March 24, 1999 | Testimony on Regulation
the Subcommittee on National Economic Growth,
Natural Resources and Regulatory Affaris - Committee
on Government Reform - United
States House of
Mr. Chairman, Members of the Committee: Thank you for inviting me to testify on the Regulatory Right to Know Act of 1999 (H.R. 1074). I am Angela Antonelli, Director of The Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. The Heritage Foundation is a privately supported nonprofit educational, public policy research organization that receives no funds from government at any level. My testimony before you today reflects my own views and not necessarily those of The Heritage Foundation.
I will present some brief remarks, but ask that my full statement be placed in the hearing record.
Mr. Chairman, I applaud you for your continued commitment to making the federal regulatory system-its more than 55 agencies, 125,000 rule-writers, and $17 billion budget-accountable to the American people for the more than 4,000 final rules they produce each and every year. Since 1995, Congress has taken a number of important steps to demand accountability and common sense in how the federal government regulates and empower the public to play a more informed role in shaping the federal government's regulatory priorities. But, as a January 1999 report by the General Accounting Office (GAO) reminds you, Congress cannot escape some blame for creating the burden and complexities of the current system. Such a report simply underscores the need for Congress to give itself and the public more and better information on the need for and consequences of regulation.
The Regulatory Right to Know Act of 1999 represents an important step in that direction. It proposes to make permanent a report by the White House's Office of Management and Budget (OMB), for which Congress asked in each of the past three fiscal years (1997-1999). Congress asked the OMB to report on the total costs and benefits of federal regulation, provide estimates of the costs and benefits of major rules (annual economic impact of $100 million or more), examine the direct and indirect impact of rules on the private sector and state and local governments, and provide recommendations for the reform or elimination of federal regulatory programs.
Congress asked for these reports because the "public has a right to know about the costs and benefits of federal regulatory programs" and, empowered with that information, could more effectively hold regulators accountable for improving efforts to protect the public health, safety, and the environment. Indeed, after three years and two reports to Congress, those who have long supported the need for some basic system of regulatory accounting can take comfort in knowing that the OMB's reports to date demonstrate that such accounting not only is possible, but also has the potential to become an extremely useful tool for policymakers who seek to make regulatory investments in a way that maximizes benefits while minimizing costs, thereby achieving the greatest levels of protection possible for the money spent.
Why Regulatory Right to Know Is Important
The health of our country's economy and, even more important, the desire to achieve the highest levels of investments in public health, safety, and environmental protections demand that Congress empower itself and the public with the information and analysis about the benefits and consequences of federal regulations or regulatory programs. As one recent study notes, "[R]egulations can become an obstacle to achieving the very economic and social well-being for which they are intended." Until Congress and the public demand more information and accountability from regulators in order to engage them in a debate about regulatory priorities and spending in the same way we do about the annual federal budget, not much change can or should be expected. Such a proposal as the Regulatory Right to Know Act of 1999 represents an effort to bring the hidden costs and benefits of regulation into the sunlight so that the public and its representatives can be better informed about the less-than-obvious impacts of regulations and do a better job of establishing regulatory priorities and spending.
Environmentalists, consumers, and others will cry, like Chicken Little, that the sky will fall because of this proposal. Ironically, they conveniently now will argue that the public's right to know-to have more information instead of less-actually threatens the public's health and well-being. Indeed, many of these groups are interested in preserving and defending the current system. But what are they really defending? Bureaucracies that are accountable to no one; that demand and spend resources as though they were unlimited; and that fail to set priorities. But what are the real costs? A 1994 Harvard University study examines 500 life-saving interventions and concludes that we save 60,000 lives a year less than we should because of our inability to set priorities to protect the public from the most serious risks it faces. The real costs are the lives that could have been saved but were not-because we were denied information that could have helped us to see what needed to be done versus what felt good to do.
More information and analysis of the impact of regulations, whether it be proposals to add new regulations or those to eliminate or modify existing regulations (and the information and analysis required must be identical for all of these types of proposals), would help Congress and further empower the public to debate and decide the best allocation of national resources. I strongly believe that a more informed, democratic process ultimately will give us a country capable of devoting more, not fewer, resources to the types of policies that will save more lives, improve the quality of our lives and our environment, and allow us to be more prosperous.
Such proposals as the Regulatory Right to Know Act of 1999 are intended to give Congress and the public the very best information and analysis available about important decisions affecting our health and prosperity. I think most Americans would consider it risky and dangerous to the future of their children if you rejected research, analysis, and information that would empower Congress and American families to work smarter and achieve higher levels of protection and a better quality of life for every dollar spent.
Regulatory Right to Know: Building on Lessons Learned
The Regulatory Right to Know Act of 1999 is a good proposal that responds to a number of important and valuable lessons learned by Congress and the public based on two annual OMB reports on the costs and benefits of regulation:
Lesson #1: Aggregate costs and benefits are not nearly as important as the assessment of the costs and benefits of individual rules. As the OMB itself has noted, the "devil is in the details" and this means examining individual regulations. Although all studies may suggest that, in the aggregate, benefits outweigh costs, what is more useful is the study that not only reviews the aggregate but also contributes to an understanding of individual regulations and whether each regulatory action in and of itself generates more benefits than costs. In the case of the Environmental Protection Agency's (EPA) Section 812 Clean Air Act report, as the OMB points out, the "monetized benefit estimates associated with reducing exposure to fine particulate matter (PM) account for 90 percent of the total estimated benefits" (p. 29). What this suggests is twofold:
Much of the benefit of the Clean Air Act over the past 20 years now is to be derived from the EPA's latest and most controversial rule-making on particulate matter; and By extension, many of the other Clean Air Act regulations issued over the past 20 years often had costs than far exceeded their benefits.
The EPA's study of the Clean Air Act over the past 20 years would be of far greater credibility and value if it made an effort to accomplish the very thing the Clinton Administration repeatedly has indicated is more important than just producing aggregate cost and benefit estimates: an examination of individual regulations to determine what regulatory actions produce significant benefits and which are less successful. It is precisely for this reason that the findings of a study by Robert Hahn of the American Enterprise Institute are much more useful to policymakers than the EPA Section 812 study. The Hahn updated study included by the OMB reviews 106 regulations and, as the OMB notes, concludes that "not all agency rules provided net benefits. In fact, less than half of all final rules provided benefits greater than costs...a few rules provided most of the net benefits" (p. 25). This is precisely the type of detailed information that regulators and policymakers need if they strive to make better decisions in the future.
Lesson #2: The independent regulatory agencies issue rules that have costs (and benefits) even if the OMB does not review them. In response to public comment, the OMB includes in its second report a review of economically significant rules covered by the Congressional Review Act and the Unfunded Mandates Reform Act. In doing so, the OMB acknowledges that such independent regulatory agencies as the Federal Communications Commission and the Securities and Exchange Commission issue major rules. Indeed, during 1997, approximately one-third of the major rules issued were from these two agencies alone. The OMB currently does not review rules issued by independent regulatory agencies, regardless of their costs and benefits. Nevertheless, the purpose the OMB's report on the costs and benefits of regulation is to address both in the aggregate and individually the costs and benefits of all federal regulations. To the extent that many independent agencies fail to do benefit-cost analysis, the OMB should develop its own estimates and not continue to ignore the economic impact of such rules as it does in its second annual report with the statement,
Since we have used a criterion of using only agency or academic peer reviewed estimates, we conclude that the 41 GAO reports contain no information useful for estimating the aggregate costs and benefits of regulation [p. 62].
If the OMB continues to refuse to provide the analysis, Congress should make sure that independent agencies develop the capabilities to evaluate the benefits and costs of their rules systematically before imposing them on an unsuspecting public.
Lesson #3: Agencies lack consistency in their benefit-cost methods. Although it is true that it is no easy task to go about estimating the "impact of regulations on society and the economy," many of the estimation challenges that the OMB faces reflect the huge inconsistencies in methods used across federal agencies in benefit-cost analyses. A May 1998 GAO report confirms the wide variation in agency economic analyses. If the OMB's current Best Practices guidelines for benefit-cost analysis were enforced, many of these problems would have been mitigated long ago. Congress should do nothing to interfere with efforts to promote greater, more consistent use of the Best Practices guidelines. There is no reason that agencies cannot follow one set of guidelines. The continuing inconsistency in benefit-cost methods reflects the fact that neither the President nor Congress has demanded any better from the agencies.
Lesson #4: Regulators have incentives to understate costs and overstate benefits. In its second annual report, the OMB includes some retrospective cases studies. They highlight how important it is for agencies to be held accountable for reevaluating individual regulations and regulatory programs to determine whether they achieved the benefits intended and at what cost. One should not find it surprising that, when an agency is interested in justifying a regulatory action, overstated benefits and understated cost estimates often result. This suggests that agencies must undertake such retrospective studies more routinely and use them to inform future decisions and to consider reforming or eliminating some existing programs.
Lessons #5: Because regulators are self-interested, independent review is essential. The OMB must do what Congress intended when its assigned this report to it and offer its own independent, professional judgment about the consistency, quality, and validity of agency benefit and cost estimates. In addition, in the absence of agency estimates, the OMB should provide its own estimates and/or incorporate any third-party studies on the direct or indirect impact of such rules. As part of the executive branch, however, it may never be possible for the OMB to offer an independent review of agency analyses; thus the necessity to ensure that any OMB report be subject to outside, independent review as well as public comment. The OMB must be thorough in summarizing and presenting both the comments of the any independent reviewer(s) and the public in any final report to Congress. There has been concern about the failure of the OMB to be sufficiently responsive to public comments in the issuance of its final reports.
Lesson #6: The OMB and the regulators have the responsibility for developing recommendations for regulatory reform. In response to public comments, the OMB's second annual report includes recommendations for the reform of certain regulatory programs, such as food safety, airbags, drug labeling, and so forth. Initially, the OMB took the position of including only those recommendations suggested to it by the public. The only problem with this approach is that the OMB and the regulatory agencies have far more expertise and experience that the average American about how effectively regulatory programs function. The OMB and the regulatory agencies must take responsibility for providing the public with policy recommendations for public comment. In addition, I would suggest, too, that there is no particular reason that Congress also would not want the public to know not only about efforts to reform or eliminate regulatory programs or rules but also any initiatives on the part of agencies to expand or add new regulatory programs and provide the public with an opportunity to comment on those proposals as well.
Lesson #7: The OMB and the regulators are not necessarily interested in presenting information to Congress and the public in a way that will be useful or helpful. Not surprisingly, just as self-interested agencies have incentives to understate costs and overstate benefits, they also have incentives to avoid accountability whenever possible. Thus, it should come as no surprise that the OMB's reports to Congress have not presented information in the most easy-to-digest manner. For example, in its second annual report, the OMB makes no real effort to
Summarize net benefits (that is, to do the math) for most of its aggregate estimates or the estimates of individual rules; Present a summary table that compares trends from year to year (would not put 1998 estimates side by side with 1997 estimates of the benefits and costs of regulation); and
Give little, if any, economic context to the either the benefits or costs of regulation. This last omission is perhaps the most serious flaw. For example, put in its proper context, such as relative to gross domestic product, the EPA 812 benefit estimates suggest that the annual economic benefits of the Clean Air Act alone exceeds that of the economic output of the agriculture, forestry, fishing, and health care industries of the United States. To its credit, the OMB in its second annual final report does point out that
the expected value of the estimated monetized benefit for 1990 is $1.25 trillion per year. This estimate implies that the average citizen was willing to pay over 25 percent of her personal income per year to attain the monetized benefits of the Clean Air Act [p. 26].
When put in this context, such estimates are understandably subject to a more critical eye.
Congress must work with the OMB to ensure that the information provided is as easily digestible and understandable to the average American as it can be. Regulators, serving as employees of the American people, have the fundamental responsibility to explain how rules impact individuals, households, businesses, and state and local governments in ways so that, ultimately, the American people can decide what their national priorities and spending will be.
Mr. Chairman, let me conclude by again congratulating you and your colleagues on both sides of the aisle for understanding the importance of the public's right to know more about the benefits and costs of regulation. The Regulatory Right to Know Act is a good step in the right direction because it (1) builds on the previous accounting statements; (2) makes such an accounting statement permanent so that the federal regulators start taking it seriously and know they will be held accountable each year; and, most important, (3) empowers the public to debate more effectively regulatory priorities and spending in the same way they debate federal budget priorities and spending each year by more effectively linking the two together. I hope Congress will continue to build on this framework in the years to come. The public stands only to benefit by improving the ability of our federal regulatory system to establish more effective regulatory priorities to improve our country's investments in public health, safety, and the environment while maintaining a strong economy.
Thank you, Mr. Chairman. I would be happy to answer any questions.
Angela Antonelli is a former Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation