«Informing Regulatory Decisions: 2004 Draft Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on State, Local, ...»
Informing Regulatory Decisions: 2004 Draft Report to Congress on the Costs and
Benefits of Federal Regulations and Unfunded Mandates on State, Local, and Tribal
This Draft Report to Congress on regulatory policy was prepared pursuant to the
Regulatory Right-to-Know Act. It provides a statement of the costs and benefits of
Federal regulations and recommendations for regulatory reforms. The report will be
published in its final form later this year, after revisions to this draft are made based on public comment, external peer review, and interagency review.
A major feature of this report is the estimates of the total costs and benefits of regulations reviewed by OMB. Major Federal regulations cleared by OMB from October 1, 1993, to September 30, 2003, were examined to determine their quantifiable benefits and costs. The estimated annual benefits range from $62 billion to $168 billion, while the estimated annual costs range from $34 billion to $39 billion. A substantial portion of both benefits and costs is attributable to a handful of EPA clean-air rules that reduce public exposure to fine particulate matter.
During the past year, 6 “major” final rules with quantified and monetized benefits and costs were adopted. These rules added $1.6 to $4.5 billion in annual benefits compared to $1.9 billion in annual costs. There were an additional 8 final “major” rules that did not have quantified and monetized estimates of both benefits and costs.
The Report also reviews the international literature on the effects of regulation on national economic growth and performance. Based on a comparison of 130 countries, the ten least regulated economies are Hong Kong, Singapore, the United States, New Zealand, the United Kingdom, Canada, Switzerland, Ireland, Australia and the Netherlands. These same economies have experienced relatively good economic performance measured by economic growth, per capita income and life expectancy. The adverse impacts of regulation may be mediated through factors such as the number of procedures required to start a new business, the time and costs of registering a new business, and the enforceability of contracts. More research is needed to determine the precise causal relationships between regulation and economic growth and performance.
In light of recent concerns about the health of manufacturing in the U.S., the Report reviews the economics literature on the impacts of regulation on manufacturing enterprises. The cumulative costs of regulation on the manufacturing sector are large compared to other sectors of the economy. In response to the large impact of regulation on manufacturing, OMB requests public nominations of promising regulatory reforms relevant to this sector. In particular, commenters are requested to suggest specific reforms to rules, guidance documents or paperwork requirements that would improve manufacturing regulation by reducing unnecessary costs, increasing effectiveness, enhancing competitiveness, reducing uncertainty and increasing flexibility.
CHAPTER I: THE COSTS AND BENEFITS OF FEDERAL REGULATIONSSection 624 of the FY 2001 Treasury and General Government Appropriations Act, the “Regulatory Right-to-Know Act,” requires OMB to submit "an accounting statement and
associated report" including:
(A) an estimate of the total annual costs and benefits (including quantifiable and
nonquantifiable effects) of Federal rules and paperwork, to the extent feasible:
(1) in the aggregate;
(2) by agency and agency program; and (3) by major rule;
(B) an analysis of impacts of Federal regulation on State, local, and tribal government, small business, wages, and economic growth; and (C) recommendations for reform.
This chapter consists of two parts: part A presents the accounting statement, and part B presents a brief report on regulatory impacts on State, local, and tribal governments, small business, wages, and economic growth. We recently reported on regulatory reform progress in our 2003 final report published in September, 2003, and we will update this progress in the 2004 final report.
Part A revises the benefit-cost estimates in last year’s report by updating the estimates to the end of fiscal year 2003 (September 30, 2003). Like the 2003 report, this chapter uses a 10-year look-back: estimates are based on the major regulations reviewed by OMB from October 1, 1993 to September 30, 2003. This means that 32 rules reviewed from October 1, 1992 to September 30, 1993, were included in the totals from last year’s report but are not included here. A list of these rules can be found in Appendix B. All of the estimates presented in this chapter are based on agency information or transparent modifications of agency information performed by OMB.
We also include in this chapter 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 Congressio nal Review Act.
A. Estimates of the Total Benefits and Costs of Regulations Reviewed by OMB1
Table 1 presents estimates by agency of the benefits and costs2 of major rules 3 reviewed by OMB over the past year (October 1, 2002 to September 30, 2003). OMB reviewed 37 final major rules over that period. 4 These 37 rules represent approximately 11 percent of the 349 final rules reviewed by OMB during this 12-month period, and less than 1 percent of the 4,312 final rules published in the Federal Register during this 12 month period. OMB believes, however, that the costs and benefits of major rules capture the vast majority of the total costs and bene fits of all rules subject to OMB review.
Of the 37 rules, 25 implemented Federal budgetary programs, which caused income transfers, usually from taxpayers to another group. Rules that transfer Federal dollars among parties are not included in the benefit-cost totals because transfers are not social costs or benefits. If included, they would add equal amounts to benefits and costs.
The remaining 12 regulations were “social regulations,” which may require substantial additional private expenditures as well as provide new social benefits.
Of the 12 “social regulations,” we are able to present estimates of both monetized costs and benefits for 6 rules. OMB used agency estimates where available. If an agency quantified estimates but did not monetize, standard assumptions were used to monetize, as explained in Appendix A. The 6 other final rules did not include monetized estimates for either costs or benefits, so we did not include these rules in the totals in tables 1-3.
We attempt to summarize the available information on the impact of these rules in the “other information” column of Table 4.
OMB discusses, in this report and in previous reports available at http://www.whitehouse.gov/omb/inforeg/regpol.html, the difficulty of estimating and aggregating the costs and benefits of different regulations over long time periods and across many agencies using different methodologies. Any aggregation involves the assemblage of benefit and cost estimates that are not strictly comparable. In part to address this issue, the 2003 report included OMB’s new regulatory analysis guidance, also released as OMB Circular A -4, which took effect on January 1, 2004, for proposed rules, and will take effect in January 1, 2005, for final rules. The guidance recommends what OMB considers to be “best practice” in regulatory analysis, with a goal of strengthening the role of science, engineering, and economics in rulemaking. The overall goal of this guidance is a more competent and credible regulatory process and a more consistent regulatory enviro nment. OMB expects that as more agencies adopt our recommended best practices, the costs and benefits we present in future reports will become more comparable across agencies and programs. OMB will work with the agencies to ensure that their impact analyses follow the new guidance.
In many instances, agencies were unable to quantify all benefits and costs. We attempted to capture the essence of these effects on a rule-by-rule basis in the columns titled “Other Information” in the various tables reporting agency estimates. The monetized estimates we present necessarily exclude these unquantified effects.
The Federal Register citations for these major rules are found in Table 4.
This draft report does not contain information on EPA’s Prevention of Significant Deterioration and Nonattainment New Source Review: Routine Maintenance and Repair Final Rule (68 FR 61247). OMB completed review of this rule on August 27, 2003 and EPA published the rule on October 27, 2003. On December 24, 2003, however, the Court of Appeals for the District of Columbia Circuit stayed the effective date of the rule. As a result, the rule did not become effective on December 26, 2003, as originally intended by the Agency.
Table 2 presents an estimate of the total costs and benefits of 85 regulations reviewed by OMB over the ten-year period from October 1, 1993 to September 30, 2003 that met two conditions. Each rule generated costs or benefits of at least $100 million annually, and a substantial portion of its costs and benefits were quantified and monetized by the agency or, in some cases, monetized by OMB. The estimates are therefore not a complete accounting of all the costs and benefits of all regulations issued by the Federal government during this period. As discussed in the 2003 Report, OMB has chosen a 10 year period for aggregation because pre-regulation estimates prepared for rules adopted more than ten years ago are of questionable relevance today. The estimates of the costs and benefits of Federal regulations over the period October 1, 1993 to September 30, 2003 are based on agency analyses subject to public notice and comments and OMB review under E.O. 12866.
The aggregate benefits reported in Table 2 are substantially smaller than the aggregate benefits presented in the 2003 Report. This is due to one EPA rule implementing the sulfur dioxide limits of the acid rain provisions in the 1990 Amendments to the Clean Air Act. This rule fell in the time period of 1992 to 1993 and therefore is not included in this report’s totals. This rule’s estimated benefits of nearly $80 billion per year represented roughly one-third to one-half of the total benefits from the 10-year aggregation. Regardless, as can be seen in Tables 2 and 3, EPA rules continue to be responsible for the majority of costs and benefits generated by Federal regulation during this time period.
Table 3 provides additional information on aggregate benefits and costs for specific agency programs. In order for a program to be included in Table 3, the program needed to have finalized 3 or more rules in the last 10 years with both monetized or monetizable costs and benefits. These criteria account for the major difference between Table 3 in the 2003 report and Table 3 of the 2004 report: the Coast Guard is no longer included as a program, since one of their Vessel Response Plans fell out of the 10-year range. OMB did review three major Coast Guard rules this year (see Table 4), but the benefits of a reduced risk of terrorism have proven very difficult to quantify and monetize. See Chapter 4 in the 2003 Report for a more detailed discussion of this issue.
The ranges of costs and benefits presented in Tables 1-3 are not necessarily correlated. In other words, when interpreting the meaning of these ranges, the reader On January 13, 2004, the United States Court of A ppeals for the Second Circuit struck down a 2001 Department of Energy rule setting energy efficiency standards for central air conditioners. Because of this ruling, we removed this rule from our totals for the Department of Energy in Tables 2 and 3. We w ill reconsider the treatment of this rule in the final version of t he report.
should not assume that low benefits are associated with low costs and that high benefits are associated with high costs. Thus, for example, it is possible that the net benefits of EPA’s water programs taken together could range from negative $2.2 billion to positive $5.7 billion per year.
Based on the information contained in this and previous reports, the total costs and benefits of all Federal rules now in effect (major and non- major, including those adopted more than 10 years ago) could easily be a factor of ten or more larger than the sum of the costs and benefits reported in Table 2. More research is necessary to provide a stronger analytic foundation for comprehensive estimates of total costs and benefits by agency and program.
In order for comparisons or aggregation to be meaningful, benefit and cost estimates should correctly account for all substantial effects of regulatory actions, not all of which may or may not be reflected in the available data. OMB has not made any changes to monetized agency estimates other than converting them to annual equivalents.
Any comparison or aggregation across rules should also consider a number of factors that our presentation does not address. To the extent that agencies have adopted different methodologies —for example, different monetized values for effects, different baselines in terms of the regulations and controls already in place, different treatments of uncertainty—these differences remain embedded in Tables 1-3. While we have relied in many instances on agency practices in monetizing costs and benefits, our citation of, or reliance on, agency data in this report should not be taken as an OMB endorsement of all the varied methodologies used to derive benefits and cost estimates.
Many of these major rules have important non-quantified benefits and costs.
These qualitative issues are discussed in the agency rulemaking documents, in previous versions of this Report, and in Table 4 of this Report.