Fighting Regulation: The Regulatory Review

“Twenty-one of the twenty-three participants agreed that almost two dozen ‘sacred cows’ (long-standing and politically unassailable laws and regulations) were having a detrimental effect on the economy.” The Challenge of Regulatory Reform, a report to the president from the Domestic Council Review Group on Regulatory Reform, January 1977, p. 20. See also Economists' Conference on Inflation Report, Vol. 1 (5 September 1974), pp. 11–13.

The Domestic Council Review Group on Regulatory Reform, op. cit., p. 13.

Congress established the Interstate Commerce Commission (ICC) in 1887. The first federal commission on the paperwork burden presented its report the same year. See Commission on Federal Paperwork, Final Summary Report, 3 October 1977.

The President's Committee on Administrative Management (Brownlow Committee), Report of the Committee with Studies of Administrative Management in the Federal Government, 1937; Hector Louis J. , “Problems of the CAB and the Independent Regulatory Commissions,” Yale Law Journal, 931, 960 (May 1960), originally prepared as a memorandum to President Eisenhower, 10 September 1959; Redford Emmette S. , “The President's Committee on Government Organization,” 17 November 1960; Landis James M. , Report on Regulatory Agencies to the President-Elect, Committee Print, Subcommittee on Administrative Practice and Procedure, Committee on the Judiciary, U.S. Senate, 1960, pp. 81–87; the President's Advisory Council on Executive Organization (Ash Council), A New Regulatory Framework: Report on Selected Independent Regulatory Agencies, 1971; Subcommittee on Oversight and Investigations, Committee on Interstate on Foreign Commerce, U.S. House of Representatives (Moss Committee), Federal Regulation and Regulatory Reform, October 1976, pp. 487–501, 547–549; Committee on Government Affairs, U.S. Senate (Ribicoff Committee), Study on Federal Regulation, Vol. 1, The Regulatory Appointments Process, January 1977, pp. ix–x, and Vol. 5, Regulatory Organization, December 1977.

Ash Council, op. cit.; Moss Committee, op. cit.; Ribicoff Committee, op. cit.

Moss Committee, op. cit., pp. 3, 462–465, 469–483, 529–567; Ribicoff Committee, op. cit., Vol. 2, pp. xix, xx, 135–158, and Vol. 3, passim; Subcommittee on Administrative Practice and Procedure, Committee on Judiciary, U.S. Senate, Public Participation in Federal Agency Proceedings Hearings, 94th Congress, 2nd session, January–February 1976; Graham James M. Cramer Victor H. , Appointments to the Regulatory Agencies: The Federal Communications Commission and the Federal Trade Commission (1949–1974), printed at the direction of the Committee on Commerce, U.S. Senate, 94th Congress, 2nd session, April 1976; Special Subcommittee on Legislative Oversight, Committee on Interstate and Foreign Commerce, U.S. House of Representatives, Independent Regulatory Commissions, H.R. Report 2711, 85th Congress, 2nd session, 1959. See also Lazarus Simon , “Halfway Up from Liberalism: Regulation and Corporate Power,” in Nader Ralph Green Mark (eds.), Corporate Power in America (New York: Grossman, 1975); Lazarus Simon , The Genteel Populist (New York: Holt, Rinehart and Winston, 1974); and Lazarus Simon Onek Joseph , “The Regulators and the People,” Virginia Law Review, Vol. 57 (1971) pp. 1069–1108. See also Bernstein Marver , Regulation: Government by Independent Regulatory Commission (Princeton. N.J.: Princeton University Press, 1955); Nadel Mark V. , The Politics of Consumer Protection (Indianapolis: Bobbs-Merrill, 1971); Sabatier Paul , “Social Movements and Regulatory Agencies: Toward a More Adequate—and Less Pessimistic—Theory of ‘Clientele Capture,”’ Policy Sciences (1975) pp. 301–342; Wilson James Q. , “The Politics of Regulation” in McKie James W. (ed.), Social Responsibility and the Business Predicament (Washington, D.C.: Brookings, 1974), pp. 135–168; Olson Mancur Jr. , The Logic of Collective Action (Cambridge, Mass.: Harvard University Press, 1965); Stone Alan , Economic Regulation and the Public Interest (Ithaca, NY: Cornell University Press, 1977); and Green Mark (ed.), The Monopoly Makers: Ralph Nader's Study Group Report on Regulation and Competition (New York: Grossman, 1973).

Hector , op. cit.; Ash Council, op. cit., pp. 34–37; Ribicoff Committee, op. cit., Vol. 9, p. viii, and Vol. 2, pp. 66, 94. See also Friendly Henry J. , A Look at the Federal Administrative Agencies: The Need for Better Definition of Standards (Cambridge, Mass.: Harvard University Press, 1962); Davis Kenneth C. , Administrative Law of the Seventies (San Francisco: Bancroft-Whitney, 1975); Theodore Lowi, The End of Liberalism (New York: Norton, 1969).

Attorney General's Committee on Administrative Procedure, Administrative Procedure in Government Agencies, Senate Document No. 8, 77th Congress, 1st session, 1941, Committee on Administrative Procedure, U.S. Senate; the U.S. Commission on Organization of the Executive Branch of Government (First House Commission), The Independent Regulatory Agencies: A Report with Recommendations (Washington, D.C.: GPO, 1949); the U.S. Commission on Organization of the Executive Branch of Government (second Hoover Commission), Legal Services and Procedures (Washington, D.C.: GPO, 1955); Landis , op. cit.; Moss Committee, op. cit.; Ribicoff Committee, op. cit., Vol. 4; Commission on Federal Paperwork, Final Summary Report (Washington, D.C.: GPO, 1977); Subcommittee on Administrative Law and Government Relations, Committee on the Judiciary, U.S. House of Representatives, Congressional Review of Rulemaking Hearings, 94th Congress, 1st session, October–November 1975; Subcommittee on Administrative Practice and Procedure, Committee on Judiciary, U.S. Senate, Administrative Procedure Act Amendments of 1976, Hearings, 94th Congress, 2nd session, April–May 1976. See also Kaufman Herbert , Red Tape (Washington, D.C.: Brookings, 1976).

Note, however, that these dramatic results have been gained at the expense of the so-called old regulation (such as industry-specific controls on prices, entry). In each of these cases, it was demonstrated either that there had never been a valid justification for government intervention or that technological and market changes had rendered government intervention obsolete. Elsewhere, particularly so far as the “new regulation” (environmental, worker, and consumer health and safety regulation) is concerned, this is not the case. Government action can and usually does pursue valid, worthwhile social objectives. In these areas, the debate has to do with the effectiveness, the efficiency, and the appropriateness of the specific actions taken by the government. See The Domestic Council Review Group on Regulatory Reform, op. cit.

See Thompson Fred Zumeta William , “The Objectives and Benefits of Regulation,” Working Paper No. 15 (Los Angeles: Public/Not-for-Profit Management, Graduate School of Management, UCLA, February 1980).

Based upon an interview with Simpson Richard , former director of Consumer Product Safety Committee, on August 6, 1978. Also see Cornell Nina Noll Roger Weingast Barry , “Safety Regulation” in Owen Henry Schultze Charles (eds.), Setting National Priorities: The Next Ten Years (Washington, D.C. Brookings, 1976).

Cornell Noll Weingast , op. cit. For example, in worker health and safety regulation, in addition to establishing tolerable hazard levels or standards, the regulators must decide where to focus the regulatory effort, determine the kind of standards to employ, select a detection strategy, and make a trade-off between detection effort and penalties for violators. Frequently it appears that decisions made with respect to these issues are more consistent with the objective of minimizing administrative costs and, thereby public spending, than with any other objective. Regulation is typically targeted where enforcement costs are lowest, not necessarily where the total cost of reducing the hazard is lowest. Design standards are generally preferred to performance standards, perhaps because compliance with a design standard may be ascertained by means of a single inspection, whereas performance standards require continuous monitoring. Reactive detection strategies, combined with punitive penalties, are more frequently employed than are comprehensive, ex ante detection strategies and low penalties. All of this is evidence of a commendable concern with public expenditure. Nevertheless, exclusive concern with public expenditures can lead to substantial inefficiency and ineffectiveness.

Cornell Noll Weingast , op. cit., pp. 479–500; and Bennett James Johnson Manuel , “The Political Economy of Government Paperwork.” Policy Review (Winter 1979), pp. 27–43.

Cornell Noll Weingast , op. cit., p. 502.

Ibid., p 477.

Ibid., p. 477–500. This statement and the following discussion of evaluative criteria used to assess review mechanisms is based upon Joel Demski and Gerald Feltham, Cost Determination: A Conceptual Approach (Ames, Iowa: Iowa State University Press, 1976), pp. 3–13.

See Executive Order 11821 Inflation Impact Statement (White House, 27 November 1974); this was extended through December 31, 1977 by Executive Order 11949: Economic Impact Statement Program (White House, 31 December 1976); and expanded by Executive Order 12044, Improving Government Regulations (White House, 23 March 1978); see also Federal Register (30 May 1978), Part II, “Improving Government Regulations, Proposals for Implementing Executive Order 12044”; Commerce Department 23170, HEW 23119, Renegotiation Board 23197, Water Resources Council 23199; and “Use of Cost Benefit and Other Similar Analytical Methods of Regulation,” Federal Register, 44:45 (6 March 1979), p. 12198.

Miller James C. III , “Lessons of the Economic Impact Statement Program,” Regulation (July–August 1977), p. 15. This analysis is largely based upon Hopkins Thomas D. , An Evaluation of the Economic Impact Statement Program (Washington, D.C.: Council on Wage and Price Stability, 7 December 1976). See also Mulock Bruce K. , “Economic and Inflation Impact Statements,” U.S. Library of Congress, Multilith 78–157E, 1978, and Bernick Kathryne L. , “The Inflation Impact Statement Program and Executive Branch Coordination,” draft for the ABA Commission on Law and the Economy Study of Federal Regulation, Washington, D.C., 18 May 1977.

Bernick , op. cit., pp. 13–17; also Miller , op. cit., p. 17.

Hopkins , op. cit., pp. 17–18.

Executive Order 11821; see also Hopkins , op. cit., p. 17.

Hopkins , op. cit., p. 38, pp. iii, iv; The 1977 Joint Economic Reort, Report of the Joint Economic Committee, Congress of the United States, on the January 1977 Economic Report of the President, 10 March 1977, p. 95; and “Testimony of William Lilley, Acting Director of CWPS,” Inflationary Impact of Government Regulations, Hearings before the Subcommittee on Economic Stabilization of the Committee on Banking, Currency and Housing, House of Representatives, 94th Congress, 2nd session, 17 December, 1976, p. 8, as cited in Bernick , op. cit., p. 11.

Miller , op. cit., p. 18.

Information has value only to the extent that it increases the probability that a better decision will be made. Since apparently no decisions were directly affected by the information generated by the IIS/EIS program, this information had no value. The program did have a cost, albeit small; consequently, by its definition, the IIS/EIS program was “inflationary.” However, the initial efforts associated with the program may be justified in terms of the agencies' learning how to prepare cost-benefit analysis. This is the kind of intangible benefit typically ignored in the impact statements.

Bernick , op. cit., pp. 8–18. The IIS/EIS program must be distinguished from CWPS self-initiated intervention under its legislative authority. Lilley cites several examples of success under the latter on pp. 9–10, 24 of Bernick, op. cit. Section 3(a) of the Council on Wage and Price Stability Act of 1974 (Public Law 93–487, as amended by P. L. 94–78, 1 U.S.C. 1904 note) directs the Council to: Review and appraise the various programs, policies, and activities of the departments and agencies of the United States for the purposes of determining the extent to which those programs and activities are contributing to inflation; and intervene and otherwise participate on its own behalf in rulemaking, ratemaking, licensing and other proceedings before any of the departments and agencies of the United States, in order to present its views as to the inflationary impact that might result from the possible outcome of such proceedings. Notably, “such intervention is not limited to proceedings in which an IIS is involved.” The majority of CWPS interventions have been where the proposal is not “major” (where the agency did not identify a proposal as major but CWPS disagreed, or where the proposing agency is not even participating in the IIS program), Hopkins , op. cit., p. 18.

Hopkins , op. cit., p. iii—v; Bernick , op. cit., pp. 9–19.

Miller , op. cit., p. 18.

Its principal responsibility is a biennial regulatory calendar, which contains a comprehensive listing of all major regulations being developed, along with their costs, benefits, and legal implications. Miller, op. cit., p. 18. The RARG's analytical efforts are carried out by the same group of analysts at CWPS who reviewed IIS/EISs. This apparently cosmetic change was in part intended to reduce some of the internal conflicts of objectives within CWPS (interview with CWPS staff, August, 1978).

Cornell Noll Weingast , op. cit. On the OMB's propensities, see Schick Allen , “The Budget Bureau That Was: Thoughts on the Rise, Decline, and Future of a Presidential Agency,” Law and Contemporary Problems, Vol. 35 (Summer 1970), pp. 519–539; and Bombardier Gary , “The Managerial Function of OMB: Intergovernmental Relations as a Test Case,” Public Policy Vol. 23 (Summer 1975), pp. 317–354. Also see Wildavsky Aaron , “A Budget for All Seasons? Why the Traditional Budget Lasts,” Public Administrative Review (November–December 1978); Thompson Fred Zumeta William , “Control and Controls: A Reexamination of Control Patterns in Budget Execution,” Policy Sciences (forthcoming).

Miller , op cit.; and from interview with CWPS staff and ex-staff members in August 1978. In a number of instances, CWPS documents equate maximization of net benefit with maximization of consumers' surplus. This slip is indicative of the conflict within CWPS. It must be understood that applied welfare economics is not a common skill in the U.S. federal bureaucracy. The CEA and Treasury have traditionally been dominated by macro-economists. And, while it might seem that the OMB would be a “hot bed” of cost-benefit analysis, it is not. Indeed, one senior official in OMB said, “… what we look for are MBA types and some economists. Agricultural economists and labor economists are OK, but none of these applied welfare types; they can't seem to understand what budgeting is about.” This is one of the problems FEA had in meeting CWPS's expectations: They had great difficulty going from the input-output models which they used to formulate policies, to an elaboration of costs and benefits.

Quoted in Bernick , op. cit., p. 26.

Ibid.

See Operation Common Sense (Washington, D.C.: HEW, 5 April 1978); and Getting Our Priorities Straight (Washington, D.C.: Department of Labor, 30 April 1979).

Cornell Noll Weingast , op. cit. For a more comprehensive discussion of this point see Stanbury W. T. Thompson Fred , “Scope and Coverage of Government Regulation in Canada and the United States,” (Ottawa: Economic Council of Canada, Regulation Reference, Working Paper Series, Spring 1979).

Bennett Johnson , op. cit.

Arthur Andersen & Company, Cost of Government Regulation Study for Business Roundtable (New York: The Business Roundtable, 1979).

Page R. T. , Economics of Involuntary Transfers: A Unified Approach to Pollution and Congestion Externalities (New York: Springer-Verlag, 1973), p. 29; Mills E. S. Bramhall D. E. , “A Note on the Asymmetry Between Fees and Payments,” Water Resources Research 2:3 (1966), pp. 619–716; Baumol W.J. Oates W. E. , The Theory of Environmental Policy (Englewood Cliffs, N.J.: Prentice-Hall, 1975), pp. 183, 189–190; and Kneese A.V. Maier K.G. , “Bribes and Charges for Pollution Control, Natural Resources Journal, 33:14 (October 1973), p. 716. The problem here is that assumption of compliance cost may have unwanted incentive effects as far as the affected firms are concerned. In effect, under this proposal, firms would be selling compliance efforts to the government. Consequently, they may be tempted to do something destructive in order to be paid (bribed) for not doing it.

Kamien M.I. Schwartz N.L. Dolbear F.T. , “Asymmetry between Bribes and Charges,” Water Resources Research 2:1 (1st Quarter, 1966), p. 153; Kneese Maier , op. cit., pp. 682–686.

Baumol Oates , op. cit., p. 189.

See Brown Edmund G. Jr. , The Buck Stops Here: A Proposal for a Federal Fiscal Impact Act (Sacramento, CA: Department of Finance, 22 February 1978).

Interview with Richard Ray, program budget manager for the State-Mandated Costs Program, State Department of Finance, Sacramento, California, 22 July 1978.

In theory a bribe is identical in consequence to a charge (such as an accident tax or an effluent charge) plus a lump sum transfer. In terms of allocative efficiency, bribes may be made to produce the same outcome as a tax. However, prices and bribes produce different distributional outcomes. A bribe system implicitly says that the firm has a property right (the right to pollute or to cause accidents) which is being expropriated by the state for which a just compensation is paid. The tax approach implies that no such right exists, rather the firm has simply been exploiting the ignorance or folly of its employees, customers, or the public. Most people seem to prefer the latter interpretation; at least, their preferences regarding the incidence of regulatory burdens reflect such a perspective. Federal assumption of compliance costs as outlined above would make a smaller claim on the public fisc than one might think. The fact is that compliance costs as they are identified here are costs of doing business and are deductible from corporate income taxes. The federal government now may be said to pay half of the cost of compliance. These tax expenditures aren't tracked. Of course, we would expect the magnitude of regulation-induced costs to be reduced.

Crandall Robert , “Is Government Regulation Crippling Business?” Saturday Review (20 January 1979), p. 34.

Kaufman Herbert , Are Government Organizations Immortal? (Washington, D.C.: Brookings, 1976).

Ibid., p. 60.

Wildavsky , op. cit.

See Wildavsky Aaron Hammann Arthur , “Comprehensive Versus Incremental Budgeting in the Department of Agriculture,” Administrative Science Quarterly 10:3 (December 1965), pp. 321–346; Minmier George S.L. , “An Evaluation of the Zero-Base Budgeting System in Governmental Institutions,” Department of Accounting, Georgia State University, Atlanta, Research Monograph No. 68, 1975; Lee Hogan Roy , “Zero-Base Budgeting: A Rationalistic Attempt to Improve the Texas Budget System,” unpublished M.A. thesis, Public Administration, University of Texas, Austin, December 1975; and Gould S. L. Odall A. O. Thompson Fred , “Zero-Base Budgeting: Some Lessons from an Inconclusive Experiment,” Canadian Public Administration (Summer 1979).

As we understand it, a budget is primarily a spending plan that details the timing and purpose of expenditures. Budgets are divided into separate accounts. Most accounts have two components: The base and the increment. We assume a regulatory budget would have these characteristics.

By timing we mean both the expenditure pattern during the budget year and the authority for continued expenditures in future years. The U.S. federal budget does not formally distinguish between noncontinuing operating expenditures and capital outlays. Obviously, nonrecurring expenditures are not included in the base and typically, each project or type of project is treated as a separate account. It seems likely that the same procedure would be followed with respect to costs mandated by the regulatory agencies.

Budgeting does not merely mean expenditure planning. In general, it refers to a specific decision-making process. Endorsement of the regulatory budget concept means adopting this process. The budget process may be decomposed into two phases: Preparation and execution. At the federal level, budget preparation begins about eighteen months before the beginning of the budget year, with a call for spending estimates, and ends with formal enactment of the appropriation bill. Execution of the budget begins when the agencies start sending money and ends when the accounts have been closed, following post-audit and evaluation.

Budget preparation has three distinct phases. (A.) Preparation of estimates: Under guidelines prepared by the central control agency, spending departments and agencies prepare a preliminary budget. Usually this budget shows how they would spend a specified amount of money and what they would do if they had a little more. This exercise is intended to help the control agency identify the budget base—the expenditure level which would permit the speeding agency to continue to do what it has been authorized to do. (B.) Budget negotiation: At this stage, the budgeteers get together with agency staff to define the base. Three kinds of budget change proposals are prepared: Increments supported by both the control agency and the spending agency, increments proposed by the spending agency but not supported by the control agency, and changes proposed by the control agency and the spending agency. (C.) Enactment: The base plus the first and third categories of budget changes are included in the executive budget and are forwarded to Congress. Congress then devotes most of its attention to the proposed changes. The spending agency is expected to defend proposed increases, and the central agency any proposed cuts. Congress decides, and in doing so enacts the plan—level, purpose and timing of expenditure, by account—into law. Hence, the spending agency is legally bound to deliver on a whole series of promises made to Congress in return for a quantity of money equal to or less than that specified in the budget.

Budget execution has two phases. (A.) Spending: Once the budget year begins, the agency begins to spend its allocation. The central control agency, the Office of Management and Budget, insures that spending goes according to plan. Timing of expenditures is enforced through a system of allotments, monthly or quarterly. The spending agency is prohibited from incurring obligations in excess of its allotment. Further, the control agency reviews all requests for intertemporal transfers and transfers between accounts or, in some cases, purposes and objects of expenditure. (B.) Audit and evaluation: Following the completion of the budget year, the records of the agency are audited to verify the accuracy of agency reports and compliance with the law. Ex post evaluation is conducted to verify that performance targets accepted by the agency were met.

The budget process is highly protracted. The budget cycle extends Over three to four calendar years. At any one time, each of the participants in the process—the spenders, cutters, legislators—are involved in several distinct cycles so that they are simultaneously involved in several distinct phases of the process. This means that understandings, commitments and expectations are constantly being revised, as are estimates and controls.

For further reference see Wildavsky Aaron , The Politics of the Budgetary Process, 3rd ed. (Boston: Little, Brown, 1979); Wildavsky Aaron , Budgeting: A Comparative Theory of Budgetary Processes (Boston: Little, Brown, 1975); Thompson Zumeta , op. cit.; Kamlet Mark Mowery David , “The Budgetary Base in Federal Resource Allocation,” Working Paper (Stanford University, August 1979).

Wildavsky , Budgeting; Niskanen Wiliam , Bureaucracy and Representative Government (Chicago: Aldive-Atherton, 1971); and Niskanen William , “Bureaucrats and Politicians,” Journal of Law and Economics 18:3 (December 1975), pp. 617–643.

See especially Niskanen , op. cit.

Wildavsky Hamman , op. cit.

Under the regulatory budget, we would expect firms to pay a larger role in the preparation phase of the budget process than is normally the case with client or target groups. However, this might be managed by requiring notification of an intended rule change in the Federal Register coincident with agency response to the call for estimates, and public hearings could be held on program change proposals. A key problem that would have to be solved has to do with transfers of funds from notational accounts (such as compliance costs) to administrative accounts. Some flexibility should be required—otherwise the administrative cost minimization problem might persist. But regulatory agencies would doubtless tend to aggrandize themselves at the expense of the regulatory mission, if not prevented from doing so by the control agency. There is no optimal “flexibility” level; rather, the amount of scrutiny given fund transfers should likely vary with the performance or trustworthiness of the agencies.

“Statement of Harry S. Havins, Director, Program Analysis Division, U.S. General Accounting Office,” in Cost of Regulations to the Consumer, Hearings before the Committee on Commerce, Science, and Transportation, U.S. Senate, 95th Congress, 2nd session, November 21 and 22, 1978, pp. 75–76.

Ibid.; and “Statement of Mark Green, Director, Public Citizen's Congress Watch,” ibid. p. 245.

In part, this is also a problem of resources. The Council on Wage and Price Stability team doing analysis for the Regulatory Analysis Review Group presently has twenty-four economists. This is four times the number available during the earlier IIS/EIS period. Nevertheless, as Crandall observes: “… RARG has a very small staff; undertakes only a limited number of reviews a year… . Clearly, this organization cannot hope to have a major impact on the score of agencies in the executive branch which issue thousands of major regulations a year.” (“Statement of Crandall Robert W. , Senior Fellow, Brookings Institution,” in Cost of Regulation to the Consumer, cited above, p. 181.)

Ibid., pp. 180–181.