Federal regulation is today much more costly than all of the domestic discretionary spending programs of the federal government combined. Yet regulatory agencies can tax and spend "freely in pursuit of environmental quality, product safety, and other regulatory goals—the costs they impose are free of the budget and appropriation controls that constrain spending programs.

The regulatory reform bills pending in Congress would alleviate this problem by requiring regulatory agencies to demonstrate that the social costs of their rules are justified by the social benefits. Cost-benefit analysis is not perfect, but its shortcomings are mainly those of regulation itself—uniform government rules are always "too strict" for some people and "too lenient" for others. A cost-benefit standard would screen out clearly excessive rules, while providing a productive framework for debate over close cases in regulatory policy.

The regulatory reform legislation being debated in the Congress this month would do lots of things, but the main thing would be to require the regulatory agencies to assess carefully the benefits and costs of their rules and to make decisions, presumably after review by the Office of Management and Budget, based on cost-benefit standards.

This has turned out to be highly controversial, primarily because of the Clinton administration's outlandish and frequently dishonest campaign against the legislation. For some reason, administration officials have been offering examples of obviously beneficial regulations as reasons not to require regulators to sort out beneficial from harmful rules. But the legislation should not be controversial. Cost-benefit analysis, and systematic regulatory oversight by OMB, should be considered rudimentary good practice.

The congressional proposals are not drastic new policy departures that have sprung suddenly from the Republicans' "Contract with America" or from the new party composition of the Congress. Every president since President Nixon has established procedures by executive order requiring regulatory agencies to assess the benefits and costs of their rules and to submit them for review by the Executive Office of the President. Legislation to make the cost-benefit standard the norm of federal rulemaking (something an executive order cannot do) has been championed by prominent Democrats as well as prominent Republicans and by academic students of regulation across the philosophical spectrum. One such bill, similar albeit weaker and less exacting than the current ones, passed the Senate 94-0 in 1982.

Regulation Unlimited

Federal regulation has grown enormously in recent decades and is today much more costly than all of the domestic discretionary spending programs of the federal government combined. Yet regulation—because the expenditures it requires are realized within the private sector—is subject to none of the institutions that govern and moderate direct federal spending: spending authorizations, limits on available tax revenues, regular annual review and budgeting by a central budget office, regular annual review and appropriations by the Congress, and so forth.

Under these circumstances, the now well-known problems of regulation—the tendency of regulatory requirements to grow without limit in number and detail; the tendency of single-purpose agencies to be overzealous, extravagant, and sometimes abusive in the pursuit of these purposes; and the tendency of policy to be manipulated and distorted by special-interest groups (including, of course, business groups)—are predictable and routine rather than the product of crazed bureaucrats or the election of one or another party to control of the Executive Branch. Imagine if every federal agency was free to set its own spending levels and to assess its own taxes, with no systematic budget control by Congress or OMB. This is approximately the situation with federal regulation today.

Cost-benefit Criticisms

Opponents of cost-benefit analysis argue, inconsistently, that it is an arcane, technocratic exercise—policy by computer—that would strip government officials of the ability to make nuanced, socially aware policy decisions, and that measuring private-sector costs and benefits is too slippery and subjective to be worth the effort. Both criticisms are highly exaggerated, and each is beside the point.

Cost-benefit analysis does involve a few distinctive techniques, the most important of which are "discounting" future costs and benefits to present values so that they can be usefully compared, and estimating the value to individuals and populations of such non-market goods as reductions in risk to life and health and increases in amenity and recreational opportunities. But these techniques are fairly elementary and conventional: they can be mastered in a few hours time, they are routinely taught in college and graduate school courses, and they ought to be generally understood by anyone in a position to make $50 million policy decisions. If legislators and regulators cannot summon the intellectual resources to understand that spending $100 twenty years from now is less costly in current resources than spending $100 today, or to understand the importance—especially in cases involving risk of death or disease —of carefully comparing alternatives that will produce more or less risk reduction for a given investment of resources, then one is at a loss to know how regulatory goals and priorities are to be determined. Cost-benefit analysis is not an abdication of human judgment; it is the rigorous application of that judgment.

Cost-benefit analysis does involve uncertainties and opportunities for subjective judgments—opportunities that can be used to twist the conclusions of a study to fit the preconceptions of a regulatory official, an OMB official, or a senator. The most important difficulty is that individual interests and preferences vary widely with respect to most of the things government regulation is concerned with. Different people attach different values to, and are willing to pay different amounts for, somewhat cleaner lakes or additional safety gear on automobiles—because of differences in income, occupation, age, skill (driving skill for example), health, and taste. Any attempt at estimating the "social" costs and benefits of a uniform government rule will obscure these differences to some extent.

But these and similar criticisms of cost-benefit analysis miss the central point, which is that the problems are not in the effort to measure costs and benefits but in the nature of government regulation itself. To say that individual preferences differ in ways a single cost-benefit assessment cannot capture is the same thing as saying that a uniform government rule will necessarily be too strict and costly for some people and too lenient and cheap for others. There is simply no escaping the need for averaging and approximation where government has some legitimate regulatory role (so that the absence of regulation would leave even more people less well off). The question is, how is the best balance to be struck? The purpose of cost-benefit analysis is not to provide the answer but to frame the debate in a useful and productive way.

I believe that careful inquiry into the costs and benefits of specific regulatory policies is the only way to discuss regulatory policies intelligently. If you ask someone who says he is opposed to cost-benefit analysis—say a representative of the Sierra Club or the AFL-CIO—to explain why he favors some particular EPA or OSHA rule, he will invariably respond with assertions about the harms being suffered under current circumstances and the benefits that will result from changing those circumstances. This is casual cost-benefit analysis; more formal cost-benefit exercises are simply efforts to understand the assumptions and completeness of such assertions as thoroughly as possible.

Political Functions of Cost-benefit Analysis

Cost-benefit analysis, correctly understood, performs two critical political functions in regulatory policy. The first is to screen out clearly excessive rules and thus to counteract the natural tendency of single-mission regulatory agencies to be overzealous—"overzealous" meaning forcing private expenditures in pursuit of public goods that are vastly in excess of what informed citizens (even the most wealthy, risk-averse, or environmentally sensitive citizens) would support. The various regulatory "horror stories" that have been offered by proponents of regulatory reform legislation in recent weeks are largely of this variety. I am convinced from personal experience in government that the mere obligation to explain publicly the likely benefits and costs of a dubious rule (to try "to pass the hee-haw test," as they say in the bureaucracy) is a useful counterweight to the slanted incentives that exist in all program agencies.

The second function is to provide a productive framework for debating the merits of the many close cases in regulatory policy, where reasonable people will differ on what the correct policy should be. Government rulemaking, despite all its trappings of procedure and formal findings and rationality, is a competitive process: not only the officially responsible regulatory officials, but also members of Congress, members of the president's administration from other agencies and from the president's Executive Office, representatives of groups most directly affected by a rule, and members of the general public, will typically have important views and interests which they legitimately wish to be taken into account. It has been, however, a slanted and imperfect sort of competition. The opaqueness and obscurity of traditional rulemaking has tended to narrow the scope of debate to the views of those most immediately affected—well organized and funded interest groups, the professional staffs of program subcommittees in the Congress, and the bureaucracy itself—excluding those whose interests are more general and therefore more balanced. This is the institutional source of the problem of regulatory "capture" and undue interest-group influence.

The regulatory reform bills would oblige regulators to lay out clearly and succinctly their estimates of the likely benefits and costs of a proposed course of action, to identify alternative policies for achieving the objective at hand, and then to chose the policy with the greatest net benefits to the general public. These requirements would addresses the systematic problems of government regulation in two ways: by widening effective participation in regulatory debate and by focusing that debate on the general public interest. Thus it is not adventitious that the regulatory reform bills combine the cost-benefit standard with procedures for regulatory review by the president, the Congress, and the courts. The standard and the procedures are integral parts of making regulation more effective and public spirited. Together they establish the following policy: a federal regulation may be issued only when a regulatory agency can persuade informed, disinterested officials outside the agency that the regulation will be beneficial to society as a whole. This is a moderate policy, and as close to the established constraints on taxing and spending as one can get in the case-by-case world of regulation. It would not be a revolution, but anyone familiar with federal rulemaking today knows that it would be a substantial improvement.

More or Less Bureaucracy?

Critics of the regulatory reform bills are fond of saying that the bills would produce "more bureaucracy, not less," as if this assertion were enough to stop the reformers in their tracks. This criticism, like the criticisms of cost-benefit analysis, is wildly exaggerated and ultimately irrelevant. The federal regulatory agencies have been doing cost-benefit assessments of their major rules for years. Doing this work better and more routinely, explaining assumptions and conclusions more clearly on the public record, and then actually heeding the conclusions, may be somewhat more costly but not much more costly. If the regulatory reformers are correct that a good many new and existing rules could not survive a conscientious assessment of their benefits and costs, then there will be fewer rules and fewer people writing and enforcing them.

The proper question, moreover, is not how many people are employed in the federal government generating regulations, but what is the sum of the government and private-sector costs of regulation (and whether the resulting social benefits are worth these costs). The private-sector costs of complying with federal regulations are incomparably larger than the budgets of the agencies issuing the rules; this huge "leverage" suggests that investments in improving the substance of federal rules can have large total payoffs.

In any event, the size and social importance of the federal regulatory establishment is today so great that extended controversy over major rules—involving the Congress, the president's immediate office, interest groups, and the general public—is a certainty, not something contingent on new legislation. The question is not whether these debates will take place; the questions are what will be the terms of the debates, what kind and detail of information the agencies will provide to those involved in the debates, and what standards the agencies and the courts will apply in making final decisions. The regulatory reform bills provide the right answers to these questions.