Reining in the Executive Branch Bureaucracy, Part 6: Deal with the Deadweight Cost of Regulation

Since the Federalist Papers, America has debated “Energy in the Executive.” But President Obama’s 2014 agenda framed by his State of the Union address heralds a class warfare agenda, one fusing an “income inequality” theme with federal industrial policy.

“When I can act on my own without Congress, I’m going to do so,” Obama promises. This spend-and-transfer fixation makes Americans poorer and dependent except for the lucky few running things.

Others have argued for federal budget rationality as essential to any anti-poverty agenda. This series proposes a greater prosperity enhancing opportunity, streamlining the nearly $2 trillion regulatory state and ending the uncertainty, wealth destruction and job loss it creates.

The last installment of “Reining In the Executive Branch” explained why to distinguish between “economic” and “social” regulation when reporting on costs, impacts and employment.

Similarly, process rulings like leasing requirements for federal lands and revenue collection standards and service-oriented administrative paperwork — such as that for business loans, passports and getting government benefits already appear separately in OMB reports (and in some cases the Information Collection Budget).

Many such rules implement federal budgetary programs, primarily income transfers from taxpayers to program beneficiaries. Program changes involving Medicare and Medicaid are examples.

Such dollar-for-dollar wealth transfers, like taxes, are not our specific concern here. They should be in many respects, since governmental programs not involving defense or protection of property and rights displace what private sector could do, for example in sweeping areas like health care and retirement.

In any event, budget, process or transfer rules — whatever one chooses to call them — are reported on, but not included in OMB’s net benefit tally each year in the Report to Congress on the Benefits and Costs of Federal Regulations. OMB does note that these entail transfer costs (which matter to the parties not on the receiving end) and deadweight losses thus far unaccounted for:

[T]ransfer rules may…impose real costs on society to the extent that they cause people to change behavior, either by directly prohibiting or mandating certain activities, or, more often, by altering prices and costs. The costs resulting from these behavior changes are referred to as the “deadweight losses” associated with the transfer.

OMB has reviewed 324 major “budget” rules over the course of the decade, with vastly more non-major ones among the 46,625 rules finalized since 2001 as seen in “The Funnel – On the Depth of Regulatory Cost Review, 2001-present.”

Deadweight costs of budget regulations comprise a potentially significant category of government induced cost that doesn’t get addressed, even in surveys that find the cost of government to be already substantial. In Tip of the Costberg, for example, deadweight losses associated with taxes noted by OMB, a small component of homeland security costs and some telecom costs are the only ones noted, but others could have been (some of these were noted in a previous series called “Cataloging Washington’s Hidden Costs“).

It is obvious that certain administrative costs represent, not regulation as such, but rather “services” secured from government by the public. But that does not make it appropriate not to actively disclose them, or, more importantly, to fail to anticipate their entailing future costs or having displacement or deadweight effects.

Similarly, it is important not to lump service-related paperwork in the same category with the tax compliance burden and other involuntary, non-service-related process costs such as workplace reporting requirements. All these are hardly minimal and should be tallied where possible.

In recognizing the reality of deadweight costs, OMB expressed that it “will consider incorporating any such (cost-benefit) estimates into future Reports.” More needs to be done to analyze the costs of these transfers and their impacts on individual rights, choice and economic growth.

Also in The “Reining In the Executive Branch Bureaucracy” Series:
Part 1: Measure Regulatory Costs
Part 2: Regulatory Benefits? Maybe Not
Part 3: Make Regulations Transparent Like the Budget
Part 4: Put a Spotlight on Economically Significant Rules
Part 5: Categorize Regulations by Impact