Dear John:
Enclosed are my comments on the report by the Office of
Management and Budget (OMB) entitled "Draft Report to Congress on
the Costs and Benefits of Federal Regulations," made available
through a notice published in the Federal Register on
January 7, 2000 (65 FR 1295-1296). OMB's draft third report to
Congress on the costs and benefits of federal regulation is
required by Section 638(a) of the 1999 Omnibus Consolidated and
Emergency Supplemental Appropriations Act. These comments reflect
my own opinion and do not necessarily reflect those of The Heritage
Foundation.
OMB is once again to be commended for its efforts. Each report
has generated considerable debate about whether OMB can or should
function as an objective critic of agencies' analyses or simply
should compile and report the agencies' data. Regardless of how OMB
chooses to define its role, each report builds on the previous one
and, in doing so, helps academics and other interested parties
contribute to expanding our base of knowledge about the types and
impacts of federal regulations. This is a primary goal of this
report to Congress. OMB's reports demonstrate that such accounting
is not only 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.
My comments are submitted to OMB with the intention of helping
to develop the most comprehensive and methodologically sound report
possible based on available information. However, I must state
clearly that I believe that the report made available to the public
is not a complete report for purposes of public comment. First, the
guidelines for agencies to standardize measures of the costs and
benefits and format for the accounting statement (required in
Section 638(c) ) also should be made available to the public for
comment. Second, in this year's report, Congress for the first time
also required an "independent and external review" of the
guidelines to standardize measures of costs and benefits and the
format of the accounting statement as well as a review of the
accounting statement itself (required in Section 638(d)). OMB
states in its draft report that it interpreted this requirement to
select "independent and external experts in the economics of
Federal regulation to peer review this draft report."
Because the peer review process and the public comment process
are simultaneous and not sequential, the public is denied the
ability to make its own judgement as to the balance in the
selection of peer reviewers and to comment on the conclusions of
these OMB-selected "experts" about the guidelines and this draft
report. Unlike privately peer reviewed scientific journals, federal
regulatory policymaking should not be dictated or
disproportionately influenced by a handful of experts selected by
an agency. The public through Congress ultimately has the right to
determine through it activism or its silence whether or not
government policies are acceptable.
In the future, I would strongly urge OMB to provide to the
public for comment a complete report only after it has been
subjected to peer review. The report should contain a list of the
peer reviewers and a summary of their conclusions. The public then
will have all the information to which it is rightly entitled to
comment on this report.
Sincerely,
Angela M. Antonelli
Director
Thomas A. Roe Institute for
Economic Policy Studies
The Heritage Foundation
Attachment
Comments on the
Office of Management and Budget's Draft Report to Congress on the
Costs and Benefits of Federal Regulation, Third Edition, 2000
Submitted by
Angela M. Antonelli
February 22, 2000
OMB's Third Report to Congress on the Costs and Benefits of
Federal Regulation demonstrates that such accounting is not only
possible, but also has the potential to become an extremely useful
accountability tool to help the public and Congress ensure that
regulatory decisions and their investments maximize benefits while
minimizing costs and achieve the greatest levels of protection for
the money spent.
LESSON LEARNED FROM OMB'S 2000 DRAFT
REPORT
In reviewing this draft report, there are several important
lessons learned:
Lesson #1: Aggregate costs and benefits of rules are not
nearly as important as the assessment of costs and benefits of
individual rules. OMB acknowledged this important lesson in its
first report in 1997, but has since tried to make this point less
obvious because it reflects poorly on regulatory choices and
investments made to date. In 1997, OMB stated that "the substance
is in the details, not in the total," (p. 21), which means
examining individual regulations.
One should not find this de-emphasis surprising in OMB's
subsequent reports. In its 1998 report, it significantly revised
its aggregate cost and benefit estimates by including the
Environmental Protection Agency's (EPA) Section 812 report. At that
time, the vast majority of public commenters expressed serious
reservations about the methodological soundness of the estimates.
By including this estimate in its report -- suggesting that Clean
Air regulations were responsible for the vast majority of benefits
of all regulation -- it began to throw into question the rest of
the regulations issued by EPA and other agencies. Indeed, it
increasingly looked as if most regulations actually have costs that
exceeded benefits. A 1999 report by Robert Hahn of the American
Enterprise Institute, entitled "Regulatory Reform: Assessing the
Government's Numbers," recently concluded that all EPA rules
promulgated between 1982 and mid-1996 under other environmental
statutes, such as the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA), the Clean Water Act
(CWA), the Toxic Substances Control Act (TSCA), and the Federal
Insecticide, Fungicide, and Rodenticide Act (FIFRA) have negative
net benefits. (See Hahn, p. 10).
In the 2000 report, OMB has still included EPA's Section 812
report estimates of the costs and benefits of the Clean Air Act.
And although OMB has revised downward EPA's benefits estimates from
$3.2 trillion to $1.45 trillion (1997 dollars), the problem still
remains. If these benefit estimates were removed from Table 3 of
the 2000 draft report, it becomes very obvious that the costs and
benefits of regulation are much closer. As Hahn points out in his
1999 study, it also is likely that most benefits come from just a
handful of other regulations, namely safety regulations issued by
the Department of Transportation. The need for many other rules
becomes highly questionable.
Lesson #2: Agencies lack consistency in the their
benefit-cost methods of analysis. Although it is true that is
it no easy task to estimate the impact of regulation on society and
the economy, the OMB acknowledges that the estimate challenges it
faces reflect the huge inconsistencies in methods used by agencies
in developing benefit-cost analyses. The 2000 report does little to
overcome this problem, which has long been recognized by the
regulatory experts and the General Accounting Office, (See GAO's
Regulatory Reform: Agencies Could Improve the Development
Documentation and Clarity of Regulatory Economic Analyses,
GAO/RCED-98-142, May 1998).
If OMB's current Best Practices guidelines for
benefit-cost analysis were enforced by OMB with the agencies, many
of the "apples and oranges" problems that OMB repeatedly speaks of
would have long ago been mitigated. Hopefully, OMB will do a better
job working with agencies in implementing the new guidelines
developed pursuant to Section 638(a) of the 1999 Omnibus
Consolidated and Emergency Supplemental Appropriations Act intended
to standardize estimates of costs and benefits.
Lesson #3: The OMB is not inclined to present information to
Congress and the public in a way that be the most helpful or
useful. OMB's 2000 report to Congress does not present
information in the most easy-to-digest manner. For example, the OMB
makes no real effort to:
- Summarize net benefits (that is, do the math) either for its
aggregate estimates or estimates of individual rules;
- Present a summary table that compares trends from year to year
(that is, does not compare 1998 estimates with 1997 estimates of
the benefits and costs of regulation); and
- Provide much, if any, economic context to either the benefits
or costs of regulation.
In addition, the 2000 report fails to provide the public with
any information about the guidelines being developed, who OMB
selected to peer review the guidelines, and who the peer reviewers
are for the draft report, or provide a summary of their
comments.
Lesson #4: There are a lot of rules that OMB has not
considered, such as those of independent regulatory agencies, that
have costs and benefits and should be counted. The omissions
have become even more glaring since 1997. In the second report in
1998, OMB acknowledged that independent regulatory agencies, such
as the Federal Communications Commission and the Securities and
Exchange Commission, also issue major rules, and even though OMB
does not review them, these rules still have costs and benefits to
be considered. OMB was too narrowly construing congressional
intent. In 1998, OMB only gave lip service to the major rules
issued by independent regulatory agencies and no data were provided
because data was not prepared by the agencies. Although OMB could
have gone to agencies and asked for better information, it made no
effort to do so.
In the 2000 report, OMB included Table 7 which highlights the 24
major rules issued by independent regulatory agencies. Again, OMB
has done nothing to shed any additional light on the costs and
benefits of these rules and thus the aggregate estimates do not
include them.
In the 2000 report, the OMB makes it clear on page 23 just how
few rules are included in its estimates of the benefits and costs
of this year's major rules (April 1, 1998 through March 31, 1999).
The 44 rules it examines represent far less than the more than
4,700 final rules issued during that time period. And about
one-half of the 44 have no cost or benefit information that allow
them to be considered in the aggregate estimates.
Since OMB's first report in 1997, federal regulatory agencies
have issued more than 15,000 final rules. OMB's annual reports have
captured less than 100 of them. Although OMB claims on page 23 that
the rules it considers "represent the vast majority of the costs
and benefits of new federal regulations during this period," it
really has no way of knowing this given the very small sample it
has considered.
RECOMMENDATIONS FOR IMPROVING OMB'S
2000 DRAFT REPORT TO CONGRESS
Unfortunately, many of the recommendations about OMB's Draft
2000 Report that follow are similar to recommendations made to
improve the usefulness and credibility of OMB's 1998 and 1997
Reports to Congress.
Recommendation #1: OMB should not just present aggregate
estimates of the costs and benefits of social regulation, but also
include in a summary table the aggregate estimates of the costs and
benefits of economic and process regulations. It is a mistake
to separate out the different forms of regulation. Although most of
the costs and benefits of regulation might be derived today from
social regulations, it is critically important to remind the public
and Congress that economic and process regulations have costs
and/or benefits and that these forms of regulations need to be
subjected to as careful scrutiny and analysis as social
regulations. As Table 5 illustrates and page 16 of the report
concludes, the burden of paperwork approaches $190 billion
annually. This cost is in the range of annual total costs of social
regulation, although OMB suggests that there is probably some
degree of double counting here. OMB should do a better job parsing
apart these estimates and reporting them together in a summary
table. For many Americans, as Professor Thomas Hopkins has rightly
noted, regulations often manifest themselves in the form of
government paperwork or red tape.
Recommendation #2: OMB should report best estimates of
aggregate benefits and costs in addition to presenting ranges of
estimates. OMB should use its judgement and its Best
Practices guidelines to either develop the best estimate or to
consult with agencies to develop a best estimate. If OMB did a
better job enforcing its Best Practices and eliminating the
"apples and oranges" problem, it would be better able to do
this.
Recommendation #3: OMB should focus more attention on the
costs and benefits of individual regulations. In Table 4 of the
report, OMB presents the total monetized benefits and monetized
costs of social regulation by agency from April 1995 to March 1999.
It would be far more useful to look within each agency to see how
many individual rules had benefits that exceed the costs. This
would allow a closer examination of the types of rules that
accomplish the most benefits to society and raise questions that
rightly should be raised about the need for other rules. This focus
on individual rules would help policymakers make better decisions
on where to make regulatory investments that will do the most good
for the money spent.
Recommendation #4: OMB should present information in a way
that is more useful to the public. OMB's 2000 report to
Congress does not present information in the most easy-to-digest
manner. For example, the OMB should:
- Summarize net benefits (that is, do the math) either for its
aggregate estimates or estimates of individual rules;
- Present a summary table that compares trends from year to year
(that is, compare 1998 estimates with 1997 estimates of the
benefits and costs of regulation);
- Provide an economic context to either the benefits or costs of
regulation;
- Provide the public with any information about the guidelines
being developed, who OMB selected to peer review the guidelines,
and who the peer reviewers are for the draft report, and provide a
summary of their comments.
Recommendation #5: OMB must do a better job including
estimates of the costs and benefits of rules issued by independent
regulatory agencies and to include in its aggregate totals of the
costs and benefits of regulations all regulations, not just
major rules. As this commenter pointed out in her comments
about OMB's first draft report in 1997, just because OMB does not
review a rule does not mean the rule has no cost. In response to
this, OMB acknowledged the major rules issued by independent
regulatory agencies in its 1998 report to Congress. However, in
1998 and now in 2000, OMB continues to fail to make any effort to
gather better information about these major rules, which can
represent as much as one-third of the major rules issued by
regulatory agencies in a given year.
In addition, since April 1, 1996, federal regulatory agencies
have issued more than 15,000 final rules. OMB has considered just a
small fraction of these rules. Some of the rules excluded could
have annual costs of $90 million or more, yet they fall outside the
definition of a major or "economically significant" rule. OMB needs
to make more of an effort to account for these rules.
On the other hand, OMB should not include benefit-cost estimates
of the EPA's NAAQS for particulate matter and ozone, which was
overturned by the courts and not implemented to date.
Recommendation #6: OMB should be more than just a clerk
reporting the agencies' data on the costs and benefits of federal
regulation to Congress. OMB should provide critical analyses,
consistent with its Best Practices guidelines, about the
strength and weaknesses of agencies' methods for conducting
benefit-cost analysis. OMB should provide the public in this
report its own assessment of how well an agency does its job. For
example, given the considerable controversy about EPA's Section 812
retrospective report, OMB would have well served the public by
providing its own review, even adjusting EPA's estimates as needed,
consistent with its Best Practices guidelines. In addition,
OMB should create some competition among agencies to improve their
analyses by evaluating how effectively each agency conforms with
the Best Practices guidelines, and make this information
available to the public.
Recommendation #7: OMB should do a better job estimating the
impact of regulations on state, local and tribal governments, small
businesses, wages and economic growth. OMB really only gives
lip service to the requirements of Section 638(a)(2), and appears
to narrowly interpret the requirement to only cover the last 4
years.
- State, local and tribal governments. OMB should not be
so lazy and look to a large body of literature on the burden of
federal regulations on state and local governments that served as
an impetus for passage of the Unfunded Mandates Reform Act (UMRA)
of 1995. In addition, the now defunct Advisory Commission on
Intergovernmental Relations (ACIR) produced a draft report in 1996
that reflected extensive input and consultation with state and
local governments about the impact of federal regulations. These
and other reports most certainly can help provide better estimates
of the impact and cost of regulation and to serve to point OMB in
the direction of much needed regulatory reform (as it is asked to
provide in this report). Finally, OMB has had a terrible record of
overseeing agencies' compliance with Title II of UMRA, and this
also has limited OMB's ability to provide more information in this
draft report about the impact of regulations on state, local and
tribal governments.
- Small business. Again, OMB fails to review the body of
literature about the impact of regulation on small businesses. This
includes the works of Professors Thomas Hopkins and Murray
Weidenbaum. In addition, agency regulatory impact analyses (RIAs)
also look at impacts by business size. OMB should begin to keep
track of this information more systematically as part of its
growing database on regulations.
- Impact on Wages. Rather than simply offer vague
observations speculating that social regulation decreases wages and
economic deregulation increases wages, OMB should take a more
careful look at how firms absorb the costs of regulation and what
kind of impacts on productivity (and wages) that result. Again,
there is literature by Professor Wayne Gray and others that can
shed some light on this kind of analysis of the impact of
regulation on productivity and wages.
- Impact on Economic Growth. Again, OMB falls short by
failing to provide any decent, systematic review of the literature
on this subject. And rather than get into an unsubstantiated
discussion and critique of how GDP is measured, OMB should focus
instead on giving the public some basic information, such as what
is GDP, what is the amount of U.S. GDP in 1999, what percent of GDP
does the cost of regulation represent, and a review of the
literature of the effects of regulation on economic growth.
Recommendation #8: OMB should resurrect a review and analysis
of retrospective studies performed either by agencies or third
parties. The review of OSHA, NHTSA and other retrospective
studies in its 1998 Report to Congress was widely viewed as very
helpful to the public and those who commented on the report.
Unfortunately, OMB's 2000 Draft report, while it acknowledges on
page 4 that "the most precise estimates of the costs and benefits
of regulation appear in retrospective studies," does not tell the
public whether any additional retrospective studies have been
conducted by agencies or third parties since the last report. OMB
should make a good faith effort to continue to provide this
information to the public if more up-to-date studies or information
exists.
Recommendation #9: OMB should provide more usable
recommendations to Congress about the reform of existing regulatory
programs. OMB simply presents a short list of 10 initiatives
underway in Chapter IV of the 2000 Draft report. Unfortunately, OMB
fails to give Congress any useful information to help make
important changes that will benefit Americans and improve the
quality of their lives. For example:
- What is the problem with the existing regulatory program?
- What priority should be given to each effort?
- For each agency action mentioned, is the initiative the highest
priority regulatory reform action item for the agency? If not, why
is it included here?
- What kind of benefits and costs are to be saved or generated by
these reform efforts?
- What are some obstacles, if any, to achieving change?
- Are there legislative barriers to change that Congress must
address? What are the benefits of doing so?
In its 1998 Report to Congress, OMB was criticized for failing
to provide more recommendations and more information about those
recommendation. However, it did provide a fairly lengthy report
about one initiative - electricity restructuring. OMB should try to
provide this level of justification for a reform initiative for
many more than just one and to try serve a coordinating function to
establish regulatory priorities within the Administration for
making progress in achieving these reforms.