Draft Report to Congress on the Costs and Benefits of Federal Regulations

OFFICE OF MANAGEMENT AND BUDGET

Draft Report to Congress on the Costs and Benefits of Federal

Regulations

AGENCY: Office of Management and Budget, Executive Office of the

President.

ACTION: Notice and request for comments.

-----------------------------------------------------------------------

SUMMARY: OMB requests comments on the attached Draft Report to Congress

on the Costs and Benefits of Federal Regulations. The draft report is

divided into four chapters. Chapter I sets the context and provides the

background for the next three chapters. Chapter II presents OMB's best

estimate of the total costs and benefits of Federal regulation. Chapter

III provides data on the costs and benefits of each of the economically

significant regulations reviewed by OMB under Executive Order 12866 in

the last year. 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.

DATES: To ensure consideration of comments as OMB prepares this Draft

Report for submission to Congress on or before September 30, 1997,

comments must be in writing and received by OMB no later than September

1, 1997.

ADDRESSES: Comments on this Draft Report should be addressed to John F.

Morrall III, Office of Information and Regulatory Affairs, Office of

Management and Budget, NEOB, Room 10235, 725 17th Street, N.W.,

Washington, D.C. 20503.

Comments may also be submitted by facsimile to (202) 395-6974, or

by electronic mail to [email protected] (please note that ``1'' in

``A1'' is the number one and not the letter ``l''). Be sure to include

your name and complete postal mailing address in the comments sent by

electronic mail. If you submit comments by facsimile or electronic

mail, please do not also submit them by regular mail.

Electronic availability and addresses: This Federal Register Notice

is available electronically from the OMB Homepage on the World Wide

Web: ``http://www.whitehouse.gov/WH/EOP/OMB/html/fedreg.html.''

FOR FURTHER INFORMATION CONTACT: John F. Morrall III, Office of

Information and Regulatory Affairs, Office of Management and Budget,

NEOB, Room 10235, 725 17th Street, N.W., Washington, D.C. 20503.

Telephone: (202) 395-7316.

SUPPLEMENTARY INFORMATION: Congress directed the Office of Management

and Budget (OMB) to prepare a Report to Congress on the Costs and

Benefits of Federal Regulations. Specifically, under Section 645 of the

Treasury, Postal Services and General Government Appropriations Act,

1997 (Pub. L. 104-208), the Director of OMB is to submit to Congress,

no later than September 30, 1997, a report that, in summary, provides

(1) estimates of the total annual costs and benefits of Federal

regulatory programs, (2) estimates of the costs and benefits 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, and (4) recommendations

from OMB and a description of significant public comments to reform or

eliminate any Federal regulatory program that is inefficient,

ineffective, or is not a sound use of the Nation's resources.

The attached document is a draft of this report to Congress. OMB is

to provide public notice and an opportunity to comment on the report

before it is submitted to Congress no later than September 30, 1997.

Issues for Comment

Accordingly, OMB seeks comments on all aspects of the attached

draft report, but in particular is 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 discussed 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.

Sally Katzen,

Administrator, Office of Information and Regulatory Affairs.

Draft 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 has become increasingly

prevalent in our society, and the importance of our regulatory

activities cannot now 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 (Pub. 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. 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

[[Page 39353]]

present is neither a complete response to the mandate, nor 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 this issue.

To be more specific, we found enormous data gaps in the information

available on regulatory benefits and costs. Accurate data is

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.

This document is only a draft of our report. Section 645(b)

requires the Director of OMB to provide public notice and an

opportunity to comment on the report before it is submitted to Congress

at the end of September 1997. Accordingly we seek comments on all

aspects of this document, but in particular are 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 discussed;

Our 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 issued between April 1, 1996, and March 31,

1997, that we discuss; 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.

All comments received will be carefully considered in preparing the

final report that will be submitted to Congress.

The draft 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 are approximately $200 billion in annual costs and $300

billion in annual benefits for environmental and social regulation and

about $90 billion in annual costs and nominal benefits for economic

regulation. While this information is useful, we cannot over emphasize

the limitations of these estimates for use in making recommendations

about reforming or eliminating regulatory programs. As discussed in

this chapter, aggregate estimates of the costs and benefits of

regulation offer 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 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.

[[Page 39354]]

Chapter I. The Role of Economic Analysis in Regulatory Reform

1. Federal Regulatory Programs

The regulatory programs that exist today are the product of many

different forces, often operating independently of one another, but

with the support--over many decades--of both major political parties in

both the Legislative and Executive branches.

The History of Major Regulatory Programs

Federal regulation as we know it began in the late 19th century

with the creation of the Interstate Commerce Commission, which was

charged with protecting the public against excessive and discriminatory

railroad rates. The regulation was economic in nature, setting rates

and regulating the provision of railroad services. Having achieved some

success, this administrative model of an independent, bipartisan

commission, reaching decisions through an adjudicatory approach, was

used for the Federal Trade Commission (FTC) (1914), the Water Power

Commission (1920) (later the Federal Power Commission), and the Federal

Radio Commission (1927) (later the Federal Communications Commission).

In addition, during the early 20th century, Congress created several

other agencies to regulate commercial and financial systems--including

the Federal Reserve Board (1913), the Tariff Commission (1916), the

Packers and Stockyards Administration (1916), and the Commodities

Exchange Authority (1922)--and to ensure the purity of certain foods

and drugs, the Food and Drug Administration (1931).

Federal regulation began in earnest in the 1930s with the

implementation of wide-ranging New Deal programs. Some of the New Deal

economic regulatory programs were implemented by the Federal Home Loan

Bank Board (1932), the Federal Deposit Insurance Corporation (FDIC)

(1933), the Commodity Credit Corporation (1933), the Farm Credit

Administration (1933), the Securities and Exchange Commission (SEC)

(1934), and the National Labor Relations Board (1935). In addition, the

jurisdiction of both the Federal Communications Commission (FCC) and

the Interstate Commerce Commission were expanded to regulate other

forms of communications (e.g., telephone and telegraph) and other forms

of transport (e.g., trucking). In 1938, the role of the Food and Drug

Administration (FDA) was expanded to include prevention of harm to

consumers in addition to corrective action. The New Deal also called

for the establishment of an agency to enforce the Fair Labor Standards

Act of 1938 in the Department of Labor, which is now called the

Employment Standards Administration.

A second burst of regulation began in the late 1960s with the

enactment of comprehensive, detailed legislation intended to protect

the consumer, improve environmental quality, enhance work place safety,

and assure adequate energy supplies. In contrast to the pattern of

economic regulation adopted before and during the New Deal, the new

social regulatory programs tended to cross many sectors of the economy

(rather than individual industries) and affect industrial processes,

product designs, and by-products (rather than entry, investment, and

pricing decisions).

The consumer protection movement of that era led to creation in the

then newly formed Department of Transportation (DOT) of several

agencies designed to improve transportation safety. They included the

Federal Highway Administration (1966), which sets highway and heavy

truck safety standards; the Federal Railroad Administration (1966),

which sets rail safety standards; and the National Highway Traffic

Safety Administration (1970), which sets safety standards for

automobiles and light trucks. Regulations were also authorized pursuant

to the Truth in Lending Act, the Equal Credit Opportunity Act, the

Consumer Leasing Act, and the Fair Debt Collection Practices Act. The

National Credit Union Administration (1970) and the Consumer Product

Safety Commission (1972) were also created to protect consumer

interests.

In 1970, the Environmental Protection Agency (EPA) was created to

consolidate and expand environmental programs. Its regulatory authority

was expanded through the Clean Air Act (1970), the Clean Water Act

(1972), the Safe Drinking Water Act (1974), the Toxic Substances

Control Act (1976), and the Resource Conservation and Recovery Act

(1976). This effort to improve environmental protection also led to the

creation of the Materials Transportation Board (1975) (now part of the

Research and Special Programs Administration in the DOT) and the Office

of Surface Mining Reclamation and Enforcement (1977) in the Department

of the Interior (DOI).

The Occupational Safety and Health Administration (1970) was

established in the Department of Labor (DOL) to enhance work place

safety. Major mine safety and health legislation had been passed in

1969, following prior statutes reaching back to 1910. Enforcement

responsibility now lies with the Mine Safety and Health Administration,

also in the DOL. The Pension Benefit Guaranty Corporation and the

Pension and Welfare Administration were established in 1974 to

administer and regulate pension plan insurance systems.

Also in the 1970s, the Federal Government attempted to address the

problems of the dwindling supply and the rising costs of energy. In

1973, the Federal Energy Administration (FEA) was directed to manage

short-term fuel shortage. Less than a year later, the Atomic Energy

Commission was divided into the Energy Research and Development

Administration (ERDA) and an independent Nuclear Regulatory Commission

(NRC). In 1977, the FEA, ERDA, the Federal Power Commission, and a

number of other energy program responsibilities were merged into the

Department of Energy (DOE) and the independent Federal Energy

Regulatory Commission.

Another significant regulatory agency, the Department of

Agriculture (USDA) (1862), has grown over time so that it now regulates

the price, production, import, and export of agricultural crops; the

safety of meat, poultry, and certain other food products; a wide

variety of other agricultural and farm-related activities; and broad-

reaching welfare programs. Agriculture regulatory authorities have

changed over time, but now include the U.S. Forest Service (1905), the

Natural Resources Conservation Service (1935), the Farm Service Agency

(1961), the Food and Consumer Service (1969), the Agricultural

Marketing Service (1972), the Federal Grain Inspection Service (1976),

the Animal and Plant Health Inspection Service (1977), the Foreign

Agricultural Service (1974), the Food Safety and Inspection Service

(1981), and the Rural Development Administration (1990).

In addition to the regulatory agencies listed above, most

Departments and agencies also issue regulations that affect the public

in a variety of ways such as:

Eligibility standards and documentation requirements for

government benefit programs, i.e., USDA's Food and Nutrition Service,

Health and Human Services' (HHS) Health Care Financing Administration,

Housing and Urban Development's (HUD) Federal Housing Administration,

DOL's Employment and Training Administration, and DOI's Bureau of

Indian Affairs as well as Veterans Affairs, Education, the Department

of

[[Page 39355]]

Defense, and the Social Security Administration;

Use and leasing requirements for Federal lands and

resources, i.e., USDA's Forest Service and DOI's Bureau of Land

Management and National Park Service; and

Revenue collection requirements, i.e., Treasury's Internal

Revenue Service, Customs Service, and Bureau of Alcohol, Tobacco and

Firearms.

The consequence of the long history of regulatory activities is

that Federal regulations now affect virtually all individuals,

businesses, State, local, and tribal governments, and other

organizations in virtually every aspect of their lives or operations.

Some rules are based on old statutes; others on relatively new ones.

Some regulations are critically important (such as the safety criteria

for airlines or nuclear power plants); some are relatively trivial

(such as setting the times that a draw bridge may be raised or

lowered). But each has the force and effect of law and each must be

taken seriously.

The Nature of Regulation

It is conventional wisdom that competition in the marketplace is

the most effective regulator of economic activity. Why then is there so

much regulation? The answer is that markets are not always perfect and

when they are not, society's resources may be imperfectly or

inefficiently used. The advantage of regulation is that it can improve

resource allocation or help obtain other societal benefits. For

example, consider the following situations:

--Certain markets may not be sufficiently competitive, thus potentially

subjecting consumers to the harmful exercise of market power (such as

higher prices or artificially limited supplies). Regulation can be used

to protect consumers by regulating prices charged by natural monopolies

or preventing firms from restricting competition through mergers,

collusion or creating entry barriers.

--In an unregulated market, firms and individuals may impose costs on

others--including future generations--that are not reflected in the

prices of the products they buy and sell. They may pollute streams,

cause health hazards, or endanger the safety of their workers or

customers. Regulation can be used to reduce these harmful effects by

prohibiting certain activities or imposing the societal costs of the

activity in question on those causing the harm. One goal of regulation

is to induce private parties to act as they would if they had to bear

the full costs that they impose on others.

--Similarly, in an unregulated market, firms and individuals may not

have incentives to provide individuals with accurate or sufficient

information needed to make intelligent choices. Firms may mislead

consumers or take advantage of consumer ignorance to market unsafe or

risky products. Regulation may be needed to require disclosure of

information, such as the possible side effects of a drug, the contents

of a food or packaged good, the energy efficiency of an appliance, or

the full cost of a home mortgage.

--Even when consumers have full information, the Government may wish to

protect individuals, especially children, from their own actions.

Regulation may thus be used to restrict certain unacceptable or harmful

practices such as substance abuse.

--Regulation can also be beneficial in achieving goals that reflect our

national values, such as equal opportunity and universal education, or

a respect for individual privacy.

There are also many potential disadvantages of regulating--to the

Government, to those regulated, and to society at large--that can give

rise to significant costs.

--The direct costs of administering, enforcing, and complying with

regulations may be substantial. Some of these costs may be borne by the

Government, while others are paid for by firms and individuals,

eventually being reflected in the form of higher prices, lower wages,

and foregone investment, research, and output.

--There are also disadvantages of regulation that are difficult to

measure, such as adverse effects on flexibility and innovation, which

may impair productivity and competitiveness in the global marketplace,

and counterproductive private incentives, which may distort investment

or reduce needed supporting activities.

In short, regulations (like other instruments of government policy)

have enormous potential for both good and harm. Well-chosen and

carefully crafted regulations can protect consumers from dangerous

products and ensure they have information to make informed choices.

Such regulations can limit pollution, increase worker safety,

discourage unfair business practices, and contribute in many other ways

to a safer, healthier, more productive, and more equitable society.

Excessive or poorly designed regulations, by contrast, can cause

confusion and delay, give rise to unreasonable compliance costs in the

form of capital investments, labor and ongoing paperwork, retard

innovation, reduce productivity, and accidentally distort private

incentives.

The only way we know to distinguish between the regulations that do

good and those that cause harm is through careful assessment and

evaluation of their benefits and costs. Such analysis can also often be

used to redesign harmful regulations so they produce more good than

harm and redesign good regulations so they produce even more net

benefits. The next section describes how regulatory analysis has

evolved to do just that.

2. Development of the U.S. Regulatory Analysis Program

As discussed above, the late 1960's and early 1970's marked a

period in U.S. history of major expansion of health, safety and

environmental regulation. Numerous new government agencies were set up

to protect the American workplace, the environment, highway travelers,

and consumers. As with almost every political development, the

significant growth in the amount and kinds of regulation created a

counter political development that ultimately produced a companion

program to evaluate the regulatory system.

The Nixon and Ford Review Programs

The Nixon Administration established in 1971 a little known review

group in the White House called the ``Quality of Life Review'' program.

The program focused solely on environmental regulations to minimize

burdens on business. These reviews did not utilize analysis of the

benefits and costs to society. The controversy that resulted from the

program began a debate about both Presidential review of regulations

and the use of benefit-cost analysis that would continue for two

decades and to some extent continues today.

Soon after Gerald Ford became President in 1974, he held an

economic summit that included top industry leaders and economists to

seek solutions to the stagflation and slow growth that the nation was

then facing. Out of that summit came proposals to establish a new

government agency in the Executive Office of the President, called the

Council on Wage and Price Stability (CWPS), to monitor the inflationary

actions of both the government and private sectors of the economy. It

also led President Ford to issue Executive Order 11821, requiring

government agencies to prepare inflation impact statements before they

issued costly new regulations. The innovative aspect

[[Page 39356]]

of the Ford program was the creation of a specific White House agency

to review the inflationary actions, mainly regulations, of other

government agencies. CWPS was staffed primarily by economists drawn

from academia and had little authority beyond the influence of public

criticism.

The economists at CWPS quickly concluded that a regulation would

not be truly inflationary unless its costs to society exceeded the

benefits it produced. Thus the economists turned the inflation impact

statement into a benefit-cost analysis. This requirement, that agencies

do an analysis of the benefits and costs of their ``major'' proposed

regulations--generally defined as having an annual impact on the

economy of over $100 million--was adopted in modified form by each of

the four next Presidents.

The Administrative Procedure Act requires agencies to give the

public and interested parties a chance to comment on proposed

regulations before they are adopted in final form. The agency issuing

the regulation must respond to the comments and demonstrate that what

it is intending to do is within its scope of authority and is not

``arbitrary or capricious.'' CWPS used this formal comment process to

file its critiques of the agencies' economic analyses of the benefits

and costs of proposed regulations. CWPS would also issue a press

release summarizing its filing in non-technical terms. The CWPS

analyses attracted considerable publicity. But while this system was

effective in preventing some unsupportable regulations from becoming

law, it had little success in preventing the issuance of poorly thought

out regulations that had strong interest group support.

Nevertheless, one of the legacies of this approach was that it

slowly built an economic case against poorly conceived regulations,

raising interest particularly among academics and students who began to

use the publicly available analyses in their textbooks and courses.

When benefit-cost analysis was first introduced, it was not welcomed by

the political establishment, especially the lawyers and other non-

economists who comprised many agencies and congressional staffs. But

over time, as these analyses became standard fare in textbooks, the

value and legitimacy of benefit-cost analysis became evident, and it

slowly gained acceptance among the public.

The Carter Review Program

After President Carter came to office in 1977, the regulating

agencies argued that the Executive Office of the President should not

have a role in reviewing their regulations. On the other hand, the

President's chief economic advisers argued that a centralized review

program based on careful economic analysis was necessary to assure that

regulatory burdens on the economy were properly considered and that the

regulations that were issued were cost effective. Rapidly escalating

inflation in 1978 convinced President Carter of the need to act. In

March of 1978, he issued Executive Order 12044, ``Improving Government

Regulations.'' It established general principles for agencies to follow

when regulating and required regulatory analysis to be done for rules

that ``may have major economic consequences for the general economy,

for individual industries, geographical regions or levels of

government.''

President Carter also set up a new group, called the Regulatory

Analysis Review Group (RARG), with instructions to review up to ten of

the most important regulations each year. The RARG was chaired by the

Council of Economic Advisors (CEA) and was composed of representatives

of OMB and the economic and regulatory agencies. It relied on the staff

of CWPS and the CEA to develop evaluations of agency regulations and

the associated economic analyses and to place these analyses in the

public record of the agency proposing to issue the regulation. The

analyses were reviewed by the RARG members and reflected the views of

the member agencies, including the agency that proposed the regulation.

In this way, the Carter Administration helped to institutionalize

both regulatory review by the Executive Office of the President and the

utility of benefit-cost analysis for regulatory decision makers. Also,

in an important legal ruling, the U.S. Court of Appeals for the

District of Columbia in Sierra Club v. Costle (657 F. 2d 298 (1981))

found that a part of the President's administrative oversight

responsibilities was to review regulations issued by his subordinates.

The Reagan/Bush Reform Effort

During the Presidential campaign of 1980, the issue was not whether

to continue a regulatory review oversight program, but whether to

strengthen it. President Reagan had made regulatory relief one of his

four pillars for economic growth--in addition to reducing government

spending, tax cuts, and steady monetary growth. He specifically used

the term ``regulatory relief'' rather than ``regulatory reform'' to

emphasize his desire to cut back regulations, not just make them more

cost effective. One of his first acts as President was to issue

Executive Order 12291, ``Federal Regulation'' (February 17, 1981).

The Reagan regulatory oversight program differed from the Carter

Program in a number of important respects. First, it required that

agencies not only prepare cost-benefit analyses for major rules, but

also that they issue only regulations that maximize net benefits

(social benefits minus social costs). Second, OMB, and within OMB the

Office of Information and Regulatory Affairs (OIRA), replaced CWPS as

the agency responsible for centralized review. Third, agencies were

required to send their proposed regulations and cost-benefit analyses

in draft form to OMB for review before they were issued. Fourth, it

required agencies to review their existing regulations to see which

ones could be withdrawn or scaled back. Finally, President Reagan

created The Task Force on Regulatory Relief, chaired by then-Vice

President Bush, to oversee the process and serve as an appeal mechanism

if the agencies disagreed with OMB's recommendations. Together these

steps established a more formal and comprehensive centralized

regulatory oversight program.

In 1985, President Reagan issued Executive Order 12498,

``Regulatory Planning Process,'' that further strengthened OMB's

oversight role by extending it earlier into the regulatory development

process. The Order required that agencies annually send OMB a detailed

plan on all the significant rules that they had under development. OMB

coordinated the plans with other interested agencies and could

recommend modifications. It also compiled these detailed descriptions

of the agencies' most important rules--usually about 500--in one large

volume called the Regulatory Program of the U.S. Government.

The Bush Administration continued the regulatory review program of

the Reagan Presidency. Nonetheless, the pace of new health, safety, and

environmental regulations that had begun to increase at the end of the

Reagan Administration continued during the first two years of the Bush

Administration. In 1990, President Bush responded to expressions of

concern about increasing regulatory burdens by returning to the

approach used by the Reagan Task Force on Regulatory Relief. Vice

President Quayle was placed in charge of a task force--now called the

Competitiveness Council--whose mission was to provide regulatory

relief.

[[Page 39357]]

The Clinton Review Program

On September 30, 1993, President Clinton issued Executive Order

12866, ``Regulatory Planning and Review.'' The Order reaffirmed the

legitimacy of centralized review but reestablished the primacy of the

agencies in regulatory decision making. It retained the requirement for

analysis of benefits and costs, quantified to the maximum extent

possible, and the general principle that the benefits of intended

regulations should justify the costs. In addition, while continuing the

basic framework of regulatory review established in 1981, it made

several changes in response to criticisms that had been voiced against

the Reagan/Bush programs.

One of the changes was to focus OMB's resources on the most

significant rules, allowing agencies to issue less important

regulations without OMB review. OMB had been reviewing about 2,200

regulations per year with a staff of less than 40 professionals. This

change enabled OMB to add greater value to its review by focusing on

the most important rules.

A second change was the establishment of a 90-day period for OMB

review of proposed rules. Executive Order 12291 contained no strict

limit on the length of review, and some reviews had dragged on for

several years before resolution. The Clinton Executive Order also set

up a mechanism for a timely resolution of any disputes between OMB and

agency heads.

A third change was to increase the openness and accountability of

the review process. All documents exchanged between OIRA and the agency

during the review are made available to the public at the conclusion of

the rulemaking. The Executive Order also requires that records be kept

of any meetings with people outside of the Executive branch on

regulations under review by OMB, that agency representatives be invited

to attend the meetings, and that all written communications be placed

in the public docket and given to the agency.

OMB has produced three reports on its implementation of this

Executive Order. On May 1, 1994, OMB published a six month assessment

of the Executive Order that the President had requested when he issued

the Order (Report to the President On Executive Order No. 12866, 1994).

The report concluded that many initial improvements in the regulatory

review system had been made, but that in some areas it was taking

longer to show results than expected. Among other things, the report

documented that the new Executive Order was resulting in increased

selectivity. The 578 rules reviewed by OMB over the six-month period

was about one half the rate of review under the previous Executive

Order. Freeing up limited staff resources to concentrate on the more

significant rules resulted in a higher percentage of changes to the

rules reviewed. Second, the new time limits for OMB review were for the

most part being met. Of the 578 reviews completed in the first six

months of the Executive Order, only three had gone beyond 90 days and

those delays were requested by the agencies. Third, the report

concluded that the new requirements for openness and accountability

were being met. During the six-month period, 36 meetings were held with

outsiders about specific rules under review. These meetings were

disclosed to the public and agency representatives were always invited.

In October 1994, OIRA produced a second report entitled, The First

Year of Executive Order No. 12866, that basically confirmed the

findings of the first report. The number of significant rules that OIRA

was reviewing fell to a rate of about 900 per year, 60 percent lower

than the 2200 per year average reviewed under the previous Executive

Order, and the number of rules that were changed continued to increase.

About 15 percent of the rules were ``economically significant''--

meaning in general that the regulation was expected to have an effect

on the economy of more that $100 million per year. The 90-day review

period was generally observed, and there were about 70 meetings during

the first year, to which agency representatives were invited. The

report concluded that the new openness and transparency policy had

served to defuse, if not eliminate, the criticism of OIRA's regulatory

impact analysis and review program.

The third report, More Benefits Fewer Burdens: Creating a

Regulatory System that Works for the American People, was issued in

December 1996. The report provided a series of examples of how the

agencies and OMB had worked together to produce regulations that

adhered to the principles of Executive Order 12866. The examples were

organized around six broad themes, several of which emphasize economic

analysis and efficiency:

Properly identifying problems and risks to be addressed,

and tailoring the regulatory approach narrowly to address them;

Developing alternative approaches to traditional command-

and-control regulation, such as using performance standards (telling

people what goals to meet, not how to meet them), relying on market

incentives, or issuing nonbinding guidance in lieu of rules;

Developing rules that, according to sound analysis, are

cost-effective and have benefits that justify their costs.

Consulting with those affected by the regulation,

especially State, local, and tribal governments;

Ensuring that agency rules are well coordinated with rules

or policies of other agencies; and

Streamlining, simplifying, and reducing burden of Federal

regulation.

The report included examples of incremental improvements in the

regulatory systems across the government. Although few major

eliminations or reforms of regulatory programs were listed, the sum of

the improvements indicated that significant benefits were attained with

lower costs. A key recommendation of this report was the continued use

by the agencies, and vigorous promotion by OMB, of the principles of

the Executive Order.

An appendix to More Benefits Fewer Burdens contained information on

the costs of regulations issued between 1987 and 1996, which we use

below to estimate the aggregate costs of regulation. Another appendix

included a discussion of regulatory reform legislation that President

Clinton had supported and was passed by Congress during the three-year

period, including three statutes that require agencies to follow

certain procedures and/or consider various economic impacts before

taking regulatory action: the Unfunded Mandates Reform Act of 1995, the

Paperwork Reduction Act of 1995, and the Small Business Regulatory

Enforcement Fairness Act of 1996.

3. Basic Principles for Assessing Benefits and Costs

In order to help agencies prepare the economic analyses required by

Executive Order 12866 or the various statutes enacted by the Congress

in the last few years, OMB developed, through an interagency process, a

``Best Practices'' manual that was issued on January 11, 1996. Best

Practices sets the standard for high quality economic analysis of

regulation--whether in the form of a prospective regulatory impact

analysis of a proposed regulation, or in the form of a retrospective

evaluation of a regulatory program. The principles that are described

in detail in Best Practices are summarized here because they can serve

as an introduction to how we have evaluated the studies on the costs

and benefits of regulation discussed in the following chapters. We

discuss those principles in Best

[[Page 39358]]

Practices that are general in nature, then those that pertain to

benefits, and then those that pertain to costs.

General Principles

Costs and benefits must be measured relative to a baseline.

Typically, this baseline is constructed to reflect policy in the

absence of the regulation being evaluated, consistent with pending

government actions, and applied equally to benefits and costs. In some

instances where the likelihood of government actions is uncertain,

analysis with multiple baselines is appropriate.

Costs and benefits should be presented in a way to maximize their

consistency or comparability. Costs and benefits can be monetized,

quantified but not monetized, or presented in qualitative terms. A

monetized estimate is one that either occurs naturally in dollars

(e.g., increased costs by a business to purchase equipment needed to

comply with a regulation) or has been converted into dollars using some

specified methodology (e.g., the number of avoided health effects

multiplied by individuals' estimated willingness-to-pay to avoid them).

A quantitative estimate is one which is expressed in metric units other

than dollars (e.g., tons of pollution controlled, number of endangered

species protected from extinction). Finally, a qualitative estimate is

one which is expressed in ordinal or nominal units or is purely

descriptive. Presentation of monetized benefits and costs is preferred

where acceptable estimates are possible. However, monetization of some

of the effects of regulations is often difficult, if not impossible,

and even the quantification of some effects may not be easy. As

discussed below, aggregating costs and benefits is particularly

difficult, if not impossible, where they are not presented in

consistent or comparable units.

An economic analysis cannot reach a conclusion about whether net

benefits are maximized--the key economic goal for good regulation--

without consideration of a broad range of alternative regulatory

options. To help decision-makers understand the full effects of

alternative actions, the analysis should present available physical or

other quantitative measures of the effects of the alternative actions

where it is not possible to present monetized benefits and costs, and

also present qualitative information to characterize effects that

cannot be quantified. Information should include the magnitude, timing,

and likelihood of impacts, plus other relevant dimensions (e.g.,

irreversibility and uniqueness). Where benefit or cost estimates are

heavily dependent on certain assumptions, it is essential to make those

assumptions explicit, and where alternative assumptions are plausible,

to carry out sensitivity analyses based on the alternative assumptions.

The large uncertainties implicit in many estimates of risks to

public health, safety or the environment make treatment of risk and

uncertainty especially important. In general, the analysis should fully

describe the range of risk reductions, including an identification of

the central tendency in the distribution; risk estimates should not

present either the upper-bound or the lower-bound estimate alone.

Those who bear the costs of a regulation and those who enjoy its

benefits often are not the same people. The term ``distributional

effects'' refers to the distribution of the net effects of a regulatory

alternative across the population and economy, divided in various ways

(e.g., income groups, race, sex, industrial sector). Where distributive

effects are thought to be important, the effects of various regulatory

alternatives should be described quantitatively to the extent possible,

including their magnitude, likelihood, and incidence of effects on

particular groups. There are no generally accepted principles for

determining when one distribution of net benefits is more equitable

than another. Thus, the analysis should be careful to describe

distributional effects without judging their fairness.

Benefits

The analysis should state the beneficial effects of the proposed

regulatory change and its principal alternatives. In each case, there

should be an explanation of the mechanism by which the proposed action

is expected to yield the anticipated benefits. As noted above, an

attempt should be made to quantify all potential real benefits to

society in monetary terms to the maximum extent possible, by type and

time period. Any benefits that cannot be monetized, such as an increase

in the rate of introducing more productive new technology or a decrease

in the risk of extinction of endangered species, should also be

presented and explained.

The concept of ``opportunity cost'' is the appropriate construct

for valuing both benefits and costs. The principle of ``willingness-to-

pay'' captures the notion of opportunity cost by providing an aggregate

measure of what individuals are willing to forgo to enjoy a particular

benefit. Market transactions provide the richest data base for

estimating benefits based on willingness-to-pay, as long as the goods

and services affected by a potential regulation are traded in markets.

Where market transactions are difficult to monitor or markets do

not exist, analysts should use appropriate proxies that simulate

willingness-to-pay based on market exchange. A variety of methods have

been developed for estimating indirectly traded benefits. Generally,

these methods apply statistical techniques to distill from observable

market transactions the portion of willingness-to-pay that can be

attributed to the benefit in question. Contingent-valuation methods

have become increasingly common for estimating indirectly traded

benefits, but the reliance of these methods on hypothetical scenarios

and the complexities of the goods being valued by this technique raise

issues about its accuracy in estimating willingness to pay compared to

methods based on (indirect) revealed preferences.

Health and safety benefits are a major category of benefits that

are indirectly traded in the market. The willingness-to-pay approach is

conceptually superior, but measurement difficulties may cause agencies

to prefer valuations of reductions in risks of nonfatal illness or

injury based on the expected direct costs avoided by such risk

reductions. The primary components of the direct-cost approach are

medical and other costs of offsetting illness or injury; costs for

averting illness or injury (e.g., expenses for goods such as bottled

water or job safety equipment that would not be incurred in the absence

of the health or safety risk); and the value of lost production.

Values of fatality risk reduction often figure prominently in

assessments of government action. Reductions in fatality risks as a

result of government action are best monetized according to the

willingness-to-pay approach for small reductions in mortality risk,

usually presented in terms of the value of a ``statistical life'' or of

``statistical life-years'' extended.

It is important to keep in mind the larger objective of

consistency--subject to statutory limitations--in the estimates of

benefits applied across regulations and agencies for comparable risks.

Failure to maintain such consistency prevents achievement of the most

risk reduction from a given level of resources spent on risk reduction.

Costs

The preferred measure of cost is the ``opportunity cost'' of the

resources used or the benefits forgone as a result of the regulatory

action. Opportunity costs include, but are not limited to, private-

[[Page 39359]]

sector compliance costs and government administrative costs.

Opportunity costs also include losses in consumers' or producers'

surpluses, discomfort or inconvenience, and loss of time. The

opportunity cost of an alternative also incorporates the value of the

benefits forgone as a consequence of that alternative. For example, the

opportunity cost of banning a product (e.g., a drug, food additive, or

hazardous chemical) is the forgone net benefit of that product, taking

into account the mitigating effects of potential substitutes. All costs

calculated should be incremental--that is, they should represent

changes in costs that would occur if the regulatory option is chosen

compared to costs in the base case (ordinarily no regulation or the

existing regulation) or under a less stringent alternative. As with

benefit estimates, the calculation of costs should reflect the full

probability distribution of potential consequences.

An important, but sometimes difficult, problem in cost estimation

is to distinguish between real costs and transfer payments. As

discussed below, transfer payments are not social costs but rather are

payments that reflect a redistribution of wealth. While transfers

should not be included in the estimates of the benefits and costs of a

regulation, they may be important for describing the distributional

effects of a regulation.

Chapter II. Estimates of the Total Annual Costs and Benefits of Federal

Regulatory Programs

1. Overview

This chapter discusses the total annual costs and benefits of

existing Federal regulatory programs called for by Section 645(a)(1).

Before doing so, however, it is important to place the subject in

perspective. First, we need to keep in mind the discussion in chapter I

on best practices for estimating costs and benefits. Second, it is

important to ask: What public policy purposes do aggregate estimates

serve? And, in particular: In what ways can these estimates help

support the recommendations to reform the regulatory system required of

the Director by Section 645(a)(4)? Clearly, knowing the costs and

benefits of proposed regulatory actions and their alternatives,

including the alternative of no action, enables policy officials to

make decisions that improve society's well being. But for reasons

discussed below, knowing the total costs and total benefits of all of

the many and diverse regulations that the Federal government has issued

provides little specific guidance for regulatory decisions.

For example, four possible outcomes can result from totaling up the

costs and benefits of all existing Federal regulations:

(1) High costs and high benefits.

(2) High costs and low benefits.

(3) Low costs and high benefits.

(4) Low costs and low benefits.

Given the intensity of the debate over regulatory reform,

categories (3) and (4) are not likely outcomes of careful and fair

accounting. A priori, it is not clear which of the remaining two

categories is most likely. But does it matter? In each case, the policy

guidance would be the same. Real economic improvement comes from

expanding those significant regulatory programs that provide benefits

that are greater than costs and contracting those programs that provide

benefits that are less than costs. The substance is in the details, not

in the total.

The implication of this discussion is that an excessive amount of

resources should not be devoted to estimating the total costs and

benefits of all Federal regulations. To the extent that the costs and

benefits of specific regulatory programs can easily be combined, some

indication of the importance of regulatory reform can be inferred by

the magnitude of these estimates, but knowing the exact amounts of

total costs and benefits, even if that were possible, adds little of

value.

This proposition is important because it is extremely difficult, if

not impossible, to estimate the actual total costs and benefits of all

existing Federal regulations with any degree of precision. There are at

least two types of intractable problems that make this so.

The Baseline Problem

In order to estimate the impact of regulations on society and the

economy, one has to determine the counterfactual--that is, how things

would have been if the regulation had not been issued. In other words,

what is the baseline against which costs and benefits should be

measured? With respect to estimating total costs and benefits of all

Federal regulations, the baseline problem has several dimensions.

First, it is impossible to determine the true counterfactual, since

it never happened. What would have happened in the absence of

regulation can only be an educated guess. Furthermore, the greater the

hypothesized difference between reality and the counterfactual, the

more problematic the exercise. For example, some estimates of the total

cost of regulation include the cost of compliance with our tax system.

But to twist a phrase, one can no more easily imagine a world without

taxes than one can imagine a world without death. It is also difficult

to imagine a world without health, safety, and environmental

regulation. Could a civil society even exist without regulation? In

other words, what do we use as the baseline for a world without any

regulation?

Second, even disregarding the problem of modeling large changes,

there are significant difficulties in determining the counterfactual

for individual regulations that one could begin to aggregate. One can

survey firms and other regulated entities on their expected compliance

costs either ex ante, before the regulation is implemented, or ex post,

after the regulation has gone into effect. For both types of studies,

the problem of potential bias must be kept in mind. It is often alleged

that strategic behavior may color both regulators' and the regulated's

estimates of the cost of regulation (Hahn and Hird 1991, Hopkins 1991,

and Hahn 1996). Agencies are generally advocates of their programs and

businesses generally are not in favor of regulation. In the ordinary

course, therefore, the best studies are ex post studies done by

individuals who do not have vested interests, but do have reputations

as objective analysts to uphold.

Often only ex ante cost estimates are available, but even if firms'

or agencies' estimates are unbiased at the time, technological change

or ``learning-by-doing'' may result in those estimates overstating

compliance costs (Hahn and Hird 1991 and Hahn 1996). In fact, there is

much evidence that competition among regulated firms often reduces

expected compliance costs once real time and effort is directed at the

problem (Office of Technology Assessment 1995).

While ex post studies are likely to be more accurate than ex ante

studies because firms should by then have had experience with actual

regulatory compliance costs, ex post cost estimates have their own

problems. Properly done they are likely to be resource and time

intensive. Firms do not usually keep their cost accounting estimates

according to what regulations are driving them. Thus, when surveyed,

firms have to reconstruct causality. A recent General Accounting Office

(GAO) report details the difficulties the GAO had in trying to

determine the total cost of Federal regulation by surveying a sample of

firms. The firms reported great difficulty in estimating their own

costs of compliance because they could not easily separate Federal from

State and local regulation and because they

[[Page 39360]]

did not keep records on incremental costs of regulation (See GAO 1996,

pp. 49-51). Some studies have attempted to address this problem

reasonably successfully by comparing the results of different degrees

of regulation in different localities or time periods.

Moreover, virtually all of the studies of the costs of regulation

produced to date are measuring the expenditures of firms required (ex

ante or ex post) by regulation, whereas the cost to society of

regulation should be measured by the change in consumer and producer

surplus associated with the regulation and with any price and/or income

changes that may result (Cropper and Oates 1992). At one extreme,

ignoring the consumer surplus loss produced by a ban understates costs

to society because although no compliance expenditures are required,

consumers can no longer buy the product. At the other extreme,

calculating compliance expenditures based on pre-regulation output

overstates costs because if the firm raises prices to cover compliance

costs, consumers will shift to other products, which reduces their

welfare losses (Cropper and Oats 1992, p. 722).

A third problem relates to the economy and the appropriateness of

the baseline for the purpose for which it is expected to be used. If

the objective is to reduce the burden of existing regulation, even ex

post evaluation surveys may be inadequate for they would reflect the

cost of gearing up to comply, not the cost saving of no longer having

to comply with a given regulatory program. While the former is relevant

for deciding whether to regulate, the latter would be the relevant

concept if one is considering reducing regulation. There is also the

dynamic nature of the economy, whereby technological advances over time

are likely to reduce the start-up cost of compliance the firm

originally faced. In addition, sunk costs, such as specialized capital

costs and the cost of changing procedures already in place, make the

cost savings from eliminating regulation less than the cost of

complying with those regulations. Very few studies exist, especially

for health, safety and environmental regulation, that attempt to

determine the cost savings that would result from reducing or

eliminating existing regulation.

It is important to note that this dynamic nature of the economy may

affect the estimation of benefits as well as costs. Technological

improvements could reduce predicted benefits. For example, medical

progress can reduce the future benefits estimated for health, safety

and environmental regulations, just as productivity improvements in

manufacturing reduces the costs of compliance of some regulations. New

drugs or medical procedures can reduce the benefits of regulations

aimed at reducing exposure to certain harmful agents such as an

infectious disease or even sunlight. Regulations aimed at increasing

the energy efficiency of consumer products or buildings may see their

expected benefits reduced by new technology that reduces the cost of

producing energy. Furthermore, productivity improvements lead directly

to higher incomes, which lead people to demand better health and more

safety. Business responds to these demands by providing safer products

and workplaces, even in the absence of regulation. Individuals with

rising incomes may also purchase or donate land to nature conservancies

to provide ecological benefits. Yet as on the cost side, the baseline

that is used is almost always the status quo, not what is likely to be

true in the future.

Fourth, the construction of a baseline may be complicated where, as

frequently occurs, there are several causes of the change in behavior

attributed to a Federal regulation. State and local regulations may

also require some level of compliance. The tort system, voluntary

standards organizations, and public pressure also cause firms to

provide a certain degree of public protection in the absence of Federal

regulation. As GAO points out, determining how much of the costs and

benefits of these activities to attribute solely to Federal regulation

is a difficult undertaking (GAO 1996). Adding to the complexity, the

degree to which these other factors cause firms and other regulated

entities to provide safe and healthful products and workplaces and

engage in environmentally sound practices changes over time, generally

increasing with increasing per capita incomes and knowledge about cause

and effect.

Thus, although the National Highway Traffic Safety Administration

has significantly increased the safety of automobiles, it is not likely

that if the agency's regulations were eliminated the automobile

companies would discontinue the safety features that had been mandated.

Consumers demand safer cars than they used to and automobile companies

are concerned about product liability. This same phenomenon exists with

the environment, although probably to a lesser extent. Environmentally

responsible behavior has become good for the bottom line. One paper

company interviewed by GAO said that it would have incurred a

substantial amount of its compliance costs even if there were no

regulations, simply as good business practices (GAO 1996, p. 51). Over

time, this ``rising baseline'' phenomenon reduces the true costs of

health, safety, and environmental regulations. Estimates of the

aggregate costs of regulations that include the unadjusted cost

estimates from aging studies are thus likely to be overestimates of the

real costs of those regulations.

The Apples and Oranges Problem

The studies that have attempted to tote up the total costs and

benefits of Federal regulations have basically added together a diverse

set of individual studies. Unfortunately, these individual studies vary

in quality, methodology, and type of regulatory costs included. Thus we

have an apples and oranges problem, or, more aptly, an apples, oranges,

kiwis, grapefruit, etc., problem.

Part of the problem arises because of the nature of regulation

itself. There are over 130,000 pages of regulations in the Code of

Federal Regulations, with about 60 Federal agencies issuing regulations

at the rate of over 1,800 per year. For our purposes, a ``regulation''

or ``rule'' means an agency statement of general applicability and

future effect, which the agency intends to have the force and effect of

law, that is designed to implement, interpret, or prescribe law or

policy or to describe the procedure or practice of an agency. Clearly,

``regulation'' encompasses a lot of territory. The Hopkins series of

studies (1991, 1992, 1995, 1996), which are the latest attempts to

aggregate the costs of all regulations for which estimates are

available and which we discuss in detail later, include five major

categories of regulation:

Environmental. As the EPA points out, the true social cost of

regulations aimed at improving the quality of the environment are

represented by the total value that society places on the goods and

services foregone as a result of resources being diverted to

environmental protection. (Cost of a Clean Environment, pp. 1-2 to 1-

3.) These costs include the direct compliance costs of the capital

equipment and labor needed to meet the standard, as well as the more

indirect consumer and producer surplus losses that result from lost or

delayed consumption and production opportunities resulting from the

higher prices and reduced output needed to pay for the direct

compliance costs. In the case of a product ban or prohibitive

compliance costs, almost all of the costs represent consumer and

producer surplus losses. Most of the cost estimates used in this report

do not

[[Page 39361]]

include consumer and producer surplus losses because it is difficult to

estimate the demand and supply curves needed to do this type of

analysis.

Further indirect effects on productivity and efficiency result from

these price and output changes as they filter through other sectors of

the economy. According to EPA in the Cost of Clean report, recent

research indicates that compliance cost estimates may understate

substantially the true long-term costs of pollution control (p. 1-3).

The estimates used in this report do not include these indirect and

general equilibrium effects.

The benefits of environmental protection are represented by the

value that society places on improved health, recreational

opportunities, quality of life, visibility, preservation of ecosystems,

biodiversity, and other attributes of protecting or enhancing our

environment. As discussed in chapter 1, the value is best measured by

society's willingness to pay for these attributes. Because most types

of improvements in environmental quality are not traded in markets,

benefits must be estimated by indirect means using sophisticated

statistical techniques that generally make benefit estimation more

problematic than cost estimation.

Although the EPA issues the great majority of environmental

regulations, DOI, DOT, and the DOE, among others, also issue rules

aimed at improving the environment.

Other Social. This category of regulation includes rules designed

to advance the health and safety of consumers and workers, as well as

regulations aimed at promoting social goals such as equal opportunity

and equal access to facilities. They are often lumped together with

environmental regulation in the category of ``Social Regulation.''

Social regulation is mainly concerned with controlling the harmful or

unintended consequences of market transactions, such as air pollution,

occupationally induced illness, or automobile accidents. These

consequences are commonly called ``negative externalities'' and

regulation designed to deal with them attempts to ``internalize'' the

externalities. This can be done by regulating the amount of the

externality, e.g., banning a pollutant or limiting it to a ``safe''

level, or by regulating how a product is produced or used. The

techniques and methodological concerns involved in the estimation of

the social costs and benefits generated by these rules are similar to

those involved in the estimation of costs and benefits of environmental

regulation discussed above.

Economic. Economic 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. The regulations are

usually applied on an industry basis such as banking, trucking, or

securities. In the United States, much of this type of regulation at

the Federal level is administered by what are referred to as

``independent'' commissions, e.g., the FCC or the SEC, whose members

are appointed but not removable without good cause by the President.

The economic loss caused by this type of regulation results from the

higher prices and inefficient operations that often result when

competition is prevented from developing.

The costs of such regulation are usually measured by modeling or

comparing specific regulated sectors with less regulated sectors,

estimating the consumer and producer surplus losses that result from

higher prices and lack of service, and estimating the excess costs that

may result from the lack of competition. In contrast to social

regulatory cost estimates, these estimates are mainly indirect costs.

Economic regulation, including antitrust, may produce social

benefits when natural monopolies are regulated to simulate 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). Much

of the motivation for economic regulation is based on equity and

fairness considerations, but often it is based on enhancing one group

at the expense of another. These considerations are not social costs or

benefits, but do need to be factored into regulatory decisions.

Transfer. As discussed in chapter 1, transfers are payments from

one group in society to another and therefore are not real costs to

society as a whole. One person's loss is another person's gain.

Examples of transfers include payments to Social Security recipients

from taxpayers and the higher profits that farmers receive as a result

of the higher prices consumers must pay for farm products limited by

production quotas. Nevertheless, Hopkins (1991) includes transfer costs

in the total cost of regulations. He does place them in a separate

category and points out that they are different from the real social

costs that result from economic efficiency losses. As discussed in

Chapter 1, OMB's guidance states that transfers should not be added to

the cost and benefit totals included in regulatory assessments but

should be discussed and noted for policymakers.

Process. Process costs, according to Hopkins, are the

administrative or paperwork costs of filling out government forms such

as income tax, immigration, social security, etc. Although there are

benefits to the services that these government programs provide and

some minimum amount of process cost is necessary to deliver these

services, it makes little sense to try to place a separate value on

administration. Rather, process costs should be viewed as a ``cost of

doing business'' that should be minimized for a given level or quality

of service.

Adding these various categories together, as Hopkins and others

have done, does two things. It produces large numbers and it creates

confusion. It produces large numbers by including ``costs'' that are

not normally considered as part of the regulatory reform debate. For

example, costs such as the burden of filling out income tax forms or

doing the paperwork needed to get visas, passports, small business

loans, and veterans benefits are not what one usually thinks about when

worrying about the cost of regulation. Nor do we usually think that the

income gained by farmers from price support programs or the increased

sales by domestic businesses as a result of trade protection are costs

of regulation. Congress did not seek oversight of these types of costs

when, in the last Congress, it debated legislative proposals for

comprehensive regulatory reform, such as S. 343 and H.R. 9, or when it

passed the Unfunded Mandate Reform Act of 1995 or the Small Business

Regulatory Enforcement Fairness Act of 1996.

Adding these categories of regulation together with health, safety

and environmental regulation also creates confusion because the

appropriate policies to reduce any adverse effects from these programs

are very different. To reduce price supports, modify international

trade protectionism, and minimize non-cost-effective health, safety,

and environmental regulation would take very different paths. Lumping

them together does not enlighten the search for appropriate reforms.

In sum, adding up the costs and benefits of the various regulatory

programs may give us a rough estimate of the magnitude of the impact of

regulatory activities on the economy and make it clear that regulation

plays an important role in our economy. Indeed, we can use the total

cost figures to begin to track the extent of this activity relative to

other aggregate data.

[[Page 39362]]

For example, our calculations indicate that regulatory costs are about

4% (3.8%) of GDP in 1997. We have also looked at 1988, and found that

regulatory costs were then roughly the same percentage. From this

comparison, we can say that there has been no material growth in the

cost of regulation relative to the size of the economy in the last

decade.

However, these data provide little useful information about what to

do next. If what is intended is to make regulation more efficient, one

needs to estimate the incremental costs and benefits of individual

regulations, or specific provisions of individual regulations, on a

case-by-case basis. If what is intended is to reduce the burden of

existing, health, safety and environmental regulation, one needs to

estimate how firms would react to the removal of requirements, not how

they acted when the requirements were originally imposed. If what is

intended is to improve the cost-effectiveness of new regulations, one

needs to know what factors are preventing future regulations from being

more cost-effective. But none of this information is found in the

aggregate estimates of the costs and benefits of regulation done to

date.

2. Our Estimates of the Costs and Benefits of Existing Regulations

To meet the requirements of Section 645(a)(1), we surveyed the

existing literature on the total costs and benefits of regulation,

supplementing it with information we have obtained from reviewing

regulatory impact analyses over the last ten years under Executive

Orders 12291 and 12866. Our review of the literature revealed only one

comprehensive study that attempted to estimate the total costs and

benefits of all Federal regulations (Hahn and Hird 1991). Hahn and

Hird's estimates were peer reviewed and published in one of the top

economics/legal journals specializing in regulatory issues, the Yale

Journal on Regulation. In addition, EPA issued a report to Congress at

about the same time known as the Cost of Clean report (EPA 1990). The

Cost of Clean report is recognized as the most thorough and careful

attempt to estimate the compliance cost of environmental regulation

published to date.

The Hahn and Hird study compiled cost and benefit estimates from

over 25 studies published mostly by academics in peer reviewed

journals, e.g., Hufbauer (1986) for international trade, Wenders (1987)

for telecommunications, Gardner (1987) for agricultural price supports,

Morrison and Winston (1986 and 1989) for airlines, Crandall (1986) for

highway safety, and Crandall (1988), Denison, (1979), and Viscusi

(1983) for Occupational Safety and Health. It should be noted that

although all of these studies are generally recognized as the best

available, they are not without shortcomings. For example, the Crandall

(1988) and Denison (1979) studies relied upon for the cost of OSHA

regulations used survey data that included expenditures that firms

would have made on safety in the absence of OSHA regulation.

The Cost of Clean report's estimates of costs are based on annual

survey data from the Department of Commerce's ``Pollution Abatement and

Control Expenditures'' (PACE) reports, regulatory impact analyses of

major EPA regulations, and special analyses by EPA program offices or

contractors. The PACE report surveys, which were conducted through

1994, but discontinued thereafter, cannot be used without careful

adjustments because they contain pollution control expenditures that

are not Federally mandated. EPA is continuing efforts to review the

costs and benefits of certain of its regulatory programs. It has

completed reports on drinking water (EPA 1993) and surface water (EPA

1995) and is presently working on a report required by the Clean Air

Act Amendments of 1990 on the costs and benefits of the Clean Air Act,

which it plans to submit to Congress in October of 1997. A draft of

this report indicates that some of the numbers we report below may be

understated (EPA 1997).

In addition, we used information about the costs of major

regulations reviewed by OMB under Executive Order 12291 and 12866,

which were recently published by OMB in More Benefits Fewer Burdens

(1996). (We include the cost of rules published in 1987 and 1988 to

allow for a lag between publication of the rule and the expenditure of

funds for compliance.) The rules included are generally all final rules

with annual costs of $100 million or more issued by Executive Branch

agencies, which we believe capture at least 90 percent of the costs

added by all rules. The cost estimates themselves are agency estimates

that have gone through OMB review and the Administrative Procedure Act

requirements for notice and comment by the public.

Total Costs

Using the estimates for Federally mandated regulatory costs from

the Cost of Clean report (1990, Table 8-9D) for environmental

regulation and Hahn and Hird's estimates for other social regulation

for a 1988 base, we added the cost of all major regulations reviewed by

OMB under Executive Orders 12291 and 12866 and issued by the agencies

between 1987 and 1996. The following table shows our calculations for

the costs of social regulations:

Table 1.--Estimates of the Annual Cost of Social Regulation for 1997

[Billions of 1996 dollars]

----------------------------------------------------------------------------------------------------------------

Environmental Other social Total social

----------------------------------------------------------------------------------------------------------------

1988 Baseline:

(EPA, Hahn and Hird)........................................ 101 35 136

Cost of rules 1987-96 (OMB)................................. 43 19 62

-----------------------------------------------

Total for 1997............................................ 144 54 198

----------------------------------------------------------------------------------------------------------------

While our estimates do not include the costs of regulations with

costs below $100 million and there is a possibility that agencies

understate the costs of proposed rules (Hopkins, 1992, p. 13), we

believe that, if anything, the estimates overstate actual direct costs

because of the rising baseline phenomenon discussed above. For example,

as a sensitivity analysis, it does not seem implausible that, for

environmental and other social regulations over ten years old, no more

than half of compliance costs would likely be saved if these Federal

regulations magically disappeared over night. The automobile companies

are not likely to make their cars less safe or less fuel efficient.

Similarly, the great majority of firms are not likely to stop

controlling asbestos and cotton dust

[[Page 39363]]

fibers or lead dust and benzene emissions in the workplace if these

regulations were abolished. Nor would the judicial tort system likely

tolerate increased levels of harmful pollution or harmful products. If

this scenario is correct, then the cost of social regulation in 1997

would fall to $130 billion (136/2+62=130), or $93 billion for

environmental regulations and $37 billion for other social regulation.

To the cost estimates for environmental and other social

regulation, we must add the costs of the other types of regulation,

i.e., economic and process regulation. We use the Hahn and Hird

estimate for the efficiency cost of economic regulation for 1988.

Because the great majority of these regulations are issued by

independent regulatory agencies (e.g., the FCC, the FTC, the SEC, the

FDIC and the NRC that were not required under Executive Orders 12291 or

12866 to submit information on benefits and costs of regulations to

OMB, we did not have our own data to update the 1988 baseline. Instead,

we relied on a study by Hopkins (1992) who derived an estimate of $81

billion for the efficiency costs of economic regulation for 1997.

Hopkins made several additions to Hahn and Hird to update economic

regulation costs to 1997: $10 billion for surface transportation costs,

$5 billion for the Jones Act, and $5 billion for banking regulations

(p. 27). We have no basis to question these estimates and therefore

have included them. On the other hand, we do not include Hopkins'

estimate of the transfer costs of economic regulation, because, as

noted above, we do not believe that transfers are costs that should be

included in total cost of regulation estimates. In addition, we do not

include the process or paperwork cost estimated by Hopkins and others

(Hopkins 1991 and 1992 and Weidenbaum and DeFina 1978) because these

costs are for the most part already included in cost estimates supplied

by the agencies and reviewed by OMB. However, there are costs of

paperwork imposed by the independent agencies that should be added.

According to OMB's latest Information Collection Budget, the burden

hours of paperwork imposed by the independent agencies was about 390

million hours (or about $10 billion in costs using a $26.50 per hour

estimate to take into account the fact that these agencies' paperwork

often require some professional expertise to fill them out). Since

these costs are mostly for economic regulation (the NRC paperwork is

only two percent of the total), we add the $10 billion to the $81

billion estimate for the cost of economic regulation.

Our best estimate of the total cost of regulation for 1997 is thus

the following:

Table 2.--Estimate of the Annual Total Cost of Regulation for 1997

[Billions of 1996 dollars]

------------------------------------------------------------------------

------------------------------------------------------------------------

Environmental.............................................. 144

Other Social............................................... 54

Economic................................................... 91

------------

Total.................................................. 289

------------------------------------------------------------------------

Total Benefits

Aggregating benefits from individual regulations poses special

problems even beyond those discussed above for aggregating costs. There

are several important limits to such an exercise. First among these is

uncertainty. Because so much of the uncertainty in possible benefit

estimation is unknown, and so little is known about the relationships

among benefit estimates of different regulations, analysts have

virtually no basis for aggregating benefits in a manner that might

preserve information about the likely distribution of aggregate

benefits.

Second, as noted above, benefits, like costs, may be presented as

monetized, quantified, or in narrative forms. For a variety of reasons,

many of them understandable, if not legitimate, agencies often do not

express beneficial effects in monetizable terms that can easily be

aggregated. What is being described may not be readily amenable to

quantification or monetization (e.g., the value of greater national

security or of increased individual privacy), or the agency may have

chosen not to develop monetized estimates because of resource or time

constraints. Moreover, while some of the effects are present as

quantified estimates, these cannot be summed if they are not expressed

in common units. Of course, when effects are not expressed in

quantitative terms, this aggregation problem is even more acute. We can

only conclude that estimates of the total benefits of regulation will

be understated by an unknown amount until all significant benefits are

monetized.

Because of the difficulty of estimating benefits, there are very

few studies that attempt to estimate the total benefits as well as

costs of regulation. Indeed the only study that has attempted to

estimate the total benefits of all regulations is the study by Hahn and

Hird that we relied upon for the 1988 cost baseline. Hahn and Hird

present the following broad range of estimates of the annual benefits

of regulation in billions as of 1988, which we have converted to 1996

dollars using the CPI:

Table 3.--Hahn and Hird's 1988 Benefit Estimates

[Billions of 1996 dollars]

------------------------------------------------------------------------

Low High

------------------------------------------------------------------------

Environmental............................... 21.8 179.3

Other Social................................ 33.5 60.3

Economic.................................... 0 0

---------------------------

Total................................... 55.3 239.6

------------------------------------------------------------------------

Note that while Hahn and Hird do not include any benefits from economic

regulation (on the grounds that they are negligible in most cases),

they state that the regulation of natural monopolies and antitrust can

theoretically produce efficiency gains (p. 253). When Hahn and Hird

take the midpoints of their benefit and cost estimates, they find net

benefits of regulation of about $2 billion, which leads them to

conclude that ``* * * net benefits of social regulation are positive

but small.'' (p. 253, f. 74).

Since the Hahn and Hird study, the only systematic study of the

benefits together with the costs of major social regulations, of which

we are aware, is a study by Hahn, published jointly by Oxford

University Press and the AEI Press in 1996. In that study, Hahn

reviewed the regulatory impact statements required by Executive Orders

12291 and 12866 for major regulations produced by agencies between 1990

and mid-1995. Hahn accepted the agency estimates of benefits at face

value, used consensus estimates from the academic literature to value

the benefits (e.g., the Viscusi 1992, estimate for a ``statistical

life'') and used consistent assumptions across agencies to produce

monetized benefit estimates (pp. 214-217). He found that 54 regulations

had produced almost $500 billion in benefits in present value

(discounting at 5 percent and using his middle value consensus

estimates) (p. 218). Hahn also calculated that these regulations

produced $220 billion in net costs (gross costs minus any costs savings

produced by regulation).

Unfortunately, we do not have enough information to convert Hahn's

present value estimates to annual estimates so that we could compare

them to our annual cost estimates presented above. However, we can use

Hahn's benefit/cost ratio ($500b/$220b) or 2.5, assume that it holds

for the full period since 1988, and calculate an aggregate benefit

estimate. It should be noted , however, that Hahn believes his

aggregate net benefit estimates `` * * * are likely to

[[Page 39364]]

substantially overstate actual net benefits'' (p. 224). Both our

estimates and Hahn's estimates would most likely include almost the

same set of regulations issued between 1990 and 1995 because we both

attempted to be exhaustive in our cost collection effort. According to

our sample, about 80% of the costs of social regulation issued between

1989 and 1996 were issued between 1990 and 1995. Assuming that in 1988,

social regulation produced net benefits of $2 billion as Hahn and Hird

suggest, and using Hahn's benefit-cost ratios for environmental (1.4)

and other social regulation (5.3), we calculate that the benefits of

regulation in 1996 were as follows, and we present our cost estimates

for comparison:

Table 4.--Estimates of the Total Annual Benefits and Costs of Regulation

for 1997

[Billions of 1996 dollars]

------------------------------------------------------------------------

Benefits Costs

------------------------------------------------------------------------

Environmental................................. 162 144

Other Social.................................. 136 54

Economic...................................... 0 91

-------------------------

Total..................................... 298 289

------------------------------------------------------------------------

As explained above, these are very rough estimates, probably

overstating both the benefits and costs, and viewed alone not very

informative. The total numbers on costs and benefits indicate that

regulation has produced about as much in benefits as in costs, but this

is because economic regulation produces negligible benefits.

Disaggregating the totals a little reveals that ``Other Social''

regulation produces very large net benefits, but if one digs into both

the Hahn and Hird, and Hahn studies in greater detail, it becomes clear

that most of the benefits of this category are produced by highway

safety regulation. Hahn and Hird state that they found very little

``credible evidence'' that as of 1988, OSHA regulations had produced

any significant benefits (275-276), although Hahn's 1996 study found

that OSHA regulations had produced over $50 billion (present value) in

net benefits by 1995.

Hahn makes clear that even though his study found that the 53

regulations issued between 1990 and 1995 produce very large net

benefits, only 23 would ``pass'' a cost-benefit test. He also points

out that if the rules that had not passed the test had not been issued,

net benefits would have been $115 billion, or about 40 percent greater

(p. 221). He also finds that all safety regulations have benefits

greater than costs, and that regulations based on the Clean Air Act and

the Safe Drinking Water Act had positive net benefits (p. 221) (which

is corroborated by the EPA Drinking Water study (1993)). An analysis of

the costs and benefits of regulations based on other regulatory

programs produced mixed results. The message is clear: the policy

content is in the details.

3. Other Estimates of the Total Costs of Regulation

As noted, the estimates of total costs and benefits that we have

provided overstates, we believe, both the benefits and most certainly

the costs of regulation. Nonetheless, our cost estimates are

substantially less than other numbers that are often cited and have

gained a certain credibility in the debate. We would note that, apart

from the Hahn and Hird study we used, all other estimates of total

costs do not present benefit estimates. We believe that presenting

costs without benefits is not very informative and potentially

misleading. In any event, some explanation of the difference between

our numbers and other numbers that have been cited is appropriate.

According to a 1995 report to Congress by the Small Business

Administration's (SBA) Office of Advocacy, there are estimates of the

total cost of regulation generated by the Heritage Foundation as high

as $810 billion to $1.7 trillion for 1992 with benefits reportedly

netted out. We cite this study because it is the largest estimate of

the costs of regulation that we are aware of. Our reference to it

should not be construed as any endorsement of it; indeed, it has not

been peer reviewed, it has not been published in a reputable journal,

and most importantly, the basis for the estimate has not been made

publicly available. Our own view is that the numbers are either wrong

or are measuring something other than what we are talking about.

On the other hand, there is a series of Hopkins studies of the

total cost of regulation (1991, 1992, 1995, and 1996), which is both

well known and better documented. The Hopkins estimates have also

received attention from the Congress. A recent GAO study, Regulatory

Reform: Information on Costs, Cost-Effectiveness, and Mandated

Deadlines for Regulation (1995), was asked to focus on the Hopkins

study because of its prominence and the fact that it was the only game

in town.

Hopkins relied on the paper by Hahn and Hird (1991) that provided

estimates of the costs and benefits of economic and social regulation

for 1988, on the 1990 study by the EPA, The Cost of a Clean, and

various reports from OMB: The Information Collection Budget (various

years)--that is, the same materials that we used for our 1988 cost

baseline. Hopkins also reviewed two earlier attempts at adding up the

total costs of regulation as of 1976-77 by Weidenbaum and DeFina (1978)

and Litan and Nordhaus (1983) to make estimates of the trend in total

regulatory costs over this decade. He also projected cost to the year

2000, based on estimates from the Cost of Clean, extrapolations of past

trends, and some educated guess work about the future costs of

compliance with regulations required by statutes such as the Clean Air

Act Amendments of 1990 and the Americans with Disabilities Act of 1990.

Because we focus our attention on the state of regulation as of 1997,

we do not directly critique the earlier studies by Weidenbaum and

DeFina or Litan and Nordhaus, nor do we discuss Hopkins' extrapolations

beyond 1997.

Hopkins' cost estimate for 1997 (presented by us in 1996 dollars

using the CPI), is as follows:

Table 5.--Hopkins' Estimate of the Annual Costs of Regulation

[Billions of 1996 dollars]

------------------------------------------------------------------------

------------------------------------------------------------------------

Environmental.............................................. 185

Other Social............................................... 62

Economic: Efficiency Costs................................. 81

Economic: Transfer Costs................................... 148

Process.................................................... 232

------------

Total.................................................. 708

------------------------------------------------------------------------

One important problem with these estimates is that, with the

exception of the Process estimate, they are based on individual studies

that were published, for the most part, between 1975 and 1990 and then,

as mentioned above, extrapolated to 1997 based on the Cost of Clean

cost projections for future years for environmental regulation and his

own ad hoc ``guesstimates'' (his words ( 1991, p. 11)) for other social

and economic regulation. Note that although we also use data from 1988

and earlier, his approach differs significantly from ours. Rather than

extrapolation, we used timely information supplied by the agencies over

the period 1987 to 1996 that was subject to notice and public comment

and OMB review to update the estimates on benefits and costs to 1997.

Ideally, to get a realistic picture of the total costs of regulation,

one needs to do a comprehensive study of all regulatory costs facing

the economy at a given point in time. But that would be prohibitively

expensive and, as pointed out above, ex post surveys of the costs of

existing regulations have their own problems.

[[Page 39365]]

A second problem relates to the appropriateness of Hopkins'

adjustments. Specifically, Hopkins' adds to EPA's Cost of Clean report

(the 1988 base), $10 billion for the Clean Air Act Amendments, $8

billion for Superfund/RCRA, and $1 billion for several DOT

environmental regulations. It is not clear, however, how these figures

are derived. Similarly, Hopkins' estimate for ``other'' social

regulation costs starts with Hahn and Hird (as we did), but adds an

additional $1 billion and an assumed rise of 5% percent per year for

OSHA regulations, and adds $4 billion for the new universal

accessibility standards, $500 million for food labeling regulations,

$200 million for energy conservation standards, and $1.6 billion for

clinical lab regulations. These amounts are taken from a combination of

agency and industry sources, although again it is not clear how the

specific numbers were derived.

As noted above, we used Hopkins' updates for the changes in

economic costs to 1997. Moreover, we added $10 billion to his estimate

of the cost of economic regulation to account for the paperwork costs

imposed by the independent agencies. But we did not include Hopkins'

estimate of transfer costs. Hopkins acknowledges that transfers are

exchanges of funds from one group to another, but he argues that the

existence of transfers creates real social costs because they give rise

to ``rent-seeking behavior.'' (``Rent seeking behavior'' is behavior

that attempts to capture or create excess profits usually by

influencing government actions, such as regulations.) He states that

the existence of transfers creates real costs that exhausts the amount

of the transfer as interest groups and their lobbyists, lawyers and

experts campaign for those funds (p. 29). We believe that Hopkins has

the causality wrong. Rather than the existence of a transfer program

causing rent-seeking behavior, rent-seeking behavior causes the

transfer. It is the possibility that rent-seeking behavior may result

in a gain that causes special interests to form and campaign for

special treatment. The transfer program does not have to exist, just

the possibility that one could be set up. Thus to the extent that rent-

seeking behavior imposes real costs on society, those costs would be

more appropriately attributable to our democratic political system than

to a particular regulation.

We also believe that Hopkins' has overstated the costs of process

regulation, which for the most part either represents double counting

or more appropriately belongs elsewhere. Most of Hopkins' estimate is

based on the burden hour estimates reported in OMB's annual Information

Collection Budgets (various years ) of the time it takes the public to

comply with information requests made or generated by the Federal

government. He multiplies burden hours by $26.50 per hour (in 1996

dollars), an estimate of the public's opportunity cost for filling out

forms and gathering information. While average private nonagricultural

hourly earnings was $11.82 in 1996 (less than 45 percent of the number

he used), Hopkins argues that his time cost estimate is not too high

because about 85 percent of the burden hour estimate is from the

Treasury Department, much of which represents the time it takes high

priced tax accountants to fill out income and corporate tax forms.

We believe the paperwork costs of the tax code should not be

included in an estimate of the total cost of regulation. First, filling

out tax forms is not the result of ``regulations'' but rather of the

tax code itself, with most regulations merely providing interpretations

and clarifications of tax law. Second, Hopkins assumes a zero

baseline--that is, he implicitly assumes that replacing the revenue

generated by the present tax code could be done with no record keeping

or reporting costs. The implicit baseline is a world without taxes.

Third, reforming the tax code is an entirely different public policy

area than regulation, and lumping the two together, especially when the

tax numbers are so large relative to social and economic regulatory

costs, just confuses the issue.

Hopkins has removed the cost of procurement paperwork, such as that

imposed by DOD and GSA, based on an OMB estimate that in 1990 the

procurement paperwork burden was about 30 percent of the total non-tax-

related paperwork. He correctly points out that those costs are mostly

paid by taxpayers through higher procurement costs, and thus it would

be double counting to include them as private sector regulatory costs.

However, most of the remaining paperwork costs also represent double

counting, because the estimates of regulatory costs for individual

social and economic regulations that he uses already include these

costs as a cost of compliance. Specifically, the compliance cost

estimates submitted to OMB and included in our estimate for the cost of

social regulation include associated paperwork costs. Although Hopkins

admits the likelihood of double counting, he dismisses it because ``the

dominance in this category of tax-related paperwork suggests this is

not likely a serious problem'' (1991, p. 14). But once tax-related

paperwork is removed, it becomes a serious problem.

Hopkins also adds to his process costs estimates $10 billion in

1997 as the amount that State and local government spent to comply with

Federal mandates. However, we cannot determine a clear basis for his

estimate. Because our approach of adding the costs of all social

regulations issued since 1987 should capture State and local regulatory

costs, there should not be a special provision for State and local

mandates.

The final piece of Hopkins' process cost estimate is an estimate of

how much more overhead the U.S. multi-payer health care system

generates than Canada's single-government-payer system. His argument

here is that because the United States has less regulation, it has

higher regulatory costs. It is certainly true that regulation can

improve efficiency, but it seems disingenuous to argue that because

regulations have not mandated a single payer system or restricted

private payment systems, etc., regulatory costs are increased. These

increased cost estimates (Woolhandler and Himmelstein, 1991), if they

are true (they are controversial), are more properly treated as

benefits of regulation (or of a government program), not as costs of

not regulating. Additionally, as discussed above, including these costs

confuses the regulatory reform debate.

In sum, in our view, Hopkins' total cost estimate is about 240%

greater than ours because he includes inappropriate transfers and

process costs and less accurate estimates of the growth of social

regulation since 1988.

4. Assessment of the Direct and Indirect Impact of Federal Rules

A proper assessment of the costs and benefits of regulation would

have to take into account both the direct and indirect impact of

regulation on the economy. As reported above, our estimate of the

direct effect is that, in the aggregate, the net benefits of regulation

issued to date is positive. The few studies that have attempted to

determine the indirect effects of regulation on productively and

welfare have found significant indirect effects, implying that the

direct effects reported above are significant understatements of the

full costs of regulation (Hazilla and Kopp 1990 and Jorgenson and

Wilcoxen 1990). However, as Hahn and Hird (1991) point out, it is not

clear how to evaluate these studies and others like them, which are

based on huge, complex and often proprietary models of the U.S.

economy. This makes it almost impossible to validate the

[[Page 39366]]

models or to view the assumptions on which they are based.

These studies have another major problem because they only take

into account indirect cost effects and do not include the indirect

beneficial effects that may result from better health and safer lives.

Yet it is generally agreed that healthier people tend to work harder

and longer and save and invest more, thereby increasing the growth of

the economy. Therefore, without knowing what the indirect and general

equilibrium benefits of regulation are, one should not draw conclusions

by only looking at the indirect costs. Models that take into account

the indirect benefits and general equilibrium effects of longer life

spans, higher levels of environmental quality, and more equal

opportunities remain to be developed.

The best survey of what we know about the full range of indirect

costs and benefits of social regulation was recently published in one

of the leading economic journals: the Journal of Economic Literature

(Jaffe, Peterson, Portney, and Stavins 1995). Although concentrating on

environmental regulation, their discussion should apply to health and

safety regulation as well because they are similar in their economic

effects and the direct costs of health and safety regulation are only

about one third the amount of environmental regulation. The authors

conclude from a survey of the literature that environmental regulation

has little impact on ``competitiveness as measured by net exports,

overall trade flows, and plant location decisions (p. 157), `` modest

adverse impacts on productivity'' (p. 151) and ``significant dynamic

impacts * * * in the form of costs associated with reduced investment''

based on computable general equilibrium models (p. 151). However, they

also point out that, for the most part, these estimates do not take

into account the feedback effect from improvements in the environment

(p. 153).

Jaffe et al. also examine the contention that environmental and

other social regulation may actually enhance economic growth and

competitiveness by stimulating improvements in productivity as firms

compete among themselves to comply with regulations in the least cost

way. We discussed this proposition above as a reason why the actual

costs of compliance ex post often turns out to be less than predicted

ex ante. Several authors have extended this proposition beyond the ad

hoc to include the economy as a whole (Porter 1991 and Gardiner 1994).

This line of reasoning claims that the country that leads in

environmental protection will gain a lasting comparative advantage in

international trade in the supplier industries because of having been

the ``first mover'' into an area that other countries must follow.

We are cautious about extending such claims to the economy as a

whole. To be sure, certain sectors benefit and we may even develop a

comparative advantage in them, but other sectors must invariably lose

their comparative advantage because resources are drawn from them and

comparative advantage is by definition a relative phenomenon. Jaffe, et

al., (p. 157) conclude:

Thus, overall, the literature on the ``Porter hypothesis''

remains one with a high ratio of speculation and anecdote to

systematic evidence. While economists have good reason to be

skeptical of arguments based on nonoptimizing behavior where the

only support is anecdotal, it is also important to recognize that if

we wish to persuade others of the validity of our analysis we must

go beyond tautological arguments that rest solely on the postulate

of profit-maximization. Systematic empirical analysis in this area

is only beginning, and it is too soon to tell if it will ultimately

provide a clear answer.

We agree with this statement and hope that this report stimulates

``systematic empirical analysis'' in this area, as well as work on as

the broader issue of how to improve the estimation of the costs and

benefits of regulatory programs discussed in this report.

Chapter III. Estimates of Benefits and Costs of ``Economically

Significant'' Rules

1. Scope

In this chapter, we examine the benefits and costs of ``each rule

that is likely to have a gross annual effect on the economy of

$100,000,000 or more in increased costs,'' as required by Section

645(a)(2). We have included in our review those final regulations on

which OIRA concluded review during the 12-month period April 1, 1996,

through March 31, 1997. We chose this time period to ensure that we

covered a full year's regulatory actions as close as practicable to the

date our report is due, given the need to compile and analyze data and

publish the report for public comment. In addition, we thought it would

be useful to adopt a time period close to that used for the annual OMB

report required by the Unfunded Mandates Reform Act of 1995.

The statutory language categorizing the rules we are to consider

for this report is somewhat different from the definition of

``economically significant'' rules in Executive Order 12866 (Section

3(f)(1)). It also differs from similar statutory definitions in the

Unfunded Mandates Reform Act and Subtitle E of the Small Business

Regulatory Enforcement Fairness Act of 1996--Congressional Review of

Agency Rulemaking. Given these varying definitions, we interpreted

Section 645(a)(2) broadly to include all final rules promulgated by an

Executive branch agency that meet any one of the following three

measures:

Rules designated as ``economically significant'' under

Section 3(f)(1) of Executive Order 12866;

Rules designated as ``major'' under 5 U.S.C. 804(2)

(Congressional Review Act);

Rules designated as meeting the threshold under Title II

of the Unfunded Mandates Reform Act (2 U.S.C. 1531-1538).

We did not include rules issued by independent regulatory agencies

because we do not review their rules under Executive Order 12866. In

any case, we believe that few of their individual regulations meet the

statutory criteria of Section 645(a)(2).

During the time period selected, OIRA reviewed 41 final rules that

met these criteria. (Table 6.) For 9 of these 41 final rules, OIRA also

reviewed a proposed rule during the time period. (OIRA reviewed 13

additional proposed rules that met one or more of the three criteria

listed above.) 1 Of the 41 final rules, USDA submitted 12;

HHS submitted 8; EPA submitted 7; and the remainder were from the

Departments of the Commerce (1), Housing and Urban Development (2),

Interior (2), Justice (1), Labor (2), and Transportation (3), and the

Social Security Administration (2). Also included is one multi-agency

rule from HHS, DOL, and Treasury. These 41 rules represent about 15% of

the final rules reviewed by OIRA during this period, and less than 1%

of all final rules published in the Federal Register between April 1,

1996, and March 31, 1997. Nevertheless, because of their greater scale

and scope, we believe that they represent the vast majority of the

costs and benefits of new Federal regulations during this period.

---------------------------------------------------------------------------

\1\ These proposals include several particularly significant

proposals reviewed by OIRA: EPA's two proposals in November 1996 to

revise the National Ambient Air Quality Standards for Particulate

Matter and Ozone; EPA's proposal in the summer of 1996 expanding the

industries covered by the Toxic Release Inventory; and FDA's January

1997 proposal regarding Animal Proteins Prohibited in Ruminant Feed.

These proposals are not discussed because they were not yet final

during the time frame on which we are reporting.

[[Page 39367]]

Table 6.--Economically Significant Final Rules

[4/1/96-3/31/97]

------------------------------------------------------------------------

-------------------------------------------------------------------------

Department of Agriculture

Foreign Agriculture Service:

CCC Supplier Credit Guarantee Program

Dairy Tariff-Rate Import Quota Licensing

Farm Service Agency:

1995-Crop Sugarcane and Sugar Beet Price-Support Loan Rates

Farm Program Provisions of the 1996 Farm Bill

Peanut Poundage Quota Regulations--7 CFR Part 729 (Interim Final)

Conservation Reserve Program--Long Term Policy

Federal Crop Insurance Corp.:

Catastrophic Risk Protection Endorsement

General Administrative Regulations--Subpart T

Animal and Plant Health Inspection Service: Karnal Bunt

Food Safety and Inspection Service: Hazard Analysis and Critical Control

Points

Food and Consumer Service:

Certification Provisions (Mickey Leland Childhood Hunger Relief

Act), Food Stamp Program

Child and Adult Care Food Program: Targeting of Day Care Home

Reimbursements (Interim Final)

Department of Commerce

Bureau of Export Administration: Encryption Items Transferred from the

U.S. Munitions List to the Commerce Control List

Department of Health and Human Services

Health Care Financing Administration:

Limits on Aggregate Payments to Disproportionate Share Hospitals

Hospital Inpatient Prospective Payment Systems FY 1997 Rates

Medicare Revisions to Policies Under Physician Fee Schedule 1997

Requirements for Physician Incentive Plans in Prepaid HCOs

Individual Market Health Insurance Reform (Interim Final)

Food and Drug Administration:

Food Labeling Nutrition Labeling, Small Business Exemption

Medical Devices: CGMP Quality Systems Regulation

Sale and Distribution of Tobacco

Department of Housing and Urban Development

Office of Housing:

Single-Family Mortgage Insurance (Interim Final)

Sale of HUD-Held Single-Family Mortgages

Department of Interior

Fish and Wildlife Service:

Migratory Bird Hunting--Final Frameworks Early Season

Migratory Bird Hunting--Final Frameworks Late Season

Department of Justice

Immigration and Naturalization Service: Inspection and Expedited Removal

of Aliens (Interim Final)

Department of Labor

Employment Standards Administration: Service Contract Act Standards for

Federal Service Contracts

Occupational Safety and Health Administration: Methylene Chloride

Department of Transportation

National Highway Traffic Safety Administration:

Occupant Crash Protection (Airbag Depowering)

Light Truck Corporate Average Fuel Economy MY 1999

Federal Railroad Administration: Roadway Worker Protection

Environmental Protection Agency

Office of Solid Waste and Emergency Response:

Accidental Release Prevention--112(r)

Financial Assurance for Local Gov't. Owners of MSW Landfills

Office of Air and Radiation:

Deposit Control Gasoline

Acid Rain Phase II NOX

Federal Test Procedure Revisions

Voluntary Standards for Light Duty

Vehicles (49-State)

Office of Prevention, Pesticides, and Toxic Substances: Lead-Based Paint

Activities in Target Housing

Social Security Administration

Cycling Payment of Social Security Benefits

Determining Disability for Individuals Under Age 18 (Interim Final)

Common Rule--Health and Human Services/Labor/Treasury: Health Insurance

Portability of Group Health Plans (Interim Final)

------------------------------------------------------------------------

[[Page 39368]]

2. Overview

As noted in chapter I, Executive Order 12866 ``reaffirms] the

primacy of Federal agencies in the regulatory decision-making process''

because agencies are given the legal authority and responsibility for

rulemaking under both their organic statutes and certain process-

oriented statutes, such as the Administrative Procedure Act, the

Unfunded Mandates Reform Act, and the Small Business Regulatory

Enforcement Fairness Act. The Executive Order also reaffirms the

legitimacy of centralized review generally and in particular review of

the agencies' benefit-cost analyses that are to accompany their

proposals. The Executive Order recognizes that in some instances the

consideration of benefits or costs is precluded by law. For example,

the National Ambient Air Quality Standards under the Clean Air Act are

to be health-based standards set by EPA solely on the basis of the

scientific evidence. In addition, under the Clean Water Act,

technology-based standards must be established without regard to

benefits. A variation is the Occupational Safety and Health Act, where

health standards must be based on significant risks to the extent they

are economically and technologically feasible. However, the Executive

Order requires agencies to prepare and submit benefit-cost analysis

even if those considerations are not a factor in the decision-making

process. Again, it is the agencies that have the responsibility to

prepare these analyses, and it is expected that OIRA will review (but

not redo) this work.

Reviewing for this report the benefit-cost analyses accompanying

the 41 final rules listed in Table 6, we found a wide variety in the

type, form, and format of the data generated and used by the agencies.

For example, agencies developed estimates of benefits, costs, and

transfers that were sometimes monetized, sometimes quantified but not

monetized, sometimes qualitative, and, most often, some combination of

the three. Generally, the boundaries between these types of estimates

are relatively well-defined.

As discussed above, all monetized estimates are, by definition,

given in dollars and permit ready comparison and aggregation. Monetized

estimates of effects are what is most generally thought of as the basis

of benefit-cost analysis. Even when such figures are available,

however, care must be taken when interpreting them because they depend

for comparability on a number of distinct elements. Specifically,

monetized estimates consist of: (1) the dollar value itself; (2) the

base year of the dollar used; (3) the initial year in which the effects

occur; (4) the final year after which the effects disappear; (5) the

discount rate used (whether explicitly or implicitly) to convert future

into current values (or vice versa); and (6) the format in which the

monetized value is represented.

Format means the characterization of the monetized or quantified

effects over time. In the rules on which we are reporting, we found

that agencies used a variety of formats:

1. Annualized values, which spread out variable effects into yearly

sums that are financially equivalent to the actual temporal schedule,

regardless of how ``lumpy'' it might be;

2. Present values, which convert over time into an immediate lump-

sum;

3. Constant annual values, in which effects have been estimated (or

are assumed) to be fixed each year over the time horizon in which the

regulation applies;

4. Other formats, such as varying annual values or values reported

only for selected years, which can be converted into annualized or

present value format under certain specified conditions and

assumptions; and

5. Unknown formats, which cannot be interpreted without additional

information.

From the perspective of benefit-cost analysis, annualized and

present value formats are always preferred because they permit

aggregation and comparisons within and across regulatory actions.

Constant annual values are slightly less desirable insofar as they

require the additional step of discounting to permit such aggregation

and comparison. Constant annual values are typically found in monetized

cost estimates involving federal budget outlays, and in quantified

benefit estimates where agencies have chosen not to discount;

aggregation and comparison within and across regulations generally

cannot be performed without a common discounting methodology. Where an

agency's estimation methodology follows an unknown format, further

research needs to be performed to ascertain how to convert or

reconstruct annualized or present value estimates.

Quantified estimates may take the form of a variety of different

units, but they share in common a numeric measure. Generally,

quantified estimates of benefits, costs, and transfers must be

interpreted with the same elements noted above in mind. The most

important difference, of course, is that quantified estimates are

expressed in units other than dollars. Such estimates may be aggregated

only if they are presented in the same or similar units. Also, a

quantified estimate should identify the applicable time period (e.g.,

tons of pollution controlled per year, number of endangered species

protected from extinction per decade). Quantified estimates that lack

reference to the time periods to which they apply may be highly

misleading, and should be converted to similar time periods to be

comparable. Indeed, even when estimates of similar type include

explicit reference to their underlying time periods, care must be taken

when aggregating or comparing them because of the risk of summing

estimates based on different time periods or inconsistent base years.

In contrast, qualitative estimates may not have any units at all,

or they may be expressed in units that do not lend themselves to simple

comparisons. As has often been observed, it is more frequently the case

that costs are monetized and benefits are more often quantified or

presented in qualitative form. Qualitative effects should be evaluated

in terms of their uniqueness, reversibility, timing, and geographic

scope and severity. These effects are the most difficult to interpret,

and this may lead some to give them short shrift. The fact that an

effect has not been monetized or quantified does not, however,

necessarily mean that it is small or unimportant. In discussing

agencies' descriptions of qualitative effects, we use the first year in

which such effects are expected to occur where it can be determined.

Qualitative effects must be used with care for other reasons as

well. Because they tend to be general and descriptive, they may be

broader than the incremental effects of the particular regulation being

analyzed. For example, in developing a rule designed to address a

particular safety problem, an agency may describe the extent of the

problem--that is, so many persons injured per year from this particular

cause. While important in estimating the benefits of the rule, this

figure itself is not a benefit estimate unless and until it is linked

to the likely effectiveness of the proposed rule. Finally, qualitative

estimates cannot be aggregated at all because they do not contain units

that permit arithmetic operations. In addition, not infrequently they

fail to contain relevant information about the period of time during

which they apply.

Cost-effectiveness measures and break-even analyses, which are

frequently used in regulatory analyses, are not equivalent to either

monetized or quantified estimates. Unlike benefits and costs, which are

expressed with

[[Page 39369]]

time as the explicit or implicit denominator, cost-effectiveness

estimates (e.g., dollars per ton of pollution controlled) are expressed

in terms of cost per unit of benefit--that is, as ratios in which

``cost'' is the numerator and ``benefit'' is the denominator.

Frequently, such estimates are quite useful, particularly when

comparing alternative methods of achieving a predetermined objective.

Nevertheless, cost-effectiveness estimates cannot be compared with

either cost or benefit estimates, nor can they themselves be aggregated

in any manner.

Similarly, break-even analyses reveal the minimum level of benefits

necessary for net benefits to be positive. For example, if a regulation

is estimated to prolong one ``statistical life'' at a cost of $X

million, break-even analysis reveals that if society's willingness-to-

pay to prolong one statistical life is greater than $X million, then

the benefit of the regulation exceeds its cost. Likewise, if we know

that society's willingness-to-pay to prolong one statistical life is $X

million, and that the regulation will cost $X million then break-even

analysis reveals that benefits exceed costs if more than one

statistical life is saved. While this form of analysis is often useful

to decision makers, it does not address either the absolute or marginal

magnitude of benefits and costs.

3. Benefits and Costs of Economically Significant Final Rules

A. Social Regulation

Of the 41 rules reviewed by OIRA, 22 represent major new regulatory

initiatives requiring substantial additional private expenditures and/

or providing new social benefits. (See Table 7). EPA issued 7 of these

rules; USDA issued 4; HHS and DOT each issued 3; and the remaining 5

were spread among DOC, DOI, DOJ, and DOL. Agency estimates and

discussion are presented in a variety of ways, ranging from an

extensive qualitative discussion of benefits, e.g., USDA's rules

implementing the 1996 Farm Bill, to a more complete benefit-cost

analysis, e.g., the HHS rule on the Sale and Distribution of Tobacco.

Benefits Analysis. Of the 22 rules listed in Table 7, agencies

provided monetized benefit estimates in 8 cases. Monetized benefit

estimates included items such as: (1) FDA's estimated $275 to $360

million per year in annualized cost savings from its deregulatory food

labeling rule (these are savings in the costs associated with

compliance with labeling requirements on low-volume products that FDA

estimated would be enjoyed by small businesses); (2) FDA's estimated

$9.2 to $10.4 billion per year reduced incidence of morbidity and

mortality from its rule restricting cigarette sales and marketing; (3)

EPA's estimated $174 million per year in reduced damage to chemical and

other facilities from its accidental release prevention rule; and (4)

USDA's estimated $2 billion per year in the value of improved soil

productivity, water quality, and wildlife from rules implementing its

Conservation Reserve Program.

BILLING CODE 3110-01-P

[[Page 39370]]

[GRAPHIC] [TIFF OMITTED] TN22JY97.000

[[Page 39371]]

[GRAPHIC] [TIFF OMITTED] TN22JY97.001

[[Page 39372]]

[GRAPHIC] [TIFF OMITTED] TN22JY97.002

[[Page 39373]]

[GRAPHIC] [TIFF OMITTED] TN22JY97.003

[[Page 39374]]

[GRAPHIC] [TIFF OMITTED] TN22JY97.004

[[Page 39375]]

[GRAPHIC] [TIFF OMITTED] TN22JY97.005

[[Page 39376]]

[GRAPHIC] [TIFF OMITTED] TN22JY97.006

[[Page 39377]]

[GRAPHIC] [TIFF OMITTED] TN22JY97.007

BILLING CODE 3110-01-C

[[Page 39378]]

An innovative feature of FDA's estimate for monetized benefits from

the tobacco rule is explicit recognition of the increases in longevity,

the timing of these increases, and their value. In part of its benefits

analysis, FDA estimated more than 900,000 years of life would be gained

by each cohort (about 4 years per would-be smoker). FDA discounted

these life-years to account for the delay associated with smoking

related health effects, and then monetized the life-years gained at

$117,000 per life-year, an estimate derived from academic literature.

In 6 cases, agencies provided benefit estimates that were

quantified but not monetized. These included: (1) OSHA's estimated 31

cancer cases per year avoided and 3 deaths per year avoided from acute

central nervous system effects and carboxyhemoglobinemia from its

methylene chloride rule; (2) NHTSA's estimated 83 to 101 fatalities

prevented and 5,100 to 8,800 fewer serious injuries (primarily to

children) over the lifetime of one model year's vehicles from its

airbag depowering rule; and (3) EPA's estimated number of tons of

hydrocarbons, carbon monoxide, and nitrogen oxide emissions which it

expected would be reduced annually from several of its rules. In one

case, the medical device rule, FDA provided some of its benefit

estimates in monetized form; other benefits were quantified.

In a number of cases where agencies reported monetized or

quantified benefit estimates, they also provided a qualitative

description of unquantified effects. For example, DOT discussed the

possibility that its railroad worker protection rule could increase the

carrying capacity of the nation's railroads and boost railroad employee

morale. OSHA reported that its methylene chloride rule would lower

exposure for as many as 30,000 to 54,000 workers, reducing the risk of

adverse central nervous system effects (other than death) of

carboxyhemoglobinemia every year. FDA reported that its medical device

rule would yield additional benefits in the form of fewer injuries in

other less severe categories (that were not quantified by the FDA),

reduced inconvenience to users and/or patients, and reduced burden on

medical personnel in terms of having to repeat treatments, replace

devices, and complete the paperwork and reporting associated with

medical device failures. EPA reported that the accidental release

prevention rule would result in efficiency gains by providing the

public with additional information on accident prevention plans for

manufacturing facilities and by improving the transfer and adoption of

new technologies between industries.

Finally, in 8 cases, agencies reported neither monetized nor

quantified benefit estimates. In some (but not all) of these cases, the

agency provided a qualitative description of benefits. For example,

USDA's analysis of the 1996 Farm Bill program rules included a

qualitative discussion of the benefits of increased efficiency due to

the additional flexibility the rule provided for farmers to decide

which crops to plant. In its rule establishing training requirements

for lead abatement contractors, workers, etc., EPA discussed in

qualitative terms the value to consumers of being able to purchase

abatement services of reliable quality.

Cost Analysis. In 17 of the 22 cases, agencies provided monetized

cost estimates. These include such items as: (1) USDA's estimated $900

million per year in consumer ``deadweight'' losses from restrictions on

farm output under its Conservation Reserve Program; (2) EPA's estimated

$138 million per year for gasoline detergent additives under its

deposit control gasoline rule; and (3) OSHA's estimated $101 million

per year to reduce occupational exposures to methylene chloride. For 2

deregulatory rules--FDA's food labeling rule and EPA's municipal solid

waste landfill financial assurance rule--agencies' monetized cost

estimates were very small or zero.

In 4 of the 22 cases, agencies provided estimates of non-monetized,

quantitative effects that were intended to better inform decision

makers, but which were not identified as benefit or cost estimates per

se. For example, NHTSA estimated that its airbag depowering rule would

result in 50 to 431 more fatalities and an increase of 171 to 553

serious chest injuries (primarily to adults not wearing seatbelts) over

the lifetime of one full model-year of vehicles, and DOI estimated that

duck hunters spend over $400 million per year on duck-hunting

activities.

Seven (7) of these 22 rules have positive net monetized benefits--

that is, the estimated monetized benefits exceed the estimated

monetized costs of the rules. For example, FDA estimated its tobacco

rule would result in $9 to 10.2 billion per year in net benefits

(benefits minus costs). EPA estimated its Accidental Release Prevention

rule would generate $77 million per year in net benefits. For the

remaining 15 rules, agency analysis did not provide enough information

to allow an estimate of net benefits. Five (5) of the rules provided

quantified estimates of the expected benefits in terms of tons of

emissions reduced or injuries avoided; but in those cases, the agencies

did not assign values to these effects. Five (5) additional rules

identified qualitative benefits associated with the rule; but in these

cases, the agencies did not develop any quantified estimates of the

likely magnitude of these effects. Finally, in 5 cases, we classified a

rule as economically significant although little economic data on the

effects of the rule existed. These deserve comment.

USDA Karnal Bunt: Karnal bunt is a fungal disease that infects

wheat, and during the past year was closely controlled to prevent

potential losses in wheat exports. Fear of widespread Karnal bunt

infestation led USDA's Animal and Plant Health Inspection Service

(APHIS) to take several emergency quarantine actions beginning in March

1996. The quarantine severely restricted the movement of wheat grown in

Arizona, two counties in Southern California, New Mexico, and portions

of west Texas. It also directed the plowing under of several thousand

acres of wheat and instituted mandatory disinfection procedures for

combines and wheat handling equipment. APHIS instituted these

procedures on an emergency basis to prevent the spread of the disease.

These restrictions were known to be expensive, but estimates of how

expensive were not developed at the time the actions were taken.

In October 1996, APHIS issued the rule included on Table 7, which

continued the quarantine and its restrictions, and established

provisions for compensating wheat farmers and handlers who suffered

losses. The rule was designated economically significant because,

although economic data were not then available, both agency and OIRA

staff agreed that the impacts associated with the rule were

significant. For the same reason, it was designated ``major'' under

SBREFA. While needing to issue this rule promptly APHIS agreed that it

would conduct a Regulatory Flexibility Analysis and an economic

analysis. In an analysis developed after the time period of our report,

USDA estimated one-year costs totaling about $42 million. The Federal

government paid $24 million to affected parties to compensate for these

losses. However, the Department acknowledged that other potentially

significant costs had not been formally estimated. The Department

estimated the benefits of the rule to be approximately $2 billion--

based upon the potential loss of export markets if our trading partners

chose not to buy U.S. wheat--clearly making it an economically

significant rule.

[[Page 39379]]

DOI Migratory Bird Hunting (2 rules): These are unusual rules in

that they are permissive rather than restrictive--that is, migratory

bird hunting is prohibited absent these annual regulations which allow

hunting, setting bag limits and other controls on both early and late

season hunts. Thus the rules permit spending rather than requiring the

expenditure of private resources. DOI reports that the National Survey

of Fishing, Hunting, and Wildlife Associated Recreation indicated that

expenditures by migratory bird hunters (exclusive of licenses, tags,

permits, etc.) totaled $686 million in 1991. Based on this estimate,

DOI estimated expenditures by duck hunters would be over $400 million

per year in 1995. However, this figure is not a social benefit in the

commonly used sense of the term.

DOT Light Truck CAFE: Each year DOT must establish a Corporate

Average Fuel Economy (CAFE) standard for light trucks, including sport-

utility vehicles and minivans, (DOT also sets a separate standard for

passenger cars). For the past two years, however, appropriations

language has prohibited NHTSA from spending any funds to change the

standards. In effect, Congress has frozen the light truck standard at

its existing level of 20.7 miles per gallon (mpg) and has prohibited

NHTSA from analyzing effects at either 20.7 mpg or alternative levels.

Although benefits and costs are not estimated, DOT's experience in

previous years indicates that they may be substantial. Over 5 million

new light trucks are subject to these standards each year, and the

standard, at 20.7mpg, is binding on several manufacturers; some are

just above the standard and at least one is currently below 20.7 mpg.

Because of these likely substantial effects, the rule was designated as

economically significant even though analysis of the effects was

prohibited by law.

DOC Encryption: Commerce's encryption rule allows the exportation

of more effective encryption products, subject to certain conditions

such as the development of a key management infrastructure. Although

quantitative estimates are not available, the rule is economically

significant, because, as commerce's analysis notes,

The initiative addresses important foreign policy and national

security concerns identified by the President. Export controls on

cryptographic items are essential to controlling the spread abroad

of powerful encryption products which could be harmful to critical

U.S. national security, foreign policy and law enforcement

interests. This initiative will preserve such controls and foster

the development of a key management infrastructure necessary to

protect important national security, foreign policy and law

enforcement concerns.

(61 FR 68573).

Aggregate Effects. As noted above in chapter II, the substantial

limitations of the available data on the benefits and costs of this set

of rules make it virtually impossible to develop an aggregate estimate

of benefits and costs for even a single year's regulation. First, there

are no quantified or monetized estimates for 6 of the rules. In

addition, since many effects are not expressed in monetized terms,

there is a problem of apples and oranges in aggregating estimates.

Eight (8) of the rules listed in Table 7 have quantified estimates of

significant effects. Some of the quantified effects--premature deaths

and serious injuries avoided--are not unique to these rules but rather

are frequently identified in the RIAs for a variety of rules, and other

agencies have assigned monetized estimates to these outcomes. In any

event, the different quantitative effects cannot be summed because they

are not expressed in common units. Finally, when effects are only

described in a qualitative way, the aggregation problem becomes all the

more problematic.

Because of the substantial variation in the presentation of agency

estimates and the differences in their discussion of benefits and

costs, Table 8 takes some initial steps in presenting agency estimates

in a more consistent way. This presentation re-formats the monetized

benefit and cost information on a rule-by-rule basis to enhance their

comparability. One key factor involves discounting where the timing of

effects matters. In order to make the agency estimates more consistent,

we performed some basic adjustments to agency estimates. For example,

the FRA presented monetized benefit and cost numbers in the form of a

present value over 10 years ($240 million in benefits and $229 million

in costs). We converted these to equal annual payments of $33 million

and $32 million respectively, using the 7 percent discount rate FRA

used to generate the present value estimates. We performed a similar

procedure for EPA's Lead-Based Paint rule, using the 3 percent discount

rate the agency used in calculating the rule's $1.114 billion present

value cost over 50 years. In the case of EPA's Federal Test Procedure

rule, the agency reported emission reductions for only four specific

years (2005, 2010, 2015, and 2010); in order to facilitate comparisons

with other emission-reducing rules, we used a linear interpolation

procedure to infer emission reductions in the interim years, and then

generated an equivalent annual stream of emission reductions.

Table 8.--Summary of Agency Estimates for Final Rules

[4/1/96-3/31/97]

----------------------------------------------------------------------------------------------------------------

Other quantitative

Agency/rule Benefit estimate Cost estimate effects

----------------------------------------------------------------------------------------------------------------

USDA:

1996 Farm Bill

Farm Program Conservation..... $2 Billion/Yr............. $900 Million/Yr

Reserve Program............... (1997-2002)............... (1997-2002)..........

Karnal Bunt................... (\1\)

Hazard Analysis and Critical $.065-2.43 Billion/Yr..... $88-106 Million/Yr

Control Points.

Commerce:

Encryption Items Transferred .......................... $1.4 Million/Yr

from the U.S. Munitions List

to the Commerce Control List.

Health and Human Services:

Food Labeling/Nutrition $275-360 Million/Yr....... $4 Million/Yr \2\

Labeling: Small Business

Exemption.

Medical Devices: Quality $29 Million/Yr; 44 deaths $82 Million/Yr

Systems Regulation. and 484-677 serious

injuries avoided/Yr.

[[Page 39380]]

Restriction on Sale and $9.2-10.4 Billion/Yr \3\.. $180 Million/Yr...... $160 Million/Yr in

Distribution of Tobacco. reduced house fire

damage.

Interior:

Migratory Bird Hunting (Early

Season Frameworks).

Migratory Bird Hunting (Late

Season Frameworks).

Justice:

Inspection and Expedited .......................... $235 Million/Yr

Removal of Aliens.

Labor:

Methylene Chloride............ 31 Cancer Cases/Yr; 3 $101 Million/Yr...... 30,000 to 54,000 workers

Deaths/Yr from acute protected from central

central nervous system nervous system effects

effects. and episodes of

carboxyhemoglobinemia.

Transportation:

Airbag Depowering............. 83-101 fatalities and $0................... Increases of 50-431

5,100-8,800 serious fatalities and 261-842

injuries prevented over serious chest injuries

lifetime of one full over lifetime of one

model year's vehicles. full model year's

vehicles.

Light Truck CAFE Model Year

1999.

Roadway Worker Protection..... $33 Million/Yr............ $32 Million/Yr

EPA:

Accidental Release Prevention. $174Million/Yr............ $97 Million/Yr

Financial Assurance for $105 Million/Yr........... $0

Municipal Solid Waste

Landfills.

Deposit Control Gasoline...... 25,000 tons hydrocarbons; $138 Million/Yr Average savings of 64

474,000 tons carbon average (1997-2000). million gallons of

monoxide; 95,000 tons gasoline/Yr (1995-2001).

nitrogen oxides average

annual emission

reductions (1997-2001).

Acid Rain Phase II NOX 890,000 tons nitrogen $204 Million/Yr

Controls. oxide annual emission

reduction.

Federal Test Procedure 41,280 tons hydrocarbons; $199-245 Million/Yr.. $202 Million/Yr in

Revisions. 2,580,000 tons carbon potential fuel savings.

monoxide; 218,582 tons

nitrogen oxides

annualized emission

reductions.

Voluntary Standards for Light- 279 tons hydrocarbons; $600 Million/Yr

Duty Vehicles. 3,756 tons carbon

monoxide; 400 tons

nitrogen oxides DAILY

emission reductions in

2005.

Lead-Based Paint Activities in .......................... $33 Million/Yr \4\

Target Housing.

----------------------------------------------------------------------------------------------------------------

\1\ Agency performed analysis after the fact and released it after 3/31/97.

\2\ Maximum first-year cost; expected to decline thereafter.

\3\ Benefits and cost at 7% discount rate. FDA also provided estimates at 3%.

\4\ Using EPA's 3% discount rate.

Any comparison or aggregation across rules must also consider a

number of factors which the presentation in Table 8 does not address.

First, for example, these rules may use different baselines in terms of

the regulations and controls already in place, the initial year for the

rule, and the time period over which the rule was considered to be

effective. In addition, these rules may well treat uncertainty in

different ways. In some cases, agencies may have developed alternative

estimates reflecting upper and lower bound estimates. In other cases,

the agencies may offer a mid-point estimate of benefits and costs, and

in some cases the agency estimates may reflect only upper bound

estimates of the likely benefits and costs. Also, in order for

comparisons or aggregation to be meaningful, benefit and cost estimates

should correctly account for all substantial effects of regulatory

actions, including potentially offsetting effects, which may or may not

be reflected in the available data.

A final reason that any regulatory accounting effort has limits is

the treatment of the effects of regulations on distribution or equity.

None of the analyses addressed in this report provide quantitative

information on the distribution of benefits or costs by income

category, region, or any other factor. As a result, there is no basis

for quantifying distributional or equity impacts.

Transfer Regulations

Of the 41 rules listed in Table 6, 19 were rules necessary to

implement Federal budgetary programs. (See Table 9.) The budget outlays

associated with these rules generally provided ``transfers'' or reduced

transfers to program beneficiaries. Of the 19, 8 are USDA rules that

implement federal appropriations regarding agricultural and food stamp

policies; 7 are HHS and SSA rules that implement Medicare, Medicaid,

and Social Security policy; 2 are HUD rules associated with Federal

mortgage protections; 1 is a DOL rule

[[Page 39381]]

associated with Federal service contracts; and 1 is a joint HHS,

Treasury, and DOL action setting standards for health insurance

portability group health plans.

Table 9.--Transfer Rules

------------------------------------------------------------------------

-------------------------------------------------------------------------

Department of Agriculture:

Commodity Credit Corporation Supplier Credit Guarantee Program

Dairy Tariff-Rate Import Quota Licensing

1995-Crop Sugar Cane and Sugar Beet Price-Support Loan Program

Peanut Poundage Quota Regulations

Catastrophic Risk Protection Endorsement

General Administrative Regulations * * * Subpart T

Food Stamp Program Certification Provisions

Child and Adult Care Food Program: Day Care Home Reimbursements

Housing and Urban Development:

Single-Family Mortgage Insurance

Sale of HUD-Held Single-Family Mortgages

Labor:

Service Contract Act Standards for Federal Service Contracts

Health and Human Services:

Limits on Aggregate Payment to Disproportionate Share Hospitals

Hospital Inpatient Prospective Payment Systems (FY 1997)

Medicare Revisions to Policies Under Physician Fee schedule 1997

Requirements for Physician Incentive Plans in Prepaid Health Care

Organizations

Individual Market Health Insurance Reform: Portability from Group to

Individual Coverage

Social Security Administration:

Cycling Payment of Social Security Benefits

Determining Disability for Individuals Under Age 18

Multi-Agency Common Rule--HHS/Treasury/Labor: Interim Rules for Health

Insurance Portability for Group Health Plans

------------------------------------------------------------------------

The transfers arising from these programs represent payments from

one group to another (often from the Federal government to program

beneficiaries, but also within beneficiary groups and from recipients

back to taxpayers) that redistribute wealth; they are not social costs

(or social benefits) and do not directly reflect the ``opportunity

cost'' of resources used or benefits foregone. Social costs may arise

indirectly from these transfers, however, because they must be financed

through mechanisms--for example, income and payroll taxes--that affect

the use of real resources. Similarly, social benefits may arise from

these transfers if the beneficiaries realize marginal benefits from the

payments that are greater than the loss for those who finance the

payments (i.e., taxpayers).

Estimates of the magnitude of the social costs and benefits

associated with these rules are typically not available. As a practical

matter, the transfers arising form these rules are a product of the

Federal program authorization and budget appropriations processes, and

the social costs involved are generally viewed as subsidiary to the

transfers involved. For these reasons, the Best Practices document

specifically notes that instead of a complete benefit-cost analysis, a

different form of regulatory analysis may be appropriate for

regulations implementing these Federal programs.

Chapter IV. Recommendations

This report is to include ``recommendations from the Director of

OMB 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'' (Section 645 (a)(4)). As indicated in the Introduction, we

are soliciting comment on a wide range of issues related to our

discussions of the methodology we use in evaluating total annual

benefits and costs of Federal regulatory programs; estimates of the

benefits and costs of ``economically significant'' or ``major'' rules;

and direct and indirect impacts of Federal rules on the private sector

and governmental bodies. We are also seeking comment on regulatory

programs or program elements that are ``inefficient, ineffective, or *

* * not a sound use of the Nation's resources.''

As we indicated in chapter II, the current state of knowledge of

benefits and costs of Federal regulatory programs is limited, although

growing. While some aggregate estimates of the benefits and costs of

Federal regulations have been made based on adding the results from

various studies, these aggregate estimates are best viewed as valiant

first attempts to summarize existing knowledge. They may be viewed as

general indicators of the importance of regulation to the American

people and to the economy, but not as guides to specific regulatory

reforms.

Although many difficult methodological problems have yet to be

solved, we presented in chapter II our own aggregate estimates of the

costs and benefits of regulation to further the discussion and generate

comments that we hope will lead to better estimates. Except for the

consensus among economists that there appear to be little long run

economic benefits from most economic, as opposed to environmental and

other social, regulation, we do not believe that the existing evidence

on aggregate costs and benefits rises to the level that would support a

recommendation to eliminate any regulatory programs. Virtually all of

the evidence discussed above is based either on estimates for proposed

regulations or on dated studies of existing regulations. These data are

not appropriate for determining whether existing regulations should be

repealed or significantly modified because of the sunk cost and rising

baseline problems discussed above. Before supportable recommendations

are made to eliminate existing regulatory programs or elements of

programs, empirical evidence based on analytical techniques designed to

solve the methodological problems discussed above must be developed. We

are interested in receiving studies and suggestions for methodological

approaches appropriate for evaluating existing regulations in

[[Page 39382]]

order to develop the strong empirical evidence necessary to propose

supportable recommendations for eliminating or reforming regulatory

programs.

Chapter III points out that we also need better evidence for

determining whether proposed regulations are cost-effective and produce

the greatest net benefits. Agencies have had difficulties generating

sufficient data to make these determinations for individual

regulations. In some instances, there are significant technical

problems to assessing costs and, in particular, benefits. In other

instances, the ability of the government to conduct analysis is limited

by factors that direct use of limited agency resources--for example,

statutory and judicial deadlines--forcing agency action within time

frames that preclude adequate analysis. In some other instances, it is

not at all clear that given limited financial and human resources,

additional analysis would be useful. Finally, there are occasionally

emergencies that demand swift federal action, where the public expect

their elected officials to respond as best they can without the delay

that careful analysis would entail.

In summary, based on our discussion and findings in chapters I, II

and III above, we see three major themes:

Our estimates of the total costs and benefits of

regulation in the $300 billion (4 % of GDP) range clearly indicate that

regulation is important in providing both health, safety, and

environmental benefits and a well functioning economy.

It is very difficult to draw strong conclusions about how

to improve regulatory policy from macro data on benefits and costs.

Micro data on individual regulations are needed.

Although considerable progress has been made in providing

micro data in advance of regulatory proposals and in developing best

practice guidance, further progress is needed to continue improving

regulatory decisions. Specifically, we need to ensure that the quality

of data and analysis used by the agencies improves, that standardized

assumptions and methodologies are applied more uniformly across

regulatory programs and agencies, and that data and methodologies

designed to determine whether existing regulations need to be reformed

is developed and used appropriately.

Consequently, at this stage, we do not believe substantial economic

evidence exits on which to base proposals for major reforms or

eliminations of social regulatory programs or their elements. We

specifically solicit comment on such programs or program elements on

which members of the public may have information that would lead to a

conclusion that such programs are inefficient or ineffective and should

be eliminated or reformed. In particular, we solicit studies or

comments on studies that provide strong, objective and verifiable

evidence on the true social benefits and costs of eliminating or

reforming specific regulatory programs or their elements using

appropriate methodology.

We are proposing for comment the following recommendations designed

to improve the quality of data and analysis on individual regulations

and on regulatory programs and program elements as a first step toward

developing the evidence needed to propose major changes in regulatory

programs.

OIRA should lead an effort among the agencies to raise the

quality of agency analyses used in developing new regulations by

promoting greater use of the Best Practice guidelines and offering

technical outreach programs and training sessions on the guidelines.

An interagency group should subject a selected number of

agency regulatory analyses to ex post disinterested peer review in

order to identify areas that need improvement and stimulate the

development of better estimation techniques useful for reforming

existing regulations.

OIRA should continue to develop a data base on benefits

and costs of major rules by using consistent assumptions and better

estimation techniques to refine agency estimates of incremental costs

and benefits of regulatory programs and elements.

OIRA should continue to work on developing methodologies

appropriate for evaluating whether existing regulatory programs or

their elements should be reformed or eliminated using its Best

Practices manual as the starting point.

OIRA should work toward a system to track the net benefits

(benefits minus costs) provided by new regulations and reforms of

existing regulations for use in determining the specific regulatory

reforms or eliminations, if any, to recommend.

Regulation and regulatory reform have the potential to do much good

for society or much harm. The key to doing the former is having the

information and analysis necessary for wise decision-making. The steps

outlined above are aimed at continuing our efforts to improve our

ability to make better regulatory decisions.

Bibliography

Crandall, Robert W., Howard Gruenspecht, Ted Keeler and Lester Lave.

Regulating the Automobile (Washington D.C.: Brookings Institution,

1986).

Crandall, Robert W. ``What Ever Happened to Deregulation?'' in David

Boaz (ed.) Assessing the Reagan Years (Washington D.C.: Cato

Institution, 1988).

Cropper, Maureen L. and Wallace E. Oates. ``Environmental Economics:

A Survey,'' Journal of Economic Literature, Vol. 30, No. 2 (June

1992).

Denison, Edward F. Accounting for Slower Economic Growth: The U.S.

in the 1970's (Washington D.C.: Brookings Institution, 1979).

Eads, George C. And Michael Fix. Relief or Reform? Reagan's

Regulatory Dilemma (Washington, DC: The Urban Institute Press,

1984).

Gardner, Bruce L. Protection of U.S. Agriculture: Why, How, and Who

Loses? (University of Maryland Dept. Agriculture and Resource

Economics Working Paper No. 87-15).

Gray, W. B. ``The Cost of Regulation: OSHA, EPA, and the

Productivity Slowdown,'' American Economic Review, (December 1987).

Hahn, Robert W. and John A. Hird. ``The Costs and Benefits of

Regulation: Review and Synthesis,'' Yale Journal on Regulation,

(Vol. 8, No. 1, Winter 1991).

Hahn, Robert W. ``Regulatory Reform: What do the Numbers Tell Us?,''

in Hahn, Robert W., ed., Risks, Costs, and Lives Saved: Getting

Better Results From Regulation, (New York: Oxford University Press

and AEI Press, 1996).

Hazilla, Michael and Raymond Kopp. ``Social Cost

This text is long and has been trimmed here. Open the source document for the complete record.