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How a New President Can Roll Back Bureaucracy, Part 12: Acknowledge and Minimize Indirect Costs

This is the 12th entry in a series on how the next president can reduce bureaucracy. Earlier installments have addressed a freeze on rulemaking, the role of law and economics staff in policy making, rule review and repeal, stricter cost analysis, dissecting regulatory dark matter, boosting Unified Agenda disclosure, tracking rule accumulation, issuing a “regulatory report card,” improving “major rule” classification, analyzing economic regulations separately from other varieties, and improving “transfer cost” assessments.

Part 12:  Acknowledge and Minimize Indirect Costs of Regulations

In its annual reports to Congress on regulatory costs and benefits, the Office of Management and Budget (OMB) allows that “many regulations affect economic growth indirectly through their effects on intermediate factors,” but remains non-committal on whether the net effects are positive or negative.

A similar situation exists with respect to regulations’ effects on employment: OMB knows they raise cost and negatively affect employment, but the political environment does not allow it to simply assert this (“OMB continues to investigate the possibility that certain kinds of regulations can have adverse effects on job creation in particular”). A new president can choose to speak plainly about the broken window fallacy

Direct cost assessments are difficult enough. When indirect costs of regulation are too challenging for policy makers to work out, government officials cannot credibly argue that compliance is feasible or fair or affordable.

Since compliance-focused direct regulatory cost estimates may—inadvertently or purposely—omit indirect costs, they should be guarded against and minimized. For all we know, indirect costs of regulation could even exceed the magnitude of direct costs. OMB occasionally has acknowledged that regulatory costs could be many times the amount it presents annually. For example:

[T]he total costs and benefits of all Federal rules now in effect (major and non-major, including those adopted more than 10 years ago) could easily be a factor of ten or more larger than the sum of the costs and benefits reported.

Fairness and accountability in government require acknowledging indirect effects. Otherwise officials will regularly underestimate and downplay regulatory impacts, and thus overregulate.

Taxing and spending are substitutes for regulation, and if regulation is seen as an artificially cheap alternative means of achieving governmental ends, policy makers will exploit it. That concern escalates when regulators can disregard entire categories of indirect costs, such as input or product bans, disapprovals of pipelines or antitrust regulation. Regulators could falsely appear to avoid imposing high regulatory costs.

Recognizing and sensibly incorporating indirect cost presents serious challenges, but if the new president and Congress emphasize costs rather than “net-benefit” assessments, manpower and resources are freed to better assess indirect regulatory costs.

Addressing indirect costs, and all costs for that matter, will ultimately require congressional approval of final agency rules, because comprehensive cost assessment and quantification is impossible for third parties who are mere mortals.

This points to an important principle—the aim of annual regulatory accounting such as OMB’s cost-benefit cannot be solely accuracy, but must oblige Congress to assume accountability to voters for regulation. Putting Congress back in charge of lawmaking can induce agencies to minimize indirect costs by ensuring that they “compete” before Congress for the “right” to regulate.

Even imperfect recognition of indirect cost magnitudes can help keep regulatory priorities in sync with where a (perhaps one day) more accountable Congress believes benefits to lie. The new president’s pen and phone can raise the profile of this important concern.

Also in this Series:

How a New President Can Roll Back Bureaucracy, Part 1: Freeze Regulations Temporarily

How a New President Can Roll Back Bureaucracy, Part 2: Boost Regulatory Review Resources and Free Market Law and Economics Staff at Agencies

How a New President Can Roll Back Bureaucracy, Part 3: Professionalize Review, Revision, Repeal and Sunsetting of Regulations

How a New President Can Roll Back Bureaucracy, Part 4: Expand Number of Rules Receiving Cost Analysis

How a New President Can Roll Back Bureaucracy, Part 5: Scrutinize All Agency Decrees That Affect the Public, Not Just Formal “Rules”

How a New President Can Roll Back Bureaucracy, Part 6: Enhance Rule Disclosure In the Unified Agenda of Federal Regulations

How a New President Can Roll Back Bureaucracy, Part 7: Track the Accumulation of Federal Regulations as Businesses Sectors Grow

How a New President Can Roll Back Bureaucracy, Part 8: Compile an Annual Regulatory Transparency Report Card 

How a New President Can Roll Back Bureaucracy, Part 9: Improve the Classification of Major Rules

How a New President Can Roll Back Bureaucracy, Part 10: Account Separately for Economic, Health & Safety, and Environmental Regulations

How a New President Can Roll Back Bureaucracy, Part 11: Analyze “Transfer” Costs And Recognize Deadweight Costs of Government

This series builds upon recommendations in “One Nation Ungovernable? Confronting the Modern Regulatory State,” in Donald J. Boudreaux, ed., What America’s Decline In Economic Freedom Means for Entrepreneurship and Prosperity, Fraser Institute and Mercatus Center at George Mason University (2015), pp. 117-181.