Reining in the Executive Branch Bureaucracy, Part 7: Recognize and Reduce Indirect Costs 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 and other activism.

“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.

Accountability in government and basic fairness require acknowledging indirect effects of regulation and minimizing negative impacts.

In the series “Cataloging Washington’s Hidden Costs, it was noted that indirect costs may often be omitted from compliance-focused regulatory direct cost estimates, such as the engineering costs of controlling an emission.

But if indirect costs are regarded as too difficult to compute, then government cannot credibly argue that compliance is somehow not overly burdensome.

If Congress continues to allow regulators to overlook entire categories of indirect costs (such as product bans, disapprovals of pipelines, employment impacts or antitrust regulation’s re-orienting of entire industries), then regulations can tend toward such hard-to-quantify types, imposing grave burdens and dampening productivity. Under such scenarios, many regulations could be expected to feature bans or disapprovals so that regulators would avoid appearing to impose high direct regulatory costs despite hardship inflicted.

The federal Office of Management and Budget (OMB) allows that “many regulations affect economic growth indirectly through their effects on intermediate factors,” (Draft Report 2013, p. 48) but is non-committal on whether specific and economy-wide indirect effects of regulation end up creating net costs rather than net benefits on the whole.

The great uncertainty surrounding the nature and extent of indirect costs suggests they ought to be guarded against and minimized where possible, especially since some have argued that indirect costs of regulation could even exceed the magnitude of direct costs, and since OMB itself at times acknowledged that regulatory costs could be many times the amount it presents annually in its Reports to Congress on regulatory benefits and costs.

Without accounting for indirect effects, officials will tend to understate the full impacts of regulation and thus overregulate, harming consumers, employment and growth. Even in the best of times, ignoring regulation’s costs can make it appear more attractive relative to taxing and spending — the alternative means of achieving governmental ends.

There are no easy solutions, but part of the answer is to limit those types of regulatory activities most likely to be considered indirect costs. We need a good survey of those, for starters: what, exactly, do we leave out when we assess the cost of regulations? I took a long stab at it in the series, “Cataloging Washington’s Hidden Costs.”

Another way of dealing with the indirect costs (and economically significant rules) is to insist upon congressional approval of final agency rules, especially where indirect or unknown costs are a significant component. Under such a framework of congressional accountability, handwringing over indirect costs wouldn’t be quite as worrisome, since consequences for the regulator and lawmaker may be less avoidable even without any quantitative analysis.

Ignoring indirect costs means cost understatement. Recognizing and somehow reasonably incorporating those presents a challenge. Luckily, opportunity costs apply even to OMB and agency economists.

By downplaying benefit assessments as suggested earlier in “Regulatory Benefits? Maybe Not” and focusing instead on costs, extra manpower and resources remain available to better assess realities of indirect regulatory burdens.

The reason for an annual regulatory accounting is not solely accuracy, but making Congress more accountable, and inducing agencies to recognize opportunity costs by ensuring that they compete for the “right” to regulate in the open sunshine.

We could do worse than settle for rough indirect cost estimates that nonetheless help provide a basis for allocating scarce resources in loose correspondence with where a (perhaps one day) more accountable Congress believes benefits to lie.

If the burden of compliance is to be regarded as tolerable, then government may not pretend that merely assessing the full costs of compliance is too cumbersome. It has the easy part, by comparison.

Next Time: OMB and Congress Should Recommend Rules to Revise and Repeal

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
Part 6: Deal with the Deadweight Cost of Regulation