PRESIDENTIAL MANAGEMENT OF THE
REGULATORY STATE

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

Remarks Prepared for Delivery to the National Economists Club

Library of Congress

March 7, 2002

The Office of Management and Budget is well known as the center of budgetary policy in the executive branch, but OMB's role as a force for sound regulatory policy is not well understood. Today I would like to discuss some of OMB's recent initiatives to strengthen the analytic foundations of Federal regulatory policy. Before doing so, I believe I need to provide some basic background about the responsibilities of my Office at OMB: the Office of Information and Regulatory Affairs (OIRA).

The best way to proceed may be by posing the following question: "Why would any clear-thinking President ask a senior OMB official with a modest staff of 40 analysts to oversee the entire federal regulatory state?" Let me suggest, at the outset, that any such effort might justly be considered ambitious.

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 in my office are obviously outnumbered by the thousands of regulatory specialists in the agencies.

All significant rulemakings must be submitted to OMB for review and clearance before they are published in the Federal Register. Yet 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, any changes suggested during OMB review are destined to make waves and bruise egos, which means that they will be resisted, sometimes fiercely and effectively.

It is sometimes argued that the Congress, through legislative mandates and oversight, should be the sole institution that instructs or guides the efforts of agencies. From this perspective, any OMB "influence" on regulation 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 the view that Presidential management of the regulatory state is hopeless or perverse. Rather, I share the vision of Supreme Court Justice Stephen Breyer who described in his book, BREAKING THE VICIOUS CIRCLE, an experienced cadre of civil servants in the Executive Office of the President who have broad expertise in the craft of regulatory policy. More importantly, these analysts are empowered to look beyond the tunnel visions that plague individual agencies, thereby fostering a more holistic approach to regulatory policy.

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 regulatory policy. The common theme has been professional analysis of regulations to make sure they are sensible. Given this history, it is informative to consider why leaders are so determined to manage the regulatory state.

For starters, Presidents have recognized that, regardless of whether we like rules, the federal regulatory state is here to stay. It is true that so-called economic regulation - price and entry controls in specific industries - has seen much privatization over the last 30 years. Yet the public and Congress have revealed a growing commitment to public health, safety and environmental protection. In fact, various forms of social regulation of producers and consumers have been on the rise for over 30 years.

Capitalism is at the heart of American society but citizens also recognize the limitations of capitalism. For example, recent revelations about the Enron fiasco have stimulated discussion of the need for appropriate public disclosure requirements and other regulations. As we advocate more worldwide appreciation of the form of democratic capitalism that America cherishes, we must continue to improve the regulatory policies that are designed to curb the imperfections of capitalism.

The policy debate continues as to what level of government should possess the most regulatory power. There is surely an urgent need for federal regulators to consult with state and local officials and to respect the role of federalism in our national system of government. Indeed, my boss, OMB Director Mitch Daniels, has instructed me that I should return to agencies any proposed rule that does not have adequate consultation with our intergovernmental partners. This principle is particularly important when Washington seeks to impose unfunded mandates on state and local officials. But we should also respect the views of Alexander Hamilton, an important framer of our Constitution. Hamilton recognized the weaknesses in the original Articles of Confederation and the need for a strong centralized government to promote the welfare of the republic. Indeed, there is growing consensus that in certain fields of regulatory policy it is important for the federal government to preempt the regulatory powers of state and local governments. In other words, a thoughtful approach to regulatory policy envisions a substantial role for the federal government. And this role will only become more important as our nation engages in more international deliberations to harmonize regulations with our trading partners.

While we need federal regulators, let's face it: they are expensive. Now the total budgets of federal regulators are not much greater than $8 billion per year. But for every dollar that taxpayers provide to federal regulators, another 100 dollars in cost is imposed outside the federal sector. Note that this figure, $800 billion in aggregate terms, is larger than the entire discretionary federal budget, amounting to an average annual cost of almost $8,000 per household. These regulatory costs are like an invisible tax on the consumer who typically does not realize that regulation is causing higher prices for goods and services.

It is certainly true that many federal rules have significant, even lifesaving, benefits for households and future generations. OMB's recent Annual Report to Congress describes numerous cost-effective federal regulations. Yet there is real concern that regulatory resources are not always invested wisely, suggesting that we could save more lives and do more for the consumer and taxpayer through a simple reallocation of the regulatory dollar.

Certainly, no one would suggest that agencies should be permitted to negotiate their "on-budget" resources from Congress, without any OMB review. Likewise, Presidents realize that regulatory expenditures, while off budget, require fiscal restraint for the same reasons that the size of public budgets need to be restrained. If the President restrains the federal budget without restraining regulation, advocates of government spending may simply respond by urging Congress to shift regulatory costs from the federal budget to states and the private sector. In other words, the President cannot manage the Nation's fiscal health without managing the regulatory state.

OMB also has a role in conflict resolution. When two or more agencies disagree about an issue, 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 the last six months, OMB has worked with EPA and DOE and other White House offices to devise a legislative strategy on the President's Clear Skies Initiative, a market-based approach to achieving cleaner power generation in America. This initiative calls for a 60-70% reduction of air pollutants that have been associated with cardiopulmonary diseases, asthma and lung cancer.

Of course, 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 Office of Information and Regulatory Affairs is pursuing an agenda of quality regulation. What President Bush seeks is a smarter regulatory process rooted in sound science, engineering, and economics. A high-quality regulatory process is not uniformly pro-regulation or anti-regulation. Instead a smart 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 the agenda of quality regulation under the terms of the Clinton-Gore executive order on regulatory planning, 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 modest changes that may have a long-lasting impact on the regulatory state by increasing the roles of formal analysis, peer review and public participation in regulation.

First, we have taken steps to enhance the openness of OMB's regulatory review process. 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. Our web site is updated daily, providing unprecedented amounts of information about our meetings with interest groups, our letters to agencies, my speeches, and our reports to Congress. We are also an active partner in a multi-year effort to link my office to the Administration's E-government initiative, which will allow the public to provide interactive inputs on OMB's web site. Now, I certainly do not believe that the Executive Office of the President can operate in a fishbowl. There is a delicate balance to be drawn here but 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 have reversed the 20-year decline in staffing at OIRA while recognizing the increasing importance of science-based regulation. We are now hiring the first physical 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.

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 in drinking water was supported by just that type of review. 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 eighteen return letters in the last six months and they are available for scrutiny on OMB's web site. A return letter does not necessarily kill a proposed rule. In five cases so far, we have cleared an improved version of a rule that we initially returned. Knowing that we care, agencies are beginning to invite OMB into the early stages of regulatory deliberations, where our analytical approach can be more effective.

Fourth, we have demonstrated that we are prepared to initiate new regulatory actions when they are needed. I am not simply talking about the series of new rules aimed at protecting homeland security, including airline safety, food safety, and immigration control. President Bush himself recently announced new regulatory steps to protect the 401(k) and retirement plans of the American worker.

At OIRA we have devised a modest tool called the "prompt letter" that OMB uses to 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 involves 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 suggests that priority be given to a new rulemaking that would test cars and light trucks in offset crash tests, as well as frontal crash tests, an approach that may reduce injuries in vehicle crashes. And our most recent letter to EPA, has encouraged greater use of electronic reporting under the TRI program, thereby allowing communities to obtain this information more quickly. 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.

In the search for promising new regulations, we should not forget the urgent need to streamline existing federal regulations. OMB does not believe that across-the-board reviews of all existing rules are a cost-effective use of agency resources; yet OMB does support selective reviews of existing rules based on public participation. We recently sought public comment in this area and learned of 71 specific suggestions to modify or rescind existing rules. We have rated these ideas in our recent annual report to Congress and are now in discussions with agencies about whether 23 suggested reviews should be an agency priority. 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, which should be released in the next month or so.

Finally, and perhaps most importantly, OMB has developed government-wide guidelines to promote better quality in both the formal analyses and original data that agencies use and disseminate to the public. The OMB guidelines were mandated by Congress and we have developed them pursuant to an extensive public comment process. When agency information is so influential that it forms the basis of major public policies, we go beyond the standard of journal peer review and require that such information be reproducible, or is at least highly transparent about research design, data sources, and analytic methods.

When people are harmed or otherwise affected by poor quality information that agencies disseminate, the OMB guidelines provide new avenues for citizen complaints, agency corrections, and formal appeals processes to resolve disputes. Over the next year each agency, including the independent agencies, will be preparing information-quality guidelines that OMB will review. The agencies will be reaching out to the scientific communities and the public to assist in this process and they will need your help. We urge you to participate in this process because we believe it has tremendous potential to enhance the competence and accountability of the federal regulatory state.

Let me conclude with three concrete illustrations of how OMB is making a difference in the process of regulatory analysis and decision making. First, the National Highway Traffic Safety Administration recently sent us a draft final rule calling for all new vehicles to be equipped with a tire-pressure monitoring system. OMB supports such a rule because it will help consumers know if they have an under-inflated tire. Yet NHTSA's rulemaking supported what is called a 4-tire standard by comparing that option to doing nothing. We argued that NHTSA should instead compare the 4-tire standard to a meaningful alternative, such as a 1-tire standard. Although the 1-tire standard would provide less tire-related safety, it may have the side benefit of encouraging more installation of anti-lock brake systems in vehicles that do not currently have them. Our web site provides the details behind our concern. The general point is that good regulatory analysis requires careful analysis of multiple alternatives. Second, the Small Business Administration, out of concern for the welfare of small travel agencies hurt by the events of September 11, recently sent a draft rule to OMB calling for a broad expansion of the definition of a small business to 500 employees or less, even for non-manufacturing industries. We argued to SBA that a more sensible approach would be to modernize the definition of a small business in the travel-agent industry. The general point is the lower-cost options should be analyzed by agencies. Third, the President's Clear Skies proposal calls for a second phase of pollution reduction at coal-fired powerplants beginning in 2010, but only after a science and technology review is completed. OMB has argued that we need better information about which particles in the air -- defined by diameter and chemical composition -- are most responsible for adverse health effects. If those particles come primarily from coal-fired powerplants, then the marginal benefit analysis may favor steeper cuts in pollution at utilities. Yet it could be the case that particles from diesel and gasoline-powered engines are the most important culprit, in which case the focus of particulate control may need to be directed at mobile sosurces. The general point is that a good benefits analysis does not assume that all tons of pollution were created equal.

Thus, I hope that I have given you a better sense of the role that OMB is playing in this Administration, particularly our role in enhancing the place of science, engineering and economics in quality regulation. Thank you very much for the opportunity to speak today and I look forward to questions, comments and discussion.