Rochester Institute of
Technology, Rochester, NY;

ï¿½ Lester B. Lave, Professor of Economics, Carnegie Mellon University,
Pittsburgh, PA;

ï¿½ Robert E. Litan, Co- Director, AEI- Brookings Joint Center for Regulatory
Studies, Washington, D. C.;

ï¿½ Paul R. Portney, President, Resources for the Future, Washington, D. C.;
and

ï¿½ Murray L. Weidenbaum, Chairman, Center for the Study of American Business,
Washington University, St. Louis, MO.

Biographical information of these experts and citations of some of their
relevant work are provided in appendix II of this report.

OMB officials reviewed our final list of cost- benefit analysis experts and
had no objections to those included. The officials did not suggest
additional experts that they believed we should consult and said that the
experts we consulted are among the leading economists in the field of cost-
benefit analysis research. However, the list of experts that we contacted is
not the only such list that could have been developed. At the direction of
the requesters, we focused on economists and did not include experts in
other professions that have examined cost- benefit issues (e. g., legal
experts or statisticians). Also, we focused our literature search on those
economists who are knowledgeable about cost- benefit analysis in

13 Kenneth J. Arrow, et. al., 1996. 14 Robert W. Crandall, et. al., 1997.

Chapter 1 Introduction

Page 26 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

the federal government. Therefore, other experts with an extensive
background in cost- benefit analysis were not included in our initial list.

We first obtained the experts' comments in late 1998 on OMB's 1997 report
and on OMB's August 1998 draft report and obtained additional information
from them after the final 1998 report was published in February 1999. We
also consulted with them during the preparation of our report to ensure that
we had accurately characterized their views. The views attributed to them
are their own and do not necessarily reflect those of the organizations with
which they are affiliated or our views.

We conducted our work between June 1998 and March 1999 at OMB in Washington,
D. C., and at the sites of our interviews with the cost- benefit experts
(Washington, D. C.; Rochester, NY; Pittsburgh, PA; and St. Louis, MO), in
accordance with generally accepted government auditing standards. At the end
of our review, we sent a draft of this report for comments to the Director
of OMB. On April 7, 1999, we met with the Acting Administrator of OIRA to
obtain OMB's comments, which are presented in chapter 6, along with our
evaluation.

Chapter 2 Experts Questioned OMB's 1998 Estimate of Regulatory Benefits

Page 27 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

OMB said in both its 1997 and 1998 reports that it had to confront a number
of intractable problems in developing estimates of the total annual costs
and benefits of federal regulatory programs. Those problems included (1)
determining the baseline against which regulatory costs and benefits should
be measured (i. e., what costs and benefits would have occurred if the
regulations had not been issued) and (2) the “apples and
oranges” problem of adding together the diverse (and sometimes dated)
set of previously conducted regulatory studies. OMB qualified the estimates
in both reports by stating that “it remains difficult, if not
impossible, to estimate the actual total costs and benefits of all existing
Federal regulations with any degree of precision.”

In its 1997 report, OMB estimated federal regulatory costs at $279 billion,
and benefits at $298 billion. In its 1998 report, OMB estimated regulatory
costs at between $170 billion and $230 billion, and estimated regulatory
benefits at between $260 billion and $3.5 trillion. The increase in the
benefits estimate between 1997 and 1998 was almost entirely due to the
inclusion of an EPA estimate of the benefits associated with the Clean Air
Act. The decrease in the cost estimate was primarily because OMB did not
include efficiency losses from economic regulations in its 1998 summary
table. 1 The experts we consulted generally said that OMB's 1997 and 1998
cost estimates were reasonable but said the upper- bound benefits estimate
in the 1998 report was questionable or implausible. All of the experts
criticized OMB for accepting agencies' cost and benefit estimates without
adjustment or standardization and were particularly critical of OMB's use of
EPA's benefit estimate. However, most of the experts also said that OMB
faced “political constraints” in adjusting agencies' cost and
benefits estimates, noting that an independent assessment of those estimates
would require OMB to criticize its own administration's policy positions.

OMB used similar but, somewhat different, data sources and methods of
presentation in its 1997 and 1998 reports. The 1997 report presented the
cost and benefit estimates in four categories, but in its 1998 report OMB
used somewhat different categories of regulation. In the 1997 report, OMB
included costs associated with paperwork and disclosure requirements,
whereas in the 1998 report that information was reported separately without
an estimate. However, the biggest difference between the reports was OMB's
use of an EPA study on the costs and benefits of the Clean Air Act, which
increased OMB's upper- bound benefit estimate in its 1998 report to 12 times
what it had been in the 1997 report.

1 OMB said efficiency losses associated with economic regulations result
from higher prices and inefficient operations that often occur when
competition is prevented from developing. OMB's 1998 UpperBound

Benefits Estimate Was 12 Times the 1997 Estimate

Chapter 2 Experts Questioned OMB's 1998 Estimate of Regulatory Benefits

Page 28 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

In its 1997 report, OMB presented its estimates of federal regulatory costs
and benefits in four categories and in total. 2 The four categories were:

ï¿½ Environmental regulations that focus on improving the quality of the
environment and include those issued by EPA (which has issued the vast
majority of these regulations) and the Departments of Transportation,
Energy, and the Interior;

ï¿½ Other Social regulations that are designed to advance the health and
safety of consumers and workers, promote social goals such as equal
opportunity, equal access to facilities, and protect the public from fraud
and deception. They also include the disclosure of information about a
product, service or manufacturing process where inadequate information might
place consumers or workers at a disadvantage;

ï¿½ Economic regulations that directly restrict business' pricing and output
decisions as well as limit the entry or exit of businesses into or out of
certain types of industries. These regulations often affect the agriculture,
trucking or communications industries; and

ï¿½ Process regulations that involve paperwork, such as filling out income tax
forms and immigration papers.

In its table summarizing the cost and benefits estimates, OMB did not
include estimates for one other category of regulation- the
“transfer” costs and benefits of economic regulations. Transfers
refer to regulations that move payments from one group in society to
another, (e. g., federal Social Security payments and agricultural price
supports). OMB estimated those transfers at $140 billion in costs and
benefits but said it did not include these estimates in its totals because
it considered transfers to be payments that reflect a redistribution of
wealth rather than social costs to society as a whole. 3

OMB used a variety of academic and agency studies to develop estimates of
the costs and benefits associated with the four regulatory categories
included in the 1997 report. Those sources were

ï¿½ a 1991 article by Robert W. Hahn and John A. Hird that reviewed and
synthesized the work of more than 25 prior studies assessing the impact of

2 These categories had been previously used in a series of studies of
federal regulatory costs by Thomas D. Hopkins of the Rochester Institute of
Technology. For the most recent of these studies, see Thomas D. Hopkins,
“Regulatory Costs in Profile,” Policy Sciences, 31 (Dec. 1998),
pp. 301- 320).

3 OMB noted that its 1996 “best practices” guidance states that
transfers should not be added to the cost and benefit totals included in
cost- benefit analyses but should be discussed and noted for policymakers.
OMB's 1997 Report

Chapter 2 Experts Questioned OMB's 1998 Estimate of Regulatory Benefits

Page 29 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

regulations. 4 The authors refined the results of these studies and created
their own estimates of the costs and benefits of regulation. OMB said its
review of the literature indicated that this was the only comprehensive
study that attempted to estimate the total costs and benefits of all federal
regulations. However, OMB pointed out in its 1998 report (p. 14) 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;

ï¿½ a 1990 EPA report (known as the Cost of Clean report) responding to
requirements in section 312( a) of the Clean Air Act and section 516( b) of
the Clean Water Act that presented data on environmental pollution control
costs between 1972 and 1987. 5 The data used in this report were based
primarily on surveys of actual spending conducted by the Department of
Commerce and others;

ï¿½ agencies' cost- benefit analyses (1987 through 1996) prepared pursuant to
Executive Orders 12291 and 12866;

ï¿½ a 1996 study by Hahn estimating the cost and benefits of major
environmental, health, and safety regulations from 1990 through mid- 1995; 6
and

ï¿½ a 1992 study of the costs associated with economic regulations, prepared
by Thomas D. Hopkins. 7

To develop its cost estimates, OMB first established an estimate of the cost
of environmental regulations and other social regulations, as of 1988 based
on information contained in the Cost of Clean report and the 1991 Hahn and
Hird article, respectively. OMB then updated those figures with the results
of agencies' cost- benefit analysis conducted between 1987 and 1996 to
develop the total environmental and other social cost and benefit estimates.
To develop the cost estimate for economic regulations, OMB used the results
of Hopkins' 1992 study ($ 81 billion) but reduced the Hopkins estimate by
$10 billion to take into account the deregulation of financial services and
telecommunications that occurred after Hopkins'

4 Robert W. Hahn and John A. Hird , “The Costs and Benefits of
Regulations: Review and Synthesis,” Yale Journal on Regulation, 8
(Winter 1991), pp. 233- 278. 5 “Environmental Investments: The Cost of
a Clean Environment, Report of the Administrator of the Environmental
Protection Agency to the Congress of the United States.” (1990). 6
“Regulatory Reform: What Do the Government's Numbers Tell Us?”
in Risks, Costs, and Lives Saved: Getting Better Results From Regulation
(Washington, D. C.: The AEI Press, 1996, pp. 208- 253). 7 “Cost of
Regulation: Filling the Gaps,” Report Prepared for the Regulatory
Information Service Center, Washington, D. C., (Aug. 1992).

Chapter 2 Experts Questioned OMB's 1998 Estimate of Regulatory Benefits

Page 30 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

estimate. 8 OMB's estimate for the cost of federal paperwork and disclosure
requirements focused only on those costs imposed by independent regulatory
agencies because it said the costs associated with other agencies' paperwork
was already included in the environmental and other social estimates.
Estimates of the independent agencies' paperwork costs were drawn from their
burden- hour estimates (390 million hours at the end of fiscal year 1997)
multiplied by an estimate of the cost per hour to complete the paperwork ($
26.50 per hour). 9

To estimate the benefits of environmental and other social regulations in
the 1997 report, OMB used data from the 1991 Hahn and Hird article as the
1988 baseline and updated that baseline with information from Hahn's 1996
article. OMB did not provide estimates of the benefits of economic
regulations or of federal paperwork and disclosure requirements, saying
“significant benefits remain to be quantified.”

Table 2.1 presents the cost and benefit estimates that OMB presented in its
1997 report in total and for each of the four categories of regulation. OMB
noted that “other social” regulations have large net benefits
(i. e., benefits minus costs) and said most of these net benefits were
produced by highway safety regulations.

Type of Rule Costs (billions of dollars) Benefits (billions of dollars)
Environmental $144 $162 Other social 54 136 Economic (efficiency costs) 71 a
Paperwork/ disclosure for independent regulatory agencies

10 a Total 279 298 a OMB said that the benefits of economic and paperwork/
disclosure “remain to be quantified.”

Source: Report to Congress on the Costs and Benefits of Federal Regulations,
OMB, 1997.

As noted previously, OMB did not include $140 billion in estimated transfer
costs and benefits in these totals. OMB also excluded (1) tax paperwork
costs (also estimated at $140 billion) because, OMB said, “the burden
of filling out income tax forms . . . are not what one usually thinks about
when worrying about the cost of regulation;” and it excluded (2) the
costs of regulations issued between 1987 and 1996 with impacts on the
economy

8 Hopkins, in turn, had updated an estimate of the cost of economic
regulations in Hahn and Hird's 1991 article. 9 Burden- hour estimates were
presented in OMB's Fiscal Year 1998 Information Collection Budget of the U.
S. Government.

Table 2.1: Cost and Benefit Estimates From OMB's 1997 Report (in 1996
dollars)

Chapter 2 Experts Questioned OMB's 1998 Estimate of Regulatory Benefits

Page 31 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

of less than $100 million (and therefore were not covered by the executive
order's cost- benefit analysis requirements).

OMB presented regulatory cost and benefit information somewhat differently
in its 1998 report, and also used some additional data that it had not used
in preparing the 1997 report. For example, OMB broke out the costs and
benefits of the “other social” category of regulations into
three separate categories for the 1998 report: labor, transportation, and
other social regulations (mainly regulations from the Departments of Health
and Human Services, Energy, and Agriculture). However, OMB dropped two
categories of regulations from its summary table in 1998 that it had used in
its 1997 report- economic regulations and paperwork/ disclosure
requirements. OMB said that including the indirect costs of economic
regulations with the direct costs of social regulations in its 1997 report
was “more misleading than helpful.” OMB listed estimates of
disclosure costs ($ 7 billion) and benefits (“ expected to be
significant”) with other types of regulations that it did not consider
“true regulations” or did not believe should be considered in
the same category as social regulations.

Therefore, OMB presented cost and benefit information for four categories of
regulations in its summary table: environmental, labor, transportation, and
other social rules. OMB reported other types of regulatory costs and
benefits separately, including

ï¿½ efficiency costs of economic regulations (estimated at $71 billion but
benefits “not estimated but expected to be small”);

ï¿½ tax compliance costs (estimated at $140 billion in the August 1998 draft
report but not estimated in the final report);

ï¿½ transfer costs and benefits (estimated at $140 billion in costs and
benefits); and

ï¿½ federal expenditures for social regulations (estimated costs of $13
billion, benefits of between $30 billion and $3.3 trillion) and economic
regulations (estimated costs of $3 billion, benefits “likely to be
significant”).

The data and methodology that OMB used to develop its 1998 estimates in
these categories were similar in some respects to the way OMB prepared the
1997 report. For example, OMB again used Hahn and Hird's 1991 study and the
EPA Cost of Clean report to establish a 1988 baseline for the cost estimate.
However, OMB changed its methodology in some other ways. For example, it
used new estimates of the regulations that OMB reviewed between 1995 and
1998 to update the baseline and presented the cost and benefit information
in terms of ranges rather than the point estimates used in the 1997 report.
OMB developed the new estimates by “monetizing” (i. e., OMB's
1998 Report

Chapter 2 Experts Questioned OMB's 1998 Estimate of Regulatory Benefits

Page 32 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

converting to dollars) some of the quantified benefits in the agencies'
costbenefit analyses (e. g., the number of lives expected to be saved as a
result of the regulations).

A notable change in OMB's methodology in the 1998 regulatory accounting
report was its use of data from EPA's 1997 report on The Benefits and Costs
of the Clean Air Act, 1970 to 1990. Prepared because of requirements in
section 812 of the 1990 Clean Air Act Amendments, the EPA report
(hereinafter referred to as the “Section 812 report”) estimated
that the monetized benefits of the Clean Air Act from 1970 to 1990 were
between $6 trillion and $50 trillion (present value in 1990 dollars). The
report estimated direct compliance expenditures, research and development
costs, and government costs were roughly $0. 5 trillion during this period.

OMB noted that EPA's Section 812 report was the result of a 6- year effort
and was peer reviewed by EPA's Science Advisory Board's Council on Clean Air
Act Compliance Analysis and that the Council said that the report's findings
“are consistent with the weight of available evidence.” OMB also
noted that the Council's review closure letter stated that the report
“is a serious, careful study and employs sound methods along with the
best data available. However, OMB also described several elements of the
analysis that it said “deserve further discussion in order to
understand the basis for the benefit estimates.” For example,

ï¿½ OMB noted that the Section 812 report “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. OMB said
that “considerable uncertainty” surrounds this assumption and
that any attempt to construct aggregate benefit and cost estimates are
“somewhat speculative;” 10

ï¿½ OMB also noted that although the monetized benefit estimates associated
with reducing exposure to fine particulate matter accounts for 90 percent of
the report's total benefits estimate, there is “little
discussion” in the report about the uncertainty associated with the
presumed causal relationship between particulate matter levels and
mortality; and

ï¿½ OMB noted that the Section 812 report assumed that reductions in
particulate matter yields contemporaneous reductions in the mortality and
chronic health risks associated with long- term exposure. However, OMB noted
that it is “quite possible” that there is a lag in these health
effects and

10 OMB noted that the Section 812 report acknowledge that this is an obvious
oversimplification and that state and local governments and the private
sector were responsible for an important fraction of the estimated benefits
and costs between 1970 and 1990. EPA's Section 812 Report

Chapter 2 Experts Questioned OMB's 1998 Estimate of Regulatory Benefits

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mortality, and that other researchers have assumed that these effects
require 15 years of exposure. Applying a 15- year lag to the report's
calculations and a 5- percent discount rate would, OMB said, reduce the
estimated present value of the report's mortality benefits by a factor of
two.

In summary, OMB said the results of the Section 812 report, like other
studies, appeared 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.” OMB also noted in a footnote
that “several agencies held different views pertaining to several key
assumptions” in the study, but that these concerns were not resolved
because of a court deadline. Therefore, OMB said the Section 812 report
“reflects the findings of EPA and not necessarily other agencies in
the Administration.”

Table 2.2 presents the cost and benefit estimates from OMB's 1998 report.
The ranges in OMB's estimates of total regulatory costs and benefits reflect
substantial uncertainty regarding the estimates of environmental costs and
benefits. Over 95 percent (or $3,200 billion) of the environmental
category's upper- bound benefit estimate was drawn from EPA's Section 812
report.

Type of Regulation Costs (in billions) Benefits (in billions) Lower- bound
Upper- bound Lower- bound Upper- bound Environmental $120 $170 $93 $3,300
Transportation 15 18 84 110 Labor 18 19 28 30 Other 17 22 53 58 Total 170
230 260 3,500 Note: Numbers are as reported in OMB's report. Source: Report
to Congress on the Costs and Benefits of Federal Regulations, OMB, 1998.

OMB' s estimate of the cost of federal regulations declined by between $49
billion and $109 billion between its 1997 and 1998 reports. This decline was
largely because OMB excluded $71 billion in costs associated with economic
regulations that had been in the 1997 summary table and presented it in a
separate table in the 1998 report. As figure 2.1 shows, OMB's upper- bound
benefit estimate increased by about $3.2 trillion between 1997 and 1998,
virtually all of which was because of the inclusion of estimates from EPA's
Section 812 report.

Table 2.2: Cost and Benefit Estimates From OMB's 1998 Report

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Source: Report to Congress On the Costs and Benefits of Federal Regulations,
OMB, 1997 and 1998.

According to most of the cost- benefit analysis experts that we consulted,
OMB should have done more than simply record the costs and benefits from the
various sources it consulted. Most of the experts expressed particular
concern about OMB's unadjusted use of the Section 812 report's benefit
estimate. However, the experts also said that OMB faced political
constraints in adjusting agencies' estimates. Most of the experts agreed
with OMB's decision to report the costs and benefits of transfers and tax
paperwork separately from the summary tables but differed as to whether
economic benefits and federal expenditures should have been included in the
totals.

The experts that we consulted all indicated that OMB faced a daunting task
estimating the costs and benefits of all federal regulation. Most of the
experts said that OMB's general approach of aggregating the results from
diverse studies was the only real option available. For example, Hopkins

Figure 2.1: EPA's Section 812 Data Substantially Increased Upper- Bound
Benefit Estimate Between 1997 and 1998

Experts Said OMB Should Have Done More, but Political Environment Limits
OMB's Role

Experts Said OMB Should Not Be “Clerk,” but Doing More Is
Politically Difficult

Chapter 2 Experts Questioned OMB's 1998 Estimate of Regulatory Benefits

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said that although one would ideally like to have consistency in the studies
aggregated, he also said he did not think that consistency was obtainable.
However, Crandall said using different studies to derive a total figure is
“problematic,” and that the data in some of the studies forming
the basis of OMB's estimates was “pretty thin” and unreplicated.
Lave expressed similar concerns, saying that OMB should have used studies
with uniform approaches.

Several of the experts said that OMB's cost estimates were reasonable- in
Litan's words, “in the ballpark.” However, most of the experts
said that OMB's upper- bound benefits estimate in the 1998 report was
questionable or even “implausible.” Lave said the major increase
in the benefits estimate between the 1997 and 1998 reports “is an
indication that these numbers are not very good.” Weidenbaum said that
when the benefits of regulations are so large in comparison to the costs,
“it stretches that credibility of the report.”

Noting that the 1998 benefits estimate was driven, in large part, by the
inclusion of data from EPA's Section 812 report, many of the experts voiced
specific concerns about that report's assumptions and conclusions. Virtually
all of those concerns were similar to the concerns that OMB discussed in its
report-( 1) the assumption that air quality would have deteriorated
significantly between 1970 and 1990 in the absence of the Clean Air Act, (2)
the assumed health effects from limiting exposure to particulate matter, and
(3) the methods used to estimate the value that individuals would place on
reducing health and mortality risks. Therefore, all of the experts said they
believed that the benefits estimate in the Section 812 report (and therefore
in the OMB report for 1998) was too high. For example, Portney said that
although he believed that the benefits of the Clean Air Act are greatly in
excess of its costs, EPA's (and OMB's) assertion that those benefits are as
much as one- sixth of the gross domestic product “doesn't pass the
common sense test.” Weidenbaum said OMB's use of the Section 812
report's upper- bound benefits estimate “makes a mockery of the whole
exercise.”

Because of these concerns about the accuracy of the benefits estimate, most
of the experts said they believed that OMB should have adjusted the Section
812 report's benefits estimates before including them in its report. For
example, Hahn said that OMB could have followed the procedure it outlined in
its report and accounted for the likely time lag between reducing
particulate matter and any health effects (which he said would have reduced
the benefits by a factor of two).

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The experts' views regarding adjustment of the Section 812 report's benefits
estimate were part of an overall view by most of the experts that OMB should
have played a more assertive and independent role in the preparation of its
aggregate benefit and cost estimate. Several of the experts said that OMB
had simply played the role of “clerk,” transcribing the
estimates from previous studies by academicians and agencies without
adjustment. For example, Weidenbaum said that agencies would naturally
emphasize the good that their regulations are doing and that OMB should have
done a “serious evaluation” of the agencies' figures before
including them in its report. He said the “spirit” of the
statutory requirement was for OMB to come up with its own estimates of
regulatory costs and benefits and the absence of independent review of the
benefit estimate of the Clean Air Act by OMB “puts a cloud over the
report.” Similarly, Litan said he believed the intent of the statutory
requirements was for OMB to be more than a “clerk,” and that
Congress was asking for OMB's “own judgment” regarding
regulatory costs and benefits. Hopkins said OMB should encourage agencies to
provide independent assessments, and make adjustments where needed to
account for “overblown” estimates. Lave said OMB should have
monetized those benefits and costs that the agencies did not monetize (e.
g., when agencies provided quantified, but not monetized, estimates of lives
saved). 11

Despite their view that OMB be more than a “clerk” and exercise
independent judgment in adjusting agencies' cost and benefit estimates, many
of the experts also indicated that it was politically difficult if not
impossible for OMB to make such adjustments. In general, they indicated that
agencies' regulations are ultimately approved by agency heads and, in some
cases, the President or the Vice President. OMB's responsibility in the
rule- review process is to ensure that agencies' regulations are consistent
with applicable law, the President's priorities, and the principles in
Executive Order 12866, including the cost- benefit analysis requirements.
Although there may be great deliberation within and among agencies during
their development, once a rule is promulgated it becomes a public statement
of the administration's policy. At that point, OMB's responsibility is to
support and defend that statement of policy. Therefore, requiring OMB to
provide an “independent” view of those rules and their
associated estimates of costs and benefits, altering those estimates when
appropriate, would significantly change OMB's current role of supporting the
administration's position and initiatives. In general, the experts said that
it was politically difficult to ask OMB to criticize the administration of
which it is a part.

11 As noted previously, OMB did monetize some of the agencies' quantified
estimates.

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Hahn said that he did not believe the report reflects the collective wisdom
that resides at OMB on these issues. Although OMB staff had the technical
expertise needed to develop its own “best estimate” of the
effects of the Clean Air Act, he said it would be politically very difficult
to publish such an estimate. Hahn also said that it would be more likely for
OMB staff to say what they think if there were competition from some other
group that would also examine agencies' cost and benefit estimates.

Litan said adjustment of the Section 812 report's benefit estimate was a
“dicey issue,” and that OMB was in “an inherently
difficult position” on whether to use EPA's widely varying estimate.
He said the reality of the situation is that the President and the Vice
President are ultimately responsible for anything that comes from an
executive branch agency and that “OMB will always be politically
constrained in this process.” Crandall said that OMB “responds
within a political environment,” and was not in a position to make an
independent judgment contrary to that of EPA. Likewise, Hopkins said it was
politically difficult for OMB to adjust the cost- benefit estimates
“if OMB is supposed to be representing a President, a unified
administration, a common party line.” He said this is true regardless
of which party occupies the White House.

All but one of the experts we consulted believed that OMB's exclusion of
transfer costs and benefits from the summary tables was appropriate. For
example, Portney said that transfers should be presented separately because
they are not a social cost like environmental, health, and safety
regulations. Hahn said such transfers should not be included in regulatory
cost or benefit totals but said estimating the size of such transfers can be
useful for other reasons. 12 Hopkins said that although basic economic logic
says efficiency and transfer costs should not be mixed, he believes OMB
should have included transfer costs in the totals to illustrate the
magnitude of federal regulatory activity.

The experts also generally agreed with OMB that tax paperwork should not be
included in the summary tables. Portney said including such costs would have
been inappropriate and said he does not think of IRS as a regulatory agency.
Weidenbaum said he believes that tax paperwork should be reported separately
because the taxing power of the federal government is separate from its
power as a regulator. Hahn said such costs should not be included because
one cannot talk about the costs of the

12 See Robert W. Hahn, “Government Analysis of the Benefits and Costs
of Regulation,” Journal of Economic Perspectives, 12 (Fall 1998), pp.
201- 210 for a complete discussion of Hahn's views on this issue. Experts
Differed Regarding

Inclusion of Certain Costs and Benefits in Summary Tables

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current tax system without knowing the alternative to that system. However,
Hopkins said the costs of tax paperwork should have been included in OMB's
report. He indicated that the alternate to the current tax system could be a
flat tax system and that OMB claimed in an earlier report that “[ w]
hen people speak of regulatory burden, they are usually referring to record
keeping or reporting requirements- i. e., paperwork.” 13

The experts were divided about whether the costs and benefits of economic
regulations should have been included in the OMB report's total cost and
benefit estimates. Crandall said it does not make sense to include economic
regulations with the total. Similarly, Lave said that these regulations
differ from the social regulation should be reported separately. However,
Hopkins and Litan said economic regulations should be included. Litan said
that if economic regulations constitute a “deadweight efficiency loss,
then it is a cost.” He said it is particularly important that they be
included “when we know the benefits are likely to be zero.” Hahn
said that estimating the costs and benefits of economic regulations was
useful, but whether they are combined with social regulations “depends
on what you want to do.” Although price and entry regulations are
generally considered different from social regulations, he said there is
“no right or wrong way to go.” Still others cited difficulties
associated with these rules. For example, Portney said that it is difficult
to measure the effect of regulations that affect the entrance to a market
or, in the case of FCC regulation, to measure the benefits of public
airwaves. Crandall said it was difficult for OMB to include these effects in
its reports when agencies are not conducting the analyses.

With regard to federal regulatory expenditures, both Lave and Crandall said
the amount involved is so small in comparison to other regulatory costs and
benefits that it doesn't make much difference whether the costs are included
in OMB's summary totals. However, Weidenbaum and Litan said federal
expenditures should be included as regulatory costs. Weidenbaum said such
costs are the “hardest” data available- straight out of the
federal budget. However, he said OMB's presentation of the benefits of these
expenditures (up to $3.3 trillion) was already captured in the other
categories, so presenting them as OMB did could be double counting. Hopkins,
however, said it makes more sense to show federal expenditures as part of
the fiscal budget, not in an accounting of off- budget regulatory costs.

13 OMB, OIRA, More Benefits Fewer Burdens: Creating A Regulatory System that
Works for the American People, Dec. 1996, p. 28.

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The second statutory requirement was that OMB provide estimates of the costs
and benefits of each rule likely to have a gross annual effect on the
economy of $100 million or more in increased costs. OMB interpreted the
requirement broadly to include rules that were “major” or
“economically significant” even if they did not necessarily have
$100 million in increased costs. However, OMB narrowly focused on rules
issued during specific 1- year periods and did not provide cost or benefit
data for rules issued by independent regulatory agencies. Also, OMB did not
include all rules that met its criteria and did not provide cost- benefit
data for all of the rules it included. Most of the cost- benefit experts
that we consulted said OMB should have included rules from independent
regulatory agencies and several said OMB should not have simply accepted the
cost and benefit estimates provided by the executive agencies. Nevertheless,
several of the experts also noted that it was politically difficult for OMB
to alter agencies' estimates in its report to Congress.

The statutory provisions mandating both the 1997 and 1998 reports required
OMB to provide “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.” The requirements did not exempt rules issued by
independent regulatory agencies or only apply to rules issued within a
specific time frame. However, the requirements only applied to rules with
expected regulatory effects of $100 million or more in increased costs.

In the 1997 and 1998 reports, OMB interpreted these statutory requirements
to include all final rules promulgated by executive departments and agencies
and reviewed by OIRA under Executive Order 12866 during 1- year time frames
that met any of the following criteria:

ï¿½ Rules designated as economically significant under Executive Order 12866;

ï¿½ Rules designated as major under the congressional review provisions of the
Small Business Regulatory Enforcement Fairness Act (SBREFA) 1; or

ï¿½ Rules designated as meeting the threshold under title II of the Unfunded
Mandates Reform Act of 1995 (UMRA). 2

1 The congressional review provisions of SBREFA define a major rule as one
that the Administrator of OIRA finds has resulted in or is likely to result
in (1) an annual effect on the economy of $100 million or more; (2) a major
increase in costs or prices for consumers, individual industries, government
agencies, or geographic regions; or (3) significant adverse effects on
competition, employment, investment, productivity, innovation, or the
ability of U. S.- based enterprises to compete with foreignbased enterprises
in domestic and export markets. OMB Provided Data

for Only Certain Rules in Both Reports

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For the 1997 report, the 1- year time frame was between April 1, 1996, and
March 31, 1997; for the 1998, report the time frame was between April 1,
1997, and March 31, 1998. OMB did not include any rules issued by
independent regulatory agencies because those agencies' rules are not
reviewed by OIRA pursuant to Executive Order 12866. Neither did OMB include
any rules that were issued outside of the specific 1- year time frames it
established. Therefore, in these respects, OMB's criteria were narrower than
those set forth in the statute. In other respects, OMB's criteria were
broader than the statute's requirements because they included rules that
were economically significant or major for reasons other than requiring $100
million in increased costs. For example, a rule may be economically
significant or major because it has $100 million in benefits to the economy
or because it adversely affects in a material way a sector of the economy,
productivity, competition, jobs, or state and local governments, not because
it requires $100 million in increased costs.

In its 1997 report, OMB identified 41 rules that met its criteria, of which
it said 21 were social rules and 20 were transfer rules. The Department of
Agriculture (USDA) issued the largest number of these rules (12), followed
by the Department of Health and Human Services (HHS) (8), and the
Environmental Protection Agency (EPA) (7). OMB reported the cost and
benefits data that the issuing agencies included in the 21 social rules but
did not provide any cost or benefit information for the 20 transfer rules.
OMB said it did so because these transfers represent payments from one group
to another that redistribute wealth and are not social costs. Although OMB
recognized that these rules may have some associated costs and benefits, it
said estimates of those costs and benefits are typically not available.

OMB noted in the report that there was “a wide variety in the type,
form, and format of the data generated and used by the agencies” in
their costbenefit analyses for the social rules. For example, some of the
analyses contained monetized cost and benefit estimates, some contained
quantified but not monetized estimates (e. g., the number of deaths or
injuries expected to be avoided or tons of a particular pollutant expected
to be eliminated), and some contained qualitative estimates (e. g.,
increased efficiency or improved product quality). OMB said most of the
analyses contained a combination of these estimates. OMB also said that
agencies used a variety of reporting formats within these categories,
including

2 The threshold under title II is for any proposed rule or any final rule
for which a proposed rule was published that included any federal mandate
that may result in the expenditure of $100 million or more in any one year
by state, local, and tribal governments, in the aggregate, or the private
sector. OMB's 1997 Report

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annualized values, present values, and constant annual values. 3 To present
the information in a more consistent way, OMB made some basic adjustments to
the agencies' data. However, OMB did not adjust the underlying information
in the agencies' estimates and did not impose uniform assumptions across the
agencies.

As noted previously, OMB did not include any rules in its report that had
been issued by independent regulatory agencies. OMB said it did not believe
the exclusion of independent agencies' rules was significant because
“we believe that few of their individual regulations meet the
statutory criteria of section 645( a)( 2).” However, between April 1,
1996, and March 31, 1997, independent regulatory agencies submitted a total
of 23 major rules to us pursuant to the congressional review provisions of
SBREFA. The FCC issued the largest number of these major rules (13 rules),
followed by the SEC (5 rules), and the Federal Energy Regulatory Commission
and the Federal Reserve Board (each with 2 rules). Independent regulatory
agencies are not covered by the cost- benefit requirements in Executive
Order 12866, and the agencies did not conduct cost- benefit analyses for 20
of these 23 rules. However, in one SEC rule, the agency estimated that the
rule would have nearly $160 million in benefits.

To determine whether OMB had identified all of the rules that met its
criteria, we obtained a list from the Regulatory Information Service Center
of economically significant final rules on which OMB had completed its
review between April 1, 1996, and March 31, 1997. We also developed a list
of final major rules that agencies submitted to us pursuant to our review
responsibilities under SBREFA that OMB reviewed during this period. We did
not attempt to identify rules that met the UMRA threshold because those
rules are a subset of economically significant rules. 4 We identified nine
rules that met OMB's criteria but were not in OMB's 1997 report- five social
rules and four transfer rules. Those nine rules are listed in table 3.1.

3 According to OMB, “annualized values” spread out variable
effects into yearly sums that are financially equivalent to the actual
temporal schedule. “Present values” convert effects over time
into an immediate lump sum. “Constant annual values” reflect
effects that have been estimated (or are assumed) to be fixed each year over
the time horizon in which the regulation applies.

4 See Unfunded Mandates: Reform Act Has Had Little Effect on Agencies'
Rulemaking Actions (GAO/ GGD- 98- 30, Feb. 4, 1998).

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Type of rule Department or

Agency Rule Migratory Bird Hunting; Late Seasons and Bag and Possession
Limits for Certain Migratory Game Birds Migratory Bird Hunting; Final Rule
on the Establishment of a Youth Waterfowl Hunting Day for the 1996- 1997
Migratory Bird Hunting Season Migratory Bird Hunting; Seasons and Bag Limits
for the 1996- 1997 Youth Waterfowl Hunting Day Department of

the Interior Migratory Bird Hunting Regulations on Certain Federal Indian
Reservations and Ceded Lands for the 1996- 97 Late Season Social

rules Environmental Protection Agency

Control of Air Pollution: Final Rule for New Gasoline SparkIgnition Marine
Engines; Exemptions for New Nonroad Compression- Ignition Engines at or
Above 37 Kilowatts and New Nonroad Spark- Ignition Engines at or Below 19
Kilowatts Department of Agriculture Food Stamp Program; Child Support
Deduction

Medicare Program; Physician Fee Schedule Update for Calendar Year 1997 and
Physician Volume Performance Standard Rates of Increase for Federal Fiscal
Year 1997 Department of

Health and Human Services Medicare Program; Inpatient Hospital Deductible
and Hospital

and Extended Care Services Coinsurance Amounts for 1997 Transfer

rules Department of Veterans Affairs

Compensation for Disability Resulting From Hospitalization, Treatment,
Examination, or Vocational Rehabilitation

Source: OMB's 1997 Report to Congress on the Costs and Benefits of Federal
Regulations (OMB, September 30, 1997); Regulatory Reform: Major Rules
Submitted for Congressional Review During the First 2 Years (GAO/ GGD- 98-
102R, Apr. 24, 1998); and Economically Significant Rules (RISC).

We then reviewed the agencies' cost and benefit estimates for all 50 of the
rules issued during the 1- year period that met OMB's criteria and
determined that 20 rules met the specific requirements of the statute- i.
e., rules that the agencies believed were likely to have a gross annual
effect on the economy of $100 million in increased costs. Ten of these 20
rules were social rules and 10 were transfer rules. (App. IV lists these 20
rules by agency with their cost and benefit estimates.)

OMB used essentially the same criteria to identify rules for its 1998 report
as it had in its 1997 report- rules on which OMB concluded its review during
a 1- year period that were either “economically significant”
under Executive Order 12866, “major” under the congressional
review provisions of SBREFA, or that met the threshold under title II of
UMRA. The 1- year period that OMB focused on in its 1998 report was from
April 1, 1997, until March 31, 1998.

As was the case in its 1997 report, OMB did not provide cost or benefit data
for rules that were issued by independent regulatory agencies because OMB
did not review them under the executive order. However,

Table 3.3.1: Rules That Met OMB's Criteria but Were Not in OMB's 1997 Report

OMB's 1998 Report

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OMB included in its 1998 report a discussion of major rules issued by these
agencies between April 1, 1996, and March 31, 1998, based on data provided
to us under the congressional review provisions of SBREFA. Citing our report
on the major rules submitted under SBREFA, 5 OMB noted that independent
regulatory agencies submitted 44 major rules to us during this period, 41 of
which were issued by 5 agencies (FCC, SEC, the Federal Reserve Board, the
Nuclear Regulatory Commission, and the Federal Energy Regulatory
Commission). 6 Of these 41 rules, OMB said 12 had some discussion of costs
or benefits, 4 had monetized cost information, and 1 had monetized benefit
information. Because only one of these rules contain an estimate of costs or
benefits exceeding $100 million (an SEC rule allowing electric storage for
brokers or dealer reporting, which the industry estimated would reduce costs
by $160 million), OMB concluded that our reports on the 41 rules contained
“no information useful for estimating the aggregate costs and benefits
of regulations.” However, OMB relied on the information in our major
rules reports; it did not ask these agencies if they had any other
information about the costs or benefits of these rules.

OMB identified 33 rules that met its criteria- 22 social rules and 11
transfer rules. EPA issued the largest number of the social rules (nine),
followed by USDA and HHS (three each). As it did in its 1997 report, OMB
reported the cost and benefits data that the issuing agencies included for
the 22 social rules but did not report cost or benefit information for the
transfer rules.

To determine whether OMB identified all of the rules that met its criteria,
we obtained a list of economically significant rules on which OMB concluded
its review between April 1, 1997, and March 31, 1998, and developed a list
of major rules that OMB reviewed during the same period of time. We
identified five rules that met OMB's criteria but were not in OMB's 1998
report- four social rules and one transfer rule. Those rules are shown in
table 3.2.

5 Regulatory Reform: Major Rules Submitted for Congressional Review During
the First 2 Years (GAO/ GGD- 98- 102R, Apr. 2, 1998). 6 Actually, all 44
rules were issued by these 5 agencies.

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Type of rule Department or

agency Rule Migratory Bird Hunting; Early Seasons and Bag and Possession
Limits for Certain Migratory Game Birds in the Contiguous United States,
Alaska, Hawaii, Puerto Rico, and the Virgin Islands Migratory Bird Hunting;
Regulations on Certain Federal Indian Reservations and Ceded Lands for the
1997- 1998 Early Season Migratory Bird Hunting; Late Seasons and Bag and
Possession Limits for Certain Migratory Birds Social

rules Department of the Interior

Migratory Bird Hunting; Regulations on Certain Federal Indian Reservations
and Ceded Lands for the 1997- 1998 Late Season Transfer rules Department of

Agriculture Child Nutrition and WIC Reauthorization Act Amendments Source:
OMB's 1998 Report to Congress on the Costs and Benefits of Federal
Regulation; our 1998 report, Regulatory Reform: Major Rules (GAO/ GGD- 98-
102R, Apr. 24, 1998); and RISC.

We then reviewed the agencies' cost- benefit estimates for all 38 of the
rules issued during the 1- year period that met OMB's criteria and
determined that 22 rules met the specific requirements of the statute- rules
that the agencies estimated were likely to have a gross annual effect on the
economy of $100 million in increased costs. Thirteen of these 22 rules were
social rules and 9 were transfer rules. (App. V lists these 22 rules by
agency with their cost and benefit estimates.)

Most of the cost- benefit analysis experts that we consulted had few
comments about OMB's listings of individual rules in relation to the second
statutory objective. They most frequently said that OMB should have included
rules issued by independent regulatory agencies in its listings. Several
also indicated that OMB should have made adjustments to the agencies' cost-
benefit estimates, particularly to provide a consistent monetary estimate of
the value associated with the reduction of mortality rates. However, they
also recognized political difficulties associated with adjusting agencies'
estimates.

Most of the experts that we consulted indicated that OMB should have
included cost and benefit estimates in its reports for the major rules
issued by the independent regulatory agencies. For example, Weidenbaum said
there was no reason to exclude these agencies' rules, and described their
exclusion as a “shortcut.” However, several of the experts noted
that Executive Order 12866 does not cover these agencies, thereby limiting
the information that OMB receives from them and what could be included in
OMB's reports. Similarly, Hopkins and Hahn said that if Congress wanted OMB
to include independent regulatory agency's rules in its reports,

Table 3.2: Rules Meeting OMB's Criteria But Not Included in the 1998 Report

Experts Suggested Changes in OMB Major Rule Information

Experts Said Include Independent's Rules, Adjust Agencies Estimates

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Congress could require those agencies to produce cost and benefit analyses.
Weidenbaum said that despite the limitations in the statutes and the
executive order, OMB interacts with independent regulatory agencies through
the budget process and through its responsibilities in carrying out the
Paperwork Reduction Act. Therefore, he said, OMB could have gone to these
agencies and asked them to provide their best estimates of the costs and
benefits associated with their major rules.

Similar to their comments on OMB's response to the first statutory
requirement, several of the experts that we consulted indicated that OMB
should have conducted more independent analysis of the agencies' cost and
benefit estimates instead of simply performing as a “clerk” and
including the estimates without adjustment. These experts said that OMB
should have provided its own analysis and adjusted those estimates that it
considered to be in need of refinement. In particular, Hopkins, Lave, Litan,
and Weidenbaum said OMB should have monetized some of the data when the
agencies did not do so (e. g., converting the number of lives saved into
monetized estimates). Weidenbaum said it did not make sense for some
agencies to provide monetized estimates of the benefits associated with
reductions in mortality while other agencies do not. Hopkins said that if
OMB were to make its own critical judgements regarding the agencies'
estimates, the agencies would be more likely to provide good estimates in
the first place. He said OMB should place its own critical appraisals of
agencies' estimates in the public record. As a result, he said, the agencies
would improve their estimates because they do not want to be publicly
criticized for overstating regulatory benefits.

However, Hahn, Hopkins, and Weidenbaum also noted political and
organizational difficulties associated with OMB adjusting agencies' cost or
benefit estimates. Hopkins said OMB's “clerical” function in
this regard was driven by OMB's organizational placement within the
Executive Office of the President and the interplay between the President,
OMB leadership, and the political appointees in the executive agencies. He
said that OMB could have been more aggressive regarding agencies' cost and
benefit estimates if the President wanted an energetic OMB pressing on the
agencies. In the absence of such direction, Hopkins said those wanting a
critical analysis of agencies' cost or benefit estimates will need to look
outside of OMB. Weidenbaum said that OMB is trapped between two roles- one
in which it challenges agencies to do better cost- benefit estimates and the
other in which it is forced to defend those agencies' estimates after they
have been approved. Hahn said that the report does not reflect the
collective wisdom that OMB staff has regarding regulatory

Chapter 3 OMB Did Not Provide Cost- Benefit Estimates for All $100 Million
Rules

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costs and benefits, and the problem is “how do you get them to really
tell you what they think.”

Several of the experts also questioned why OMB limited its presentation of
major rules to those it reviewed within selected 1- year periods. For
example, Weidenbaum said he did not interpret the statutory requirement to
be limited to 1- year's worth of regulations. However, he said OMB may have
done so because of data limitations and because including all $100 million
rules would have been a “big chore.” Hopkins said it was
“curious” that OMB established a time frame for these rules
despite the absence of any such time limits in the statute. Lave said it
would have been better to include more data than for just 1 year, but he
added that this issue was “not high on my list of concerns”
about OMB's report.

None of the experts expressed concerns about OMB including economically
significant and major rules that did not have $100 million in increased
costs. Weidenbaum and Hopkins said they preferred the inclusive definition
that OMB used because it included a larger set of rules than would have been
included by sticking strictly to the statutory language. Lave said he also
agreed with OMB's approach.

Overall, Hopkins said it was “astonishing” how little
information executive branch agencies had on regulatory costs and benefits
despite 17 years of executive orders requiring agencies to provide such
information. Crandall said that a “selection bias” might be in
operation here, with agencies not conducting cost- benefit analysis or not
placing a value on certain elements in the analyses when doing so would
demonstrate that the rule would not pass a cost- benefit test. In order to
overcome this problem, he said, OMB would need a lot of expertise in each of
the regulatory areas- expertise that he doubted OMB possessed.

Chapter 4 OMB Did Not Separately Assess Direct and Indirect Impacts of Rules

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The third statutory requirement was that OMB provide an assessment of the
direct and indirect impacts of federal rules on the private sector, state
and local governments, and the federal government. OMB indicated that it
believed it had satisfied the “direct” portion of this
requirement through the overall cost and benefit estimates that it provided
in relation to the first statutory requirement. OMB discussed the difficulty
in determining indirect regulatory effects in its first report but did not
provide any description of those effects in either report. The cost- benefit
analysis experts that we consulted were generally sympathetic toward OMB's
treatment of this requirement, describing it as a lower priority than the
other requirements and perhaps impossible for anyone to satisfy.

Unlike the first two statutory requirements, OMB did not have a separate
chapter of its 1997 report devoted to the third requirement on the direct
and indirect costs and benefits of federal rules on the private sector,
state and local governments, and the federal government. Instead, OMB
included a brief discussion of this requirement within the chapter that
addressed the first requirement on total regulatory costs and benefits. OMB
indicated that its estimates of the direct costs and benefits of all rules
in relation to the first requirement satisfied the portion of the third
requirement regarding an assessment of direct impacts. The report then
discussed indirect effects by first noting that several studies have found
those effects to be significant, and then describing several problems
associated with using those studies (e. g., they only examine indirect
costs, and it is impossible to validate models or view their assumptions).
Overall, OMB emphasized the methodological difficulties associated with
determining the indirect effects of federal rules.

OMB had less discussion of the third statutory requirement in its 1998
report. In the introduction to the report, OMB said that the first chapter
on the total annual costs and benefits of federal regulatory programs also
discusses such factors as economic efficiency losses, federal on- budget
regulatory expenditures, and “the possible indirect effects of
regulation on the economy as directed by Section 625( a)( 3).” For
example, in that chapter OMB explained that it did not include the
“indirect, mostly consumer surplus, losses of economic
regulation” in its summary table because it concluded that those
indirect losses may have significantly different long term effects than
direct compliance costs. However, other than these types of references, OMB
did not specifically discuss the direct or indirect effects of federal
regulations on the private sector, state and local government, or the
federal government in its 1998 report. OMB Reports

Contained Little Discussion of Third Statutory Requirement

Chapter 4 OMB Did Not Separately Assess Direct and Indirect Impacts of Rules

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In its response to comments on the first report, OMB acknowledged that its
summary of the literature on the direct and indirect effects of regulation
on the economy “did raise more questions than it answered,” but
said that it was a fair summary of the existing knowledge in the area. OMB
also noted that Executive Order 12866 calls on agencies to examine and
consider the distributional and equity effects of regulations and said that
both OMB and the agencies could do a better job in estimating those effects.
Responding to comments on the second report, OMB again said that more
information about indirect effects is needed and said it planned to do more
searching for next year's report.

Most of the cost- benefit analysis experts we consulted were generally
sympathetic to OMB's admittedly sketchy treatment of this statutory
requirement. For example, Litan said that it would be “horrendously
difficult” to obtain any other data besides direct compliance costs
from the private sector. Although Hahn said this requirement was useful, he
said OMB “punted” with regard to the requirement because data on
indirect costs by sector are extremely limited, and suggested that this
analysis be completed for only a select number of regulations to increase
this requirement's usefulness and feasibility. Hopkins said that it would be
difficult to be literally responsive to the requirement, but said more work
needed to be done in this area. Several of the experts said that this
requirement was a low priority and/ or should not have been required of OMB.
For example, Weidenbaum said he would not have included it in the
legislation because the requirement itself “probably would not now
pass a cost- benefit test.” Portney said OMB's treatment was the best
it could do given the time and resources available and said he was not sure
how reasonable it was to impose this requirement. Crandall said that OMB's
lack of response to this requirement “does not seem to be a bad trade-
off given their resources.”

However, Lave said OMB's approach to this requirement was “clearly not
right,” and did not believe that OMB had satisfied this requirement.
He said determining the distributional effects (who bears the costs, who
receives the benefits) of some types of regulations is very important and
noted that studies already conducted on provisions of the Clean Air Act
indicated that it is possible to make these types of estimates. Experts Were

Sympathetic to OMB's Treatment of Requirement

Chapter 5 Experts Criticized Lack of New Recommendations in OMB Reports

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The fourth statutory requirement was that the OMB Director provide
recommendations to reform or eliminate any federal regulatory program or
program element that is inefficient, ineffective, or is not a sound use of
the nation's resources. The 1997 report contained no such recommendations,
but the 1998 report contained an endorsement of 10 previously announced
regulatory or statutory changes and a discussion of restructuring the
electrical generation industry. All of the cost- benefit experts disagreed
with OMB's response to the requirement, and several said sufficient
costbenefit data existed to support making some recommendations. However,
several of the experts also said that it was politically difficult for OMB
to make recommendations directly to Congress to eliminate or reform existing
administration programs.

In its 1997 report, OMB concluded that it could not make any recommendations
that would meet the statutory requirement. In explanation, OMB said

“[ W] e do not believe that the existing evidence on aggregate costs
and benefits rises to the level that would support a recommendation to
eliminate any regulatory program. Virtually all of the evidence . . . is
based either on dated studies of existing regulation or on estimates for
proposed regulations. These data are not appropriate for determining whether
existing regulations should be repealed or significantly modified because of
the sunk costs and rising baseline problems discussed above. Before
supportable recommendations are made to eliminate existing regulatory
programs or elements of programs, empirical evidence based on analytical
techniques designed to solve the methodological problems discussed above
must be developed.”

However, OMB did include in the report a number of recommendations to
improve the quality of regulatory data and analysis, including (1) that OIRA
lead an effort to improve agencies' regulatory analysis by promoting greater
use of its January 1996 “best practices” guidance, (2) that an
interagency group conduct a peer review of a selected number of agency
regulatory analyses, and (3) that OIRA continue to develop a database on the
costs and benefits of major rules.

In its 1998 report, OMB again indicated that data quality problems prevented
it from making definitive recommendations on specific regulatory programs.
However, OMB said it had identified some general themes during its review of
the academic literature and analysis of data on the economic impacts of
regulations and noted the general success of large scale procompetitive
regulatory reforms. Within that theme, OMB then described the Clinton
Administration's legislative recommendation for reform of electricity
generation. OMB said this electricity restructuring proposal was an
illustration of how regulatory reform can achieve “the OMB Provided No
New

Recommendations

Chapter 5 Experts Criticized Lack of New Recommendations in OMB Reports

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economic benefits of competition in a manner that is fair and improves the
environmental performance of the electricity industry.”

OMB also said that agencies continue to reform their regulatory programs,
which are described in the Regulatory Plan located in the fall edition of
the Unified Agenda of Federal Regulatory and Deregulatory Actions. OMB said
these initiatives were important to the administration and then listed nine
such efforts that it endorsed in its 1998 report. We examined the Unified
Agenda and discovered that many of these initiatives had been announced by
the agencies years before the issuance of the OMB report. For example,

ï¿½ the Department of Agriculture's Food Safety and Inspection Service first
indicated that it was determining whether to convert some of its
“command and control” regulations to performance standards in
1995 and issued an NPRM to convert those regulations to performance
standards in May 1996;

ï¿½ HUD issued an NPRM to provide consumers with increased disclosure
concerning mortgage brokers' function and fees, and to provide greater
clarity regarding the application of the Real Estate Settlement Procedures
Act to mortgage broker fees in September 1995;

ï¿½ the Department of Transportation began reviews of its side impact
protection and heavy truck conspicuity regulations in October 1994 and
September 1995, respectively; and

ï¿½ the Department of Labor's Office of Federal Contract Compliance Programs
issued an advance notice of proposed rulemaking in July 1981 to streamline,
clarify, and reduce the paperwork burden of the regulations that govern the
nondiscrimination and affirmative action obligations of federal contractors,
and issued an NPRM in May 1996.

OMB also noted in its 1998 report that the Clinton Administration offered
“Remediation Waste Legislative Specifications” in early 1998 to
provide changes to the Resource Conservation and Recovery Act land disposal
restrictions, minimum technology requirements, and permitting requirements
for hazardous remediation waste. Although this appeared to be a new
legislative proposal, EPA issued an NPRM related to this issue in May 1992.
However, OMB officials told us during this review that the administration
determined that EPA could not take this action administratively, so
additional statutory authority was needed.

Chapter 5 Experts Criticized Lack of New Recommendations in OMB Reports

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All the experts that we consulted indicated that OMB's responses to this
statutory requirement did not adequately address the requirement. For
example, Weidenbaum said he was “amazed” that OMB could not come
up with a single program or regulation that it believed needed changing.
Similarly, Portney said the lack of any recommendations “strains
credulity.” Hopkins said OMB's practice of citing the lack of perfect
data is “a recipe for complete inaction.” He said government
always has incomplete and uneven data but that does not stop it from
preparing fiscal budgets or implementing the tax laws.

Several of the experts specifically said that they did not believe OMB's
endorsement of agencies' previously announced regulatory reform initiatives
in its 1998 report addressed the statutory requirement. For example,
Weidenbaum said that it was difficult to see how initiatives put forward by
the agencies can be seen as recommendations from the OMB Director. Because
these initiatives had already been proposed by the agencies, he said they
should not be considered recommendations. Hahn said OMB needs to use its own
expertise and institutional knowledge to help reform regulations, not simply
rely on agencies for initiatives.

Some experts were also critical of the report's discussion of electricity
restructuring in the 1998 report. For example, Hopkins said this discussion
was “ridiculous,” and found it interesting that OMB would
include this proposal regarding an issue over which it has very little
influence or data after asserting that it could not make recommendations
with regard to issues that it can exert influence and has at least some
data.

Several of the experts also said that enough cost- benefit data existed to
support the reform or elimination of particular regulations or regulatory
programs. For example, Hahn pointed to one of his recent articles in which
he suggested a number of laws and regulations that could be eliminated,
including certain international trade restrictions, USDA milk, average fuel
economy standards, marketing orders, and the Davis- Bacon Act. 1 Weidenbaum
suggested reform of agricultural marketing orders and the Maritime
Commission. Portney said current regulations on coal- fired power plants
should be replaced with performance standards. Portney noted that some
regulations are in place in which the costs exceed the benefits because of
statutory requirements that only Congress can change.

1 Robert W. Hahn, “Government Analysis of the Benefits and Costs of
Regulation,” Journal of Economic Perspectives , 12 (Fall 1998), pp.
201- 210. Experts Criticized

OMB, but Noted “Constraints”

Chapter 5 Experts Criticized Lack of New Recommendations in OMB Reports

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Although most of the experts were critical of the lack of recommendations in
OMB's reports, several of them also indicated that OMB may be unable to make
recommendations for the reform or elimination of existing regulatory
programs because of the previously discussed “political
constraints.” For example, Lave said he believed that OMB staff would
have relished making recommendations to reform some of the programs they
review, but were unable to do so because of the political environment that
exists within OMB. “In the end,“ he said, “these are
political issues and it lies with the President to make these political
decisions.”

Chapter 6 Conclusions

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Although the precise dimensions of federal regulatory costs and benefits are
unclear, there is general agreement that, in the aggregate, federal
regulations have a substantial impact on the economy. Measuring the costs
and benefits associated with a single rule can be extremely difficult, and
developing accurate estimates of the effects of all federal regulations is
even more complex. OMB's two reports on regulatory costs and benefits are
notable initial attempts to provide Congress with information that it needs
to gauge the extent of federal regulatory activity and to determine whether
the benefits associated with federal regulations justify the related costs.

OMB addressed some, but not all, of the specific statutory requirements in
its 1997 and 1998 reports. In both reports, OMB provided estimates of the
costs and benefits of federal regulations both in total and for most (but
not all) major or economically significant rules issued within particular 1-
year time frames. To develop its estimates of total regulatory costs, OMB
relied on previous estimates published in the professional literature, the
agencies' published estimates for particular rules, and (in the 1998 report)
EPA's Section 812 report estimate.

However, OMB's reports did not fully address other statutory requirements.
First, OMB did not, as directed, discuss the direct and indirect effects of
federal rules on particular sectors of the economy. In OMB's defense, most
of the experts we consulted indicated that OMB's reluctance was
understandable given the lack of data clearly documenting those effects.
Some of the experts said this requirement was a lower priority than the
other requirements. Second, OMB had no recommendations in its 1997 report
and, although it discussed a number of previously announced agency and
administration initiatives, it did not provide any new recommendations to
eliminate or reform federal regulations or regulatory programs in its 1998
report.

Most of the cost- benefit analysis experts that we consulted during our
review indicated they would have preferred that OMB provide an independent
estimate of regulatory costs and benefits and not simply transcribe the
estimates provided by federal agencies and others. In particular, the
experts believed OMB should have adjusted EPA's Section 812 report estimate
of the benefits associated with the Clean Air Act instead of using the
unadjusted estimate that dominated the benefits estimate in OMB's 1998
report. Although the legislative history of the statutory provisions that
established the reporting requirements is limited and does not demonstrate
the intent of Congress in enacting these provisions, the comments of some
individual Members of Congress

Chapter 6 Conclusions

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indicated that they wanted OMB to provide an independent regulatory
accounting statement. Specifically, they said OMB should adjust published
estimates of benefits and costs where necessary to reflect the agency's best
professional judgment regarding those estimates.

In some cases, OMB used its professional judgment and adjusted the published
estimates that it used to produce its estimates of total regulatory costs
and benefits. For example, in the 1997 report, OMB subtracted $10 billion
from Hopkins' $81 billion estimate of the efficiency losses associated with
economic regulations to account for deregulatory actions that took place
after the estimate was published. OMB performed the same adjustment in its
1998 report but did not include the efficiency loss estimate in its summary
of total regulatory costs. OMB also monetized some of the agencies'
quantified estimates for individual rules before using them to develop the
total cost and benefit estimates for the 1998 report.

However, OMB did not materially adjust any of the published cost or benefit
estimates from federal agencies- most notably EPA's Section 812 report
estimates and the agencies' estimates for individual rules. Although many of
the cost- benefit analysis experts said OMB should have adjusted the
agencies' estimates, they also recognized that OMB faced political
constraints in doing so. Specifically, they noted that OMB is part of the
administration that issued those estimates and therefore would find it
politically difficult if not impossible to disagree with those estimates in
a report to Congress.

OMB has a responsibility under Executive Order 12866 to review the agencies'
estimates of the costs and benefits of proposed and final rules before they
are published in the Federal Register. Similarly, with the Executive Order
establishing OIRA as the “repository of expertise on regulatory
issues,” OMB had a responsibility to provide EPA with its expert
opinions during the development of the cost and benefit estimates in EPA's
Section 812 report. However, after their publication, those rules and
reports (and their associated estimates of costs and benefits) represent the
administration's policy positions. OMB, as part of the administration and
particularly as the staff office to the President responsible for regulatory
policy, cannot realistically be expected to alter or dispute the
administration's own estimates of regulatory costs and benefits in a public
report to Congress. Doing so would also unilaterally substitute OMB's
judgment for the mutually agreed upon results of its consultations with the
agencies during the review process or, in the case of the section 812
report, reverse the judgment of EPA's Science Advisory Board.

Chapter 6 Conclusions

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If Congress wants a truly independent analytic perspective on executive
branch agencies' regulatory costs and benefits, it may have to assign that
responsibility to individuals or organizations located outside of the
executive branch. One such organization could be the Congressional Office of
Regulatory Analysis (CORA) that Congress considered establishing last year.
Under that proposed legislation (H. R. 1704), CORA would provide a report to
Congress on each major rule providing an independent perspective on the
rules' costs, benefits, and net benefits. The proposed legislation also
would have required CORA to provide an annual report including estimates of
the total costs and benefits of all existing federal regulations. Although
the proposed legislation would not have required CORA to assess the direct
and indirect costs and benefits of federal regulation on particular sectors
of the economy or to provide recommendations for reform or elimination of
existing rules, such additional responsibilities could be added to future
legislation if Congress believes them desirable.

Another way to obtain an independent perspective of executive branch
agencies' regulatory costs and benefits is to look to organizations outside
of government that are already engaged in the types of analyses that
Congress envisioned. For example, according to the AEI- Brookings Joint
Center for Regulatory Studies' mission statement, the Joint Center will
publish an annual report that will include “an independent assessment
of both the total and marginal costs and benefits of federal regulation,
broken down into useful categories.” The Joint Center also intends to
publish objective analyses of selected forthcoming regulations, and
recommendations for modifications or elimination of existing rules based on
their benefits and costs.

An independent perspective on regulatory costs and benefits from outside of
the executive branch could be either a substitute for the current OMB
requirement or a supplement to that requirement. Requiring an independent
perspective in addition to the existing OMB requirement could be a
considerable duplication of effort, with both organizations obtaining
information from regulatory agencies. However, a somewhat similar dual-
track process is currently in place in the federal budgetary process, with
both OMB and the Congressional Budget Office providing independent estimates
of federal revenues, spending, and budget deficits or surpluses. Federal
regulatory agencies and OMB may be prompted to develop better estimates
knowing that another entity outside of the administration will be providing
an independent perspective.

Chapter 6 Conclusions

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Regardless of which entity provides those estimates, agreement is needed
among all parties regarding the types of regulations that should be included
and other methodological issues. Agreement on these issues can prevent (or
at least lessen) disputes regarding the accuracy of such estimates after
they are developed. For example, the experts we consulted generally
suggested focusing on the costs and benefits of health, safety,
environmental, and other social regulations, and tallying economic and
transfer rules separately. Other issues in need of agreement include whether
(and if so, how) reductions in mortality risks should be monetized, whether
agencies' assumptions should be standardized to permit interagency and
interrule comparisons of regulatory costs and benefits and the degree to
which regulatory costs and benefits should be disaggregated to allow the
relative net benefits of regulatory programs to be compared. Also, although
cost- benefit analysis is conceptually a valuable tool in regulatory
decisionmaking, the results of any such analyses must be carefully examined
to ensure that the estimates are properly developed, and care must be
exercised in using any such estimates in public policy decisionmaking.
Finally, whatever entity is charged with the responsibility of providing
this kind of independent analysis of regulatory costs and benefits, those
analyses will be most useful to policymakers if the entity has sufficient
resources to do a proper job.

It is politically difficult for OMB to provide Congress with an independent
assessment of executive branch agencies' regulatory costs and benefits. If
Congress wants an independent assessment, it may wish to consider assigning
that responsibility to an organization outside of the executive branch. That
organization could include a congressional office of regulatory analysis,
which would have to be established, or an organization outside of the
federal government.

On April 7, 1999, we met with the Acting Administrator of OIRA and other OMB
staff to discuss a draft of this report, and we had subsequent discussions
with OIRA regarding its views on the draft report. OIRA stated that the
draft report reflected a substantial amount of work on our part, and that it
raised a number of useful analytical issues regarding how regulatory
benefits and costs can most appropriately be estimated and reported.

However, OIRA stated that it disagreed fundamentally with several of the
statements attributed to the experts in the report. OIRA particularly noted
that, at a number of points throughout the draft report, we quoted one or
more experts who expressed strong opinions about what they believe Matter
for

Congressional Consideration

Comments and Our Evaluation

Chapter 6 Conclusions

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OMB should have done in reviewing and evaluating agencies' cost- benefit
analyses. OIRA fundamentally disagreed with these statements, which it said
reflect a significant misunderstanding of OMB's role in developing,
overseeing, and coordinating the administration's regulatory policies. OIRA
said it analyzes and evaluates agency work products and works with them to
develop better quality analyses, evaluations, and policies. It said the role
of OMB is not to play “gotcha” with the agencies but to work
cooperatively with them, ensuring that their economic estimates are accurate
and that administration policies and programs are faithfully executed.

We believe that OIRA's comments regarding OMB's role buttresses our
conclusions and our matter for congressional consideration. It is
politically difficult for OMB to disagree publicly with agencies' statements
of regulatory policy, particularly because OIRA staff typically participate
in developing those policies. The experts that we consulted indicated that,
to be responsive to the statutory requirement, OMB should have adjusted
agency cost- benefit estimates that it believed were in error. However, the
experts also recognized the political constraints inherent in OMB's role of
supporting the administration's position and initiatives, particularly when
operating under an executive order that has as one of its stated objectives
“to reaffirm the primacy of Federal agencies in the regulatory
decision making process.”

OIRA also pointed out that it had provided original, updated, and more
refined estimates of the costs and benefits of regulations and regulatory
programs, which the experts had evidently overlooked. In addition, OIRA
noted that EPA's Section 812 report had been peer reviewed by the EPA
Science Advisory Board's Council on Clean Air Act Compliance Analysis and
that OMB had reported its concerns with some of the assumptions behind the
estimates and had used the benefits estimate to establish an upper bound for
the governmentwide estimate.

OIRA's statement that the experts overlooked original, updated, and more
refined estimates of the costs and benefits for regulations and regulatory
programs is not entirely correct. As we noted in the draft report, OMB did
make some changes to published cost or benefit estimates to derive the
governmentwide estimate in its 1998 report. However, OMB did not adjust the
benefits estimate in the Section 812 report that constituted more than 90
percent of the governmentwide estimate. Neither did OMB adjust any of the
agencies' cost or benefit estimates in relation to the second statutory
requirement regarding rules with $100 million in increased costs. Also, we
noted in the draft report that EPA's Section 812 report had been peer

Chapter 6 Conclusions

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reviewed by EPA's Science Advisory Board and that OMB reported its concerns
with some of the assumptions behind the report's estimates.

OIRA stated that Congress recognized, when it directed OMB to prepare these
reports, that OMB would be relying for the most part on existing, available
information, including the agencies' cost- benefit analyses. OIRA therefore
believes that OMB presented Congress with the estimates that Congress had
directed it to prepare. However, OIRA did not specifically comment on our
matter for congressional consideration.

Contrary to OIRA's assertion, neither the statutory language that required
OMB to provide the 1997 and 1998 reports to Congress nor the limited
legislative history of these provisions specifies that Congress expected OMB
to rely on existing information to prepare its reports on the costs and
benefits of federal rules. Although some individual Members of Congress
indicated that OMB should simply compile existing information about
regulatory costs and benefits, other Members said OMB should supplement that
information where needed and provide an “independent assessment”
of the effects of federal regulation.

OIRA offered comments on several additional points in the draft report. For
example, OIRA disagreed that the recommendations that OMB provided in the
1998 report were simply a recitation of initiatives that had previously been
put forward by the agencies. OIRA said they were major administration
initiatives and met the statutory requirement that OMB provide
recommendations. OIRA also offered suggestions to improve the presentation
of certain issues, which we incorporated into this report as appropriate.
For example, OIRA noted that some of the experts were critical of OMB for
not assigning a dollar value to the costs and benefits of certain rules, but
pointed out that OMB had, in fact, monetized some of the agencies'
estimates. We agreed to add a footnote to the experts' comments noting that
OMB had assigned monetary values to some of these estimates.

We also obtained comments on the draft report from six of the seven
costbenefit analysis experts that we consulted on the draft report. (Portney
said he was unable to review the draft because of time constraints.) In
general, the experts said the report accurately reflected their statements.
However, some of them suggested particular clarifications or modifications
to their statements and bibliographic references, which we incorporated
where appropriate.

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Appendix I Individual Views of Members of Congress Regarding Regulatory
Accounting Requirements

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As pointed out in the body of this report, the legislative history of the
regulatory accounting provisions that required OMB to provide the 1997 and
1998 reports is of limited value in determining how Congress intended for
OMB to carry out its responsibilities. However, several Members of Congress
expressed their individual views regarding these requirements during floor
consideration of the legislation. For example, on September 11, 1996,
Senator Ted Stevens (the sponsor of the first regulatory accounting
provision) said “OMB should use the valuable information already
available, and supplement it where needed” when preparing the
estimates of total annual costs and benefits called for in subsection 645(
a)( 1). He also said that “( w) here agencies have, or can produce,
detailed information on the costs and benefits of individual programs, they
should use it. I expect a rule of reason will prevail.”

On September 12, 1996, Senators John Glenn and Carl Levin also discussed
their views regarding subsection 645( a)( 1). Senator Glenn said OMB should
compile “existing analyses and estimates of regulatory costs and
benefits.” He said that the sponsors of the amendment “are aware
of OMB's resource constraints and intend that the report be based on a
compilation of existing information, rather than new analysis.”
Senator Levin said the amendment would ask OMB to “come up with its
best estimate” of the costs and benefits of regulatory programs, but
he noted that the amendment

“does not require OMB to conduct new studies or analyses or develop
new data or information. That would be a time- consuming, and expensive use
of taxpayer money. . . . (T) his amendment simply directs OMB to put
together the already available information that it has on existing Federal
regulatory programs and use that to estimate the total annual costs and
benefits of each.”

Similarly, on September 30, 1996, Senator William V. Roth, Jr. said OMB
“should draw upon the wealth of studies and reports already
done” to generate the estimate of total costs and benefits. However,
he also said that “( w) here there are gaps, OMB must supplement
existing information. To conserve its resources, OMB should issue guidelines
to the agencies to gather the needed information, as OMB does for the fiscal
budget process.” He also said OMB should “quantify costs and
benefits to the extent feasible, and provide the most plausible
estimate.”

In relation to the requirements in subsection 645( a)( 2), Senator Levin
said that “reporting on the costs and benefits of major rules is
expected to require no more than reporting, in an organized and readable
manner, the cost- benefit analyses of the major rules in effect that were
already done prior to promulgation.” However, he also said that
“( t) o the extent there is

Appendix I Individual Views of Members of Congress Regarding Regulatory
Accounting Requirements

Page 61 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

updated information that would change the estimates in those analyses, such
updates should be included in this part of the report if it is
available.”

Regarding the requirements in subsection 645( a)( 3) for an assessment of
the direct and indirect impact of the rules on different sectors, Senator
Stevens said he believed that regulation “creates a drag on real
wages, economic growth, and productivity,” and that OMB “should
discuss the serious problem of unfunded Federal mandates and inform
Congress” about the problem. However, he also said that “OMB
should use available information, where relevant, to assess the direct and
indirect effect of federal rules.” Senator Levin said the assessment
of impacts

“is intended to be a narrative discussion of OMB's opinion on this
subject. It does not require additional information gathering; rather, the
intent, here, is that the Director use the information contained in the
report on the costs and benefits of Federal regulatory programs and describe
the expected impacts of such programs on State and local governments,
business, and individuals.”

Senator Glenn said the recommendations for reform required by subsection
645( a)( 4) should include programs that should be eliminated or altered
because they are too burdensome “as well as programs that should be
strengthened to more effectively implement public policy.” Senator
Roth said that OMB should “highlight those programs or program
elements that are inefficient, and it should provide recommendations to
reform them.”

Overall, Senator Stevens said he expected OMB to produce “a credible
and reliable picture of the regulatory process- a picture that highlights
the costs and benefits of regulatory programs and that allows Congress to
determine which programs and program elements are working well, and which
are not.” Likewise, Senator Roth said OMB “must provide Congress
with a credible and reliable accounting statement on the regulatory process.

The legislative history accompanying the second set of reporting
requirements in section 625 of the fiscal year 1998 appropriations act is
even more limited than for the first requirements. However, during Senate
consideration of the legislation on July 17, 1997, Senator Fred Thompson
expressed his support for the new requirements and suggested that certain
information sources be used (e. g., existing studies by nonfederal experts
and agencies' cost- benefit analyses conducted under Executive Orders 12291
and 12866). He said “regulatory accounting should not create a
resource drain for OMB. OMB should issue guidelines requiring the agencies
to compile needed information, just as OMB does in the fiscal budget
process.” In relation to the requirement in subsection 625( a)( 1)
that

Appendix I Individual Views of Members of Congress Regarding Regulatory
Accounting Requirements

Page 62 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

OMB estimate total annual costs and benefits, Senator Thompson said OMB
should “do its best to estimate and quantify that figure on the cost
side,” and explain what benefits are being achieved for those costs.
Where agencies such as EPA can provide detailed information on particular
programs, he said OMB should make full use of this information. In relation
to subsection 625( a)( 3) requirement to assess the direct and indirect
effect of federal rules, Senator Thompson said OMB need not “devote
vast resources” to the development of complex economic models, but
rather “may use available reports, studies, and other relevant
information. . . .” In particular, he said OMB should discuss the
“serious problems posed by unfunded federal mandates for State, local
and tribal governments.”

Senator Thompson also offered some specific suggestions regarding what costs
and data should be included in OMB's reports. First, he said OMB should
estimate the total costs of paperwork, including tax paperwork. Second, he
said OMB's estimate of indirect effects should include costs associated with
product bans and marketing limitations; the benefits associated with
preservation of endangered species; and the impact of regulation on wages,
innovation, employment, and income distribution. To do these analyses, he
said, OMB could leverage the expertise and resources of other agencies,
especially the President's Council of Economic Advisors. Finally, Senator
Thompson said OMB's recommendations to improve the regulatory process and
particular programs and regulations “do not have to be based on
perfect empirical data.”

On October 29, 1997, Senator Thompson and Senator Stevens, acting as the
Chairmen of the Senate Committees on Governmental Affairs and
Appropriations, respectively, sent a letter to the Director of OMB saying
that the first regulatory accounting report was “an important
foundation for improving the regulatory system.” However, they also
said they believed there were several opportunities for improvement. First,
they recommended that the report adhere to the specific statutory
requirements by recommending improvements and assessing the indirect impacts
of federal regulation. Second, they said the report should more fully
implement the legislation, breaking down costs and benefits by program or
program element where feasible and estimating transfer costs and the costs
of all paperwork requirements, including tax paperwork. Finally, the
Chairmen said OMB should “exercise leadership to assure the quality
and reliability of information reported” by, among other things,
providing an “independent assessment” of the information
provided by the agencies. They said OMB staff should be directed to
“critique the quality of the Congressional Responses to

OMB's Initial Regulatory Accounting Reports

Appendix I Individual Views of Members of Congress Regarding Regulatory
Accounting Requirements

Page 63 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

estimates provided to them, not to simply compile data presented by the
agencies.”

On the same day, Representatives Thomas J. Bliley, Jr. and David McIntosh,
the Chairmen of the House Committee on Commerce and the House Committee on
Government Reform and Oversight's Subcommittee on National Economic Growth,
Natural Resources, and Regulatory Affairs, respectively, wrote a similar
letter to the OMB Director. They said the OMB report fell short of their
expectations in that it (1) did not fully comply with specific statutory
requirements (e. g., lacked recommendations); (2) reflected a narrow
interpretation of the congressional mandate (e. g., provided estimates for
only a small number of major rules issued during the previous fiscal year);
(3) revealed the lack of any systematic approach to collecting, analyzing,
and reporting data on regulatory impacts; and (4) failed to reflect the
leadership role that Congress intended OMB to play. In relation to the last
point, they said “Congress expected OMB to assure the reporting of
meaningful information and provide an independent assessment of regulatory
effects,” not merely to perform the “ministerial function of
reporting information provided by other agencies.

On August 28, 1998, Representative McIntosh provided his Subcommittee's
comments on OMB's August 1998 draft report. He said the Subcommittee
continued to have some of the same concerns mentioned in its October 1997
letter and said it was difficult to believe that OMB could not recommend any
regulatory programs for reform or elimination other than electricity
restructuring. He also said that OMB should have monetized costs for all
rules issued by independent regulatory agencies and should have sought out
research or reports on the direct and indirect impacts of federal rules on
the private sector, state and local governments, and the federal government.

On October 10, 1998, Senators Thompson and Stevens, again acting as the
Chairmen of the Senate Committees on Governmental Affairs and
Appropriations, respectively, also provided comments on OMB's August 1998
draft report. They said they remained concerned that OMB had “not
sufficiently used its expertise” in the draft report, and said OMB
should not simply compile data presented by the agencies but should
synthesize and evaluate the information “and provide an independent
assessment.” They indicated that OMB should prepare its best estimates
of costs and benefits in the aggregate and for individual rules and programs
and compare those estimates with agency estimates. In particular, they noted
that OMB did not provide an independent assessment of EPA's estimates of the
costs

Appendix I Individual Views of Members of Congress Regarding Regulatory
Accounting Requirements

Page 64 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

and benefits of the Clean Air Act. They also said that OMB should have done
more to provide recommendations for the reform or elimination of federal
rules, and “provide guidance on programs where the costs outweigh the
benefits using its best judgment and input from regulatory scholars.

Appendix II Biographical Information of Regulatory Experts

Page 65 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Robert W. Crandall is a senior fellow in the Economic Studies Program at the
Brookings Institution, Washington, D. C., where he has worked since 1978. He
is a former deputy director of the Council on Wage and Price Stability
during the Ford and Carter administrations, and a former faculty member at
the Massachusetts Institute of Technology, the University of Maryland, and
George Washington University. He also has been a consultant to the
Environmental Protection Agency (EPA), the Antitrust Division of the Federal
Trade Commission, and the Treasury Department. He has written widely in such
fields as antitrust, the automobile industry, competitiveness, deregulation,
environmental policy, mergers, regulation, and telecommunications policy.

An Agenda For Federal Regulatory Reform, with Christopher DeMuth, Robert W.
Hahn, Robert E. Litan, Pietro S. Nivola, and Paul R. Portney (Washington, D.
C.: American Enterprise Institute for Public Policy Research and the
Brookings Institution, 1997).

Regulating the Automobile, with Howard Gruenspecht, Ted Keeler and Lester
Lave (Washington, D. C.: Brookings Institution, 1986).

“What Ever Happened to Deregulation?” in David Boaz (ed.)
Assessing the Reagan Years (Washington, D. C.: Cato Institution, 1988).

Economic Deregulation and Customer Choice: Lessons for the Electric
Industry, with Jerry Ellig (Center for Market Processes, George Mason
University, 1997).

Robert W. Hahn is director of the American Enterprise Institute (AEI)
Brookings Joint Center for Regulatory Studies, Washington, D. C. He is also
a resident scholar at AEI and a research associate at Harvard University. He
also served as a senior staff member of the President's Council of Economic
Advisers for 2 years and has served as a consultant to government and
industry on a variety of issues involving regulation and privatization. His
research interests include the reform of regulation in developed and
developing countries and the design of new institutions for reforming
regulation.

“The Costs and Benefits of Regulation: Review and Synthesis,”
with John A. Hird, Yale Journal on Regulation (Vol. 8, No. 1 (Winter 1991)).

Improving Regulatory Accountability, with Robert E. Litan, (Washington, D.
C.: AEI and the Brookings Institution, 1997). Robert W. Crandall

Selected Publications Robert W. Hahn Selected Publications

Appendix II Biographical Information of Regulatory Experts

Page 66 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Risks, Costs, and Lives Saved: Getting Better Results from Regulation (ed.),
(Washington, D. C.: Oxford University Press and AEI Press, 1996).

“Regulatory Reform: Assessing the Government's Numbers” in
Revising Regulatory Reform: A Global Perspective, (AEI- Brookings
Institution, forthcoming).

“Policy Watch: Government Analysis of the Benefits and Costs of
Regulation,” Journal of Economic Perspectives (Vol. 12, No. 4 (Fall
1998)).

Thomas D. Hopkins is Interim Dean of the College of Business and Arthur J.
Gosnell Professor of Economics at the Rochester Institute of Technology in
Rochester, NY. He is also Adjunct Fellow for the Center for the Study of
American Business, Washington University, St. Louis, MO. From 1975 to 1984,
he served on the staff of the Council on Wage and Price Stability and as
Deputy Administrator of the Office of Information and Regulatory Affairs in
the Office of Management and Budget. His published work includes a series of
policy projects for the Organization for Economic Cooperation and
Development, the Regulatory Information Service Center, and the Small
Business Administration.

“Regulatory Costs in Profile,” Policy Study 132 (St. Louis:
Washington University, Center for the Study of American Business, Aug.
1996).

“Progress in Developing Standards for Review of Government
Regulations,” Business & the Contemporary World (Vol. IX, No. 4
(1997)).

“OMB's Regulatory Accounting Report Falls Short of the Mark,”
Policy Study 142, (St. Louis: Washington University, Center for the Study of
American Business, Nov. 1997).

“Regulatory Costs in Profile,” Policy Sciences (Vol. 31, No. 4
(Dec. 1998)). Lester B. Lave is University Professor and the Higgins
Professor of Economics in the Graduate School of Industrial Administration
and professor of engineering and public policy in the College of Engineering
and Public Policy at Carnegie Mellon University, Pittsburgh, PA. He has
consulted to EPA, the Office of Safety Administration, and other federal
agencies on the theory and application of cost- benefit analysis.

Benefit- Cost Analysis in Environmental, Health, and Safety Regulation: A
Statement of Principles, with Kenneth J. Arrow, Maureen L. Cropper, George
C. Eads, Robert W. Hahn, Lester B. Lave, Roger G. Noll, Paul R. Thomas D.
Hopkins

Selected Publications Lester B. Lave Selected Publications

Appendix II Biographical Information of Regulatory Experts

Page 67 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Portney, Milton Russell, Richard Schmalensee, V. Kerry Smith, and Robert N.
Stavins (Washington, D. C.: AEI, 1996).

“Benefit- Cost Analysis: Do The Benefits Exceed the Costs?” in
Robert W. Hahn, ed., Risks, Costs, and Lives Saved: Getting Better Results
from Regulation (Washington, D. C.: Oxford University Press and AEI Press,
1996).

Robert E. Litan is the codirector of the AEI- Brookings Joint Center for
Regulatory Studies and serves as director of Economic Studies Program and
Cabot Family Chair in Economics at the Brookings Institution. He has served
as deputy assistant attorney general in the Antitrust Division of the
Department of Justice, as Associate Director of the Office of Management and
Budget, and as a regulatory and legal staff specialist for the President's
Council of Economic Advisors. He has also consulted for numerous
organizations, public and private, and testified as an expert witness in a
variety of legal and regulatory proceedings.

Reforming Federal Regulation, with William D, Nordhaus (New Haven, Ct.: Yale
University Press, 1983).

An Agenda For Federal Regulatory Reform, with Robert W. Crandall,
Christopher DeMuth, Robert W. Hahn, Pietro S. Nivola, and Paul R. Portney
(Washington, D. C.: American Enterprise Institute for Public Policy Research
and the Brookings Institution, 1997).

Paul R. Portney is president of Resources for the Future, Washington, D. C.
He was previously the organization's vice president and director of its
Center for Risk Management and its Quality of the Environment Division. He
also has been a visiting professor at the graduate school of public policy
at the University of California at Berkeley and a visiting lecturer at
Princeton University's Woodrow Wilson School. He previously served as chief
economist at the Council of Environmental Quality in the Executive Office of
the President, as a member of the Board on Environmental Studies and
Toxicology of the National Research Council, and as a member of the National
Oceanic and Atmospheric Administration's Panel on Contingent Valuation. From
1994 to 1997, he was a member of the Executive Committee on EPA's Science
Advisory Board and was chairman of the Board's Environmental Economics
Advisory Committee.

“Economics and the Clean Air Act,” Journal of Economic
Perspectives (Vol. 4 (1990), pp. 173- 181). Robert E. Litan

Selected Publications Paul R. Portney

Selected Publications

Appendix II Biographical Information of Regulatory Experts

Page 68 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Benefit- Cost Analysis in Environmental, Health, and Safety Regulation: A
Statement of Principles, with Kenneth J. Arrow, Maureen L. Cropper, George
C. Eads, Robert W. Hahn, Lester B. Lave, Roger G. Noll, Milton Russell,
Richard Schmalensee, V. Kerry Smith, and Robert N. Stavins (Washington, D.
C.: AEI, 1996).

Murray Weidenbaum is the Mallinckrodt Distinguished University Professor and
Chairman of the Center for the Study of American Business at Washington
University in St, Louis, MO. Before joining Washington University, he served
as Corporate Economist at the Boeing Company. He was Assistant Secretary of
the Treasury for Economic Policy during the Nixon administration. In 1980,
he chaired the Task Force on Regulatory Reform for President- Elect Ronald
Reagan. In 1981 and 1982, he was Chairman of the Council of Economic
Advisers, and subsequently served as a member of the President's Economic
Policy Advisory Board.

Government- Mandated Price Increases (Washington, D. C.: AEI, 1975). The
Cost of Federal Regulation of Economic Activity, with Robert DeFina
(Washington, D. C.: AEI, 1978).

“Regulatory Process Reform,” Regulation (Winter 1997). A New
Approach to Regulatory Reform (St. Louis: Washington University, Center for
the Study of American Business, 1998). Murray Weidenbaum

Selected Publications

Appendix III Rules Meeting Specific Statutory Requirements for OMB's 1997
Report

Page 69 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Section 645( a) of the Treasury, Postal Services and General Government
Appropriations Act for fiscal year 1997 required the Office of Management
and Budget (OMB) to estimate 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” in a report to Congress. In its September 30,
1997, report, OMB interpreted this requirement broadly to include all final
rules promulgated by an executive branch agency and reviewed by OMB's Office
of Information and Regulatory Affairs (OIRA) between April 1, 1996, and
March 31, 1997, that met any of the following:

ï¿½ Rules designated as “economically significant” under section
3( f)( 1) of Executive Order 12866;

ï¿½ Rules designated as “major” under 5 U. S. C. 804( 2); and

ï¿½ Rules designated as meeting the threshold under title II of the Unfunded
Mandates Reform Act (2 U. S. C. 1531- 1538).

A rule could meet one or more of these criteria and not have a gross annual
effect on the economy of $100 million or more in increased costs. For
example, a rule may be economically significant because it has a $100
million beneficial effect on the economy, or because it has material effect
on a sector of the economy, the environment, or state or local governments.

Table III. 1 lists the 20 rules that OIRA reviewed during the 1- year time
frame that we determined had met the specific requirements of the statute-
i. e., rules that the agencies believed were likely to have a gross annual
effect on the economy of $100 million in increased costs. Ten of the rules
were “social” regulations (which include environmental, health
and safety rules) and 10 were “transfer” rules (which involve
payments from one group to another that redistribute wealth).

Two of these rules were not included in OMB's 1997 report to Congress but
met OMB's criteria for inclusion in its report: (1) the Department of
Veterans Affairs' rule on disability compensation and (2) EPA's rule on
control of air pollution for new gasoline spark- ignition marine engines.

Appendix III Rules Meeting Specific Statutory Requirements for OMB's 1997
Report

Page 70 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Type of rule Department

or agency Rule Costs (millions/ year) Benefits

(millions/ year)

Conservation Reserve Program- Long Term Policy

$970 $2,200 Department of Agriculture

Pathogen Reduction: Hazard Analysis and Critical Control Point (HACCP)
Systems

$100-$ 120 $70-$ 2, 800 Department of Health and Human Services

Regulations Restricting the Sale and Distribution of Cigarettes and
Smokeless Tobacco to Protect Children and Adolescents

$180 $9,900-$ 11,000 Department of Labor Occupational Exposure to

Methylene Chloride $110 $90 Accidental Release Prevention Requirements: Risk
Management Programs Under Clean Air Act Section 112( r)( 7)

$100 $170 Regulation of Fuels and Fuel Additives: Certification Standards
for Deposit Control Gasoline Additives

$150 $120-$ 350 Acid Rain Program; Nitrogen Oxides Emission Reduction
Program

$190 $430-$ 2,000 Motor Vehicle Emissions Federal Test Procedure Revisions

$200-$ 250 $130-$ 760 Control of Air Pollution From New Motor Vehicles and
New Motor Vehicles Engines: Voluntary Standards for Light- Duty Vehicles

$640 $230-$ 1,000 Social

rules Environmental Protection Agency

Control of Air Pollution: Final Rules for New Gasoline Spark- Ignition
Marine Engines; Exemptions for New Nonroad CompressionIgnition Engines at or
Above 37 Kilowatts and Nonroad Spark- Ignition Engines at or Below 19
Kilowatts

$270 $$ 150-$ 680

Table III. 1: Rules Likely to Have Gross Impact On Economy of $100 Million
in Increased Costs

Appendix III Rules Meeting Specific Statutory Requirements for OMB's 1997
Report

Page 71 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Food Stamp Program: Certification Provisions of the Mickey Leland Childhood
Hunger Relief Act

$7-$ 207 Department of Agriculture

Food Stamp Program; Child Support Deduction $125-$ 145 Medicaid Program:
Limitations on Aggregate Payments to Disproportionate Share Hospitals;
Federal Fiscal Year 1996

$1,105 Individual Market Health Insurance Reform; Portability From Group to
Individual Coverage; Federal Rules for Access in the Individual Market;
State Alternative Mechanisms to Federal Rules

$50-$ 200 Medicare Program; Physician Fee Schedule Update for Calendar Year
1997 and Physician Volume Performance Standard Rates of Increase for Federal
Fiscal Year 1997

$250 Department

of Health and Human Services

Medicare Program; Inpatient Hospital Deductible and Hospital and Extended
Care Services Coinsurance Amounts for 1997

$610 Department of Justice Inspection and Expedited

Removal of Aliens; Conduct of Removal Proceedings; Asylum Procedures

$205 Transfer

rules a Department of Veterans Affairs

Compensation for Disability Resulting From Hospitalization, Treatment,
Examination, or Vocational Rehabilitation

$166.5-$ 504.3 Departments of Health and Human Services, Labor and the
Treasury

Interim Rules for Health Insurance Portability for Group Health Plans

$50-$ 200

Appendix III Rules Meeting Specific Statutory Requirements for OMB's 1997
Report

Page 72 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Social Security Administration Supplemental Security

Income; Determining Disability for A Child Under Age 18

$90-$ 185 a According to OMB, transfer rules are payments from one group to
another that redistribute wealth. Therefore, OMB said, there are no real
costs to society as a whole; the "benefits" of these rules are equal to the
"costs."

Source: Regulatory Information Service Center and Federal Register.

Appendix IV Rules Meeting Specific Statutory Requirements for OMB's 1998
Report

Page 73 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Section 625( a) of the Treasury and General Government Appropriations Act
for fiscal year 1998 required OMB to estimate 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” in a report to Congress. In
its February 5, 1999, report, OMB interpreted this requirement broadly to
include all final rules promulgated by an executive branch agency and
reviewed by OIRA between April 1, 1997, and March 31, 1998, that met any of
the following:

ï¿½ Rules designated as “economically significant” under section
3( f)( 1) of Executive Order 12866;

ï¿½ Rules designated as “major” under 5 U. S. C. 804( 2); and

ï¿½ Rules designated as meeting the threshold under title II of the Unfunded
Mandates Reform Act (2 U. S. C. 1531- 1538).

A rule could meet one or more of these criteria and not have a gross annual
effect on the economy of $100 million or more in increased costs. For
example, a rule may be economically significant because it has a $100
million beneficial effect on the economy or because it has material effect
on a sector of the economy, the environment, or state or local governments.

Table IV. 1 lists the 22 rules that OIRA reviewed during the 1- year time
frame that we determined had met the specific requirements of the statute-
i. e., rules that the agencies believed were likely to have a gross annual
effect on the economy of $100 million in increased costs. Thirteen of the
rules were “social” regulations (which include environmental,
health and safety rules) and nine were “transfer” rules (which
involve payments from one group to another that redistribute wealth).

Appendix IV Rules Meeting Specific Statutory Requirements for OMB's 1998
Report

Page 74 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Type of rule Department

or agency Rule Costs (in millions) Benefits

(in millions)

Department of Agriculture Environmental Quality Incentives

Program $200 $290 Department of Energy Energy Conservation Program for

Consumer Products: Energy Conservation Standards for Refrigerators,
RefrigeratorFreezers, and Freezers

$260 $700-$ 760 Department of Health and Human Services

Quality Mammography Standards a $40 $200-$ 280

Department of Labor Respiratory Protection $120 $590-$ 2,700 Departments of
Health and Human Services, Labor and the Treasury

Interim Rules for Mental Health Parity $464 Not

estimated Emission Standards for Locomotives and Locomotive Engines b

$80 $230-$ 900 Control of Emissions of Air Pollution from Highway Heavy-
Duty Engines

$140 $220-$ 990 Effluent Limitations Guidelines: Pulp and Paper $250 $10-$
250 National Emission Standards for Hazardous Air Pollutants for Sources
Category: Pulp and Paper Production

$120 ($ 970)-$ 1,100 Standards of Performance for New Stationary Sources and
Emission Guidelines for Existing Sources: Hospital/ Medical/ Infectious
Waste Incinerators

$71-$ 146 Not estimated

National Ambient Air Quality Standards for Particulate Matter $17,000
$11,000-

$59,000 Social

rules Environmental Protection Agency

National Ambient Air Quality Standards for Ozone $4,500 $770-$ 4,300

Table IV. 1: Rules Likely to Have Gross Effect on the Economy of $100
Million in Increased Costs

Appendix IV Rules Meeting Specific Statutory Requirements for OMB's 1998
Report

Page 75 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Addition of Facilities in Certain Industry Sectors, Toxic Chemical Release
Reporting, Community Right- to- Know

$143-$ 226 Not estimated

Child and Adult Care Food Program: Improved Targeting of Day Care Home
Reimbursement

$857-$ 876 Department of Agriculture

Amendments to the Peanut Poundage Quota Regulations d Medicaid Program;
Coverage of Personal Care Services $340-$ 1,540 Medicare Program; Changes to
the Inpatient Prospective Payment Systems and Fiscal Year 1998 Rates

$6,000 Medicare Program; Fee Schedule for Calendar Year 1998; Payment
Policies and Relative Unit Adjustments

$160-$ 780 Medicare Program; Limit on the Valuation of a Depreciable Asset
Recognized as an Allowance for Depreciation and Interest After Change of
Ownership

$91-$ 114 Medicare Program: Schedule of Limits on Home Health Agency Costs
Per Visit for Cost Reporting Periods Beginning on or after October 1, 1997

$570 Department

of Health and Human Services

Medicaid Program: State Allotment for Payment of Medicare Part B Premiums
for Qualifying Individuals: Federal Fiscal Year 1998

$200-$ 400 Transfer

rules c Department of Justice Affidavit of Support on Behalf of

Immigrants $301-$ 1,701 a Although the annualized costs for this rule is
less than $100 million, according to the agency, initial

costs will exceed $100 million and then decrease. This rule is also an
unfunded mandate. b Although the annualized costs for this rule are less
than $100 million, according to the agency there

are a number of years where the associated costs will be more than $100
million. In addition, this rule is an unfunded mandate. c According to OMB,
transfer rules are payments from one group to another that redistribute
wealth.

Therefore, OMB said, there are no real cost to society as a whole; the
"benefits" of the rules are equal to the "costs." d The cost estimate for
this rule is reported only in the aggregate. The total cost associated with
the

Amendments to the Peanut Poundage Quota Regulations are $1. 75 billion
(1996- 2002). In order to compare and summarize the annual costs of all the
rules, the cost associated with this rule will not be included.

Source: Regulatory Information Service Center and Federal Register.

Appendix V Major Contributors to This Report

Page 76 GAO/ GGD- 99- 59 Analysis of OMB's Cost and Benefit Reports

Curtis W. Copeland, Assistant Director, Federal Management and Workforce
Issues Steven G. Lozano, Evaluator- In- Charge Joseph L. Santiago, Senior
Evaluator

Joseph D. Kile, Assistant Director Alan K. Belkin, Assistant General Counsel
General Government

Division Office of the Chief Economist

Office of the General Counsel

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