to Congress on the Costs and Benefits
of Federal Regulations
Summary of Public Comments
appendix summarizes the public comments on the four issues we asked
about in the July 22nd, Federal Register Notice and our
preliminary reaction to them. Because of time and resource constraints
on our part (we were still receiving comments and suggestions for
improvement as of September 23, 1997), we were not able to make
all the changes and improvements in this report that may have been
warranted. However, we intend to continue working with the agencies
and the public after this report is submitted to consider these
suggestions further and implement those that are promising.
of Cost and Benefit Estimates
first issue on which we asked for comments in the July 22nd draft
report concerned "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
theme that was repeated in several comments was that we had under
emphasized the value of "knowing the exact amounts of total costs
and benefits." These commenters argued that the public has a right
to know what the total costs and benefits of regulations are and
that regulatory accounting would help inform the political process
and shape the debate over regulatory reform. They also note that
our current position is inconsistent with statements made by OMB
in the early 1990's that discussed the regulatory budget concept
and by academic experts such as Hahn and Litan (1997) and Crandall,
et al (1997).
appears that there may have been some misunderstanding of our present
and past position on the significance of aggregate data. It is true
that we state ". . . but knowing the exact amounts of total costs
and benefits, even if that were possible, adds little of value."
But the operative terms are "exact" and "total." The fact that we
do not believe that knowing the exact total cost or benefit of all
regulations adds much policy content, does not mean that we believe
that knowing the costs and benefits of individual regulations is
unimportant. On the contrary, a key theme of the report is the importance
for good regulatory decision making of knowing the costs and benefits
of individual regulations before they are issued.
is our position inconsistent with our past statements or with the
academic articles cited on the subject of a regulatory budget. The
past OMB statements cited were discussion pieces that recommended
further study and experimentation with the concept of a regulatory
budget. We still believe that further analytical work needs to be
done to improve regulatory accounting and recommend such work in
this report. But as Hahn and Litan (1997) state in their report,
Improving Regulatory Accountability, which several commenters
cite, ". . . aggregate estimates are less important initially because
the best way to affect policy in the short term is to modify individual
regulations . . ." Moreover, although they also add that ". . .
aggregate estimates do have value," they are clearly referring to
aggregate estimates for regulatory "areas," not the aggregate of
all regulations. Even the regulatory budget they suggest Congress
may wish to experiment with (See Crandall et al, 1997)
is limited to specific areas and circumstances, such as where costs
concern expressed by commenters about our estimates of costs and
benefits was that our estimates were systematically biased. While
the charge was leveled by a number of commenters, there was disagreement
among them as to how our estimates were biased. Most industry representatives
and think tanks asserted that our estimates understated costs and
overstated benefits, while the public interest groups and Federal
agencies generally asserted that our estimates overstated costs
and understated benefits. Two reasons that were given for the belief
that our estimates of costs and benefits were systematically biased
warrant some examination.
is the theory that agency estimates, upon which many but not all
of our estimates are based, systematically understate costs and
overstate benefits because agency self-interest lies in regulation.
Although this view of agency behavior enjoys widespread support
among academics as a theoretical matter, there is little documentation
available to support it -- perhaps because there are several potentially
offsetting factors. For example, much of the data that agencies
use to make their estimates of costs comes from the regulated entities
who generally have the opposite incentives -- namely, they will
likely overstate costs to help convince decision makers not to issue
the regulation. Also, as noted in our report, competitive firms
over time frequently find more cost-effective ways, including new
technologies, to comply with regulations than had been envisioned
ex ante. Some commenters pointed to a set of case studies that
is about to be published to support this contention. On the other
hand, there is a large body of literature that shows that agencies
tend to overestimate the benefits of their programs because, over
time, technological progress -- in communications to energy exploration
to infectious disease -- has reduced the long run expected benefits
of earlier regulations. We believe that the question of these types
of systematic bias is unresolved and would profit from further analysis,
which we intend to pursue over the next year or so.
second reason that some commenters thought our cost and benefit
estimates were systematically biased was because they claimed we
ignored indirect costs and benefits. As we stated in the report,
our totals included only direct cost and benefit estimates because
there is no consensus about or transparent estimate of the indirect
costs, and even if there were, there are no comparable estimates
of the indirect benefits of regulation, which could occur because
of the improved health and longevity that health, safety, and environmental
regulation produce. We believe that the question of indirect costs
and benefits also deserves further consideration.
commenters also raised questions about some of our specific estimates
for economic, environmental and other social regulation. With respect
to economic regulation, several commenters raised questions about
our estimates of the costs and benefits of this type of regulation.
They were especially concerned with our statement in the draft report:
regulation, including antitrust, may produce social benefits when
natural monopolies are regulated to stimulate competition or when
firms are prevented from anticompetitive collusion and mergers.
In a dynamic economy, however, the dollar amount of such economic
efficiency benefits are thought to be small (Hahn and Hird 1991)."
on the Hahn and Hird survey, we entered "zero" for the benefits
of economic regulation in the draft report. The comments that we
received on this point convinced us that was a mistake. In this
report we enter an asterisk for benefits with an explanation of
what we had intended.
of the confusion that arose on this point stems from the fact that
we were using a narrower definition of "economic regulation" than
what may generally be understood to be included by the term. We
stated in the draft report that:
regulation is so-called because it directly restricts firms' primary
economic activities, e.g., its pricing and output decisions. It
may also limit the entry or exit of firms into or out of certain
specific types of businesses."
commenters, on the other hand, thought economic regulation included
anti-trust enforcement, financial soundness and capital market regulation,
and regulation aimed at fraud and deception, which they assert provide
significant benefits. We are partly to blame for this confusion
because we did not make it clear that these types of activities,
which may be viewed by some to be regulating economic activity,
were not intended to be included in the "economic regulation" category
because they do not directly regulate firms' pricing, output, or
example, antitrust enforcement by the Department of Justice and
the Federal Trade Commission is not generally done through regulation.
Financial soundness regulations, such as the Federal Reserve System's
reserve requirements and deposit insurance together with the supervision
and regulation required to avoid moral hazard, as well as SEC regulation
of the capital markets, were also not counted in our estimates of
either costs or benefits because they are not generally considered
traditional economic regulation. If they were, the benefits of such
"regulation" would almost certainly dominate the totals. As several
commenters noted, these types of requirements may have averted a
financial collapse such as we had during the Great Depression before
these controls were put in place. Finally, the treatment of the
regulation of fraud and deception is somewhat more complicated.
To the extent it is done through general disclosure requirements,
such as those issued by the FTC, the SEC and the Federal Reserve
(truth in lending), it probably should be included in the social
regulation category rather than in economic regulation because disclosure
requirements do not regulate prices, output, or entry. In any case,
the studies we used did not, for the most part, include either cost
or benefit estimates of these types of activities. In our final
report, we attempt to make it clear how we define " economic regulation,"
and we note that even for the activities we consider traditional
regulation there are significant uncertainties. We did add a category
for consumer protection regulation and for that purpose we used
estimates of paperwork burden, based on our information collection
budget for the independent agencies whose regulations we do not
review. That provided us with cost estimates, but it does not provide
benefit estimates. We again used an asterisk to indicate that significant
unestimated benefits may exist from these disclosure requirements.
commenters also raised questions about the lack of benefits for
economic regulations that were included in the Hahn and Hird estimates.
The case for benefits from economic regulation (as we define it)
rests on the case of the natural monopoly, where an industry's cost
can be minimized only by having a single firm produce. Regulation
can then improve social welfare by inducing firms to price efficiently.
A case in point is local telephone markets, where the FCC has produced
significant welfare benefits to consumers of local phone services
through the lower prices that result from mandating interconnections
to the local loop. Others contend that natural monopolies are dependent
on technology and demand and both have a habit over time of undermining
natural monopolies. Furthermore, the history of regulatory agencies
which regulate natural monopolies, including the FCC up to the ATT
breakup, has been one characterized by their slow adaptation to
technological and market changes to the detriment of consumers.
Whatever the validity of this generalization, one commenter suggested
that currently the benefits of local phone regulation to consumers
could be as high as $34 billion. Clearly this issue deserves more
commenters also raised questions about our estimates of the costs
and benefits of environmental regulation. One commenter argued that
our base case estimate for the cost of environmental regulation
in 1988 was an overstatement because it was based on EPA's Cost
of Clean report, which included costs that should have been
attributed to state and local regulations. The Cost of Clean
report provided an aggregate estimate including the costs of State
and local regulations in its totals, but it also disaggregated the
total into various components, including an estimate for Federally
mandated regulations, excluding costs that arise from State and
local actions. We used the Federally mandated costs for our estimates.
The commenters also pointed out that some expenditures on automobile
emissions regulations would undoubtedly continue even it EPA regulations
were rescinded and therefore these costs should not be included.
We made this same point in our discussion of the rising baseline
phenomenon, but also pointed out that this implied that the benefits
of these regulations should not be counted either. There is currently
no way to know which expenditures originally incurred because of
regulation would continue to be incurred even if those regulations
were rescinded. On the other hand, since it is likely that the expenditures
that would be continued are likely to be the ones that produce the
most benefits, this phenomenon implies that the ex post
ratio of benefits to costs is likely to be less than the ex
ante ratio. In the report, we generally use ex ante
estimates but note that the rising baseline phenomenon implies that
both costs and benefits are likely to be overstatements of the effects
of removing regulation.
One commenter also asserted that our estimate of the benefits
of environmental regulation were understated because the benefit
cost ratio that we used to extrapolate benefits for the 1987 to
1996 period, which was based on Hahn's (1996) estimates of the
benefits and costs of EPA regulations over the period 1990 to 1995,
was based on benefits and costs for those actions and we should
have used a benefit-cost ratio based on all regulations, not just
the most recent ones. The implicit assumption behind this recommendation
is that the benefit cost ratios of environmental regulations systematically
decline over time, presumably because the most cost-effective regulations
are issued first. If that is so, then using benefit cost ratios
for the most recent regulations to extrapolate to all regulations
would understate benefits. But there is little empirical evidence
for this proposition, perhaps because over time agencies are learning
to do a better job in designing more cost-effective regulations.
In fact the Hahn and Hird's 1988 baseline benefit cost ratio for
environmental regulation is lower that Hahn's (1996) ratio based
on regulation issued between 1990 and 1995. Thus the procedure
recommended by this commenter would lower the estimated benefits
of environmental regulation, not increase them as the commenter
Direct and Indirect Effects
second issue on which we requested comments was our discussion of
the indirect effects of regulation. Several commenters suggested
that more work should be done in assessing the indirect impacts
of Federal regulation on various sectors of the economy. We acknowledge
that our summary of the literature on the direct and indirect effects
of regulation on the economy did raise more questions than it answered,
but we also believe it is a fair summary of the existing knowledge
in the area. Our main points were that these effects are important
but they occur on both the cost and benefit side and it is not clear
which side predominates. Clearly more work needs to be done on this
commenter suggested that the affects of regulation on innovation,
wages, employment, and income distribution should be examined. We
agree. Executive Order 12866 calls on the agencies to examine and
consider the distributional and equity effects of regulations that
they propose to issue. We believe that both OMB and the agencies
can do a better job in estimating the distributional and equity
effects of regulation. This is another area that we hope to be able
to work on with the agencies over the next few years to improve
our July 22nd draft report, we also asked commenters to provide
" 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 we discussed in the draft report. Several commenters did suggest,
and in some cases sent, studies of the costs and benefits of regulatory
programs. Several of the studies have only recently been completed,
while others are drafts of reports that are still under review.
Moreover, we have not had time to evaluate them for reliability
and their consistency with the studies that we have used in arriving
at our estimates. Over the next year, we intend to review these
materials and any others that become available. Below is a brief
description of the studies we received.
Vice Chairman of the Board of Governors of the Federal Reserve sent
us a recently completed staff study that summarizes the results
of various other studies of the cost of banking regulation (Elliehausen
1997). The study concludes that the incremental cost of banking
regulations in 1991 was about $7.7 billion. Incremental costs was
defined as costs that banks would not incur but for Federal regulation.
The study also concluded that banks spend another $8 billion or
so to comply with regulations that they would spend even in the
absence of Federal regulation. One of the studies that the Fed staff
relies on is a study by the accounting firm, Grant Thorton (1993),
which was sent to us directly by the Independent Bankers Association
American Water Works Association sent us three studies : Estimating
the Costs of Compliance With Drinking Water Standards: A User Guide,
Methods for Valuing the Benefits of the Safe Drinking Water Act:
Review and Assessment, and the Cost-Effectiveness of SDWA Regulations.
This material contains information on cost and benefit estimation
methodology and some estimates of the costs of drinking water regulations.
American Automobile Manufacturers Association sent us several articles,
including a 1991 study by NHTSA, Moving America More Safely
and Tengs, et al, "Five Hundred Life-Saving Interventions
and Their Cost-Effectiveness."
U. S. Chamber of Commerce sent one of their recent publications,
Federal Regulation and its Effects on Business, reporting
on two nationwide surveys of business experiences with Federal regulation.
The study provides information on how many businesses perceive the
regulatory process and offers suggestions as to what types of regulations
businesses fine most burdensome.
Environmental Defense Fund sent their July 1997 report, Toxic
Ignorance: The Continuing Absence of Basic Health Testing for Top-Selling
Chemicals in the United States, which points out that the benefits
of environmental regulation cannot be estimated if we lack basic
data on the toxicity of high-volume chemicals.
American Enterprise Institute sent us two recent studies that it
and the Brookings Institution just published, Improving Regulatory
Accountability (Hahn and Litan 1997) and An Agenda for
Regulatory Reform (Crandall et al 1997). These studies
offer numerous proposals intended to improve the regulatory system.
other commenters cited various studies in support of their various
suggestions to help improve our understanding of the impact of regulation,
some of which we were unfamiliar with. We intend to review these
studies to broaden our understanding of the issue discussed in the
Regulatory Programs or Program Elements
we asked commenters to identify "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." Many of the recommendations
we received were for reforms to the regulatory process. There were
surprisingly few specific regulatory programs or program elements
that were identified for us. The fact that we received so few proposals
for reforming specific programs or regulations, especially accompanied
with supportive studies, reinforces our conclusion that it is premature
to make specific recommendations about reforming specific regulatory
programs. We will continue to review the information we received
and other information on the costs, benefits and other effects of
regulation for the purpose of finding candidates for reform. The
following describes the suggestion we have received to date.
Hopkins of the Rochester Institute of Technology recommended that
OMB list particular regulations that "fail" a benefit-cost test,
identify the efficiency gain from their reform or rescission, and
indicate any legal or other obstacles to taking action. As an example
of a rule whose costs exceeds its benefits, Hopkins offered EPA's
recently promulgated National Ambient Air Quality Standard (NAAQS)
Business Roundtable (BR) listed both EPA's ozone and particulate
matter NAAQSs as "prime examples" of inefficient and ineffective
rules, whose costs are ". . . far in excess of any benefits." BR
stated that the costs of the standards are so large that the resulting
reductions in living standards and subsequent ability to afford
health and medical needs would lead to an increase in the incidence
of death and serious disease. BR also identified the Corporate Average
Fuel Economy standard as a candidate for reform. BR stated this
standard ". . . has saved little or no fuel, but, which, when binding,
has come at high direct and indirect costs -- including the costs
associated with increased highway fatalities and injuries associated
with the smaller and lighter vehicles mandated by the standard."
BR suggested the use of economic incentives, such as fuel taxes
as a more effective and less costly way to reduce fuel consumption.
U.S. Chamber of Commerce offered the results of two recent surveys
of its members. Among the observations were the following: (1) The
complexity of pension regulations has effectively prevented a large
percentage of firms from offering defined benefit plans; (2) One
in six companies laid off workers to deal with the cost of labor
and employee benefits regulations and one in three avoided hiring
new employees; and (3) One in 10 businesses laid off workers to
meet the cost of environmental and natural resource regulations.
Edison Electric Institute identified EPA's New Source Performance
Standards/Prevention of Significant Deterioration programs under
the Clean Air Act and the 316 Program under the Clean Water Act
as programs that should be reformed to include a benefit-cost approach
in determining compliance options.
National Apartment Association, National Leased Housing Association,
and National Multi Housing Association joint comments stated that
the analysis supporting EPA's lead-based paint rule was "seriously
deficient in many respects." These commenters stated that, given
the significant expenditures involved, EPA needs to make clearer
the benefits of the program before imposing such costs.
the American Water Works Association stated that the benefits of
the drinking water program are largely attributed to a relatively
small handful of contaminants. It recommended EPA maintain sufficient
statutory flexibility in selecting contaminants to regulate as well
as in the form of those regulations.
summary, we received many helpful comments from a diverse set of
interests. We have much food for thought and much work to do.