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Toward a Federal Regulatory Budget

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Toward a Federal Regulatory Budget

The Pitfalls in Quantifying Regulatory Costs and How to Avoid Them

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How much do regulations cost? That is a very good question. Some compliance burdens aside, tabulating the subjective and indirect costs of regulations experienced both at the individual level and economy-wide is virtually impossible. Yet, try we must. Even if government collected a negligible percentage of Americans’ incomes in taxes, we would still keep track of taxation to prevent its abuse. The same applies to regulatory costs imposed on the private sector, which are far from negligible.

So where to begin? As Nobel laureate economist James M. Buchanan counseled, there are no “objectively identifiable magnitudes” available to the third‑party regulator: “Cost cannot be measured by someone other than the [regulated] decision-maker because there is no way that subjective experience can be directly observed.”

Still, we do have some estimates. Recent ones include:

  • An Office of Management and Budget (OMB) estimate of $68-$103 billion in annual costs for some “major” rules—those with at least $100 million in estimated annual costs;
  • A $2.028 trillion annual estimate from the National Association of Manufacturers; and
  • A study from the Mercatus Center at George Mason University estimates the economy “weighs” around $4 trillion less annually than it otherwise would, had regulatory burdens remained constant since 1980.
  • This author’s annual survey of the federal regulatory state, Ten Thousand Commandments, which most recently estimated economy-wide regulatory costs of $1.885 trillion for 2015.

The unreliability of regulatory cost estimates may be fatal to budgeting precision, but not to the need for formal disclosures that keep cost burdens on the front burner of policy making.

Moreover, the very intractability of regulatory costs underscores the urgency for Congress to take responsibility for all regulatory actions bureaucracies impose—both the measurable and the non-measurable—and to impose processes that force hidden costs to the surface in order to assess their gravity.

Despite the growth of government in recent years, the U.S. House of Representatives’ fiscal year 2017 budgeting process showcases some potential new controls over the Washington behemoth.

On the fiscal side, in January Congress adopted a dynamic scoring rule for major legislation, which would allow tax cuts to favorably affect official federal revenue estimates by taking macroeconomic variables into account.

On the regulatory side, the concept of a “regulatory budget” has gained new currency among lawmakers. The federal government can fund programs either by raising taxes, increasing the federal budget, or by borrowing, increasing the federal debt. However, the government can also “fund” policy through regulatory mandates that compel the private sector and state and local governments to bear the costs of federal initiatives. To shine a light on these costs, scattered pertinent and relevant regulatory data should be summarized and reported publicly to help create pressures for even better disclosure and reform.

The Fiscal Year 2017 Budget Resolution contained a lengthy Policy Statement on Federal Regulatory Budgeting and Reform. While presidents have issued fiscal budget requests that tangentially addressed regulatory issues or even explicitly encouraged the creation of a regulatory budget, the 2017 resolution was a distinctive marking of territory by Congress in the realm of overall budgetary planning. 

The confluence of dynamic scoring and the new emphasis on the concept of regulatory budgeting may not be coincidental, but inevitable given the times. Public discussion over federal regulation’s effects on employment, output, GDP, and the federal budget’s own bottom line will become unavoidable as uncharacteristically low interest rates return to historical norms. In a July 2015 Joint Economic Committee hearing on dynamic scoring, former Texas Sen. Phil Gramm remarked: “[D]ynamic scoring is not just about taxes. It is about spending. It is about policy. It is about regulation.” [Emphasis added]

Annual federal spending is set to soon surpass $4 trillion, adding to a mounting national debt that threatens to become unserviceable as discretionary spending cuts and entitlement reforms remain controversial and remote. Mounting interest on the debt can overwhelm yearly spending, leaving economic liberalization as the only remaining option to spur economic growth and employment. Thus, we may soon see renewed bipartisan concern over regulatory overreach and greater interest in economic liberalization. This seems to happen about once a generation when the political stars align.

The Competitive Enterprise Institute’s annual survey of the federal regulatory enterprise, Ten Thousand Commandments, attempts to estimate the overall costs of rules using the best available data. But more and better tool are still needed. A functioning regulatory budget would make government’s reach more visible to lawmakers and the public. Further, it would incentivize lawmakers to a) limit what agencies may compel the private sector to spend on regulatory compliance and b) set the stage for minimizing indirect losses arising from regulatory interventions.

The concept of a regulatory budget is neither new nor partisan. For example former Democratic Texas Sen. Lloyd Bentsen proposed an “annual regulatory budget” in 1979. Regulatory budgeting was also considered as a reform option in President Jimmy Carter's 1980 Economic Report of the President. Recent legislative offerings include Sen. Marco Rubio’s (R-Fla.) National Regulatory Budget and Sen. Mike Lee’s (R-Utah) Article I Regulatory Budget Act. Most recently, the June 2016 House Task Force on Reducing Regulatory Burdens released a series of recommendations for economic liberalization and growth with a regulatory budget among them.

Such proposals are welcome, but it is important to appreciate the informational limitations in creating a regulatory budget. The effort poses some risks, and a poorly executed one would be worse than leaving things alone. For starters, agencies tend to emphasize benefits and lowball costs. The Heritage Foundation’s James Gattuso raises some valid concerns about budgeting efforts set on autopilot and paired with slippery calculations. He observes:

Members [of Congress] certainly don’t abide by the fiscal budget now. And it is hard to imagine lawmakers declining to authorize a new rule that regulators say would save lives at little cost, based only on—ultimately artificial—budget allocations.

A regulatory budget is best suited to a constitutional republic rooted in limited government principles and congressional accountability, rather than an administrative state that operates largely without supervision. But the unfortunate reality that we could not “keep the republic,” as Benjamin Franklin warned, is not entirely fatal to the idea of regulatory budgeting as a liberating device from the modern regulatory Leviathan. Cautious experiments within a broader rubric of total congressional accountability for both agencies’ regulations and informal “guidance” are urgently needed and should be undertaken post haste. As noted, there are pitfalls. Following are some key ones to avoid.