Testimony to the Subcommittee on Regulatory Affairs of the House Government Reform Committee, July 27, 2005

Testimony to the Subcommittee on Regulatory Affairs of the House Government Reform Committee, July 27, 2005

October 12, 2005

Chairwoman [Candice] Miller [R-Mich]. Ranking Member [Stephen] Lynch [D-Mass] and Members of the Subcommittee, thank you inviting me to comment on congressional regulatory reform initiatives. 

I commend the Subcommittee for holding this hearing, and for its vigilant oversight of regulatory agencies. “More oversight by Congress” is the short answer to the question of how to improve federal regulation.

Federal regulatory costs are large, growing, and, what is more disturbing, uncontrolled. The Office of Management and Budget’s (OMB) 2005 draft report on federal regulation estimates the annual costs of 45 major rules reviewed by OMB during the period 1994-2004 at $34.8 billion to $39.4 billion. OMB says the total cost of all rules now in effect “could easily be a factor of 10 or more larger”—in other words, totaling between $340 billion and $390 billion annually.

This is consistent with the estimate of the Small Business Administration study by Mark Crain of George Mason University and Thomas Hopkins of the Rochester Institute of Technology, after factoring out regulatory costs that the OMB report does not include—namely, the burden of tax-related paperwork and rules governing income transfer programs.

OMB’s estimate also does not include the economy-wide repercussions of the occasional regulatory disaster, such as the largely regulation-induced telecom meltdown, which contributed to and prolonged the recent recession.

The 1996 Telecommunications Act, as interpreted and implemented by the Federal Communications Commission, forced incumbent local phone companies to share their facilities with challengers at below-market rates. The easy availability of cross-subsidies attracted large numbers of new entrants, creating a classic bubble of too many companies chasing too few customers. At the same time construction and equipment purchases fell sharply, as new entrants saw no need to build, because they could lease incumbents’ facilities on the cheap, and incumbents feared that any assets they might build would just end up subsidizing rivals.

In any case, the regulatory burden is large and growing. Agencies promulgate in excess of 4,000 rules per year. James Gattuso of the Heritage Foundation found that about three fourths of all the major rules adopted during 1992 to 2003 increased rather than decreased regulatory burdens.

These costs are uncontrolled. Nothing in the current process requires or even allows elected officials to make explicit choices about the costs of regulatory programs.

During the past three decades, Congress has adopted, debated, or considered numerous regulatory reform proposals. The specific provisions or elements of these initiatives typically fall into one of two categories that, for want of better terms, I call policing reforms and checks and balances reforms.

Policing reforms aim to regulate the regulators by establishing rules of rulemaking and  tasking OMB to review agencies’ compliance with those rules.

Checks and balances reforms seek to de-monopolize agency decision making by increasing Congress’s responsibility for regulatory decisions, fostering interagency competition, or enabling outside experts to compete for public approbation with agency experts.

Both types of reforms will be needed to make the regulatory system more affordable and accountable. However, a word of caution is in order.

In the past, reformers have relied heavily on policing reforms. Pinning their hopes on what James Madison called “parchment barriers,” reformers have proceeded as if agencies could be legislated or managed into practicing sound science and economics. The results, as my written testimony chronicles, have been disappointing.

Rules of rulemaking are not self-enforcing. Furthermore, OMB is a watchdog in constant danger of becoming a rubber stamp, because the OMB Director and the agency heads all are appointed by the same president and are part of the same administration.

To say that “more oversight by Congress” is essential to regulatory improvement is really to say that we need more checks and balances in the regulatory process. To paraphrase Madison, agency must be made to counteract agency, and outside experts must be allowed to compete with agency experts.

I am pleased to say that all the bills this Subcommittee is examining today emphasize checks and balances reforms. They seek to increase Congress’s participation in and responsibility for regulatory decisions. Rep. J.D. Hayworth’s (R-Ariz.) bill, the Congressional Responsibility Act (H.R. 931),  explicitly aims to enforce compliance with Article I, Section 1 of the U.S. Constitution, which requires Congress to approve agency rules before they can take effect. Rep. Sue Kelly’s (R-N.Y.) bill, the Cut Unnecessary Regulatory Burden (CURB) for Small Business Act (H.R. 1167),  would enhance Congress’ analytic resources to review federal rules. Rep. Bob Ney’s (R-Ohio) bill, the Joint Committee on Agency Rule Review Act (H.R. 576), would create a new joint committee to strengthen Congress’s institutional capability to review regulatory proposals.

I would like to call your attention to a modest proposal devised by former OIRA economist Richard Belzer. The goal of the proposal is to enable outside experts to compete with agency experts. Statutes like the Small Business Regulatory Enforcement and Fairness Act (SBREFA) and various executive orders create a huge demand or market for regulatory analysis, but it is a market in which agencies currently face little competition and no market test for their “products.” Outsiders are free to submit alternative cost-benefit estimates, but the agencies ultimately decide which estimates are best. This is problematic, because it allows agencies to have the final say in grading their own work.

Agencies, in other words, monopolize the power to score their own proposals. But they have no monopoly on regulatory expertise. Corporations, think tanks, universities, small business associations, and state and local governments employ hundreds, perhaps thousands, of professionals trained in economics and science.

In a nutshell, Belzer proposes that Congress require OMB to hold contests to pick the best analyses of selected major rules. OMB would be forbidden to split the difference or take some from column A and some from column B. OMB might be biased in favor of the agency by virtue of being on the same team, but the contest would be run in the full light of day, and if OMB were to always give the prize to agency analyses,  it would lose all standing in the regulatory community and before the public.

The contests would put pressure on the agencies to produce credible analyses. To have a realistic chance of winning, their analyses would at a minimum have to conform to OMB’s best practices and information quality guidelines.

Some might object that making OMB the judge would simply transfer monopoly power from the agencies to the White House, giving undue influence to the President or his appointees. That is a reasonable concern, but it also easily addressed. “If for whatever reason you do not have sufficient trust in OMB’s judgment,” says Belzer, “ask GAO to evaluate the same information and reach its own conclusions. Even OMB can benefit from some competition.”

Thank you again for the opportunity to testify. I would be happy to answer any questions.