Report to Congress on the Costs and Benefits
of Federal Regulations

Introduction

The Federal Government affects the lives of its citizens in a variety of ways -- through taxation, spending, grants, and loans, and through regulation. Over time, regulation -- generally speaking, Executive branch actions to interpret or implement legislation -- has become increasingly prevalent in our society, and the importance of our regulatory activities cannot be overstated.

Both proponents and opponents of regulation have resorted to grand characterizations of either the benefits or the costs of regulation, without much substantiation and very little agreement on the underlying facts. In order to help further the debate on the nation's regulatory system, Congress adopted Section 645 of the Treasury, Postal Services and General Government Appropriations Act, 1997 (P.L. 104-208) on September 30, 1996. Section 645(a) directs the Director of the Office of Management and Budget to submit to Congress, no later than September 30, 1997, a report that provides --

"(1) estimates of the total annual costs and benefits of Federal Regulatory programs, including quantitative and nonquantitative measures of regulatory costs and benefits;

"(2) estimates of the costs and benefits (including quantitative and nonquantitative measures) of each rule that is likely to have a gross annual effect on the economy of $100,000,000 or more in increased costs;

"(3) an assessment of the direct and indirect impacts of Federal rules on the private sector, State and local government, and the Federal Government; and

"(4) recommendations from the Director and a description of significant public comments to reform or eliminate any Federal regulatory program or program element that is inefficient, ineffective, or is not a sound use of the Nation's resources."

The request for this report reflected a consensus that it could be productive to assemble the information available, and acknowledge the data gaps and the limits of the information at hand, all for the purpose of improving the quality of the debate and potential recommendations for regulatory reform. The goals of this statutory charge are worthwhile and important, but also very ambitious. Having spent a considerable amount of time, we must acknowledge at the outset that what we present is not, in many respects, as much as we would have liked to have done had we had more time and resources. But it is, we believe, a useful step in the process and will enable, we hope, a more constructive dialogue on these important issue.

To be more specific, we found enormous data gaps in the information available on regulatory benefits and costs. Valid and reliable data are particularly sparse on benefits, a fact that has been noted often by commentators in the literature and analysts in the field. We were not surprised by this finding. First, the limited quantified or monetized data is partly a result of the obvious technical difficulties, many of which we will discuss below (e.g., the problem of establishing baselines or valuing qualities not generally traded in the marketplace). Just as important, however, are the significant "cultural" or "philosophical" barriers to reducing values, equities, and a myriad of physical or emotional effects to dollars and cents. There are few agreed upon conventions for doing this, and agencies are understandably reluctant to spend scarce time and resources on what may be perceived as a not very informative exercise. This is compounded by the belief of some that it is morally or politically difficult or wrong to engage in such seemingly uncaring calculations. Some also fear a tyranny of numbers -- that is, "if it is quantified, the decision will necessarily be determined solely by the numbers." Their understandable response is not to quantify or monetize.

Nevertheless, the fact remains that explicitly quantifying and monetizing benefits and costs significantly enhances the consideration of alternative approaches to achieving regulatory goals, ultimately producing more benefits with fewer costs. As explained more fully below, President Clinton's Executive Order 12866, "Regulatory Planning and Review," recognizes and incorporates this principle, requiring agencies to quantify both costs and benefits to the best of their ability and to the extent permitted by law. This report takes up the challenge of the Executive Order and Section 645 and candidly presents the available information on both the total costs and benefits of regulation and the costs and benefits of the recent major individual regulations. We hope that this is just the beginning of an important dialogue to improve our knowledge about the effects of regulation on the public, the economy, and American society.

Before submitting this report to Congress, we provided the public with notice and an opportunity to comment on the report as required by Section 645(b). We received over thirty comments from representatives of industry and public interest groups, Federal agencies, and individuals. Almost every commenter praised the report for taking the first step in making Federal regulation more understandable and accountable to the public, and many provided helpful comments to make the report a more useful document for furthering our understanding of the impacts of regulation on society. Commenters also singled out aspects of the report they liked and offered suggestions for improving the aspects they thought needed more work. The theme of most comments was that additional work should be done to improve the state of the art of estimating the costs and benefits of regulation. In addition, many commenters thought that we should provide a more detailed breakdown of the costs and benefits by program area and that we should provide a more independent review and critique of agency estimates.

We have done our best to incorporate commenters' useful suggestions. It must be said, however, that many of the suggestions for further work that we received were quite ambitious -- requiring detailed analyses of the costs and benefits of additional regulatory program areas or individual regulations. Also, some suggestions went in inconsistent directions. Finally, some of the comments that we received apparently misinterpreted parts of our draft. In response, we have tried to clarify the report to correct any misunderstandings.

In our July 22, 1997, Notice published in the Federal Register, we asked for comments on all aspects of the draft report and stated that we were particularly interested in comments and suggestions pertaining to the following:

1. The validity and reliability of the quantitative and qualitative measures of the costs and benefits of regulations in the aggregate, as well as of the individual regulations issued between April 1, 1996, and March 31, 1997, discussed in the attached draft report;

2. The discussion of the direct and indirect effects of regulation;

3. Any additional studies that might provide reliable estimates or assessments of the annual costs and benefits, or direct and indirect effects, of regulation in the aggregate or of the individual regulations that are disc ussed in the draft report; and

4. Programs or program elements on which there is objective and verifiable information that would lead to a conclusion that such programs are inefficient or ineffective and should be eliminated or reformed.

Also, Congress specifically required that the report provide ". . . a description of significant public comments to reform or eliminate any Federal regulatory program or program element that is inefficient, ineffective, or is not a sound use of the Nation's resources." We have summarized the comments we received pursuant to the Federal Register Notice in the appendix to this report. As noted above, we have incorporated the insights we gained from the comments into the final report to the extent possible.

The report is divided into four chapters: Chapter I sets the context and provides the background for the next three chapters. It discusses the development of our regulatory system and demonstrates the breadth of activity that is called regulation, which ranges from economic regulation such as price supports of agricultural products to social regulation such as the protection of workers and the environment. It tracks the use of benefit-cost analysis to evaluate specific regulations, with the recognition of the limits of quantification and its permitted use under the law. Chapter I concludes by presenting the outline of the "best practices" guidance that the current regulatory review program under Executive Order 12866 uses in conducting economic analyses and estimating costs and benefits of economically significant regulations.

In accordance with Section 645(a)(1), Chapter II presents our best estimate of the total costs and benefits of Federal regulation. We use a well recognized, peer reviewed study (Hahn and Hird 1991) for the costs and benefits of regulations as of 1988, supplemented by an Environmental Protection Agency (EPA) report to Congress (Cost of Clean 1990); we then add information about costs and benefits from agency regulatory impact analyses (RIAs) for regulations that have been issued since 1988. In almost all cases, the RIAs have gone through notice and comment and been reviewed by OMB for accuracy and reliability. The figures derived -- with several important caveats -- are approximately $280 billion in annual costs and over $300 billion in annual benefits for all regulation. Of that, social regulation -- mainly health, safety, and environmental regulation -- is estimated to produce about $200 billion in costs and $300 billion in benefits. About $70 billion of the costs and a nominal level of benefits are attributable to economic regulations that limit entry, output, and prices of firms. Not included in "economic regulation," as we use the term, are regulations regarding the safety and soundness of financial institutions and capital markets, which some might consider to be regulations that are economic in a sense. There is significant agreement that the benefits of these types of regulations clearly exceed the costs, although neither has been quantified in any systematic way. Finally, we estimate that regulations from independent agencies that require consumer protection disclosures impose about $10 billion in costs and a significant but unknown amount of benefits.

While this information is useful and a necessary first step in understanding the type and extent of our regulatory activities, we cannot over emphasize the limitations of these estimates for use in making recommendations about reforming or eliminating regulatory programs. As discussed in Chapter II, a single aggregate estimate of the costs and benefits of regulation by itself offers little guidance on how to improve the efficiency, effectiveness or soundness of the existing body of regulation. This chapter also discusses the possible indirect effects of regulation on the economy as directed by Section 645(a)(3) and concludes that the effects are ambiguous theoretically, not well understood empirically, and at this time offer little content for making recommendations about regulatory policy.

In fulfillment of Section 645(a)(2), Chapter III provides data on the costs and benefits of each of the economically significant regulations reviewed by OMB under Executive Order 12866 over the period from April 1, 1996, to March 31, 1997. These data were developed by the agencies as required by the Executive Order. For the most part, these data were subject to notice and public comment and reviewed by OMB. We conclude that although the agency analyses described in Chapter III provide much useful information on Federal regulatory programs and provisions of regulations, there should be further improvement in providing high quality data and analyses before decisions about modifying regulatory programs can be made.

Chapter IV provides recommendations aimed at further developing the information, methodologies, and analyses necessary for improving the efficiency, effectiveness and soundness of regulatory programs and program elements as required by Section 645(a)(4). We also propose several ways for the agencies and OMB to work together to improve the quality of the data and analysis found in the economic impact studies submitted to OMB under Executive Order 12866, including "best practices" training sessions and interagency peer reviews of selected regulatory programs.

The report concludes with an Appendix that contains a summary of the comments we received in response to our July 22, 1997, Federal Register Notice and a bibliography of the articles and publications that we used in writing the report.