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:
-
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;
-
The
discussion of the direct and indirect effects of regulation;
-
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
-
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.