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John D. Graham, Ph.D.
Office of Information and Regulatory Affairs
Office of Management and Budget
Executive Office of the President of the United States

Speech to the Harvard University Kennedy School of Government Workshop,
“Performance-Based Regulation: Prospects and Limitations
in Health, Safety, and Environmental Protection”
Washington, DC

May 13, 2002

I would like to introduce the session today with the following thought question: “Why would any clear thinking President ask a senior OMB official with a modest staff of 40 professionals to oversee the entire federal regulatory state?” Let me suggest, at the outset, that any such effort might justly be considered hopeless.

First, there are over 100 federal agencies and subagencies with regulatory mandates from Congress. They churn out 4,500 new rules each year. The 40 OMB professionals are obviously outnumbered by the thousands of regulatory specialists in the agencies.

Second, a wise regulatory system requires specialized expertise on a remarkable variety of subjects: agriculture, telecommunications, occupational safety and health, energy production and conservation, environmental protection, law enforcement, medicine and health care systems, and so forth. The responsible federal agencies have experienced professionals in each of these fields; the expertise at OMB is more limited.

Third, once a regulatory proposal is formally submitted to OMB, there is already powerful organizational momentum behind the proposal. Not only have agency staff devoted potentially years of work to data collection and analysis; policy officials at agencies may have managed delicate relationships among stakeholders. At this stage, OMB review is destined to make waves and bruise egos, which means that it will be resisted, sometimes fiercely and effectively.

Finally, it is sometimes argued that Congress, through legislative mandates and oversight, instructs or guides the efforts of agencies. From this perspective, any OMB “influence” in this bilateral relationship might be seen as extra-legal or even a perverse influence in democracy. And of course there is the cynical view that OMB is simply the place where nefarious deals are cut in the interests of lobbyists wearing alligator shoes and Rolex watches.

Not surprisingly, I do not share these views that Presidential management of the regulatory state is hopeless or perverse. I share the vision of Supreme Court Justice Stephen Breyer who described an experienced cadre of civil servants in the Executive Office of the President who have broad expertise in the craft of regulatory policy. Although I am not sure that the British or French civil service are exactly the right analogies, I do have in mind a talented and analytically keen staff who know how markets work, how government works, and respect the role of expertise and values in solving national problems.

I think the following empirical fact is instructive: Every President since Richard Nixon, Democrat and Republican, has insisted on some type of centralized management of the regulatory state. The common theme has been professional analysis of regulations to make sure they are sensible. President George Herbert Walker Bush, when frustrated by his inability to confirm a nominee to the post I now hold, created an entirely new structure in the White House to serve roughly the same function. I refer to the Council on Competitiveness run by Vice President Dan Quayle. Given this history, it is instructive to consider why Presidents are so determined to manage the regulatory state.

First, the federal regulatory state is here to stay. Although economic regulation has seen much privatization over the last 20 years, the public and Congress have revealed a growing commitment to public health, safety and environmental regulation. Market-based approaches to social regulation have shown tremendous promise but citizens expect leadership from the federal government on issues of social regulation. There is certainly an urgent need to consult with state and local officials and respect the role of federalism in our national system of government. Indeed, my boss, Mitch Daniels, has instructed me that I should return to agencies any rule that does not have adequate consultation with our intergovernmental partners. But we should also not forget that Alexander Hamilton was an important framer of our Constitution and he recognized the value of a strong central government and the weaknesses in the original Articles of Confederation.

Second, the economic costs of the regulatory state are substantial, exceeding $800 billion according to one recent estimate prepared for the Small Business Administration. Note that this figure is larger than the discretionary federal budget and the figure translates into an average annual cost of almost $8,000 per household. Although many rules have enormous benefits for households, there is real concern that these dollars are not always invested wisely. Certainly, no one would suggest that agencies should be permitted to negotiate their “on-budget” resources from Congress, without a check from OMB. Likewise, Presidents realize that regulatory expenditures, while off budget, require fiscal restraint for the same reasons that public budgets need restraint.

Third, when two or more agencies disagree about a regulatory matter, the President needs an experienced unit to forge a consensus so that governance can proceed. OMB often plays that role in the regulatory arena. Right now, for example, OMB is working with EPA and DOE and other White House offices to devise a legislative strategy to promote cleaner power generation in America.

Finally, Presidents use the powers of OMB regarding agency action to advance Administration priorities and policy objectives. President Reagan pursued an agenda of regulatory relief as one way to nurture a depressed economy riddled by the misery index: double-digit rates of inflation, unemployment, and interest. President Clinton used centralized review to promote a wide range of social objectives such as tobacco and firearms control and children’s health. We should remember that OMB is an office within the Executive Office of the President and its actions necessarily reflect Presidential priorities.

In this Administration, OMB’s regulatory office is pursuing an agenda of smarter regulation. Despite what some of our critics charge, there is no grandiose plot to roll back safeguards or attempt an across-the-board sunset of existing regulations. What the President seeks is a smarter regulatory process based on sound science and economics: a smarter process adopts new rules when market and local choices fail, modifies existing rules to make them more effective or less costly, and rescinds outmoded rules whose benefits no longer justify their costs. We are pursuing this agenda under the terms of the Clinton-Gore executive order, which we believe – though not always enforced in the 1990s– is based on sound principles and procedures.

The changes we are making at OMB are not headline-grabbers: No far-reaching legislative initiatives, no rhetoric-laden executive orders, and no campaigns of regulatory relief. Yet we are making some changes that we believe will have a long-lasting impact on the regulatory state.

First, we have taken steps to enhance the openness of OMB’s regulatory review process, building upon the steps taken by my predecessors, especially Wendy Gramm and Sally Katzen. Through the Internet, it is now possible for the public to scrutinize how we use science and economics to stop bad rules and help agencies craft better ones. We are also an active partner in a multi-year effort to link my office to E-government. There may always be a need to hold some candid deliberations in the secluded quarters of the Old Executive Office Building. I certainly do not believe that the Executive Office of the President can operate in a fishbowl. However, I do believe that more openness at OMB about regulatory review will enhance public appreciation of the value and legitimacy of a centralized, analytical approach to regulatory policy.

Second, we are hiring the first scientists and engineers at OIRA to accompany a cadre of economists, statisticians, and information technology specialists. We believe this more diversified pool of expertise will enable us to ask better questions about agency proposals. We have reversed the 20-year decline in staffing at OIRA and have done so in a way that reflects the increasing importance of science-based regulation in the federal agencies.

Third, we have sent clear signals to agencies that we care about regulatory analysis, QUALITY regulatory analysis. We are using both the carrot and the stick. The carrot we have offered is more deferential OMB review of proposals that agencies have voluntarily subjected to independent peer review. Administrator Whitman’s recent decision on arsenic, whether you like it or not, was supported by just that type of review. The Bush Administration recognizes that we should consider and account for the consensus views of the leadership of the scientific community, regardless of whether it leads to a pro- or anti- regulation result. The stick has been a revival of the dreaded “return letter”. In the last three years of the Clinton Administration, there were exactly zero return letters sent to agencies for poor quality analysis. I have signed more than a dozen such return letters in the last six months and they are available for scrutiny on OMB’s web site. Recently we have witnessed some agencies simply withdrawing rules rather than face a public return letter. Knowing that we care, agencies are beginning to invite OMB into the early stages of regulatory deliberations, where our analytical approach can have a much bigger impact.

Fourth, we have demonstrated that we are prepared to initiate new regulatory actions when they are sensible and based on sound science and economics. I am not simply talking about the series of new rules aimed at protecting homeland security, including airline safety, food safety, and immigration control. Indeed, many of these proposals will require a serious analytic look before they are cleared. We have also devised a modest tool called the “prompt letter” that enables OMB to publicly identify areas where agencies might improve regulatory policies. Our first four prompt letters, available on OMB’s web site, address potential opportunities to save lives and improve health through cost-effective regulation.. One OMB letter has accelerated FDA’s deliberations on a rule that would require labeling of foods for their trans-fatty acid content, an important risk factor for coronary heart disease. Another OMB letter to OSHA has stimulated a national information program to promote workplace use of automatic defibrillators, a technology that saves lives from sudden cardiac arrest and is already found in airports and federal buildings. A recent letter to NHTSA requires that priority be given to a rulemaking to test cars and light trucks in offset crash tests, an approach that may reduce the frequency and severity of lower extremity injuries in car crashes. And our most recent letter, to EPA, has encouraged targeted research to better understand the health benefits of reducing different types of particle pollution from power plants, industry, and motor vehicles. Unlike the more definitive Presidential directive, the prompt letter is a public request that is intended to stimulate agency and public deliberation. Final decisions about priorities remain with the agencies.

The prompt letter is not simply a pro-regulatory tool; we will be using it to encourage agency efforts to streamline the regulatory process. We do not believe that across-the-board reviews of all existing rules are a cost-effective use of agency resources; yet we have sought public comment and learned of 70 targeted suggestions to modify or rescind existing rules. We will be sharing these ideas with agencies through our forthcoming annual report on regulatory policy. We are also encouraging interested parties to prepare additional nominations for the public comment process on next year’s annual report on the costs and benefits of regulation.

Finally, and perhaps most importantly, we are developing government-wide guidelines to promote better quality in the information and technical data that agencies collect, use and disseminate to the public. The guidelines were mandated by Congress and shaped pursuant to the Paperwork Reduction Act. When agency information forms the basis of important public policies, we go beyond the standard of journal peer review and require that such data be reproducible, or at least highly transparent about research design, data sources, and analytic methods. When people are harmed by poor quality information, the OMB guidelines provide new avenues for citizen complaints, agency corrections, and formal appeals processes to resolve disputes. Each agency will be preparing information-quality guidelines that OMB will review over the next year. OMB and agencies will continue to reach out to the scientific communities to assist in this process. We urge you to participate in this process because we believe it has tremendous potential to enhance the competence and accountability of the regulatory state.

Thank you very much for the opportunity to speak today and I look forward to some questions, comments and discussion.