PRESIDENTIAL OVERSIGHT OF THE
REGULATORY STATE: CAN IT WORK?

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

Speech at Heinz School, Carnegie Mellon University

October 4, 2002

My topic this afternoon is “Presidential Oversight of the Regulatory State: Can It Work?” Regulation may seem like an abstract concern of interest only to policy wonks, but rules have a big impact on our daily lives.

• What privacy rules must your doctor respect when sharing information about your health with a pharmacist?
• What fuel economy requirements should be applied to the growing number of sport-utility vehicles, pick-up trucks and minivans?
• What financial disclosure requirements should be applied to corporations, especially in the wake of the Enron fiasco and the need for investors to make informed choices?
• What levels of radon should be permitted in drinking water and in indoor air?

We live in a regulatory state and it is reasonable to ask: Who is managing the regulatory state?

The short answer is that the President undertakes such management responsibilities. This begs yet another 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. We currently review 600 of them – 100 formal regulatory analyses.

Second, a wise regulatory system requires specialized expertise on a remarkable variety of subjects: agriculture, telecommunications, occupational safety and health, immigration control, 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, but 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. For example, President Carter, an advocate of stringent regulation and energy controls, when faced with double-digit inflation, issued an executive order that required agencies to conduct cost-benefit analyses of major rules. In late 1980, President Carter signed the Paperwork Reduction Act, which created the Office of Information and Regulatory Affairs, known affectionately as OIRA. OIRA serves as the President’s office of expertise and management of the regulatory state.

During the Reagan Years, OIRA had a stormy relationship with a Democratically controlled Congress. A threat to “zero out” OIRA’s budget was avoided only by a new requirement that the OIRA Administrator be confirmed by the Senate.

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 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. For example, OMB recently worked with EPA and DOE and other White House offices to devise a legislative strategy to promote cleaner power generation in America. It calls for a 70% reduction in the pollutants that form smog and soot in the air.

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. We see this not simply as a slogan but as something very practical: adopting new regulations whose benefits to the public justify their costs, modifying existing regulations to improve effectiveness and/or reduce cost, and rescinding regulations that are outmoded or that should never have been adopted in the first place. Smart regulatory policy is not uniformly pro-regulation or anti-regulation; the science and economics may point in very different directions depending upon the case.

The changes we are making at OMB in pursuit of smarter regulation 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 the regulatory process, including OMB’s regulatory review. My office is involved with the President’s E-government initiative, which will expand the services and information provided by the federal government over the Internet. Part of this increased interactivity is the promotion of e-rulemaking, which will increase public participation in the regulatory process.

Through the Internet, it is also possible for the public to scrutinize how we at OMB use science and economics to stop bad rules and help agencies craft better ones. By consulting our web site, you can learn which rules are formally under review at OMB, which rules have recently been cleared, and which rules have been returned to agencies for reconsideration. You can even learn about which interest groups have recently lobbied us, the date of the meeting, the names of the participants, and the specific topic of the meeting. 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 decision on arsenic last year, 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 roughly 20 such return letters during my tenure thus far, and the letters are available for scrutiny on OMB’s web site. 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. For example, since the events of September 11, we have worked with regulators on 58 new rules aimed at protecting homeland security, including airline safety, food safety, and immigration control.

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 letter to NHTSA suggested 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 another 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.

Finally, and perhaps most importantly, we are taking steps to improve the quality of information and analysis that agencies use and disseminate to the public. Pursuant to the Information Quality Act, OMB issued government-wide guidelines to promote better quality in the information and technical data that agencies collect, use and disseminate to the public. 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 has prepared its own implementing guidelines, which were reviewed by OMB, and the agencies must annually report to OMB on their implementation of the Information Quality Act. Improvements in information quality have tremendous potential to enhance the competence and accountability of the regulatory state.

In summary, the Bush Administration is committed to a strong, centralized approach to regulatory policy. We seek to adopt smarter regulations. The approach is becoming more open, it is becoming more analytical, and it is beginning to exert influence at earlier stages of the regulatory process. Although we certainly have a lot of work to do, I am confident—and after more than a year in this job, convinced—that Presidential oversight of the regulatory state does work. And it works for the public good.

Thank you very much for the opportunity to speak today and I certainly welcome any questions and comments.