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The Funnel of Gov -- OMB's 2014 Report to Congress on the Benefits and Costs of Federal Regulations

Over the weekend the Office of Management and Budget (OMB) released the 2014 Draft Report to Congress on the Benefits and Costs of Federal Regulations.

If it draws attention to it at all, the administration will say it's fiscal year 2013 rules had benefits of up to $81.4 billion annually, while costing just $2.5 billion annually. The problem is only seven rules out of thousands had benefit and cost analysis.

So, let's back up for context. As of year-end 2013, according to the Regulatory Plan and the Unified Agenda of Federal Regulations, 63 federal departments, agencies and commissions had just completed or were at work on 3,305 rules and regulations at assorted stages of planning and implementation (pre-rule, proposed, final, completed); of these, 191 were acknowledged to be "economically significant."

But during calendar year 2013 though, 3,659 rules were finalized. Today’s doctrine holds that such major or “economically significant” rules (those anticipated to have an economic impact of at least $100 million) account for the bulk of regulatory costs. The OMB intones that:

“[T]he benefits and costs of major rules, which have the largest economic effects, account for the majority of the total benefits and costs of all rules subject to OMB review.” (2014 Draft, p. 22)

OMB’s cost-benefit breakdowns incorporate only benefits and costs of “major” rules that agencies or OMB have expressed in quantitative, monetary terms, omitting numerous categories and cost levels of rules altogether.

For fiscal year 2013 (October 1, 2012– September 30, 2013), OMB reviewed 54 executive agency major rules with some combination of cost and benefit estimates (compared to, again, the 3,659 rules finalized in calendar year 2013. Of these, only seven had cost and benefit calculations expressed in dollar terms.

OMB presents this subset of rules as having annual costs of between $2.4 billion to $3.0 billion in 2010 dollars, and benefits of between $30.9 billion to $81.4 billion.

It will be unsurprising to learn that this is the tidbit OMB touts prominently whenever it's now asked about benefits of the regulatory enterprise. Thirty other rules implemented transfer programs; such “budget rules” are officially considered transfers rather than regulations (not appropriate in my view as government controls more economic activity). Of the remaining 17 rules, agencies provided partial or no benefit and cost estimates.

“Subject to OMB review” is an important qualifier and plenty gets left out, like non-major rules and independent agencies’ compliance costs. The unaudited status of most rules small and large, such as controversial independent agency rules like the Federal Communications Commission’s net neutrality proposal, cast doubt on the implication that the annual benefits and costs report is authoritative.

OMB’s once-common recognition that costs could be significantly greater than made explicit in its annual reports was more helpful.

The upshot is that measured major, significant or economically significant rules at any given time are a small fraction of the total number of rules in the pipeline or finalized, and the number with both benefit calculations and cost calculations an even smaller proportion.

We require that sense of proportion. In its latest draft Benefits and Costs report, OMB tells us that:

“From fiscal year 2004 through FY 2013, Federal agencies published 37,022 final rules in the Federal Register. OMB reviewed 3,040 of these final rules under Executive Orders 12866 and 13563.” (2014 Draft Report, p. 8)

OK, so OMB reviews significant rules, not just economically significant or major rules; still, fewer than 10 percent of all rules are reviewed whether or not costs and benefits enter into the picture.

The Funnel of Gov -- On the Depth of Regulatory Cost Review, 2001-Present, shows that of the flow of several thousand rules issued by agencies, a relative handful get cost analysis, let alone cost-benefit analysis.

The chart depicts major rules reviewed during the fiscal years 2001 to the present, and shows the smaller proportion of rules that have any cost analysis whatsoever. The proportion of major rules with cost analysis averages around 36 percent; the proportion of all rules with any cost analysis at all as a percentage of the annual flow of final rules in the Federal Register has averaged just .45 percent. In any given year, the percentage of all rules that have cost analysis has never reached one percent; the highest was .8 percent. Benefits fare even more poorly.

Furthermore, as the Federal Register has noted (December 7, 2009, p. 64133):

The Regulatory Plan and the Unified Agenda do not create a legal obligation on agencies to adhere to schedules in this publication or to confine their regulatory activities to those regulations that appear within it.

If an agency prefers not to quantify costs of a rule, it simply may not do so. This is why points of order for Congress to object to any rule not tied to a cost estimate need consideration, rather than merely objections to major or economically significant rules.