Promise and Peril: Implementing a Regulatory Budget

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The size of the federal budget tells only one part of the tale of government’s presence in the market economy. The enormous amounts of non-tax dollars government requires to be spent on regulation — estimated at $647 billion per year — powerfully argue for some sort of regulatory scorekeeping. Regulatory costs are equivalent to over one-third of the level of government spending. A regulatory budget can be an effective tool both for spurring reform and monitoring regulatory activity.

At bottom, today’s rulemaking process is plagued by the fact that agency bureaucrats are not accountable to voters. And Congress — though responsible for the underlying statutes that usually propel those unanswerable agencies — nevertheless can conveniently blame agencies for regulatory excesses. Indeed, Americans live under a regime of “Regulation Without Representation.”

A regulatory budget could promote greater accountability by limiting the regulatory costs agencies could impose on the private sector. Congress could either specify a limit on compliance costs for each newly enacted law or reauthorization of existing law, or Congress could enact a more ambitious full-scale budget paralleling the fiscal budget, a riskier approach. A comprehensive budget would require Congress to divide a total budget among agencies. Agencies’ responsibility would be to rank hazards serially, from most to least severe, and address them within their budget constraint. In either version of a regulatory budget, any agency desiring to exceed its budget would need to seek congressional approval.

Regulatory costs imposed on the private sector by federal agencies can never be precisely measured, and a budget cannot achieve absolute precision. Nonetheless, a regulatory budget is a valuable tool. The real innovation of regulatory budgeting is its potential to impose the consequences of regulatory decisionmaking on agencies rather than on the regulated parties alone. Agencies that today rarely admit a rule provides negligible benefit would be forced to compete for the “right” to regulate. While agencies would be free to regulate as unwisely as they do now, the consequences could be transfer of the squandered budgetary allocation to a rival agency that saves more lives.

Budgeting could fundamentally change incentives. Under a budget, adopting a costly, but marginally beneficial, regulation will suddenly be irrational. Congress would weigh an agency’s claimed benefits against alternative means of protecting public health and safety, giving agencies incentives to compete and expose one another’s “bogus” benefits. Budgeting could encourage greater recognition of the fact that some risks are far more remote than those we undertake daily. In the long run, a regulatory budget would force agencies to compete with one another on the most important “bottom line” of all: that their least-effective rules save more lives per dollar spent (or correct some alleged market imperfection better) than those of other agencies.

There are clear benefits to regulatory budgeting, but there are also pitfalls. For instance, under a budget, agencies have incentives to underestimate compliance costs while regulated parties have the opposite incentive. Self-correcting techniques that may force opposing cost calculations to converge are only at the thought-experiment stage. However, limitations on the delegation of regulatory power and enhancing congressional accountability can help.

Certain principles and antecedents can help ensure that a regulatory budgeting effort succeeds. Explicitly recognizing that an agency’s basic impulse is to overstate the benefits of its activities, a budget would relieve agencies of benefit calculation responsibilities altogether. Agencies would concentrate on properly assessing only the costs of their initiatives. Since an agency must try to maximize benefits within its budget constraint or risk losing its budget allocation, it would be rational for agencies to monitor benefits, but Congress need not require it.

Other ways to promote the success of a budget are to: establish an incremental rather than total budget; collect and summarize annual “report card” data on the numbers of regulations in each agency; establish a regulatory cost freeze; implement a “Regulatory Reduction Commission;” employ separate budgets for economic and environmental/social regulation; and control indirect costs by limiting the regulatory methods that most often generate them.

A regulatory budget is not a magic device alone capable of reducing the current $647 billion regulatory burden. Yet a cautious one deserves consideration. Having good information is an aid in grappling with the regulatory state just as compiling the federal fiscal budget is indispensable to any effort to plan and control government spending.