OMB Draft Report to Congress on the Costs and Benefits of Federal Regulation
May 5, 2003
by Fred L. Smith
The Office of Management and Budget’s (OMB) draft report is disappointing at several levels: It fails to address the major challenge posed by the growth in regulations over the last several decades; it fails to challenge the misuse of analysis by the regulators themselves; and (perhaps most disturbingly) by viewing “market failures” as a necessary and sufficient condition for regulation, has stimulated a massive search for “imperfections” determined by comparing reality to a utopian “perfect competitive market.” This latter point has led OMB’s Office of Information and Regulatory Affairs (OIRA) to grant credibility to such foolish ideas as the precautionary principle and contingent valuation. OIRA can—and should—do much better. OIRA was created to ensure that regulatory interventions in the economy received the same scrutiny as expenditure decisions, not to provide intellectual legitimacy to whatever policies might be advanced by regulators. I recommend that OIRA rewrite its report to address the many problems contained therein.
Failing to Understand the Nature of the Regulatory Problem
OIRA seems to have little understanding of the nature of regulation and how it might be disciplined. By “discipline,” it should be understood, we are not asserting that regulations are “good” or “bad,” but rather that OIRA ensure that this question is addressed. To see how badly OIRA has missed this point, consider how its approach would fare if applied to OMB’s major task of reviewing government spending.
Under this approach, an OMB Office of Information and Spending Affairs would request each agency to indicate the “costs” and “benefits” of their various expenditure programs. Smart agencies would soon report glowingly high benefit/cost (B/C) ratios. Imagine further that OMB were to argue that many of the expenditure programs were in areas where markets were lacking (defense and national parks) or weak (welfare and highway development) and that, therefore, in those areas, the agencies would be allowed to assert a whole array of non-use values (existence values, contingent valuation) to ensure a “balanced” B/C analysis. Would OMB be able to credibly argue against any spending decision?
In fact, of course, OMB deals with expenditures in a much more realistic manner. No effort is made to compare the “benefits” of a new carrier group vs. an innovative education program vs. a spruced-up national monument vs. the “Big Dig” highway project. Instead, each agency has been assigned a budget and the OMB fights vigorously to ensure that the agency does not exceed that budget. OMB will, of course, favor some programs over others (via the directives of the administration) and Congress will favor others. But OMB’s policies—and strength—come from the widespread understanding that every agency will champion the largest possible expenditures on its programs and will provide convincing evidence on the value of those programs. OMB’s job is not primarily to see that this process produces the maximum value to the American citizenry (that would require an ability to make tradeoff analyses beyond their and anyone else’s ability) but rather to see that the “costs” of the program are kept within limits.
Regulatory agencies face far weaker restraints. Indeed, once the organic legislation empowering the regulatory agency is enacted, it faces few further checks. Before promulgating any specific regulation, it will, of course, have to jump through various procedural hoops, but there will be no effective check on the costs it can impose on the U.S. economy. OIRA now requires many agencies to demonstrate that the costs and benefits of each regulation have been calculated. Most regulatory agencies soon find out, however, how to employ creative accounting to ensure high B/C ratios. And when they find even this weak criteria difficult, they note that they deal with areas where markets are either weak or non-existent (in many cases because the regulatory agencies have preempted the emergence of private risk management arrangements) and advance various non-use values to justify their programs. Regulators have to be very stupid to actually be disciplined.
Consider the U.S. Environmental Protection Agency (EPA). In the one overview book on EPA written to my knowledge, EPA: Asking the Wrong Questions, the authors discuss EPA’s strategy of posing as a public health agency to gain political support for their programs. Nothing surprising about this—those at the Department of Education or the Transportation Security Administration similarly pose as pro-education and pro-security agencies. The difference is that to do this, EPA has had to systematically frighten the American people. EPA routinely produces frightening “Stephen King” documents about the vast dangers that Americans face because of trace elements in the water or air, the possible dangers that biotechnology might pose to future generations, and, of course, the possible destruction of our planet arising from global warming. Indeed, OIRA has encouraged this development by “grading” agencies on their abilities to misuse analysis to support their case.
The expenditure debate swirls around the question of whether an agency’s objectives (say, the Department of Defense, or DOD) would be better advanced by spending more in category A (say, a new air mobile division) than in Category B (say, a new battleship). An agency will, of course, fight for the highest possible budget, but it does so largely on political grounds, as would a regulatory agency in a similar situation). The difference, however, is that attention in the expenditure case focuses on the question of whether one believes the Defense budget is too high, too low, or just about right. DOD has most to say about how that money is to be allocated between the services or between technologies or between weapon systems and training—or, more often, between one congressional district and another.
In contrast, the regulatory debate focuses on the merits of each specific regulation. There is no budget cap because most regulatory costs are off-budget and therefore largely ignored. Moreover, the absence of any cap means that neither the regulatory agency nor OIRA have any reason to consider whether the agency’s mission might not better be addressed by tightening some regulations and loosening or eliminating others. Agencies fight for all regulations individually without regard to their cumulative effect.
What Should OIRA Do?
OIRA should recognize that regulatory agencies now face no serious discipline, and that, even worse, no one within the agency sees regulation A competing with regulation B. Each regulation is seen as sui generi—standing on its own grounds, to be decided only on the grounds that it is, or is not, a “good” thing. The use of B/C analysis to disguise this inherently political decision is foolish. We’re merely encouraged agencies to distort the facts, alarm the public, and posture in the media. The idea that OIRA can replicate the decisions that would have been made had a market existed is foolish. Markets without property rights—without exchange possibilities—are a Grand Illusion. The information does not exist to determine what might have happened. We should not encourage SONKing—the Scientification of Non-Knowledge—to obscure that fact.
OIRA should recast its review process, seeking to make regulatory review more akin to expenditure review. One approach would be for OIRA to develop better cost estimation procedures, to send to Congress for “advice and consent” all “major” regulations (say initially those costing the economy more than $100 million annually) and then gradually roll back this cap as the agency, OMB, and Congress became more familiar with the process. Within some phase-in period, each regulatory agency would face hearings on the Hill arguing that its impact on the economy was justified by the “benefits” it produced. That process would work as well—and no better—than the current expenditure program. But, at least, Congress would be held responsible for this impact and there would be less “let’s pretend” analysis by the agencies.
OIRA could now—with no further authority—announce its intentions to request the advice of Congress on major rules. It could also post a request for comment on these rules at the earliest possible period—for example, at the time when the agency announces its intention to launch the rule-making. OIRA should require each agency to detail its procedures for costing out its regulatory proposals, and solicit comments from those impacted by the rules. OIRA might also request Commerce, CEA, or other agencies to review the costing procedures. OIRA should not passively accept agency estimates. Its mission is to advance the public interest—not the special interests involved in the formulation of each regulatory agency’s proposals. An agency unable or unwilling to provide defensible cost estimates should find its regulations blocked. OIRA should then work with the appropriate congressional committees to ensure an informative hearing on the rule. Major rules are likely to have strong proponents and opponents. Thus, OIRA should start this review process with major rules and then move down as experience in regulatory review develops.
Efforts to control Leviathan have evolved slowly throughout our history. As the disciplining effects of controls in the tax and spending area have improved, there has been a natural tendency by regulators to select the least disciplined instrument of regulation. For that reason, regulations have become the preferred tool of special interests and those who believe the public interest is best advanced by expanding political interference in the economy. It is time to begin to subject regulations to the same type of controls to which expenditures have long been exposed. That does not mean that OIRA should presume to “know” what regulations are best, but, rather, that OIRA should ensure that the information provided on the costs of regulation (and benefits to the extent these continue to be requested) are reasonably honest and defensible. That goal is ambiguous enough—OIRA should reject all speculative arguments (the various gimmicks discussed in the latter part of the report) based on theoretical deviations from a “perfect market.” OIRA should examine whether an agency has considered the possibility that existing regulations might have created the problems that the new regulation supposedly “solves” and instead call for reducing the scope and scale of government interference in the economy.
OIRA is an heroic effort to gain control over the regulatory state. It must continually refine its ability to achieve that goal. It should not become part of the problem. The current report would not advance that mission.
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