Put Regulations on a Life-Cycle Budget

Reading through the headlines, the top economic stories are about scrutiny of regulation and spending proposals regarding the federal budget. But the similarities and differences in this scrutiny are striking.

In proposing spending cuts, the House Republicans are targeting wasteful and destructive spending in entities such as the Environmental Protection Agency. Similarly, a hearing today in the House Oversight and Government Reform Committee will highlight costly and counterproductive regulations that are harmful to job growth.

The Competitive Enterprise Institute was one of many organizations that provided examples of such rules — from the interchange fee price controls of Dodd-Frank’s Durbin Amendment that will shift debit card processing costs from wealthy retail chains to consumers to the FDA’s deadly drug delays that keep patients from accessing life-saving drugs.

Yet institutionally, the scrutiny couldn’t be more different. Spending programs must live within some budget constraints set by Congress. Yes, it’s true that these constraints are not that strong. So far, Republicans are falling short of their stated goal of cutting $100 billion in spending, and even the cuts they do make will be subject to back-and-forth by the Senate and President Obama. But at the end of the day, some finite annual budget number is set that agencies can’t exceed in their spending.

By contrast, regulations are subject to no such cost constraint by Congress. In fact, once they are implemented, they usually don’t come back before Congress unless they provoke a particular outrage. A commendable effort by members of Congress from the Bluegrass State — Kentucky Sen. Ron Paul and Rep. Geoff Davis — is trying to change this with the REINS Act, which would require Congress to affirmatively approve regulations scored by agencies as costing the economy more than $100 million.

As important as it is, the REINS Act is one of many institutional steps to make regulatory agencies accountable. Regulatory agencies need to be put on a budget — not just for what they spend enforcing the rules they implement, but for how much the rules cost the economy. Such a regulatory budget is the only real way to limit the growth of the regulatory state, which as CEI’s Clyde Wayne Crews has noted now exceeds $1.75 trillion in costs, according to the Small Business Administration.

As Crews has noted in his annual snapshot “10,000 Commandments,” regulations act as a hidden tax on business growth and job creation. Regulation is also mandated spending that has similar, and frequently more pronounced, “crowding out” effects than direct government spending. In the Affordable Care Act (Obamacare), for instance, instead of the government buying everyone health insurance with tax dollars, it mandates that individuals and businesses spend money on health insurance.

This should be seen as an off-budget tax-and-spend scheme that, like direct taxes and spending, reduces resources that consumers and business would use to purchase other more desirable goods and services. Thus, it should be subject constraints similar to that on direct government spending. As Crews wrote for CEI in 1996, “Full-fledged budgeting should establish an overall cap paralleling the fiscal budget, and would assign maximum compliance costs within each agency such that the overall cap is not exceeded.”

There have been bipartisan proposals for regulatory budgets since the 1980s. Economists Robert Litan and William Nordhaus — who held posts, respectively, in the Clinton and Carter administrations — first outlined such a proposal in their 1983 book Reforming Federal Regulation. The GOP’s “Contract With America” in 1994 contained a plank calling for regulatory budgeting.

The obstacle has been debates over the type of accounting to measure a regulation’s cost to the economy. Fortunately, over the last decade, the business world has contributed a promising answer to that question with a technique called life-cycle budgeting. Under this process, also referred to as whole-life costing or total cost of ownership, the full “life-cycle” cost of any expenditure must be calculated before it is spent. As journalist Kevin Mooney has noted, state governments have also had some success in using life-cycle budgeting to keep infrastructure costs down.

For regulations, life-cycle budgeting would mean that regulatory agencies would look at all the potential costs of a rule — direct and indirect — and only implement a rule if it doesn’t exceed a set “budget” for costs to the economy. One example of how this could work is with the regulations stemming from the onerous Sarbanes-Oxley Act of 2002 signed by the supposedly deregulatory President George W. Bush. University of Rochester researcher Ivy Zhang performed a detailed econometric study finding that law cost the economy $1.4 trillion in direct and indirect costs, including the economic activity that was not pursued as a result of the costs of the law’s accounting mandates.

A life-cycle regulatory budget would go a long way to improving the life cycle of opportunity for consumers, investors, and entrepreneurs burdened by the regulatory state.