This chapter details the promise
that a regulatory budget holds for reforming Federal regulation. The first section
defines a regulatory budget for purposes of this study. The next section analyzes
the current Federal regulatory process: how it operates, and why it has come n for so much valid criticism of late. Finally, the chapter suggests that a regulatory budget system would be an effective response to that criticism.
A. Regulatory Budget Defined
It is essential at the outset
to define certain terms used in this study:
· A regulatory budget would set limits for
a given period on the compliance costs that the executive branch of the Federal
government could impose, through regulation, on the private sector or on other
governmental units.
· Compliance costs refer to the increase in outlays necessary to bring products or procedures into line with the requirements of Federal
regulations. Examples of compliance costs include outlays for filing mandatory
forms, hiring extra production workers to meet safe-manning rules, and adding new plant or equipment to comply with emissions
standards
· The term regulation refers to executive
actions, other than general taxes or subsidies, that are intended to alter specific private or non-Federal government decisions. Examples include mandatory specifications for goods and services; ceiling or floor
prices in particular markets; outright bans on specific goods or activities; and charges on effluents from production or consumption.
The budgeting of compliance costs
is the meaning of a regulatory budget as it has been proposed in recent legislation and in most recent writings on reforming
Federal regulation. But the term regulatory
budget has also been used in a broader sense that would explicitly incorporate into the budget process the full social
costs, or even both the costs and benefits, of regulation. The full social costs
of regulation include, in addition to compliance costs, government administrative expense and indirect costs in the form of
reductions in the valued of social output. The benefits of regulation consist
of increases in the value of social output and thus are generically similar to the indirect costs.[1]
The analysis of a regulatory
budget in this study is confined to the narrower definition, encompassing only compliance costs. The discussion, below in
Section C.4.a, p.10, explains why the other costs and the benefits of regulation are better excluded from a regulatory budget
system.
B. Regulation as an Economic and Political
Activity
Regulation is one method that
the Federal government uses to claim the economic resources that it devotes to its programs and operations. Other methods
include taxation, the creation of new money, tax credits or deductions, and loan guarantees. The methods may differ mechanically
(e.g., in whether the resources enter and leave the Treasury), but in all cases the Federal government in effect acquires
the means with which to pursue its goals. In so doing it alters the allocation
of resources and the distribution of income. With some approximation, the government's
claims to economic resources can be measured and stated in common (dollar) terms, regardless of which method is used.
The amount of resources claimed
by the Federal government in a given period is mainly the result of the political, not the market process. Public disputes
over taxes, spending, the national debt, the money supply, so-called tax expenditures, and (recently) regulation reflect this
fact. Because resources are scarce, at the heart of such disputes is a set of
allocation questions: How many resources should the Federal government claim? How should the total of resources claimed be
divided among the various agencies and programs? How should the government manage the resources it claims in order to use
them most effectively?
Until well into the 20th century,
the Federal fiscal budget was run almost informally (from an organizational standpoint) out of the Executive Office of the
President. The Bureau of the Budget and its successor, the Office of Management
and Budget, are relatively recent developments, as are the now-elaborate procedures used to gather accurate, reliable fiscal
data for use by the executive branch.
The present movement to reform
Federal regulation may also be usefully viewed in historical perspective. Since the mid-1960s, Federal government regulatory
activity has expanded rapidly and on a wide front. Economists explain the burst of activity as the result of increased demands
for Federal regulation by people or organizations who stand to benefit from it. Now, however, the costs of regulation have
reached the point where those bearing them find it worthwhile to spend time and money opposing new regulations and lobbying
for the repeal or revision of existing ones. In short, just as there are demands
for regulation, so there are now demands for regulatory reform.
Current efforts to reform Federal
regulation are not without precedent:
· In 1971, the Office of Management and Budget established what became known as the
"Quality of Life Review." The purpose was to allow affected Federal agencies to comment on proposed regulations that were
intended to enhance the quality of life. Although the review was supposed to
apply broadly to all Federal agencies dealing with public health and safety, it was applied almost exclusively to regulations
proposed by the U.S. Environmental Protection Agency.
· President Ford instituted an "Inflation Impact Statement" program in November 1974.
This program provided for an evaluation of the anticipated impact of all major new regulations upon prices, productivity,
and competition.
· The Ford program was supplanted in March 1978 by President Carter's more ambitious
"Improving Government Regulations" program. Under that program, executive agencies were required to publish semiannual agendas
of contemplated regulations, and to prepare "regulatory analyses" of all regulations having "an annual effect on the economy
of $100 million or more."[2] Those analyses were to include
“a succinct statement of the problem; a description of the major alternative ways of dealing with the problems that
were considered by the agency; an analysis of the economic consequences of each of these alternatives and a detailed explanation
of the reasons for choosing one alternative over the others."[3]
· President's Carter's program also included the establishment of the Regulatory Analysis
Review Group (RARG), chaired by the Council of Economic Advisors (CEA), and including
representatives of each of the principal economic and regulatory agencies of the Executive Branch. Analytical staff support to RARG is provided by the Council on Wage and Price Stability. RARG each year makes a detailed
review of ten to twenty regulatory analyses. Upon completion of such a review, the Chairman of CEA decides whether to file
written comments on the regulatory proposal, meet with the head of the agency involved, or submit a report to the President.
· In October 1978, President Carter directed the creation of a Regulatory Council,[4] composed of thirty-five departments and agencies, to help coordinate Federal regulatory activities. The Council
is required to publish a semi-annual calendar of proposed regulatory activities and—to the extent that they have been
estimated by the initiating agency—their anticipated costs. The first such calendar was published on February 28, 1979.
No doubt the past efforts at regulatory reform
have had some influence. That influence has been largely due to better information generated by the new procedures or to the
persuasiveness of particular individuals participating in those procedures. On the whole, however, the past efforts have not
systematically brought economic constraints to bear on the regulatory process. For that reason, they have had at best a limited
effect on inducing Federal decision makers to husband the economic resources claimed through regulation.
C. The Case for Budget Control of Regulatory Compliance Costs
A regulatory budget system would
introduce economy into the Federal use of regulation to claim resources. In that
context, it might be tempting to think of a regulatory budget simply as a way to reduce Federal regulation. The temptation, however, should be resisted. The true role
of a regulatory budget would be as a tool for managing Federal regulation.
1. The Regulatory Budget as
an Element of Regulatory Reform
Regulatory reform is an imprecise
term that means different things to different people. One dimension of reform
concerns the personal stakes that individuals or groups have in the regulatory process.
At one extreme of this dimension are the government officials who pledge to reform regulation by cleaning their own
houses. At the other extreme are the business leaders who equate reform with
the dismantling of the entire regulatory apparatus.
A different dimension of regulatory
reform concerns the management of the process of promulgating Federal regulations. This
dimension has to do with how the regulatory process operates rather than with who stands to benefit from it. Proposals for the operational reform of regulation are in the tradition of the fiscal reforms in the executive
branch (1960s) and in the Congress (1970s).
The idea of a regulatory budget
belongs on the management dimension of reforming Federal regulation:
· The regulatory budget system would be a management tool for use by politically-responsible
officials.
· Under such a system regulatory officials could be left free to make detailed decisions
on how best to implement the broad provisions of laws passed by the Congress; however, they would also be limited in the compliance
costs they could thereby impose.
· A regulatory budget would provide no guarantee that the result would be fewer or less
sever regulations. It should not be viewed as part of an anti-regulatory strategy. Rather, it would be a tool for better managing the regulatory process that has over
time become so large a component of our national economic life.
2. The Need for More Effective Management of the Regulatory Process
Proposals to reform the management
of the Federal regulatory process presume a diagnosis that there is a problem needing correction. The diagnosis in this study
focuses on the incentives that the Federal government faces in passing laws and in promulgating the regulations to put the
laws into effect. The crux of the diagnosis is that, under the existing system, there are at best weak incentives to consider
the full costs of Federal regulation. As a result, there are effective incentives both to over-regulate and to choose particular
forms of regulation that may be excessively costly.
As noted earlier, regulation
claims scarce resources for government use. Sound management practice would require that decisions on regulation take into
account all resources so claimed. This would help set a limit on the total amount
of resources used and induce decision makers to allocate the total to the most effective uses. It would further cause regulatory
officials to consider costs in selecting specific targets of regulation and discipline them to choose the least-cost ways
of attaining given regulatory objectives.
Under the present arrangement,
however, the Congress and the executive branch are held accountable for only a small fraction—the administrative costs,
which are included in the fiscal budget—of the total resources claimed by Federal regulation. This provides little incentive
for regulatory officials to consider compliance costs or possible reductions in social output when decisions involving regulation
are made.
In effect, the present Federal
regulatory process contains what in the study of market allocation is called an "externality": pertinent information is omitted
from decision making, with the result that the full cost of regulation exceeds the cost as perceived by decision makers. As
a consequence, there is probably more regulation, and its composition is different, under the existing arrangement than if
Federal decision makers were held accountable for all the resources claimed by regulation.
The incentives just outlined
operate at two distinct levels of the Federal government. At the policy making level—that is, in the Congress and at
the top echelons of the administration where legislative proposals are initiated—the benefits and costs of programs
involving the use of regulation will be weighed with only a partial accounting of the full costs. It is even possible that
there is a positive incentive to resort to regulation, in preference to other government methods of claiming resources that
are subject to fuller accountability. For example, current efforts to compel a balanced fiscal budget might have little impact
on the true economic scope of government, as opposed to the mere size of expenditures, unless attention is also paid to the
compliance costs being imposed by regulation.[5]
The second level of the Federal
government at which the above incentives operate is policy execution. Typically, the laws as passed by the Congress state
policy goals only in broad, idealized terms. It is left to the writers of the regulations
in the bureaucracy to provide the details of implementation. This means that regulatory officials have considerable latitude
in choosing both the particular regulatory targets and the specific kinds of regulatory methods for assuring compliance. In
the existing regulatory process, these officials have only weak incentives—through fiscal-budget control of administrative
costs—to choose targets and methods that would achieve the congressionally-mandated goals at minimum incremental cost.
They have much greater incentive to select targets and methods that—regardless of the cost of complying with the resulting
regulatory requirements—minimize the risk of failure to achieve the assigned social goal, and thus minimize the risk
of personal criticism for having failed to achieve their goals.
A related point concerns the
life histories of individual regulations pertaining to a given law. The broad, idealized tasks embodied in a law are inherently
unattainable in practice. Thus, even an ambitious, mission-oriented set of initial regulations will not achieve all the possible
objectives. As the initial program approaches success, however, the agency will
turn its attention to other, as yet unmet objectives—of which there is an inexhaustible supply. Moreover, the agency
has little if any incentive under the present system to retire existing regulations. The result is that the number and scope
of regulations under a given law tends to grow steadily with time.[6]
3. A Regulatory Budget as a Management Tool
The preceding diagnosis suggests
that a serious defect of the present Federal regulatory process is that it produces excessive, and excessively costly, regulation.
The source of the problem is that the current process does not take into account the full costs of regulation. There are a
number of possible methods for restructuring regulatory incentives to make decision makers aware of the full costs and to
force them to incorporate them into their decisions. The method examined in this
study is the familiar management tool of the budget.
One student of the Federal fiscal
process has characterized a budget as a "series of goals with price tags attached" and (because resources are limited) as
a "mechanism for making choices among alternative expenditures."[7] A regulatory budget would put price tags (in the form of compliance costs) on the pursuit of Federal goals through
regulation. It would also place limits on the total of compliance costs that may be imposed on the national economy, and on
their allocation among individual agencies.
Under a regulatory budget system,
the President and the Congress would have to decide, explicitly and in advance, what the total Federal regulatory burden would
be for a given period. They would also have to determine the relative importance
of regulation in different areas in order to allocate the individual agency budgets. The Federal officials who actually write
regulations would be given an effective incentive to design new regulations so as to economize on the limited resources assigned
to them. It would be possible to encourage the timely removal of marginally effective or obsolete existing regulations, by
providing agencies with regulatory budget credits for the resulting cost reductions.[8]
The regulatory budget can thus
be seen as a tool for establishing management control over the economic impact of regulation. Control is used here in its
generic sense. The word, which is derived from the accounting profession, refers to a higher level of abstraction against
which subordinate matters can be evaluated without having to examine them in detail.[9]
It is the lack of such a higher
level of abstraction that has limited the effectiveness of previous efforts to control the economic impact of Federal regulation.
Instead, those efforts have been based on two mistaken assumptions:
· that government officials outside an agency proposing a regulation can know enough
details about the specific issue at stake to prevail in a debate with the far more knowledgeable proponent—agency officials;
and
· that the outside officials will be as determined and persistent as the proponent agency.
That is why the Quality of Life
Reviews and the Inflation Impact Statements frequently amounted to little more than annoying ankle-pecking of the proponent
agencies. In the end, the proponent agencies usually prevailed, even if after significant delays.
The regulatory budget would make
it possible to do away with fruitless and enervating second-guessing of the judgments of politically responsible agency heads.
So long as an agency remained within its budget allocation, higher levels of government would not have to worry about its
regulatory requirements causing unacceptably large adverse, economic impacts. Agency heads who failed to get the most out
of their, regulatory budget allocations (in terms of their assigned goals) would be disciplined through normal political channels:
pressure from the interest groups that support the goals in question. Indeed, the tightened constraint of a regulatory budget
to husband compliance costs would give such groups even more incentive to apply pressure than the peak constraint of current
procedures.
4. Coverage of a Regulatory Budget
Two related aspects of what a
regulatory budget would cover require attention. The first aspect is the inclusion of
compliance costs and the exclusion of benefits and indirect costs. The second aspect is the range of Federal agencies whose
regulations would be subject to budget limits.
a. Compliance Costs vs. Benefits
and Indirect Costs
As noted at the outset, the regulatory
budget analyzed in this study would cover only the direct costs of complying with Federal regulations. A possible objection
to a regulatory budget so defined is that it would exclude two important economic effects of Federal regulation —namely,
benefits and indirect costs (i.e., output losses).[10] This would appear to violate the goal for a regulatory budget suggested in Section C.2, above: to make the Federal
government more accountable for the overall economic consequences of its regulatory decisions.
There is some merit in this objection.
The weighing of costs and benefits in government decision making can certainly stand improvement. In spite of all the efforts
that have been devoted to benefit-cost analysis and similar techniques, Federal decision making remains highly imprecise and qualitative—one could even say impressionistic—when it comes to assessing
the impacts, positive and negative, of Federal programs on the economy.
A regulatory budget system, however,
would not be the right vehicle for attempting to introduce the needed improvement, except where compliance costs are concerned. The reason is not the desirability but the difficulty of estimating the benefits and
indirect costs of Federal regulation on a sufficient scale and with enough reliability to be practical. The immense task of
analysis, data collection, and computation would be prohibitively costly even if it were possible to reach consensus
on the quantified results. Thus, under a regulatory budget, consensus on benefits and on indirect costs would have to be reached
as it is now under the fiscal budget: implicitly through the political process.
The exclusion of benefits and
indirect costs from the formal regulatory budget process would not prevent the useful application of benefit-cost analysis
to individual problems. For instance, benefit-cost analysis could be used to decide whether regulation of a specific product
or activity was worthwhile, or to choose between alternative forms of regulation. Neither
would the exclusion mean that benefits and indirect costs could not be weighed in the political and legislative debates on
particular regulatory programs. All it would mean is that the data used directly to control the economic impact of regulation
would be limited to the direct costs of compliance.
A comparison with the fiscal
budget is useful here. Benefits and indirect costs are not specifically included
in the fiscal budget, either. But they are incorporated implicitly, most often in qualitative or conjectural form, in the
political debates that precede decisions to raise or spend funds. While quantitative benefit-cost analyses are frequently
conducted to support or oppose specific projects or programs, the only data that actually enter the fiscal budget are revenue
and expenditure estimates.
b. Agency Coverage
The question of which Federal
agencies to cover in a regulatory budget could be answered in terms of the common distinction that is drawn between social
and economic regulation. Social regulation, which covers such broad areas as
health, safety, and welfare, is said to impose mainly compliance costs on the economy. In contrast, economic regulation, which
applies to prices and quantities in specific markets, is said to impose mainly indirect costs on the economy. One could therefore argue that the budgeting of compliance costs should be confined to social regulation
and not applied to economic regulation.
There is increasing evidence,
however, that this common distinction between social and economic regulation is blurred. The indirect costs of social regulation—for
example, in workplace and product safety, environmental quality, and drugs—are now viewed as substantial and growing.
By the same token, the compliance costs associated with economic regulation—for example, in trucking, agriculture, crude
oil, and natural gas—are widely recognized as imposing heavy burdens on business firms. It would be difficult, on grounds
of compliance vs. indirect costs, to classify the auto fuel economy standards of the Department of Transportation as either
solely social or solely economic.
A different criterion for settling
the question of agency coverage is provided by the very logic of a regulatory budget developed in this study. Unless all agencies'
regulations were included in the budget, Federal policy makers would have an incentive to evade budget limits by shifting
programs to agencies left outside the system. The avoidance of opportunities to evade budget discipline would be central to
the proper functioning of a regulatory budget. By this criterion, agency coverage
should be total, not partial.
[1] Expressing indirect costs and benefits in terms of the value of social output
does not presume that either magnitude must be measured solely in monetary or other quantifiable form.
[2] Executive order 12044, March 23, 1978.
[4] Memorandum for the Heads of Executive Departments and Agencies, The White House,
Washington,
October 31, 1978.
[5] For example, with some ingenuity, the government could probably establish a
comprehensive national health insurance program entirely through regulation, with scant effect on the public budget.
[6] This analysis assumes normal human self-interest on the part of loyal government
employees, and does not impute to them any venality or vindictiveness. Recent work by Niskanen, Tullock and others has shown
that the bureaucratic counterpart of market competition is that officials who fail to serve their own self-interest will end
up being replaced by ones who do.
[7] Aaron Wildavsky, The Politics of the Budgetary Process, 2nd edition (Boston:
Little, Brown, 1974), p. 2.
[8] At present, there are few incentives for agencies to remove old regulations
from the books. Hence regulatory requirements may remain in effect long after they have ceased to be necessary or useful.
[9] When banking first began, the proprietor of a counting house in the Italian
city-states maintained a contra rolus against which the subordinate accounts (maintained
by assistants who might not be trustworthy) had to balance. In that way the proprietor was able to tell—without having
to review every detailed transaction—whether his assistants were stealing from him and to pin-point areas that required
his managerial attention. Over the centuries the word was anglicized to
counter roll, and subsequently contracted into countrol
and eventually control.
[10] Administrative expenses would also be excluded. However, they are now covered
by the fiscal budget, and there would be little point in transferring them to a regulatory budget. Moreover, administrative
expenses account for such a minor fraction of the total costs of Federal regulation that it would scarcely be worth complicating
the regulatory budget by including them.
