The burden of federal regulation on the U.S. economy has often been compared to a tax. From environmental mandates that impose costs on energy production, to Internet restrictions that discourage innovation and investment on the Web, to pharmaceutical controls that slow the introduction of new medicines and increase their prices, the regulatory “tax” impacts nearly every facet of our lives, and is increasing steadily.
Unlike ordinary taxation, however, these regulatory burdens are neither accounted for, nor limited, by any of the budgeting tools available to Congress. Some policymakers would like to change this. Among these is Senator Mike Lee (R–UT), who introduced legislation earlier this year to establish a “regulatory budget” specifically for the costs of red tape.
This well-meaning legislation aims to address a real problem: the growth of regulatory burdens. And the proposed solution of budgeting those costs has a commonsense appeal to it. As John Graham, former head of the regulatory review office in the George W. Bush Administration put it: “Why…should $1 billion in compliance costs on industry (investors, workers and consumers) be treated differently than $1 billion in federal budgetary outlays that are typically financed by taxes?” Supporters argue that a regulatory budget would substantially improve policymaking, forcing Congress to take responsibility for regulatory costs and encouraging regulators to prioritize regulatory activity.
Although the goal is laudable, achieving it would be difficult or impossible. Estimates of regulatory costs are notoriously imprecise. For many rules, no cost estimates are made at all. Moreover, the process would be vulnerable to gaming by those intent on pursuing institutional or personal agendas. Unless resolved, these gaps and flaws in regulatory analysis could easily overwhelm a regulatory budget process, distorting decision making.
Before a regulatory budget can even be considered, significant improvements must be made in how regulatory costs are quantified, to reduce the likelihood of bias and error. Moreover, clear rules under which a budget would operate must be established, to reduce the likelihood of gamesmanship and unintended consequences.
Solutions to the problems with regulatory budgeting are by no means clear. However, regardless of whether a regulatory budget process is an achievable goal, there are a number of reforms consistent with the goals of regulatory budget proposals that should be considered. Among these: expanding cost-benefit analysis to independent agencies, expanding congressional regulatory analysis capabilities, and limiting major rulemaking to regulations in an agenda approved by Congress.
A Brief History of Regulatory Budgeting
Regulatory budgeting is a long-standing, non-partisan idea. Legislation to create a budget for federal regulation was introduced as early as 1978 by Senator Lloyd Bentsen (D–TX). That proposal, structured as an amendment to the Congressional Budget Act, would have required each regulatory agency to report every fiscal year on the cost of complying with its regulations. The President would then, as part of his annual budget submission, have set out a budget for each agency’s rules, indicating the maximum costs of compliance. Congress would then adopt a non-binding resolution setting out maximum costs for all rules.
The legislation went nowhere, stymied in part by doubts about the practicality of quantifying costs. However, the idea has been periodically revived over the years. In 2014, Senator Marco Rubio (R–FL) introduced the National Regulatory Budget Act. This plan would have created a new, independent Office of Regulatory Analysis, charged with estimating the total costs of regulation imposed by each agency of government for every fiscal year.
The Office of Regulatory Analysis would also have been required to publish an estimate of the cost of each new rule proposed by each agency. Based on these cost estimates, Congress would have established a cap on total regulatory expenditures for each agency. An agency that exceeded the cap would not have been able to impose any new rules until it was again in compliance.
Also in 2014, Senator Mike Lee introduced the Regulatory Assessment Act, an updated version of which was introduced in May 2016 as the Article I Regulatory Budget Act of 2016, with Senators Rubio and Mike Enzi (R–WY) as co-sponsors. This bill requires the President to submit to Congress each year (after a five-year phase-in) an estimate of the total cost to the private sector of complying with all “current and proposed Federal regulations.” Using this aggregate figure as a baseline, Congress would establish “the appropriate level for Federal regulatory cost,” which would be allocated by congressional committee, by subcommittee, by program, and by agency. The determination of changes in regulatory cost due to new rules would be made by the Commerce Department’s Bureau of Economic Analysis, although regulatory agencies would apparently still craft the cost-benefit analyses on which such determinations would be made.
None of the proposals described above would net out benefits from regulatory costs. This makes sense from a budgetary perspective: As with fiscal budgets, the resources allocated to a program are the total cost, not the cost minus benefits. The total cost represents the amount of society’s resources spent for the program, leaving to policymakers (and voters) the question of whether the benefits are worth that expenditure.
Potential Benefits of Regulatory Budgeting
Proponents point to a number of benefits that a regulatory budget could provide. Foremost among these, regulatory agencies would have an incentive to prioritize their planned new rules.
“Under a budget,” argues Clyde Wayne Crews of the Competitive Enterprise Institute, “adopting a costly, but marginally beneficial, regulation, will suddenly be irrational.” John Graham foresees a “healthy competition” between agencies developing, leading regulators to “advance the best proposals and drop the weaker ones.” A budget would also, argue Jeff Rosen and Brian Callahan, increase congressional accountability for regulatory policies that lawmakers currently evade. In addition, contends Susan Dudley, regulatory budgeting could “lessen the need for case-by-case oversight” of agency rulemaking because of the internal discipline it would provide.
Which—if any—of these benefits would be realized depends, of course, on the rules under which the regulatory budget operates. Some benefits are mutually exclusive. For instance, would agencies be able to shift rulemaking priorities internally, or would those priorities be set by Congress in the budget, as are line items in fiscal budgets? If regulators are not able to shift priorities, their incentives to avoid non-cost-effective rules would be minimized. If they are able to freely shift priorities, the accountability of Congress would be reduced.
Problems in Quantifying Costs
Regardless of the rules, properly estimating costs is a challenge for regulatory budgeting. Regulatory cost estimates are notoriously inaccurate and imprecise. In fact, there is not even agreement on a universal standard for analyzing regulatory costs in a way that is equivalent to classifying “outlays” or “receipts.”
This lack of reliable numbers is a particular concern with “baseline” estimates of the cost of all rules on the books, the stock of regulations (as opposed to newly adopted rules). Although all the leading proposals require that such baselines be developed, no such aggregate calculation has provided anything but rough estimates.
The most comprehensive estimates have been offered by economists W. Mark Crain and Nicole V. Crain of Lafayette College in a series of reports commissioned initially by the Small Business Administration, and subsequently updated. The latest update, published by the National Association of Manufacturers in 2014, estimated an annual regulatory cost of $2 trillion.
This figure is derived from a broad variety of sources, including public opinion polling and macroeconomic studies. This provides a sense of the scale of regulatory costs, but the patchwork of methodologies provides a far from precise estimate of total regulatory costs, much less year-to-year changes. In fact, most elements of the Crain and Crain calculation do not reflect annual changes in regulatory costs. While it does include the cost of new regulations (if that has been quantified and if they are major regulations), it does not include the increases or decreases in cost that occur each year due to changes in the economy or in technology. That makes it meaningless for use as a budget baseline.
In a more recent study, Bentley Coffey, Patrick A. McLaughlin, and Pietro Peretto of the Mercatus Center calculated the total cost of regulation at $4 trillion each year. But this figure is based upon a model of economic growth in selected industries, with regulation measured by a count of words such as “shall” or “prohibit” in the text of each rule. This is potentially useful for grasping the overall effect of rules on the economy, but does not provide information on the more direct costs.
Even supporters of regulatory budgeting have expressed skepticism as to the practicality of determining the aggregate cost of existing rules. For instance, Susan Dudley, former regulation chief in the George W. Bush Administration, has written that the “task of gathering and analyzing information on the cost of all existing regulations in order to establish a baseline budget would be enormous, and the resulting numbers not very reliable.” The Congressional Research Service has used even stronger terms, saying the problems in estimating the total costs of regulation are “inherent—and potentially insurmountable,” raising “the question of the utility of using such figures in the regulatory reform debate.”
Constantly Changing Costs
The problem with estimating total regulatory costs is not just the tremendous number of regulations—although with the Code of Federal Regulations topping 165,000 pages, that is a formidable obstacle. The problem is exacerbated by the fact that, in a dynamic economy, the impact on the economy of each of the tens of thousands of regulations on the books is constantly changing.
For instance, Federal Communications Commission (FCC) restrictions on how radio spectrum can be used may have imposed negligible costs before cell phones existed. Such rules would impose a crippling burden to the economy today.
Conversely, many rules become less costly with time as one-time capital investments required by a regulation are completed, leaving smaller annual costs. For instance, an auto safety regulation may require that manufacturers develop expensive new technologies. Once the technologies are developed, research and development become sunk costs, with little ongoing expense.
Given the constantly changing effects of the thousands of rules on the books, it is unlikely that policymakers would ever be able to measure—or even identify—their effects. An effort to do so, to use Friedrich Hayek’s term, would be a “fatal conceit” of government. Developing a comprehensive and accurate estimate of regulatory costs, at present, is simply not a realistic goal.
As an alternative to developing a comprehensive baseline estimate of the cost of regulation, some have proposed budgets based only upon incremental year-to-year changes in the regulatory burden. But there are difficulties in scoring even these incremental costs.
Today, the vast majority of the 3,000 or so new rules issued each year undergo no cost analysis, including those with an expected annual impact of less than $100 million, and those by many independent agencies such as the Consumer Financial Protection Bureau (CFPB) and the FCC. The analyses that are done are often woefully incomplete or inaccurate. According to a scorecard on the quality of agency regulatory analyses developed by the Mercatus Center, none of the 130 analyses examined received more than a 2.8 out of a possible 5, meaning each was incomplete in some meaningful way.
Moreover, the analyses are not standardized: Different agencies provide different values for a human life, for instance, making apples-to-apples comparisons difficult. Many analyses provide no estimate in dollar terms of their costs. Monetized cost estimates are frequently a range, rather than a single number. For instance, a January 2016 rule by the Commodities Futures Trading Commission regarding margin requirements for swaps dealers was reported to cost between $290 million and $2.05 billion.
These estimates are also vulnerable to manipulation. Sizeable gray areas allow agencies to control results, ranging from categorizing claimed benefits as “negative costs” to variations in the discount rates they apply. With their authority on the line, the use of creative accounting by regulatory agencies would only grow.
Implementing a regulatory budget without fixing these problems could have serious real-world effects. For instance, inflated cost estimates for proposed rules—or low-balled estimates when final rules are promulgated—would create savings on paper for regulators. This could allow those regulators to spend any “surplus” thus created on even more regulations.
Some may argue that even a budget built on flawed cost estimates is still better than no budget at all. The federal government has been using fiscal budgets for years, although the scoring of federal spending programs is far from perfect. With fiscal budgets, however, there is always some sort of reckoning, as money is either spent or not. With costing of regulation, there is no such tether to the real world, as burdens can be shifted to the private sector, with reckoning put off indefinitely.
Moreover, unlike fiscal budgeting, many costs of regulation simply cannot be meaningfully translated into dollar terms at all. How is lost innovation from Internet regulation to be scored, or the loss of religious freedom in mandating contraception coverage in health insurance? Such costs likely would go unscored, making them “free” to regulators for budget purposes. This would encourage regulators to impose restrictions that are less susceptible to quantification, even if they are in fact more “costly” overall.
The same distortion also could occur if some types of costs are quantified and not others. For instance, as Philip A. Wallach of the Brookings Institution points out, direct compliance costs (such as paperwork burdens) are easier to measure than the opportunity costs of regulation. But any comparisons of regulations based only on compliance costs would lead to sub-optimal decisions. Again, the result would be to nudge regulators towards rules with low direct compliance costs even if the overall burden placed on consumers was higher. For instance, a regulator given a strict budget limit may forgo a rule imposing reporting requirements for a given activity in favor of a complete ban that imposes lower paperwork costs but higher costs overall.
Moreover, implementing a budget process would inevitably remove focus from other necessary and more effective reforms. Similarly, the new budget mechanism could be seen by some as reducing the need for vigilant case-by-case oversight of rulemaking.
Lastly, a regulatory budget could easily be caricatured by pro-regulation advocates as a “green eyeshade” exercise. Regulation advocates could argue that otherwise beneficial rules were being blocked only because of an artificial limit imposed by accountants, rather than on any review of their merits. Faced with such arguments, the supposed solid walls imposed under the budget would not last for long. Just as with the fiscal budget, legislators likely would quickly provide “emergency” resources to get rules in place. Moreover, if the debate over regulatory restraint becomes an argument over meeting dry budget goals over creating real benefits, efforts at limiting even the worst rules would be handicapped.
A variant of incremental budgeting—known as “one-in, one-out”—would allow any new rule to be paired with the repeal of an existing rule of equivalent cost. Such systems are in effect in Canada and in Great Britain (where the rule has been changed to “one-in, two-out”).
This approach may prove useful in managing regulatory activity, and creating incentives for regulators to deregulate as well as regulate. But it does not eliminate the need to estimate costs. Policymakers still need to know that the outgoing rule is equivalent in cost to the incoming rule for it to constrain regulators.
Moreover, despite much touting of the Canadian experience with one-in, one-out, no sizeable regulation has been eliminated thus far. In Canada, the regulations eliminated over the first three years of the program totaled CDN$24 million, of which only CDN$2.7 million was saved during the most recent fiscal year. Britain has seen more success, with a reported net reduction in regulatory costs over the first nine years of the program of £243 million per year.
Any reduction in the regulatory burden would certainly be welcome, but reforms on this scale would hardly be perceptible in the U.S. Moreover, it remains to be seen whether such results, achieved under Britain’s parliamentary government, could be replicated under the U.S. separation of powers system, within which Congress and the Executive Branch may have differing or even conflicting agendas. While potentially useful, one-in, one-out rules are unlikely to provide the antidote to overregulation in the U.S.
Independent Assessment of Costs
If an independent entity, rather than the agency, were tasked with performing the analysis, the danger of gaming estimates could be reduced. This was proposed in the National Regulatory Budget Act.
Establishing an independent cost assessor would, with or without a regulatory budget, do much to reduce the problem of bias in economic analyses of regulations. The assessor would, however, face a daunting task. Preparing a regulatory analysis requires significant expertise in the policy area affected, expertise that resides in the regulatory agencies and the private sector. Replicating that expertise—in everything from air pollution controls to aviation to telecommunications—at a new agency would be a sizable undertaking.
Moreover, the needed resources could not simply be shifted from the agency to the new entity. Agency analyses are far more complex than the mere production of cost and benefit numbers. The analyses also include a review of the need for the rule, examination of alternatives, and a cost-effectiveness assessment, all of which are to be integrated into the agency’s rulemaking process. These functions are an integral part of the rulemaking process, meant to force each agency to consider alternatives to proposed rules.
Other possibilities do exist to reduce agency bias in rulemaking. Sen. Mike Lee’s Article I Regulatory Budget Act of 2016, for instance, tasks the Bureau of Economic Analysis with scoring the official costs of proposed regulations, although it stops short of having them prepare the full cost-benefit analysis. Another approach, put forward by former Office of Management and Budget (OMB) economist Richard Belzer, would be to solicit competing cost analyses from the private sector, leaving OMB or an independent assessor to decide which is preferable.
Regulatory Budgets Not Ready for Prime Time
The imposition of binding regulatory budgets for federal rulemaking is seen by supporters as a way to efficiently limit regulatory costs by creating incentives for policymakers to allocate resources efficiently. Given the limits of policymakers’ ability to quantify regulatory costs, however, regulatory budgeting is unlikely to accomplish these goals. Significant improvements in how the regulatory analyses are done will be necessary before any binding regulatory budget could be implemented.
Such a task will not be easy: The debate over regulatory budgets has gone on for forty years. Despite many refinements in regulatory impact analysis since the late 1970s, the problems remain.
Reforms Worth Considering Now
Nevertheless, a number of possible reforms consistent with the goals of a regulatory budget should be considered regardless of whether a budget is implemented. These include:
- Requiring congressional approval of new major regulations issued by agencies. A formal budget process is not required in order to make Congress accountable for regulatory policies. Congress should be required to approve all major rules before they take effect, as proposed under the Regulations from the Executive in Need of Scrutiny (REINS) Act.
- Making the semi-annual Regulatory Agenda binding. The Unified Agenda of Regulatory and Deregulatory Actions, now submitted semi-annually by the White House, should be submitted to Congress for approval, giving it the force of law. No major rule not included in this document should be allowed to go forward without further action by Congress. This would increase accountability and oversight of the process by Congress, ensuring that significant rulemaking efforts proceed only with the assent of lawmakers.
- Requiring independent agencies to conduct regulatory impact analyses of proposed rules. Today, many of the most active regulatory agencies, including the FCC and the CFPB, conduct no formal analyses of the effects or costs of proposed rules. They should be required to do so.
- Requiring independent analyses of proposed regulations to reduce agency bias. Regulatory agencies should not have a monopoly in assessing the costs and benefits of their own rules. Policymakers should increase the role of independent assessors as a check on agency estimates of regulatory costs.
- Establishing a congressional office of regulatory analysis. Congress currently has little ability to assess the costs or other impacts of regulations proposed by agencies or proposed by legislation in Congress itself. It needs access to independent and professional expertise to make informed decisions on federal rules and their consequences. This could be accomplished by building such a capability within an existing congressional institution, such as the Congressional Budget Office, the Government Accountability Office, or a new unit established by Congress. This new capability need not require a net increase in staff or budget, but could easily be paid for through reductions in existing regulatory agency expenses.
The principle behind budgeting regulations is straightforward, treating federal rules as a major expense imposed on taxpayers. In practice, given the current state of capabilities, regulatory budgeting faces daunting implementation challenges, including resolving long-standing problems with the quality of cost-benefit analyses and the gaming of the cost estimates they provide. If such problems are not resolved, a regulatory budget mechanism could make things worse rather than better.
Addressing these problems is a worthy, but long-term, endeavor. In the meantime, there are a number of other steps that Congress could take to help achieve the goals of regulatory budgeting. Through such steps, policymakers could increase both awareness of regulatory costs and accountability in their consideration, regardless of whether formal budgets are to follow.—James L. Gattuso is Senior Research Fellow for Regulatory Policy, in the Center for Free Markets and Regulatory Reform, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.