• Heritage Action
  • Heritage Libertad
  • More

February 22, 2000

The Costs and Benefits of Federal Regulation

By

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.

Heritage's daily Morning Bell e-mail keeps you updated on the ongoing policy battles in Washington and around the country.


The subscription is free and delivers you the latest conservative policy perspectives on the news each weekday--straight from Heritage experts.


The Morning Bell is your daily wake-up call offering a fresh, conservative analysis of the news.


More than 450,000 Americans rely on Heritage's Morning Bell to stay up to date on the policy battles that affect them.


Rush Limbaugh says "The Heritage Foundation's Morning Bell is just terrific!"


Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."


Sign up to start your free subscription today!