Draft Report to Congress on the Costs and Benefits of Federal
Regulations
[Federal Register: February 11, 2000 (Volume 65, Number 29)]
[Notices]
[Page 7197-7267]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11fe00-145]
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Part V
Office of Management and Budget
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Draft Report to Congress on the Costs and Benefits of Federal
Regulations; Notice
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OFFICE OF MANAGEMENT AND BUDGET
Draft Report to Congress on the Costs and Benefits of Federal
Regulations
AGENCY: Office of Management and Budget, Executive Office of the
President.
ACTION: Notice and request for comments.
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SUMMARY: On January 7, 2000, OMB published a notice of availability of
and requested comments on its Draft Report to Congress on the Costs and
Benefits of Federal Regulations. On January 27, 2000, OMB extended the
public comment period to February 22, 2000. In order to assure the
broadest possible public access, we are publishing the draft report in
this Federal Register.
DATES: Comment Due Date: February 22, 2000.
ADDRESSES: Comments on this draft report should be addressed to John
Morrall, Office of Information and Regulatory Affairs, Office of
Management and Budget, NEOB, Room 10235, 725 17th Street, N.W.,
Washington, D.C. 20503.
You may submit comments by regular mail, by facsimile to (202) 395-
6974, or by electronic mail to jmorrall@omb.eop.gov.
FOR FURTHER INFORMATION CONTACT: You can review the report on the
Internet at: ``http://www.whitehouse.gov/omb/inforeg/index.html''. You
may also request a copy from John Morrall, Office of Information and
Regulatory Affairs, Office of Management and Budget, NEOB, Room 10235,
725 17th Street, NW, Washington, D.C. 20503. Telephone: (202) 395-7316.
E-mail: jmorrall@omb.eop.gov.
SUPPLEMENTARY INFORMATION: On January 7, 2000, OMB published in the
Federal Register (65 FR 1296) a notice of availability of the Draft
Report to Congress on the Costs and Benefits of Federal Regulations and
posted it on our web site. The comment period on the draft report was
scheduled to end January 21, 2000. Members of the public and Congress
asked for additional time and better access to the draft report to
allow the public a better opportunity to participate in the comment
process. Accordingly, OMB extended the public comment period on the
draft report to February 22, 2000 by a notice in the Federal Register
(65 FR 4447) and with this notice is publishing the entire draft
report.
John T. Spotila,
Administrator, Office of Information and Regulatory Affairs.
Draft Report to Congress on the Costs and Benefits of Federal
Regulations
Introduction
This is a draft for public comment of the Office of Management and
Budget's third report to Congress on the costs and benefits of Federal
regulations. \1\ This report is required by Section 638(a) of the 1999
Omnibus Consolidated and Emergency Supplemental Appropriations Act (the
Act). The Act requires OMB to submit ``an accounting statement and
associated report'' containing:
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\1\ This report uses the terms ``rule'' and ``regulation''
interchangeably.
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``(1) an estimate of the total annual costs and benefits (including
quantifiable and nonquantifiable effects) of Federal rules and
paperwork, to the extent feasible:
(A) in the aggregate;
(B) by agency and agency program; and
(C) by major rule;
``(2) an analysis of impacts of Federal regulation on State, local,
and tribal government, small business, wages, and economic growth; and
``(3) recommendations for reform.
The Act at Section 638(b), (c), and (d) also specifies how we are
to produce the report. We must:
``(b) * * * provide public notice and an opportunity to comment on
the statement and report,
``(c) * * * issue guidelines to agencies to standardize (1)
measures of costs and benefits and (2) the format of accounting
statements, and
``(d) * * * provide for independent and external review of the
guidelines and each accounting statement and associated report under
this section.''
This draft report provides the public with an opportunity to
comment on the ``statement and report'' before we submit it to
Congress. We are also asking independent and external experts in the
economics of Federal regulation to peer review this draft report. After
taking the public comments and peer reviews into account, we will
submit the final report to Congress.
In early October 1999 in accordance with the Act, we drafted
guidelines for standardizing measures of costs and benefits and the
format of the accounting statements. We circulated them for
``independent and external review'' by nine experts in the field of
benefit cost analysis. In late October 1999, we sent the guidelines and
format to the agencies for their use in reporting the costs and
benefits of their regulations. Using this information as well as other
information from the agencies and published literature on the costs,
benefits, and impacts of Federal regulation, we prepared this draft
report.
Chapter I presents our estimates of total annual costs and benefits
of Federal regulation and paperwork in the aggregate, and by agency and
agency program. It also presents an analysis of the impacts of Federal
regulation on State, local, and tribal government, small business,
wages, and economic growth. Finally, Chapter I presents estimates of
the costs and benefits by agency of the major final regulations issued
between April 1, 1995 and March 31, 1999 for which we could quantify
and monetize impacts.
Chapter II uses agency regulatory impact analyses to present
quantitative estimates and qualitative descriptions of the benefits and
costs of the 44 major rules issued by Federal agencies for which we
concluded review during the 12-month period between April 1, 1998 and
March 31, 1999. This ``regulatory year'' is the same period we used for
the first two reports.
Chapter III presents our estimates of the costs and benefits of
major Federal regulations for which we concluded review during the
period April 1, 1995 to March 31, 1999. We included only the
regulations for which we had quantitative information on both costs and
benefits. For these regulations, we applied a uniform format and
standardized measures of costs and benefits to produce estimates that
could be more readily compared to each other. This information is used
in our aggregate and by-agency estimates of the total annual costs and
benefits of Federal regulation in Chapter I.
Chapter IV presents ten recommendations for reform of specific
Federal regulations.
Chapter I: Estimating the Total Annual Costs, Benefits, and Impacts
of Federal Regulations and Paperwork
I. Overview
This chapter presents estimates of the total annual costs and
benefits of Federal rules and paperwork in the aggregate and by agency
and agency program as required by Sec 638(a)(1)(A) and (B) of the 1999
Omnibus Consolidated and Emergency Supplemental Appropriations Act (the
Act). In this chapter, we build on the information found in Chapter I
of the
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1998 Report to Congress On the Costs and Benefits of Federal
Regulations (OMB 1998) by using data and information newly available
during 1999. These data include information:
On costs and benefits of regulations provided by the
agencies at our request pursuant to Sec 638(c) of the Act, which
requires us to ``issue guidelines to agencies to standardize measures
of cost and benefits and the format of accounting statements.''
From the economic impact analyses that agencies prepare
for major rules for which we completed review between April 1, 1998 and
March 31, 1999.
From other government reports and sources on the impacts
of regulation and paperwork.
This chapter also analyzes the impacts of Federal regulation on
State, local, and tribal government, small business, wages, and
economic growth--as required by Sec. 638(a)(2) of the Act.
A. Estimation Problems
This is our third report estimating the total annual costs and
benefits of Federal regulations. In our previous two reports (OMB 1997
and 1998), we included a detailed discussion of the methodological
problems inherent in such an undertaking.\2\ We recognize the
importance of providing information to the public on the costs,
benefits, and impacts of Federal regulations. Such information is
useful for policymakers who are designing new regulations or revising
existing ones to make them more cost efficient and fair. Nevertheless,
any estimate of total annual costs and benefits can only be rough at
best.
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\2\ The first two reports also provide background information
helpful for understanding and placing in context this third report.
Together, the reports contain information on the history of
regulation and its reform, the Administration's regulatory review
program, the basics of economic analysis of regulations, and several
case studies comparing various prospective and retrospective
analyses of regulations.
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It is difficult, if not impossible, to estimate the actual total
costs and benefits of all existing Federal regulations with accuracy.
We lack good information about the complex interactions between the
different regulations and the economy. A variety of estimation problems
for individual and aggregate estimates distort the results in different
ways. The difficulty of answering the following questions illustrate
these problems:
1. What Baseline Should We Use?
In order to estimate the impact of a regulation, we need to know
what would have happened if the regulation had not been issued. In
other words, what is the baseline against which costs and benefits
should be measured? The baseline problem has several dimensions. First,
what happens in the absence of regulation is only an educated guess
(since it never happened). Moreover, the greater the regulatory change,
the less sure we are of the regulatory benefits and costs. The
techniques of applied welfare economics, upon which benefit-cost
analysis is based, hold only for marginal changes in economic
activities. The larger the changes, the less certain we are of the
accuracy of these techniques. Thus, we are more confident in our
estimates of the costs and benefits of a small change in the level of
automobile emissions than in the costs and benefits of all Clean Air
Act regulations and especially in estimates of the total costs and
benefits of all regulations issued by the Federal Government since the
early 1900s.
Even if we disregard the problem of modeling large changes,
significant difficulties remain. It is difficult to determine the
baseline for the individual regulations that must be added together to
get an aggregate estimate for all regulations. Bias is always a problem
when surveying firms and other regulated entities on their expected
compliance costs. Both regulators and the regulated may have a stake in
the survey results. The problem is potentially greater for prospective
studies because they must predict both the baseline and the regulatory
effects. Retrospective studies concern themselves only with the
baseline. In general, the most precise estimates of the costs and
benefits of regulation appear in retrospective studies done by
individuals who are not interested parties, but who do seek to maintain
their reputations as objective professional analysts.
2. What Costs Should We Measure?
Most of the studies of the costs of regulation produced to date
measure the direct expenditures required by regulation. It is hard to
do more. Yet, as Cropper and Oates (1992) point out, the cost to
society of regulation is properly measured by the change in consumer
and producer ``surplus'' \3\ associated with the regulation and with
any price and/or income changes that may result. At one extreme,
ignoring the consumer surplus loss produced by a ban on the sale of a
product understates costs to society. Even though compliance costs are
zero, consumers are less well off because they can no longer buy the
product. At the other extreme, calculating compliance expenditures
based on pre-regulation output overstates costs because, if the firm
raises prices to cover compliance costs, consumers may shift to other
products to compensate partially for the accompanying welfare losses
(Cropper and Oats 1992, p. 722). Actually estimating the changes in
consumer and producer ``surplus'' caused by regulation requires data
that is usually not easily obtained and assumptions that are at best
only educated guesses.
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\3\ Consumer surplus refers to the incremental value of a
product, as perceived by the consumer, over and above the price paid
by the consumer for that product. Producer surplus refers to the
incremental revenue received by the producer of a product over and
above the producer's marginal costs of production.
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3. What Is the Effect of Technological Change?
Many of the studies on which we must rely for cost and benefit
estimates are dated. Over time the dynamic nature of the economy may
affect the estimation of both benefits and costs. Technological
improvements are often cited as the reason that predicted costs of
compliance often turn out to be less than actual costs (Office of
Technology Assessment 1995). Less well noted, however, is that
technological progress also alters the benefits of regulation over
time. Medical progress can reduce the future benefits estimated for
health, safety and environmental regulations, just as productivity
improvements in manufacturing reduce the costs of compliance of some
regulations. New drugs or medical procedures can reduce the benefits of
regulations aimed at reducing exposure to certain harmful agents such
as an infectious disease. Regulations aimed at increasing the energy
efficiency of consumer products or buildings may have their expected
benefits reduced by new technology that lowers the cost of producing
energy.
Technological change also leads directly to higher incomes, which
allow people to demand better health and more safety. Business often
responds to these demands by providing safer products and workplaces,
even in the absence of regulation. Individuals with rising incomes may
purchase or donate land to nature conservancies to provide ecological
benefits--not to mention tax writeoffs. Yet, as on the cost side, the
baseline that we use is generally the status quo, rather than a best
guess as to what is likely to happen in the future.
4. How Do We Determine Causality?
It is often difficult to attribute changes in behavior to specific
Federal regulations because there can be many other causal factors. In
the
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environmental area, there are regulations from several different
Federal agencies--the Environmental Protection Agency (EPA), the
Department of Agriculture (USDA), the Department of Energy (DOE), the
Department of the Interior (DOI), the Department of Commerce (DOC) and
the Department of Transportation (DOT) as well as numerous State and
local government entities. The tort system, voluntary standards
organizations, and public pressure also may cause firms to provide a
certain degree of public protection in the absence of Federal
regulation. As the General Accounting Office (GAO) points out,
determining how much of the costs and benefits of these activities to
attribute solely to Federal regulation is a difficult undertaking (GAO
1996).
5. How Do We Assess Older Regulations?
Once regulations are implemented and compliance has begun, public
attitudes about the desirability of mandated actions often change.
Regulations that were widely questioned before implementation--for
example, airbags and family leave--often find wide acceptance
afterwards. If the National Highway Traffic Safety Administration's
(NHTSA) regulations were eliminated, the automobile companies are not
likely to discontinue all the safety features that NHTSA has mandated.
Consumers now expect safer cars and seem willing to pay for them.
Indeed, they often demand more safety than NHTSA requires.
This same phenomenon is taking place in the environmental area.
Environmentally responsible behavior can be good for the bottom line.
Rising per capita income and greater acceptance of regulation encourage
such behavior, although their precise impact can be hard to measure.
Changes in consumer preferences can create a ``rising baseline''
phenomenon, which reduces the ongoing significance of health, safety,
and environmental regulations. Estimates of the aggregate regulatory
costs and benefits that use a pre-regulation baseline as opposed to a
post-regulation baseline may thus overestimate the current costs and
benefits of those regulations.
6. Is There an ``Apples and Oranges'' Problem?
Most attempts to summarize the total costs and benefits of Federal
regulations have simply added together a diverse set of individual
studies. This is an inherently flawed approach. These individual
studies vary in the quality, methodology, and type of regulatory
impacts they include. They use different assumptions about baselines
and time periods, different discount rates, different valuations for
the same attribute, and different approaches to dealing with
uncertainty. They also are seldom able to analyze the interaction
effects among the tens of thousands of regulations. Although we are
mindful of, and tried to tried to correct for, these problems in our
estimates, our numbers too should be used with caution.
7. Is it Enough To Know the Costs and Benefits?
Accurate assessment of costs and benefits does not necessarily give
us information concerning the distribution of such effects. None of the
analyses addressed in this report provides quantitative information on
the distribution of benefits or costs by income category, geographic
region, or any other equity-related factor. As a result, there is no
basis for quantifying distributional or equity impacts, which often can
be a key reason for regulation.
B. Types of Regulation
Since there are so many different types of Federal regulations, it
is useful to break this heterogeneous body up into categories. Three
main categories are widely used: social, economic, and process.
Social Regulation seeks to benefit the public interest in
one of two ways. It prohibits firms from producing products in certain
ways or with certain characteristics that are harmful to public
interests such as health, safety, and the environment. Examples would
be OSHA's rule prohibiting firms from allowing in the workplace more
than one part per million of Benzene averaged over an eight hour day
and the Department of Energy's rule prohibiting firms from selling
refrigerators that do not meet certain energy efficiency standards. It
also requires firms to produce products in certain ways or with certain
characteristics that are beneficial to these public interests. Examples
are FDA's requirement that firms selling food products must provide a
label with specified information on its package and DOT's requirement
that automobiles be equipped with certain kinds of airbags.
Economic Regulation prohibits firms from charging prices
or entering or exiting lines of business that might cause harm to the
economic interests of other firms or economic groups. Such regulations
usually apply on an industry-wide basis (for example, agriculture,
trucking, or communications). In the United States, this type of
regulation at the Federal level has often been administered by
``independent'' commissions such as the Federal Communications
Commission (FCC), the Securities and Exchange Commission (SEC), or the
Federal Energy Regulatory Commission (FERC). This type of regulation
can cause economic loss from the higher prices and inefficient
operations that often occur when competition is restrained.
Process Regulations impose administrative or paperwork
requirements such as income tax, immigration, social security, food
stamps, or procurement forms. Most process costs result from program
administration, government procurement, and tax compliance efforts.
Social and economic regulation may also impose paperwork costs due to
disclosure requirements and enforcement needs. These costs generally
appear in the cost for such rules. Procurement costs generally show up
in the Federal budget as greater fiscal expenditures.
1. Measuring the Impacts of the Different Types of Regulation
The impacts of regulation have several dimensions. Regulation
either increases or decreases the total welfare or well being of
society, or redistributes it among different groups. Usually it does
both, but the relative degree varies significantly by type of
regulation. The public purpose for a regulation usually takes one of
two forms: to maximize society's welfare or to redistribute costs and
benefits from one group to another.
Social Regulation often seeks to improve the efficiency of the
market by correcting what economists call ``market failures''--for
example, pollution or public health risks or other unintended
consequences on third parties and unequal information between buyers
and sellers. Such regulation affects the value of goods and services or
welfare enjoyed by society. We measure the impact of a social
regulation on society's welfare by estimating its net benefits: social
costs subtracted from social benefits.
Redistributive effects or ``income transfers'' should also be
measured, noted, and presented to policymakers to help in forming their
decision. OMB has issued recommended procedures or ``Best Practices,''
which are particularly useful for estimating the benefits and costs of
social regulations. We have described and discussed these procedures in
the two previous Reports to Congress on the Costs and Benefits of
Federal Regulation. As mentioned above in the introduction, we have
provided additional guidance for the agencies for standardizing the
measures of costs and
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benefits sent us for this and next year's report.
We can divide social regulation into several categories:
Environmental. The true social cost of regulations aimed at
improving the quality of the environment is represented by the total
value that society places on the goods and services foregone as a
result of resources being diverted to environmental protection. (EPA's
Cost of a Clean Environment, pp. 1-2, 1-3.) These social costs include
the direct compliance costs of the capital equipment and labor needed
to meet the standard. They also include the more indirect consumer and
producer surplus losses from lost or delayed consumption and production
opportunities that result from the higher prices and reduced output
needed to pay for the direct compliance costs. In the case of a product
ban or prohibitive compliance costs, almost all of the costs represent
consumer and producer surplus losses. Most of the cost estimates used
in this report do not include consumer and producer surplus losses
because it is difficult and often impractical to estimate the demand
and supply curves needed to do this type of analysis.
Further indirect effects on productivity and efficiency result from
price and output changes that spread through other sectors of the
economy. Estimates of compliance costs may understate substantially the
true long-term costs of pollution control.\4\ The estimates used in
this report do not include these indirect and general equilibrium
effects.
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\4\ See Jaffe, Peterson, Portney, and Stavins' survey (1995), p.
153.
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The benefits of environmental protection are represented by the
value that society places on improved health, recreational
opportunities, quality of life, visibility, preservation of ecosystems,
biodiversity, and other attributes of protecting or enhancing our
environment. This value is best measured by society's willingness-to-
pay (WTP) for these attributes. Since most types of improvement in
environmental quality are not traded in markets, benefits must be
estimated by indirect means using sophisticated statistical techniques
or ``contingent valuation'' survey methods. Such methods often have
more difficulty with benefit estimation than cost estimation.
Other Social. This category of regulation includes rules designed
to advance the health and safety of consumers and workers, as well as
regulations aimed at promoting social goals such as equal opportunity,
equal access to facilities, and protection from fraud and deception.
These kinds of regulation, as well as environmental regulation, are
concerned with controlling or reducing the harmful or unintended
consequences of market transactions. Such consequences as air
pollution, occupationally induced illness, or automobile accidents are
commonly called ``negative externalities.'' Regulations designed to
deal with such externalities are said to ``internalize'' the
externalities.
This can be done by regulating the amount of the externality, for
example, banning a pollutant or limiting it to a ``safe'' level, or
regulating how a product is produced or used. Social regulation may
also require the disclosure of information about a product, service, or
manufacturing process where inadequate or asymmetric access to
information may place consumers, citizens, or workers at a
disadvantage. The techniques and methodological concerns involved in
the estimation of the social costs and benefits generated by these
rules are similar to those involved in the estimation of costs and
benefits of environmental regulation discussed above. In the results
reported below, we further break ``Other Social'' into three
categories: transportation, labor and other regulations. The third
category includes food and drug safety, energy efficiency, and quality
of medical care regulations.
Economic regulation, especially in the past, often served to
transfer income among economic groups. In certain circumstances,
however, such as when used to regulate natural monopolies, economic
regulation can produce net social benefits. In the last twenty years,
deregulation and improvements in technology have reduced entry barriers
in a variety of sectors, including transportation, communications,
energy, and financial services. To a large degree, economic regulation
now serves more and more to promote competition, rather than to protect
firms from it. The costs of economic regulation are usually measured by
modeling or comparing specific regulated sectors with less regulated
sectors, estimating the consumer and producer surplus losses that
result from higher prices and lack of service, and estimating the
excess costs that may result from the lack of competition. These costs
are made up of efficiency losses, or costs to society, and income
transfers that one group gains at the expense of another. The Hopkins
(92) and Hahn and Hird (91) surveys of regulatory costs found that
transfer costs were generally about two to three times the social costs
of economic regulation.
Economic regulation may produce net social benefits when natural
monopolies are regulated to simulate competition. Although Hahn and
Hird (1991) argue that the dollar amounts of such efficiency benefits
are small and short lasting in a dynamic and technologically vibrant
economy, this is a judgment that is not the result of an empirical
study. It is, however, based on the increasingly accepted view that the
U.S. economy is becoming more competitive over time, with fewer long-
lasting natural monopolies, and on evidence that much economic
regulation seeks primarily to enhance one group at the expense of
another. Even though monopoly power may not be as long lasting in the
``new economy'' as it was in the old, it can still be important at a
given point in time.\5\
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\5\ Note that our definition of economic regulation does not
include antitrust activities such as preventing the formation of
monopolies through mergers or anticompetitive behavior.
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Process Regulation mainly serves to collect funds, allocate them
among groups of recipients, and establish the conditions under which
the government purchases or provides goods and services from and to the
public. Although allocating and collecting funds can serve to transfer
income between economic groups, the fiscal budget already accounts for
these transfers and we do not provide separate estimates below. We do,
however, provide estimates of the administrative costs to the public of
providing the information needed by the government to collect these
funds and provide these services because these estimates are not
included in the fiscal budget. These costs are also real burdens to
society, not transfers. Government can reduce them streamlining
paperwork and red tape.
2. Other Types of Regulatory Impacts
As discussed above, analysts often use estimates of benefits and
costs to measure the net impact of regulation on society as a whole.
Executive Order No. 12866, Regulatory Planning and Review, issued by
President Clinton on September 30, 1993, requires the agencies to
measure such impacts (Sect. 1(b)(6)). It also requires that the
agencies analyze the effect of a proposed regulation on State, local,
and tribal governments and on businesses of differing sizes (Sect.1.
(b) ((9) and (11)). As mentioned, Sect. 638 (a)(2) of the Act asks for
information on these impacts as well as on wages and economic growth.
Clearly, the impacts of regulation on these sectors are of special
interest to policymakers and should be examined
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in a full analysis of regulatory impacts. The impacts on State, local,
and tribal governments, small businesses, and workers can be measured
by distributional analysis, which looks at the transfers of income
among groups caused by regulations. Generally the analysis does not
make value judgments about the merits of these transfers, leaving that
up to policymakers. This approach is in contrast to Benefit Costs
Analysis, which generally ignores income transfers and focuses on
whether social benefits exceed social costs. Since distributional
effects and net benefits are both important, both analyses should be
presented to policymakers. Reflecting this philosophy, Executive Order
12866 states that agencies should select regulatory approaches that
``maximize net benefits'' taking into account distributional impacts
and equity.
As required by the Act, we present estimates in section II of the
costs and benefits of regulation and paperwork, and in section III
present what we know about its distributional impacts.
II. The Costs and Benefits of Regulation and Paperwork
Our estimate of the total annual costs and benefits of Federal
rules and paperwork starts with our estimates in last year's report. It
then adds new information received from the agencies about previous
regulations and about new regulations issued during the last year.
A. Social Regulation
1. Total Annual Costs and Benefits
Tables 1, 2, and 3 document how we estimate the total annual
monetized costs and benefits of social regulation as of April 1,
1999.\6\
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\6\ Our general approach follows the procedures we used in last
year's report which discusses them in more detail. (See OMB 1999, pp
13-18).
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Table 1 relies on estimates from Hahn and Hird (1991) and EPA's
Cost of a Clean Environment (1990) and Section 812 Retrospective Report
(1997) to present a range of estimates for costs and benefits as of
1988.\7\ The estimates of costs range between $84 billion and $140
billion and the benefits between $56 billion and $1.51 trillion
annually.
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\7\ We discussed in detail the problems and uncertainties
associated with these estimates in the two previous reports. We
refer the reader to them for more specific information. The
estimation problems discussed earlier in this report explain the
general estimation problems with these types of aggregate estimates.
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The $1.51 trillion upper-range estimate is dominated by EPA's
Section 812 Retrospective, which estimates the benefits of the Clean
Air Act from 1970 to 1990.
In last year's report we used EPA's upper range estimate for
benefits of $3.2 trillion. This estimate engendered considerable public
criticism. For example, a panel of regulatory experts convened by GAO
expressed considerable scepticism about the magnitude of the estimate
(GAO, 1999). EPA points out, however, that this criticism was somewhat
misdirected because the $3.2 trillion estimate was the upper bound,
95th percentile estimate generated by the 812 Retrospective Study for
the year 1990, a value which EPA itself believes has a very small
probability of being the correct estimate (that is, the probability
that benefits are equal to or greater than $3.2 trillion is 5%). EPA's
expected value for the benefits of 1970 to 1990 programs in the year
1990 is $1.45 trillion (in 1997 dollars). We have amended our report
this year to incorporate EPA's expected-value estimate.
GAO (1999) also reported that many of the experts identified
specific concerns about some of the assumptions in the Retrospective
Report, including: (1) The assumption that air quality would have
deteriorated significantly between 1970 and 1990 in the absence of the
Clean Air Act, (2) the assumed health effects from limiting exposure to
particulate matter, and (3) the methods used to estimate the value that
individuals would place on reducing health and mortality risks.\8\
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\8\ GAO also points out that these are similar to the concerns
expressed by OMB in last year's report. (See OMB 1999, pp. 25-35).
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Table 2 provides estimates of the total annual monetized costs and
benefits of social regulations issued between 1987 and the first
quarter of 1998. As explained in last year's report, the cost estimates
are based on the Regulatory Impact Analyses (RIAs) for major rules that
agencies submitted to OMB under Executive Order 12866 and its
predecessor, Executive Order 12291. To estimate benefits, we used a
combination of sources. For the years 1987 to 1995, we assumed that
benefits bore the same ratio to our cost estimates for the four
categories of regulations shown in Table 2 as they did in a study by
Robert Hahn (1996) of major regulations issued between 1990 and mid-
1995. We did this because we do not have our own systematic estimates
of the benefits for major rules issued before 1995.\9\ For the benefit
estimates for 1995 through the first quarter of 1999, we used the
information from agency-supplied RIAs modified for consistency with
Best Practices as appropriate and extended to provide more monetized
estimates of benefits and costs using consensus value estimates used by
the agencies or found in the literature. These estimates are explained
in detail in Chapter III.
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\9\ Admittedly this is a crude estimation procedure because
Hahn's inventory of rules begins in 1990 and ours extends back to
1987. Consequently, we are assuming that the relationship between
costs and benefits that Hahn found for the later period extends back
three years. Still, we know of no other approach to fill this gap in
the data until RIAs for these years are re-examined. For further
details see last year's report (OMB, 1999).
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Table 3 combines the results from Tables 1 and 2 to present our
estimates for the existing costs of social regulation as of the first
quarter in 1999. It shows that health, safety and environmental
regulation produces between $32 billion and $1,621 billion of net
benefits per year.
2. New Estimates for the Clean Air Act Amendments
EPA has also called to our attention its new study, The Benefits
and Costs of the Clean Air Act 1990 to 2010, (EPA 1999) to supplement
the set of studies that served as the basis for the monetized estimates
of benefits and costs in last year's report. This study presents
estimates of the benefits and costs of the regulatory program mandated
by the 1990 Clean Air Act Amendments (CAAA). It does not, however,
cover the benefits and costs of many of EPA's recent major regulations,
such as the 1997 final rule setting new Ozone and Particulate Matter
National Ambient Air Quality Standards and the recent regional haze
final rule. Nor does it include the costs and benefits of the
regulations EPA issued during this period pursuant to its Acts other
than the CAAA.
EPA's new study estimates total annual costs for the CAAA of about
$19 billion and total annual benefits of $71 billion in the year 2000.
We note that the adoption of a value for the projected reduction in the
risk of premature mortality is the subject of continuing discussion
within the economic and public policy analysis community within and
outside the Administration. In response to the sensitivity of this
issue, we provide estimates reflecting two alternative approaches. The
first approach--supported by some and preferred by EPA--uses a Value of
a Statistical Life (VSL) approach developed for the Clean Air Act
Section 812 benefit-cost studies. This VSL estimate of $5.9 million
(1997$) was derived from a set of 26 studies identified by EPA using
criteria established in Viscusi (1992), as those most appropriate for
environmental policy analysis applications.
An alternative, age-adjusted approach is preferred by a number of
others both within and outside the Administration. This approach was
also developed for the Section 812 studies and addresses concerns with
applying the VSL estimate--reflecting a valuation derived mostly from
labor market studies involving healthy working-age manual laborers--to
PM-related mortality risks that are primarily associated with older
populations and those with impaired health status. This alternative
approach leads to an estimate of the value of a statistical life year
(VSLY), which is derived directly from the VSL estimate. It differs
only in incorporating an explicit assumption about the number of life
years saved and an implicit assumption that the valuation of each life
year is not affected by age.\10\ Under this alternative approach, the
estimated mean VSLY is $360,000 (1997$); combining this number with a
mean life expectancy of 14 years would yield an age-adjusted VSL of
$3.6 million (1997$).
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\10\ Specifically, the VSLY estimate can be calculated by
amortizing the $5.9 million mean VSL estimate over the 35 years of
life expectancy associated with subjects in the labor market
studies. The resulting estimate, using a 5 percent discount rate,
would be $360,000 per life-year saved in 1997 dollars. This annual
average value of a life-year can then be multiplied times the number
of years of remaining life expectancy for the affected population.
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Both approaches are imperfect, and raise difficult methodological
issues which are discussed in depth in the recently published Section
812 Prospective Study, draft EPA Economic Guidelines, and the peer-
review commentaries prepared in support of each of these documents. For
example, both methodologies embed assumptions (explicit or implicit)
about which there is little or no definitive scientific guidance. In
particular, both methods adopt the assumption that the risk versus
dollars trade-offs revealed by available labor market studies are
applicable to the risk versus dollar trade-offs in the air pollution
context.
EPA currently prefers the VSL approach because, essentially, the
method reflects the direct application of what EPA considers to be the
most reliable estimates for valuation of premature mortality available
in the current economic literature. While there are several differences
between the labor market studies EPA uses to derive a VSL estimate and
the particulate matter air
[[Page 7206]]
pollution context addressed here, those differences in the affected
populations and the nature of the risks imply both upward and downward
adjustments. For example, adjusting for age differences may imply the
need to adjust the $5.9 million VSL downward, as would adjusting for
health differences; but the involuntary nature of air pollution-related
risks and the lower level of risk-aversion of the manual laborers in
the labor market studies may imply the need for upward adjustments. In
the absence of a comprehensive and balanced set of adjustment factors,
EPA believes it is reasonable to continue to use the $5.9 million value
while acknowledging the significant limitations and uncertainties in
the available literature. Furthermore, EPA prefers not to draw
distinctions in the monetary value assigned to the lives saved even if
they differ in age, health status, socioeconomic status, gender or
other characteristics of the adult population.
Those who favor the alternative, age-adjusted approach emphasize
that the value of a statistical life is not a single number relevant
for all situations. Indeed, the VSL estimate of $5.9 million (1997$) is
itself the central tendency of a number of estimates of the VSL for
some rather narrowly defined populations. When there are significant
differences between the population affected by a particular health risk
and the populations used in the labor market studies--as is the case
here--they prefer to adjust the VSL estimate to reflect those
differences. While acknowledging that the VSLY approach provides an
admittedly crude adjustment (for age though not for other possible
differences between the populations), they point out that it has the
advantage of yielding an estimate that is not presumptively biased.
Proponents of adjusting for age differences using the VSLY approach
fully concur that enormous uncertainty remains on both sides of this
estimate --upwards as well as downwards--and that the populations
differ in ways other than age (and therefore life expectancy). But
rather than waiting for all relevant questions to be answered, they
prefer a process of refining estimates by incorporating new information
and evidence as it becomes available.
Our estimates of the costs and benefits of environmental
regulations in Table 2 above include estimates for CAAA regulations as
well as other EPA regulations based on the RIAs EPA prepared at the
time. The new CAAA report estimates cannot simply be added to our
estimates in Table 2 without adjustments to correct for the overlapping
regulations. The CAAA report estimates cannot replace our estimates
because they do not include all the regulations EPA issued between 1987
and the first quarter of 1999.
3. Costs and Benefits of Major Rules by Agencies
Table 4 lists the costs and benefits by agency and agency program
for major regulations issued over the last four years (April 1, 1995 to
March 31, 1999) as estimated by us in Chapter III. During this period,
only seven agencies issued major rules. Of these, rules by EPA and HHS
had the greatest impact. Those issued by EPA are expected to provide
between $17 billion and $84 billion in annual benefits for society at
an annual cost of about $28 billion. Those issued by HHS are expected
to provide $12 billion to $14 billion in annual benefits at an annual
cost of about $800 million.
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[[Page 7208]]
B. Economic Regulation
In our 1997 and 1998 reports, we presented an estimate that the
efficiency costs of economic regulation amounted to $71 billion. This
is based on an estimate by Hopkins (1992) of $81 billion, which we
adjusted downward by $10 billion to account for the deregulation and
increase in competition that has occurred in the financial and
telecommunications sectors since Hopkins' estimates were made in 1992.
In a recent comprehensive report on regulatory reform in the United
States by a panel of experts from around world, the OECD estimated that
additional reforms in the transportation, energy, and
telecommunications sectors would lead to an increase in GDP of 1
percent (OECD, 1999). One percent of the revised first quarter 1999 GDP
of $9,073 billion is about $90 billion.
This estimate does not include the costs of international trade
protection, which Hopkins included in his estimate of the cost of
economic regulation. According to a recent study, the static gains from
removing trade barriers existing in 1990 suggested potential gains of
about 1.3 percent of GDP (Council of Economic Advisers 1998) or $120
billion for the first quarter of 1999, assuming trade barriers have not
changed.\11\ These estimates taken together suggest that Hopkins'
estimate may be too low.
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\11\ The CEA report also went on to state that studies of this
type only capture static costs, fail to capture value of foregone
varieties of products, quality improvements, and productivity
enhancements that would take place in the absence of trade barriers,
and thus understate the benefits from trade (CEA 1998, p. 238).
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As we discuss above, economic regulation also results in income
transfers from one group to another. In our previous two reports, we
used an approach used by Hahn and Hird, and Hopkins, to estimate
transfers as a multiple of the efficiency losses. Based on the OECD
estimate of efficiency losses, Hopkins' multiple of two (1992) gives
rise to an estimate of transfer costs for economic regulation (not
counting trade protection) of $180 billion.
C. Process Regulation
The main costs of process regulation consist of the paperwork costs
imposed on the public. Sec. 638(a)(1)(A) of the Act calls on OMB to
examine the costs and benefits of paperwork. Currently OMB is in the
process of revising its guidance on how the agencies should evaluate
paperwork burden. OMB issued a notice in the Federal Register on
October 14, 1999 (64 FR 55788) inviting comments on how best to improve
the uniformity, accuracy, and comprehensiveness of agency burden
measurement. In this notice, we raise the issue of expanding the
reporting of burden to include a monetized value of time, and
specifically seek comment on the idea of converting ``burden hours''
into a dollar measure of burden. If a dollar-equivalent value is
calculated for burden hours, agencies and OMB could report a single
estimate--in dollar terms--of paperwork burden that would combine
monetized burden hours with the ``cost burden'' calculation. This would
estimate out-of-pocket expenses that are not captured by the time-based
measure of burden. While this approach has analytical appeal, it does
pose significant methodological challenges.
In addition, IRS has begun work on a new model that will estimate
the amount of burden incurred by wage and investment taxpayers as a
result of complying with the tax system. IRS has undertaken this study
to improve our understanding of taxpayer burdens, to enable us to
measure both current and future levels of burden, and to help us
isolate the burden of particular tax provisions, regulations, or
procedures. To help provide input into our consideration of methods to
expand the reporting of burden to include monetized burden hours, the
IRS paperwork burden study will include the development of a White
Paper on the Monetization of Taxpayer Time. This White Paper will
examine the issues surrounding monetization, review existing research,
identify lessons learned, and discuss the implications for efforts to
monetize taxpayer time.
In our Information Collection Budgets, published annually, we
calculate paperwork burden imposed on the public using information
agencies give us with their requests for information collection
approvals.\12\ We present below in Table 5 estimates of paperwork
burden in terms of the hours the public devotes annually to gathering
and providing information for the Federal government. At a future point
in time, we hope to be able to provide information on the dollar costs
of paperwork. At present we do not know how to estimate the value of
the total annual benefits to society of the information the government
collects from the public.
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\12\ The Paperwork Reduction Act of 1995 requires Federal
agencies to seek approval from OMB for each information collection
sought from ten or more individuals or entities. As part of that
request agencies must estimate the burdens that their individual
collection requests impose on the public.
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Table 5 shows our estimates of the expected paperwork burden hours
for FY 1999 by agency. The total burden of 7,202 million hours is made
up of 5,912 million hours for the Treasury Department (82%) and 1,290
million hours for the rest of the Federal government (18%). Using the
estimate of the average value of time for the individuals and entities
that provide information to the government of $26.50 per hour, which we
used in the last two reports, we can get an idea of the dollar burden
of paperwork on the public: $190 billion. Note, however, that (1) this
is a rough average and should not be applied to individual agencies or
agency collections, and (2) this estimate should not be added to our
estimates of the costs of regulation because it would result in some
double counting. Our estimates of regulatory costs already include
paperwork costs. Many paperwork costs arise from regulations, often for
enforcement and disclosure purposes.
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[[Page 7209]]
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[[Page 7210]]
III. The Other Impacts of Federal Regulation
Sec. 638(a)(2) of the Act calls on OMB to present an analysis of
the impacts of Federal regulation on State, local, and tribal
government, small business, wages, and economic growth.
A. Impact on State, Local, and Tribal Government
Over the past four years, four rules have imposed costs of more
than $100 million on State, local, and Tribal governments (and thus
have been classified as public sector mandates under the Unfunded
Mandates Act of 1995).\13\ All four of these rules were issued by the
Environmental Protection Agency. These four rules are described in
greater detail below.
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\13\ EPA's proposed rules setting air quality standards for
ozone and particulate matter may ultimately lead to expenditures by
State, local or tribal governments of $100 million or more. However,
Title II of the Unfunded Mandates Reform Act provides that agency
statements on compliance with Section 202 must be conducted ``unless
otherwise prohibited by law''. The Conference report to this
legislation indicates that this language means that the section
``does not require the preparation of any estimate or analysis if
the agency is prohibited by law from considering the estimate or
analysis in adopting the rule.'' EPA has stated, and the courts have
affirmed, that under the Clean Air Act, the air quality standards
are health-based and EPA is not to consider costs.
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1. EPA's Rule on Standards of Performance for Municipal Waste
Combustors and Emissions Guidelines (1995): This rule set standards of
performance for new municipal waste combustor (MWC) units and emission
guidelines for existing MWCs under sections 111 and 129 of the Clean
Air Act [42 U.S.C. 7411, 42 U.S.C. 7429]. The standards and guidelines
apply to MWC units at plants with aggregate capacities to combust
greater than 35 megagrams per day (Mg/day) (approximately 40 tons per
day) of municipal solid waste (MSW). The standards require sources to
achieve emission levels reflecting the maximum degree of reduction in
emissions of air pollutants that the Administrator determined is
achievable, taking into consideration the cost of achieving such
emission reduction, and any non-air quality health and environmental
impacts and energy requirements.
EPA estimated the national total annualized cost for the emissions
standards and guidelines to be $320 million per year (in constant 1990
dollars) over existing regulations. EPA estimated the cost of the
emissions standards for new sources to be $43 million per year. EPA
estimated the cost of the emissions guidelines for existing sources to
be $277 million per year. The annual emissions reductions achieved
through this regulatory actions include, for example, 21,000 Mg. of
SO2; 2,800 Mg. of particulate matter (PM); 19,200 Mg of NOX; 54 Mg. of
mercury; and 41 Kg. of dioxin/furans.
2. EPA's Standards of Performance for New Stationary Sources and
Guidelines for Control of Existing Sources: Municipal Solid Waste
Landfills (1996): This rule set performance standards for new municipal
solid waste landfills and emission guidelines for existing municipal
solid waste landfills to implement section 111 of the Clean Air Act.
The rule addressed non-methane organic compounds (NMOC) and methane
emissions. NMOC include volatile organic compounds (VOC), hazardous air
pollutants (HAPs), and odorous compounds. Of the landfills required to
install controls, about 30 percent of the existing landfills and 20
percent of the new landfills are privately owned. The remainder are
publicly owned. The total nationwide annualized costs for collection
and control of air emissions from new and existing MSW landfills are
estimated to be $94 million per year annualized over 5 years, and $110
million per year annualized over 15 years.
3. National Primary Drinking Water Regulations: Disinfectants and
Disinfection Byproducts (1998): This rule promulgates health based
maximum contaminant level goals (MCLGs) and enforceable maximum
contaminant levels (MCLs) for about a dozen disinfectants and
byproducts that result from the interaction of these disinfectants with
organic compounds in drinking water. The rule will require additional
treatment at about 14,000 of the estimated 75,000 residential water
systems nationwide. The costs of the rule are estimated at $700 million
annually. The quantified benefits estimates range from zero to 9,300
avoided bladder cancer cases annually, with an estimated monetized
value of $0 to $4 billion. Possible reductions in rectal and colon
cancer and adverse reproductive and developmental effects were not
quantified.
4. National Primary Drinking Water Regulations: Interim Enhanced
Surface Water Treatment (1998): This rule establishes new treatment and
monitoring requirements (primarily related to filtration) for drinking
water systems that use surface water as their source and serve more
than 10,000 people. The purpose of the rule is to enhance protection
against potentially harmful microbial contaminants. The rule is
expected to require treatment changes at about half of the 1,400 large
surface water systems, at an annual cost of $300 million. All systems
will also have to perform enhanced monitoring of filter performance.
The estimated benefits include mean reductions of from 110,000 to
338,000 cases of cryptosporidiosis annually, with an estimated
monetized value of $0.5 to $1.5 billion, and possible reductions in the
incidence of other waterborne diseases.
While these four EPA rules were the only ones over the past four
years to require expenditures by State, local and Tribal governments
exceeding $100 million, they were not the only rules with impacts on
other levels of governments. For example, 18% of rules listed in the
April 1999 Unified Regulatory Agenda cited some impact on State, local
or Tribal governments. In general, OMB works with the agencies to
ensure that the selection of the regulatory option for all final rules
fully complies with the Unfunded Mandates Reform Act. For proposed
rules, OMB works with the agencies to ensure that they also solicited
comment on alternatives that would reduce costs to all regulated
parties, including State, local and Tribal governments.
Agencies have also significantly increased their consultation with
State, local, and Tribal governments on all regulatory actions that
impact them. For example, EPA and the Department of Health and Human
Services engaged in particularly extensive consultation efforts over a
wide variety of programs, on both formal unfunded mandates as defined
by the Unfunded Mandates Reform Act and other rules with
intergovernmental impacts. Agencies also made real progress in
improving their internal systems to manage consultations better. This
has helped them analyze specific rules in ways that reduce costs and
increase flexibility for all levels of government and for the private
sector, while implementing important national priorities.
This trend toward increased consultation is expected to continue.
On August 5, 1999, President Clinton issued Executive Order 13132
entitled ``Federalism.'' This Executive Order emphasizes consultation
with State and local governments and greater sensitivity to their
concerns. It also establishes specific requirements that Federal
agencies must follow as they develop and carry out policies that affect
State and local governments.
B. Impact on Small Business
The President explicitly recognized the need to be sensitive to the
impact of regulations and paperwork on small business in his Executive
Order 12866,
[[Page 7211]]
``Regulatory Planning and Review,'' issued September 30, 1993. The
Executive Order called on the agencies to tailor their regulations by
business size in order to impose the least burden on society,
consistent with obtaining the regulatory objectives. It also called for
the development of short forms and other streamlined regulatory
approaches for small businesses and other entities. The President also
supported and signed into law the Small Business Regulatory Enforcement
Fairness Act of 1996 (SBREFA). In the findings section of SBREFA,
Congress stated that ``. . . small businesses bear a disproportionate
share of regulatory costs and burdens.'' This is largely attributable
to fixed costs--costs that all firms must bear regardless of size. Each
firm has to determine whether a regulation applies, how to comply, and
whether it is in compliance. As firms increase in size, fixed costs are
spread over a larger revenue and employee base resulting in lower unit
costs.
This observation is supported by empirical information from a study
by the Office of Advocacy of the Small Business Administration (1995).
That study found that regulatory costs per employee decline as firm
size--as measured by the number of employees per firm--increases. Using
data from Hopkins (1995), SBA estimates that the total cost of
regulation (environmental, other social, the efficiency costs of
economic, the transfer costs of economic, and process regulation) was
50 percent greater per employee for firms with under 20 employees
compared to firms with over 500 employees.\14\
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\14\ SBA estimated that average per employee regulatory costs
were $5,106 for firms with under 20 employees compared to $3,404 for
firms with over 500 employees. These estimates are based on 1992
conditions using 1995 dollars. Hopkins' own estimates found a 86
percent differential (See SBA 1995, pp 39-46).
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These results do not necessarily indicate, however, the extent to
which reducing regulatory requirements on small firms would produce
more benefits for society at lower costs. That depends in part on the
contribution of small firms to the risks being addressed and the
benefits produced per dollar of compliance costs by regulating small
firms.
C. Impact on Wages
The impact of Federal regulations on wages depends upon how
``wages'' is defined and on the types of regulations involved. If we
define ``wages'' narrowly as workers' take-home pay, social regulation
may have decreased average wage rates, while economic regulation may
have increased them, especially for specific groups. If we define
``wages'' more broadly as the real value or utility of workers' income,
the directions of the effects of the two types of regulation are
probably reversed.
1. Social Regulation
By a broad measure of welfare, social regulation, regulation
directed at improving health, safety, and the environment, can create
benefits for workers that outweigh the costs. This is true even if
take-home pay does not increase. Compliance costs must be paid for by
some combination of workers, business owners, and/or consumers through
adjustments in wages, profits, and/or prices. This effect is most
clearly recognized for occupational health and safety standards. As one
leading text book in labor economics suggests: ``Thus, whether in the
form of smaller wage increases, more difficult working conditions, or
inability to obtain or retain one's first choice in a job, the costs of
compliance with health standards will fall on employees.'' \15\
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\15\ From Ehrenberg and Smith's Modern Labor Economics, p 279.
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Viewed in terms of overall welfare, the regulatory benefits of
improved health, safety, and environment improvements for workers can
outweigh the costs. In the occupational health standards case where the
benefits of regulation accrue mostly to workers, workers are likely to
be better off if health benefits exceed compliance costs.\16\ Although
wages may reflect the cost of compliance with health and safety rules,
the job safety and other benefits of such regulation can more than
compensate for any monetary loss. Workers as consumers benefitting from
safer products and cleaner environment may also come out ahead if
regulation produces significant net benefits for society.
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\16\ Based on a cost benefit analysis of OSHA's 1972 Asbestos
regulation by Settle (1975), which found large net benefits,
Ehrenberg and Smith cite this regulation as a case where workers'
wages were reduced, but they were made better off because of
improved health (p. 281).
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2. Economic Regulation
For economic regulation, designed to set prices or conditions of
entry for specific sectors, these effects may at times be reversed to
some degree. Economic regulation can result in increases in income
narrowly defined, but decreases in broader measures of income based on
utility or overall welfare. Economic regulation is often used to
protect industries and their workers from outside competition. Examples
include the airline and trucking industries in the 1970's. These wage
gains come at a cost in inefficiency from reduced competition, however,
which consumers must bear. Moreover, real wages, which depend upon
productivity, do not grow as fast without the stimulation of outside
competition.\17\
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\17\ Winston (1998) estimates that real operating costs declined
between 25 and 75 percent in the sectors that were deregulated over
the last 20 years--transportation, energy, and telecommunications.
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These statements are generalizations for the impact of regulation
in the aggregate or by broad categories. Specific regulations can
increase or decrease the overall level of benefits accruing to workers
depending upon the actual circumstances.
D. Economic Growth
The conventional measurement of GDP does not take into account the
market value of improvements in health, safety, and the environment. It
does incorporate the direct compliance costs of social regulation.
Accordingly, conventional measurement of GDP can suggest that
regulation reduces economic growth.\18\ In fact, sensible regulation
and economic growth are not inconsistent once all benefits are taken
into account.
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\18\ Social regulation reduces growth by diverting resources
from the production of goods and services that are counted in GDP to
the production or enhancement of ``goods and services'' such as
longevity, health, and environmental quality that generally are not
counted in GDP.
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The OECD (1999) estimates that the economic deregulation that
occurred in the U.S. over the last 20 years permanently increased GDP
by 2 percent. The OECD also estimates that further deregulation of the
transportation, energy, and telecommunication sectors would increase
U.S. GDP by another 1 percent. Jaffe, Peterson, Portney, and Stavins
(1995) summarize their findings after surveying the evidence of the
effects of environmental regulation on economic growth as follows:
``Empirical analysis of the productivity effects have found modest
adverse impacts of environmental regulation.'' Based on the studies
that tried to explain the decline in productivity that occurred in the
U.S. during the 1970's, they placed the range attributable to
environmental regulation from 8 percent to 16 percent (p. 151). The
recent increase in productivity growth in the U.S. coinciding with
continued health, safety, and environmental regulation supports the
notion that the negative growth effects
[[Page 7212]]
of social regulation have been relatively small.\19\
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\19\ For the last three years, output per hour in nonfarm
business has been growing as rapidly as it did on average during
productivity's golden years from 1948 though 1973.
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As indicated above, conventionally measured GDP growth does not
take into account the market value of the improvements in health,
safety, and the environment that social regulation has brought us. If
even our lower range estimate of the benefits of social regulation
($266 billion) were added to GDP, then the more comprehensive measure
of GDP, one that includes the value of nonmarket goods and services
provided by regulation, would be about 3 percent greater. \20\ Focusing
on the effect of social regulation on economic growth is misleading if
it does not take into account the full benefits of regulation.
---------------------------------------------------------------------------
\20\ Including the value of increasing life expectancy in the
GDP accounts to come up with a more comprehensive measure of the
full output of the economy is not as far fetched as it sounds. It
was first proposed and estimated in 1973 by D. Usher in ``An
Imputation to the Measure of Economic Growth for Changes in Life
Expectancy'' NBER Conference on Research in Income and Wealth.
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More important than knowing the impact of regulation in general on
growth is the impact of specific regulations and alternative regulatory
designs on economic growth. As Jaffe et al. put it: ``Any discussion of
the productivity impacts of environmental protection efforts should
recognize that not all environmental regulations are created equal in
terms of their costs or their benefits.'' (p. 152).
In this regard, market-based or economic-incentive regulations will
tend to be more cost-effective than those requiring specific
technologies or engineering solutions. Under market-based regulation,
profit-maximizing firms have strong incentives to find the cheapest way
to produce the social benefits called for by regulation. How you
regulate can go a long way toward reducing any negative impacts on
economic growth and increasing the overall long run benefits to
society.
Chapter II: Estimates of Benefits and Costs of This Year's
``Major'' Rules
In this chapter, we examine the benefits and costs of each ``major
rule,'' as required by section 638(a)(1)(C). We have included in our
review those final regulations on which OMB concluded review during the
12-month period April 1, 1998, through March 31, 1999. This
``regulatory year'' is the same calendar period we used for last year's
report. It ensures that we cover a full year's regulatory actions as
close as practicable to the date our report is due, given the need to
compile and analyze data and publish the report for public comment.
The statutory language categorizing the rules we consider for this
report differs from the definition of ``economically significant'' in
Executive Order 12866 (section 3(f)(1)). It also differs from similar
statutory definitions in the Unfunded Mandates Reform Act and subtitle
E of the Small Business Regulatory Enforcement Fairness Act of 1996--
Congressional Review of Agency Rulemaking. Given these varying
definitions, we interpreted section 638(a)(1)(C) broadly to include all
final rules promulgated by an Executive branch agency that meet any one
of the following three measures:
Rules designated as ``economically significant'' under
section 3(f)(1) of Executive Order 12866;
Rules designated as ``major'' under 5 U.S.C. 804(2)
(Congressional Review Act); and
Rules designated as meeting the threshold under Title II
of the Unfunded Mandates Reform Act (2 U.S.C. 1531-1538).
We also include a discussion of major rules issued by independent
regulatory agencies, although OMB does not review these rules under
Executive Order 12866. This discussion is based on data provided by
these agencies to the General Accounting Office (GAO) under the
Congressional Review Act.
During the regulatory year selected, OMB reviewed 44 final rules
that met the criteria noted above. Of these final rules, HHS submitted
15; EPA eight; DOT six; USDA four; DOI two; and DOL, DOC, SBA, DOJ,
PBGC, and Education, one each. Two were Federal Acquisition Regulations
rules. In addition, three agencies--DOL, HHS, and Treasury--worked
together to issue one common rule. These 44 rules represent about 18
percent of the 255 final rules reviewed by OMB between April 1, 1998,
and March 31, 1999, and less than one percent of the 4,752 final rule
documents published in the Federal Register during this period.
Nevertheless, because of their scale and scope, we believe that they
represent the vast majority of the costs and benefits of new Federal
regulations during this period.
I. Overview
As noted in Chapter II of last year's report, Executive Order 12866
``reaffirms the primacy of Federal agencies in the regulatory
decisionmaking process'' because agencies are given the legal authority
and responsibility for rulemaking under both their organic statutes and
certain process-oriented statutes, such as the Administrative Procedure
Act, the Unfunded Mandates Reform Act, and the Small Business
Regulatory Enforcement Fairness Act. The Executive order also reaffirms
the legitimacy of centralized review generally and, in particular,
review of the agencies' benefit cost analyses that are to accompany
their proposals. The Executive Order recognizes that in some instances
the consideration of benefits or costs is precluded by law.
Nevertheless, the Executive Order requires agencies to prepare and
submit benefit cost analyses even if those considerations are not a
factor in the decisionmaking process. Again, it is the agencies that
have the responsibility to prepare these analyses, and it is expected
that OMB will review (but not redo) this work. In some cases where the
agency has substantial discretion, the costs and benefits identified
may be attributable to the regulation. In other cases, where the agency
has limited discretion, they may be attributable primarily to the
statute.
We found that the benefit cost analyses accompanying the 44 final
rules listed in Table 6 vary substantially in type, form, and format of
the estimates the agencies generated and presented. For example,
agencies developed estimates of benefits, costs, and transfers that
were sometimes monetized, sometimes quantified but not monetized,
sometimes qualitative, and, most often, some combination of the three.
II. Benefits and Costs of Economically Significant/Major Final
Rules (April 1998 to March 1999)
A. Social Regulation
Of the 44 rules reviewed by OMB, 22 are regulations requiring
substantial additional private expenditures and/or providing new social
benefits,\21\ as described in Table 6.\22\ EPA issued eight of these
rules; HHS and DOT, three each; USDA and DOI, two each; DOC, DOL and
Education, one each; and HHS/DOL/Treasury jointly issued one rule.
Agency estimates and discussion are presented in a variety of ways,
ranging from a purely qualitative discussion,for example, the benefits
of the joint HHS/DOL/Treasury rule establishing minimum length-of-stay
requirements for mothers and newborns, to a more complete benefit-cost
[[Page 7213]]
analysis,for example, EPA's surface water treatment rule.
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\21\ The other 22 are ``transfer'' rules.
\22\ Note that all dollar figures Table 6 are in 1996 dollars
unless otherwise noted.
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1. Benefits Analysis
Agencies monetized at least some benefit estimates in a number of
cases including: (1) FDA's $5.7 billion over 5 years from the
additional transplants resulting from its transplant-related data rule;
(2) EPA's estimate of $1.1 to $4.2 billion per year in terms of better
air quality from its ozone transport (NOX SIP Call) rule;
and (3) DOT's $360 million over 10 years in highway safety improvements
from its reflector rule for trailers.
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Of the 22 (non-transfer) rules listed in Table 6, agencies
monetized all the benefit estimates that they were able to quantify in
10 cases. In two cases,
[[Page 7224]]
agencies provided some of the benefit estimates in monetized and
quantified form, but did not monetize other, important quantified
components of benefits. DOL's analysis of its powered industrial truck
operator training rule monetized the property damage reductions and
out-of-pocket savings associated with injury reductions. DOL, however,
did not monetize the other aspects of those injuries (such as pain and
suffering) nor the fatalities avoided. EPA's analysis of its non-
handheld engines rule monetized the projected fuel savings, but not the
estimated hydrocarbon and nitrogen oxide emission reductions.
In four cases, agencies provided quantified benefit estimates but
did not provide monetized estimates. These included: (1) DOT's 36 to 50
fatalities and 1,231 to 2,229 injuries prevented per year as a result
of child seat rule; (2) EPA's 113,500 tons of volatile organic compound
emission reductions per year from its architectural coatings rule; and
(3) EPA's annualized emission reductions of 786,000 tons of nitrogen
oxides, 110,000 tons of hydrocarbons and 87,000 tons of particulate
matter from its nonroad diesel engines rule.
Finally, in six cases, agencies did not report any quantified (or
monetized) benefit estimates. In many of these cases, the agency
provided a qualitative description of benefits. For example, USDA's
wood packing material rule discusses the potential benefits of avoiding
the loss of forest products, commercial fruit, maple syrup, and tourism
associated with a massive beetle infestation, but does not estimate the
probability of such an episode. HHS's analysis of its length-of-stay
rule for mothers and newborns includes a qualitative discussion of the
rule's positive impact on the overall health and well-being of those
affected.
2. Cost Analysis
In 16 of the 22 cases, agencies provided monetized cost estimates.
These include such items as HHS's estimate of $1.4 billion over 5 years
in direct medical costs for its transplant-related data rule; DOT's
estimate of $152 million per year for its child restraint rule; and
EPA's estimate of $1.7 billion per year for its ozone transport rule.
For the remaining six rules, the agencies did not estimate costs.
These rules included both USDA rules, DOI's two migratory bird hunting
rules, DOC's endangered species listing rule and NHTSA's light truck
fuel economy rule.
3. Net Monetized Benefits
Ten of the 22 rules provided at least some monetized estimates of
both benefits and costs. Of those, eight have positive net monetized
benefits, that is, estimated monetized benefits that unambiguously
exceed the estimated monetized costs of the rules. For example, DOT's
reflector rule will generate an estimated net benefit of about $140
million (present value) over 10 years. EPA's surface water treatment
rule will result in an estimated net benefit of between $41 million and
$1.3 billion per year. In the case of certain health, safety, and
environmental rules, the epidemiologic evidence may indicate, but not
establish with certainty, that a causal link exists between the
regulated substance and the occurrence of serious illness. Despite the
lack of certainty, an agency may decide that regulation is appropriate.
In calculating the benefits of such a rule, it is necessary to describe
more than one possible outcome, reflecting the current state of
knowledge referred to above. Thus, for example, two EPA rules resulted
in monetized benefit estimates that included the possibility of both
positive or negative net benefits. For example, EPA's disinfection
byproducts rule was estimated to generate between $3.18 billion in net
benefits and $701 million in net costs. This reflected the lack of
certainty as to whether the rule would definitely prevent bladder
cancer.
4. Rules With Quantified Effects of Less Than $100 Million per Year
Seven of the rules in Table 6 are classified as economically
significant even though their quantified effects do not exceed $100
million in any one year:
USDA--Solid Wood Packing Material from China: Because of a lack of
data, the USDA was not able to estimate the benefits and costs
associated with regulating solid wood packing materials from China to
prevent the importation of wood pests. USDA stated, however, that in
the absence of regulatory action, the wood pests could significantly
affect the forest products, commercial fruit, maple syrup, nursery, and
tourist industries, which have a value of $41 billion.
USDA--Pseudorabies in Swine: In 1999, USDA began implementing a
policy to accelerate the Federal eradication program for pseudorabies.
Although USDA authorizes a $80 million fund for indemnity payments, the
producers of the swine incur other costs such as the cost of cleaning
and disinfection. USDA did not estimate these costs because it did not
have sufficient information to determine the effect of its actions on
the market. USDA believed it was important to act immediately because
the severely depressed values of market swine presented a unique
opportunity to accelerate significantly pseudorabies eradication in a
cost-effective way through depopulation.
DOC--Endangered and Threatened Species of Salmonids: Based upon
publicly available information, OMB determined that rules covering
these species were major. Citing the Conference Report on the 1982
amendments to the Endangered Species Act, however, the agency did not
perform a benefit-cost analysis of the final rules. This report
specifically provides that economic impacts cannot be considered in
assessing the status of a species.
HHS--Safety and Effectiveness of New Drugs in Pediatric Patients:
FDA estimated that this rule will generate benefits of about $76
million per year. FDA also noted, however, that this should be
interpreted as a lower bound, since the analysis covered only five
illnesses and did not include any estimate for avoided pain and
suffering. FDA expressed the belief that the benefits of the rule could
easily exceed $100 million.
HHS--Over-The-Counter Drug Labeling: FDA estimated the benefits of
this rule at $61 to $80 million/yr. In addition, the agency was unable
to quantify several components of benefits that it believes are
significant. These include increased consumer satisfaction and a
reduction in less-severe adverse health outcomes.
DOT--Light Truck CAFE: For each model year, DOT must establish a
corporate average fuel economy (CAFE) standard for light trucks,
including sport-utility vehicles and minivans. (DOT also sets a
separate standard for passenger cars, but is not required to revisit
the standard each year.) For the past four years, however,
appropriations language has prohibited NHTSA from spending any funds to
change the standards. In effect, it has frozen the light truck standard
at its existing level of 20.7 miles per gallon (mpg) and has prohibited
NHTSA from analyzing effects at either 20.7 mpg or alternative levels.
Although DOT did not estimate the benefits and costs of the standards,
the agency's experience in previous years indicates that they may be
substantial. Over 5 million new light trucks are subject to these
standards each year, and the standard, at 20.7 mpg, is binding on
several manufacturers. In view of these likely,
[[Page 7225]]
substantial effects, we designated the rule as economically significant
even though analysis of the effects was prohibited by law.
EPA--Petroleum Refining Process Waste: EPA estimated the cost of
the rule at $20 to $40 million/yr. with an expected value of $30
million/yr. Based on new cost information submitted to EPA after the
close of the comment period, OMB determined that the rule as written
could impose costs in excess of $100 million/yr. EPA subsequently
determined that the higher cost estimates are attributable to waste
leachates not intended to be covered by the petroleum listing, and EPA
published in the Federal Register another rule clarifying that
leachates are excluded from this petroleum listing and other listings,
and are deferred to Clean Water Act discharge standards. This deferral
was in effect when the petroleum rule became effective; consequently,
the impacts for the petroleum listing are correctly estimated to be $30
million.
B. Transfer Regulations
Of the 44 rules listed in Table 6, 22 were necessary to implement
Federal budgetary programs. The budget outlays associated with these
rules are ``transfers'' to program beneficiaries. Of the 22, two are
USDA rules that implement Federal appropriations language regarding
disaster aid for farmers; eleven are HHS rules that implement Medicare
and Medicaid policy; one is an HHS rule providing assistance to needy
families; three are DOT rules regarding grants to states to increase
seatbelt usage and reduce intoxicated driving; one is an SBA rule
regarding contracting; two are Federal Acquisition Regulation rules;
one is a DOJ rule regarding immigration policy; and one is a Pension
Benefit Guaranty Corporation (PBGC) rule regarding payment of premiums.
1. Major Rules for Independent Agencies
The Congressional review provisions of the Small Business
Regulatory Enforcement Fairness Act (SBREFA) require the General
Accounting Office (GAO) to submit reports on major rules to the
Committees of jurisdiction in both Houses of Congress, including rules
issued by agencies not subject to Executive Order 12866 (the
``independent'' agencies). We reviewed the information on the costs and
benefits of major rules contained in GAO reports for the period of
April 1, 1998 to March 31, 1999. GAO reported that four independent
agencies issued twenty-four major rules during this period. We list the
agencies and the type of information provided by them (as summarized by
GAO) in Table 7.
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In comparison to the agencies subject to E.O. 12866, the
independent agencies provided relatively little quantitative
information on the costs and benefits of
[[Page 7227]]
the major rules. As Table 7 indicates, six of the twenty-four rules
included some discussion of benefits and costs. Only two of the twenty-
four regulations had any monetized cost information; only one
regulation monetized the benefits associated with the regulation.
The one rule that estimated both benefits and costs was
``Registration Form Used by Open-Ended Management Investment Companies
and New Disclosure Option for Open-Ended Management Investment
Companies'' by the Securities and Exchange Commission (SEC). This
regulation updated the Form N-1A that is used by mutual funds to
register under the Investment Company Act of 1940 and to offer their
shares under the Securities Act of 1933 [63 FR 13916]. SEC estimated
the cost associated with the regulation to be approximately $175
million. The estimated benefits for the small funds was $1.8 million.
This was the only rule in which the monetized cost exceeded $100
million.
SEC also estimated the cost associated with a regulation amending
Rule 17a-5 to require broker-dealers to report their processes for
preparing for the Year 2000. The cost was about $66 million. With
respect to the remaining regulations, the twenty-two GAO reports
contain no information useful for estimating the aggregate costs and
benefits.
Chapter III: Estimates of Benefits and Costs of ``Economically
Significant'' Rules, April 1995--March 1999
This chapter presents the available benefit and cost estimates for
individual rules from April 1, 1995 through March 31, 1999. The summary
of agency estimates for final rules from the current year (April 1,
1998 to March 31, 1999) is presented in Chapter II, Table 6. The
summary of agency estimates for final rules from the preceding three
years (April 1, 1995 to March 31, 1998) is presented in Tables 15
through 17 in the Appendix. In this chapter, we also aggregate benefit
and cost estimates for those Federal rules with significant quantified
benefit and cost estimates.
In assembling agency estimates of benefits and costs, we have:
(1) Applied a uniform format for the presentation of benefit and
cost estimates in order to make agency estimates more closely
comparable with each other (for example, providing the benefit and cost
streams over time and annualizing benefit and cost estimates); and
(2) Monetized quantitative estimates where the agency has not done
so (for example, converting tons of pollutant per year to dollars).
Adopting a format that presents agency estimates so that they are
more closely comparable also allows, at least for purposes of
illustration, the aggregation of benefit and cost estimates across
rules. While we have attempted to be faithful to the respective agency
approaches, we caution the reader that agencies have used different
methodologies and valuations in quantifying and monetizing effects.
As noted in Chapters I and II, the substantial limitations of
available data on the benefits and costs for this set of rules raise
significant obstacles to the development of a meaningful aggregate
estimate of benefits and costs for even a single year's regulations.
For example in many cases, agencies identified important benefits of
their rules that were not quantifiable. In such cases, we necessarily
excluded them from the monetized estimates we develop in this Chapter.
To the extent that these benefits are substantial, the monetized
estimates will understate the total value of the benefits. The
discussion below addresses other limitations in the data and outlines
the steps we have taken in an effort to overcome some of them.
I. Monetized Benefit and Cost Estimates for Individual Rules
We have included in this Chapter only those major rules with
quantified estimates of both benefits and costs. These include six
rules from the 1995/96 period, 15 rules from the 1996/97 period, 13
rules from 1997/98 period, and 14 from 1998/99. We have excluded 17
rules without quantified estimates of either benefits or costs. (See
Table 8.)
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Ten additional rules listed in Table 9 have also been excluded from
further discussion because only quantified cost estimates were
available and/or there were only relatively small benefit and cost
estimates.
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For some of the remaining rules, agencies quantified estimates of
significant effects but did not assign a monetized value to these
effects. Some
[[Page 7230]]
of the quantified effects--for example, small changes in the risk of
premature death or serious injury--are identified as outcomes for a
variety of rules. In a number of instances, agencies did assign
monetized estimates to these outcomes.
Differences in valuation across rules are often critical,
particularly in comparisons of individual rules or programs. The
different approaches in the quantification and monetization of these
effects across agencies can also result in an ``apples and oranges''
problem in aggregating estimates. Indeed, where effects have been
quantified, but not monetized, the different quantitative effects
cannot be aggregated because they are not expressed in common units. In
order to address this problem, this section takes the additional step
of assigning a monetized value in order to provide a more consistent
set of estimates in those cases where agencies only quantified
significant effects. We have not, however, attempted to quantify or
monetize any qualitative effects identified by agencies where the
agency did not at least quantify them.
As in the past, agencies continue to take different approaches
toward rules that affect small risks of premature death. In some cases,
such as FDA's tobacco rule, agencies have quantified and monetized
these effects in terms of ``quality-adjusted statistical life years.''
In other cases, such as FRA's roadway worker protection rule, agencies
have quantified and monetized these effects in terms of statistical
lives. In still other cases, such as DOL's industrial truck operator
rule and NHTSA's child restraint rule, agencies have quantified risks
of death in terms of life-years or lives, but have not monetized them.
Finally, in some cases, such as FDA's animal feed rule, the agency did
not develop any quantified estimate of the rule's mortality effects.
Estimates for the value of a statistical life varied across
agencies. For the tobacco rule, FDA estimated benefits based on a value
of $2.5 million per statistical life. For the roadway worker rule, FRA
used $2.7 million per statistical life. For the upper-bound estimates
of EPA's ozone and PM NAAQS rules, the agency used $4.8 million per
statistical life. For its mammography rule, FDA used $5 million per
statistical life.\23\ Similarly, agency estimates for the value of a
statistical life-year have also varied. FDA used $116,500 per life-year
for its tobacco rule. EPA used $120,000 per life-year to produce its
lower-bound estimates of benefits in its ozone and PM NAAQS rules. FDA
used $368,000 per life-year in its mammography rule. As a general
matter, we have deferred to the individual agencies' judgment in this
area. In cases where the agency both quantified and monetized fatality
risks, we have made no adjustments to the agency's estimate.
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\23\ There is a relatively rich body of academic literature on
this subject. The methodologies used and the resulting estimates
vary substantially across the academic studies. Based on this
literature, agencies have each developed estimates they believe are
appropriate for their particular regulatory circumstances.
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In cases where the agency provided only a quantified estimate of
fatality risk, but did not monetize it, we have monetized these
estimates in order to convert these effects into a common unit. For
example, in the case of HHS's organ donor rule, the agency estimated,
but did not monetize, statistical life-years saved (although it
discussed its use of $116,500 per life-year in other contexts). We
valued those life-years at $116,500 each. For NHTSA's child restraint
rule, we used a value of $2.7 million per statistical life.
In cases where agencies have not adopted estimates of the value of
reducing these risks, we used estimates supported by the relevant
academic literature. For DOL's industrial truck operator rule, for
example, we used $5 million per statistical life.\24\ We did not
attempt to quantify or monetize fatality risk reductions in cases where
the agency did not at least quantify them. As a practical matter, the
aggregate benefit and cost estimates are relatively insensitive to the
values we have assigned for these rules because the aggregate estimates
are dominated by the FDA tobacco rule and EPA's rules revising the
ozone and PM primary NAAQS.
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\24\ As a result of OSHA's interpretation of the Supreme Court's
decision in the ``Cotton Dust'' case, American Textile Manufacturers
Institute v. Donovan, 452 U.S. 491 (1981), OSHA does not conduct
cost-benefit analysis or assign monetary values to human lives and
suffering.
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II. Valuation Estimates for Other Regulatory Effects
The following is a brief discussion of our valuation estimates for
other types of effects which agencies identified and quantified, but
did not monetize.
Injury. For the child restraint rule, we adopted the
Department of Transportation approach of converting injuries to
``equivalent fatalities.'' These ratios are based on DOT's estimates of
the value individuals place on reducing the risk of injury of varying
severity relative to that of reducing risk of death. For the OSHA
industrial truck operator rule, we did not monetize injury benefits
beyond OSHA's estimate of the direct cost of lost workday injuries.
Change in Gasoline Fuel Consumption. We valued reduced
gasoline consumption at $.80 per gallon pre-tax.
Reduction in Barrels of Crude Oil Spilled. We valued each
barrel prevented from being spilled at $2,000. This reflects double the
sum of the most likely estimates of environmental damages plus cleanup
costs contained in a recent published journal article (Brown and
Savage, 1996).
Change in Emissions of Air Pollutants. We used estimates
of the benefits per ton for reductions in hydrocarbon, nitrogen oxide
(NOX), sulfur dioxide (SO2), and fine particulate
matter (PM) derived from EPA's Pulp and Paper cluster rule (October,
1997). These estimates were obtained from the RIA prepared for EPA's
July, 1997 rules revising the primary NAAQS for ozone and fine PM. We
note that in this area, as in others, the academic literature offers a
number of methodologies and underlying studies to quantify the
benefits. There remain considerable uncertainties with each of these
approaches. In particular, the derivation and application of per-ton
coefficients to value reductions in these pollutants requires
significant simplifying assumptions. This is particularly true with
respect to the relationship between changes in emitted precursors
pollutants and changes in the ambient pollutant concentrations which
yield actual benefits. As a result of these simplifying assumptions,
the monetary benefit estimates obtained by multiplying tons reduced by
benefit estimates per-ton, which we derive from analyses of other
rules, should be considered highly uncertain. For each of these
pollutants, we used the following values (all in 1996$) for changes in
emissions:\25\
\25\ Where applicable, the lower (higher) end of the value
ranges in all of the tables throughout this report reflect the lower
(higher) values in these ranges.
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Hydrocarbons: $519 to $2,360/ton;
Nitrogen Oxides: $519 to $2,360/ton;
Particulate Matter: $11,539/ton; and
Sulfur Dioxide: $3,768 to $11,539/ton.
EPA has recently recommended that we use an average value of
$7,999/ton for nitrogen oxides. EPA based this estimate on the benefits
estimate associated with its recent ``Tier 2/gasoline sulfur'' final
rule (FR cite, when available). We will be considering whether we
should use this or some other value instead of the range we currently
use and would welcome comment on the subject.
[[Page 7231]]
In order to make agency estimates more consistent, we developed
benefit and cost time streams for each of the rules. Where agency
analyses provide annual or annualized estimates of benefits and costs,
we used these estimates in developing streams of benefits and costs
over time. Where the agency estimate only provided annual benefits and
costs for specific years, we used a linear interpolation to represent
benefits and costs in the intervening years.\26\
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\26\ In other words, if hypothetically we had costs of $200
million in 2000 and $400 million in 2020, we would assume costs
would be $250 million in 2005, $300 million in 2010, and so forth.
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Agency estimates of benefits and costs cover widely varying time
periods. While HHS analyzed the effects of providing transplant-related
data from 1999 through 2004, other agencies generally examined the
effects of their regulations over longer time periods. HHS used a 10-
year period for its over-the counter drug labeling rule; DOL also used
a 10-year period for its truck operator training rule. EPA's analyses
on disinfection and enhanced water treatment rules evaluated the
effects over a twenty-year period. The differences in the time frames
used for the various rules evaluated generally reflect the specific
characteristics of individual rules such as expected capital
depreciation periods or time to full realization of benefits.
In order for comparisons or aggregation to be meaningful, benefit
and cost estimates should correctly account for all substantial effects
of regulatory actions, including potentially offsetting effects, which
may or may not be reflected in the available data. We have not made any
changes to agency monetized estimates. To the extent that agencies have
adopted different monetized values for effects, for example, different
values for a statistical life, or different discounting methods, these
differences remain embedded in Tables 10 through 14. Any comparison or
aggregation across rules should also consider a number of factors which
the presentation in tables 10 through 14 does not address. For example,
these rules may use baselines in regulations and controls already in
place. In addition, these rules may well treat uncertainty in different
ways. In some cases, agencies may have developed alternative estimates
reflecting upper-and lower-bound estimates. In other cases, the
agencies may offer a midpoint estimate of benefits and costs. In still
other cases the agency estimates may reflect only upper-bound estimates
of the likely benefits and costs.
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III. Aggregation of Benefit and Cost Estimates Across Rules
In Table 14, we aggregated the estimates for individual rules from
Tables 10 through 13 by year. This approach yields prospective
estimates of the benefits and costs that Federal agencies expected
before they issued major rules over the last three years.
We have several important observations to offer on these aggregate
estimates. First, the 1996 HHS rule placing restrictions on the sale of
tobacco and EPA's 1997 rules revising the NAAQS for ozone and
particulate matter dominate the annualized and present value aggregates
presented in Table 13. Changes in estimation methodology for these
rules, as reflected by the ``plausible range'' adopted by the analysis
for the EPANAAQS rules for ozone and particulate matter, will have a
marked effect on the aggregated benefit and cost estimates for the
rules published over the period from April 1, 1995 to March 31, 1998.
By the same token, the aggregate estimates are not very sensitive to
different approaches for the remaining rules.
The presentation of these aggregates as annualized benefit and cost
streams or as net present value estimates may obscure the actual timing
of benefits and costs. In the case of the tobacco rule, for example,
the annualized benefit estimates were estimated to be $9 to $10 billion
per year. The health benefits associated with successfully reducing the
number of young tobacco users, however, will not begin to be realized
until after 2015 because of the lag in the noticeable, adverse effects
associated with tobacco use. In the case of OSHA's methylene chloride
standard, our estimate assumes that the reduction in cancer deaths
among exposed workers will not occur until the year 2017, based on an
average 20 year lag from exposure to death from cancer.\27\
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\27\ OSHA believes that this assumption is unrealistic and that
many workers will avoid incurring cancer before 2017 as a result of
the reduction in their methylene exposures brought about by the
standard.
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Similarly, the benefits and costs of the revised ozone and
particulate matter NAAQS will only be recognized in the years after
2005. These estimates of ``out-year'' benefits and costs are not
certain. EPA will complete its next periodic review of the particulate
matter NAAQS, scheduled for 2002, before it begins implementation of
the revised particulate matter NAAQS. If this review yields a ``mid-
course'' change in the standard, the estimates of benefits and costs
could change. EPA has also expressed a continuing concern with the
uncertainty of the full attainment cost estimates because EPA believes
technological change over the next decade will yield lower-cost
approaches that will achieve the revised NAAQS.
As noted above, there are significant methodological issues that
need to be confronted when aggregating estimates from a set of
individual rules (as presented in tables 10 through 13) in an effort to
obtain an estimate of the total benefits and costs of Federal
regulation. These issues include:
(1) Adoption of a reasonable, consistent baseline (it is difficult
to patch together a sensible baseline from the differing baseline
scenarios adopted across rules).
(2) The use of prospective estimates (versus retrospective
estimates) of the benefits and costs of regulation, for example, the
reliance on prospective estimates may well fail to reflect important
changes in taste, innovation by the private sector, or changes in
Federal/State/local regulation.
(3) The ``apples and oranges'' problem associated with combining
estimates from different studies, including different measures of
benefits and costs, double-counting of benefits and costs across
related rules, differing approaches to uncertainty such as the use of
upper- and lower-bound estimates versus the use of an upper-bound only
estimate, and different discount rates.
A final reason that any regulatory accounting effort has limits is
the lack of information on the effects of regulations on distribution
or equity. None of the analyses addressed in this report provides
quantitative information on the distribution of benefits or costs by
income category, geographic region, or any other equity-related factor.
As a result, there is no basis for quantifying distributional or equity
impacts.
Chapter IV: Ten Recommendations for Reform
Sec. 638(a)(3) of the Act requires OMB to submit with its report on
the costs and benefits and impacts of Federal regulation
``recommendations for reform.'' In seeking to reform and make more
efficient the regulatory process, OMB provides guidance to the agencies
in regulatory planning and reviews individual regulations as provided
by Executive Order 12866. In so doing, we coordinate policy concerns
among the agencies and make numerous recommendations to the agencies to
ensure that regulations are consistent with applicable law, the
President's priorities, and the regulatory reform principles of
Executive Order 12866. The results of those recommendations and their
consideration by the agencies during the regulatory decisionmaking
process are reflected in final regulations and represent the
Administration's regulatory reform efforts.
The most comprehensive accounting of the recommendations and
regulations that agencies currently have under consideration is
published annually in the Administration's Regulatory Plan. The
Regulatory Plan contains a description of the most significant
regulatory and deregulatory actions that the agencies plan to issue in
either proposed or final form during the next fiscal year. The latest
Regulatory Plan was published in the Federal Register on November 22,
1999 (64 FR 63883). This year, the Regulatory Plan contains 164 entries
from 28 agencies.
The 164 regulations under development in the Regulatory Plan may be
viewed as specific recommendations for regulatory improvement or reform
based on statutory mandates and the Administration's priorities. Four
agencies--USDA, HHS, DOL, and EPA--account for 100 of the 164
initiatives. The following is a sample of the Administration's specific
regulatory reform efforts that either increase the regulated entities'
flexibility, reduce paperwork burden, clarify the regulated entities'
responsibilities with plain language, or substitute performance
standards for command-and-control:
The Food Safety and Inspection Service (FSIS) of USDA is
reforming its regulations on imported livestock and poultry products by
replacing command-and-control regulations with performance standards,
which should benefit consumers and producers and expand international
trade.
FSIS also is reforming its egg product inspection
regulations to move from a command-and-control and prior approval
systems to a performance standard approach based on the Hazard Analysis
and Critical Control Point (HACCP) system and pathogen reduction goals.
The Food and Drug Administration of HHS is also developing
a performance-based HACCP program and a labeling system rather than
specifying good manufacturing practices to reduce food-borne pathogens
in fruit and vegetable juices.
HUD is developing four year performance goals for Fannie
Mae and Freddie Mac requiring them to purchase mortgages for low and
moderate-income housing, special affordable housing, and housing in
under served areas. This will increase the number of affordable housing
units without significantly
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crowding out traditional portfolio lending.
The Bureau of Land Management of the Department of the
Interior is revising its Federal oil and gas leasing operations
regulations. It will use plain language to improve understanding of the
rule. The rule will rely on performance standards, rather than
prescriptive requirements, to allow greater flexibility to deal with
unique geological or engineering circumstances.
The Office of Federal Contract Compliance Programs of DOL
is reforming its nondiscrimination and affirmative action obligations
for government contractors under Executive Order 11246. It plans to
reduce paperwork burdens, eliminate unnecessary regulations, and
simplify and clarify regulations while improving the efficiency and
effectiveness of the contract compliance program.
The Occupational Safety and Health Administration of DOL
is revising its injury and illness reporting and recordkeeping
requirements to improve the quality and utility of the data, clarify
and simplify guidance, and exempt small businesses in low hazard
industries.
The Federal Railroad Administration of DOT is developing a
rule using careful analysis weighing the benefits of reduced collision
probabilities with the costs imposed on society to determine when and
how train whistles must be sounded at grade crossings.
EPA is streamlining its requirements for revising
operating permits issued by State and local permitting authorities for
major sources of air pollution under the Clean Air Act. It will
simplify the process for minor new source review actions that have
little or no environmental impact.
EPA is streamlining its public notification regulations
for violations of drinking water regulations by public water systems.
It will seek to give consumers better and more timely notification of
the potential health risks from drinking water when violations occur.
These reforms, as well as many other efforts underway, are
significantly improving the lives, health, and well-being of the
American public.
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