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Rewards and Risks of a Federal Regulatory Budget (Part 4)

This week I began by making the case for a regulatory cost budget but wanted to spend time exploring looming pitfalls and political traps that could derail it or easily make it not worth supporting, or even rendering it something to actively oppose.

Tuesday, I noted how, just as the federal government treats tax breaks as an “expenditure,” budgeting could inadvertently or deliberately lead to government expansion. Yesterday I addressed problems surrounding trading off “social” benefits with private costs. Here’s the third potential pitfall for those attempting a regulatory budget.

Hazard 3: The Impossibility of Measuring Costs

We opened this discussion asserting that costs cannot be measured with precision, and that foundational impenetrability was recognized by early proponents of regulatory budgeting. The first George Bush administration endorsed a regulatory budget, for example, but the White House Office of Management and Budget (OMB) at the time highlighted the following potential (here paraphrased) difficulties:  

  • A regulatory budget can create confusion about conflicting cost estimates because agencies would have powerful incentives to understate costs to avoid depleting an imposed budget. Regulated parties have incentives to overstate for the opposite reason. (The deeper problem is the fundamental subjectivity and unmeasurability of costs);
  • A budget cannot isolate which expenditures actually result from regulation and which would have been made anyway, and;
  • A budget must cope with the critical challenge presented by indirect costs. OMB argued that incorporating only direct costs in a regulatory budget would create a bias toward banning (rather than regulating or controlling) products to avoid having costs show up in the budget. Likewise, James Gattuso emphasized that "Moreover, rules with real but intangible costs—such as violations of religious liberty—would actually be free to regulators."

Apart from important concerns like intangible costs James Gattuso addressed, OMB believed these difficulties could be overcome, and argued that cost estimates need only be “unbiased and defensible.” A concern remains that conventional cost‑benefit analysis already (theoretically but not actually) conducted is plagued with the same problems to much greater extent when the benefit side of the equation is exploited to justify rulemaking.

The pitfalls of cost measurement are substantial, moreover costs will change over time: for example, while new technology will sometimes lower compliance costs, altered trajectories imposed by regulatory intervention will have created unseen and ignored costs that meanwhile propagate. Flying cars were nipped in the bud by auto safety regulations; a merged rather than denied Blockbuster and Hollywood Video combination might have reconfigured operations and stood some chance against the likes of Netflix and Redbox; immunity and regulation from the Price-Andersen Act ruled out market disciplines in nuclear power from the very beginning so we have no way of knowing its actual viability compared to the immunity from liability the federal government granted. The indirect effects of regulatory interference, even when meant to promote “markets,” are considerable and costly.  

Determining which costs are due to regulation and which would have been made anyway is likewise challenging. Former OMB official John Morrall did not regard this as a significant problem, particularly with incremental budgeting, noting that, “the amount of workplace safety that firms provide is not likely to change much from one year to the next in the absence of new regulations.” Morrall noted pertinent parallels to fiscal budgeting:

These practical problems [of cost measurement], however, are not insurmountable and mainly differ in degree from their fiscal analogue. For example … the spending forecasts for fiscal budgets do not have to be perfectly accurate for the fiscal budget process to be effective in controlling spending. As long as they are not systematically underestimated, projected cost ceilings serve as a constraint. Likewise the spending forecasts for regulatory budgets do not necessarily have to be accurate for the regulatory budget process to act as a constraining device for regulatory spending. Auditing costs for the regulatory budget can be kept to a minimum since all that is needed is ex post evaluations of a sample of situations in order to improve economic forecasting models. (John F. Morrall III, “Controlling Regulatory Costs: The Use of Regulatory Budgeting,” Public Management Occasional Papers, Regulatory Management and Reform Series No. 2, Organization for Economic Cooperation and Development, Paris, 1992, p. 14.)

Coping with indirect regulatory costs does present far more grave problems than (seemingly) direct costs. But as long as preemptive regulation is the order of the day, one could do worse than rough cost estimates that nonetheless help allocate regulatory authority in loose correspondence with where an accountable Congress believes benefits to lie. Former Treasury and OMB official J. T. Young noted:

Such arguments were made about the Budget Act of 1974, which established Congress’ budget procedures and its official estimator, the Congressional Budget Office. Almost 40 years later, both have become invaluable—objects of slings and arrows, true, but also continually improved...

…We would find it unthinkable in fiscal policy today to increase spending or taxes with no means of measuring costs. Yet that is effectively standard regulatory procedure now, because there is no binding constraint on passing these costs to the private sector.

Calculation accuracy is secondary to requiring agencies to compete to impose burdens in an environment of congressional oversight. This is key; a regulatory budget needs to operate within the framework of Congress approving agency regulations themselves, not just the level of costs as analogous to spending in the fiscal budget. Congress should vote, even if in only expedited fashion, before any costly or controversial agency regulation can take effect.

Next time we’ll address the temptation to include benefits in a regulatory budget.


Also in this series:

Rewards and Risks of a Federal Regulatory Budget (Part 1)

Rewards and Risks of a Federal Regulatory Budget (Part 2) The Perverse Expansion of Government

Rewards and Risks of a Federal Regulatory Budget (Part 3) The Elevation of Utilitarianism Over Individual Rights