We are pleased to appear before the Committee to provide our views on the Regulatory Improvement Act of 1998 (S. 981)--the regulatory reform legislation proposed by Senators Carl Levin and Fred Thompson.
The two of us have studied and written about regulatory issues for over two decades.2 Recently, we coauthored two documents published jointly by the American Enterprise Institute and The Brookings Institution, which outline principles we believe Congress should keep in mind as it seeks to improve the regulatory process. 3 We have forwarded copies of these documents to the Committee and would ask that the documents be included in the record with this testimony. We are pleased that S. 981 is fully consistent with many of the principles in these statements.
Overview of the Bill
S. 981 is a responsible, carefully crafted bill that codifies a number of practices that have already been features of the federal regulatory landscape for roughly two decades, while improving on those practices in certain key respects. The bill takes the best and discards the worst from several similar bills introduced in the last Congress and thus has well-deserved bipartisan support.
Put simply, S. 981 would require federal regulatory agencies to think hard before they act, while giving the public its "right to know" the likely effects of proposed regulatory actions. The bill is timely and welcome given the increasing importance regulation has assumed in our society. While so-called economic regulation--the control over prices and entry in particular lines of business--produces little, if any, benefit and has been justifiably scaled back, social regulation that addresses environmental, health, and safety standards is and will continue to be very much part of the legal landscape. A recent report by the Office of Management and Budget (OMB) estimates that social regulation entails benefits of roughly $300 billion and costs of roughly $200 billion annually. The OMB report further estimates that once the costs of economic regulation and paperwork are added, the total costs of all regulation reach nearly $280 billion, or an amount comparable to the annual expenditures of the federal government on all domestic discretionary programs. At this level of activity, citizens certainly have a right to expect that their government takes great care to ensure that new and existing regulations minimize real risks in a cost-effective manner.
In particular, S. 981 would codify:
The requirement, now embodied in an Executive Order, that Executive branch agencies prepare regulatory analyses (including cost-benefit analyses) of major federal regulatory proposals before issuing final rules;
The requirement, also effectively embodied in an Executive Order, that Executive branch agencies include in the statement of basis and purpose for a rule whether the rule is likely to provide benefits greater than costs and to explain why it was chosen over other reasonable alternatives; and
Oversight by the Executive Office of the President (EOP) of major regulatory proposals. This practice has been in place since the Ford Administration, and, since the Reagan Administration, has been carried out by OMB.
By codifying these well-established practices, S. 981 would ensure that current and future Administrations would implement them as a matter of law. The bill would do more than simply institutionalize existing practices, however. It would:
Require Executive branch agencies to conduct risk assessments for major rules addressing health, safety, or environmental risks. The assessments would, among other things, compare those risks to comparable risks familiar to the public (such as the risk of having a car accident, contracting cancer from smoking, or getting struck by lightning);
Require risk assessments and cost-benefit analyses to be subject to independent peer review;
require OMB, in consultation with the Office of Science and Technology Policy in the EOP, to contract with a scientific institution to advise the federal government in comparing risks and setting priorities in regulating risks of different kinds. The President would be required to submit a report to Congress within five years for making legislative changes to further this objective; and
Require agencies to establish a schedule for reviewing existing rules.
These are worthy changes. In combination, the requirements for risk assessments of individual rules, priority-setting of risks, and peer review would encourage agencies to focus their attention on more serious risks instead of imposing excessively burdensome regulations aimed at minor risks. The comparative risk assessment study, in particular, would help Congress better set regulatory priorities in the future--and, in the process, could help save more lives at less cost. Indeed, a study by two researchers at Harvard (Tammy Tengs and John Graham) suggests that a reallocation of mandated expenditures toward those regulations with the highest payoff to society could save approximately 60,000 more lives a year at no additional cost. 4
Meanwhile, the periodic review requirement in S. 981 is a major improvement on bills introduced in the last Congress that would have made it too easy for special interests to bring the regulatory process to a halt by drowning agencies in petitions to review existing rules. At the same time, by requiring agencies to schedule existing rules for review, the legislation takes a long overdue first step toward modernizing regulations that may need modification--either tightening to reflect the lower costs of compliance compared to the benefits they are achieving, or relaxation or even elimination because experience has shown that they are ineffective or unduly expensive.
Because S. 981 is such a well-balanced bill, we have only one suggested modification, which relates to the requirement that agencies obtain peer review of their cost-benefit analyses and risk assessments. Just as OMB now plays a vital role in reviewing proposed rules and the accompanying regulatory analyses, we believe it is vital to have OMB participate as an equal partner with agencies in the peer review process (for example, through joint agency/OMB selection of the peer review panels). This would help eliminate any potential bias agencies might have in the selection of peer reviewers, leading to a more balanced assessment of regulatory proposals.
Responses to Possible Objections
The current version of S. 981 has been changed in a number of respects to respond to various concerns that were voiced about an earlier version. Nonetheless, because regulatory reform has been so contentious a subject in the Congress over the years, it would not surprise us that the Committee may hear objections even to this revised bill from some quarters. We believe the following possible complaints are unfounded.
First, it is conceivable that some will object to the fact that the bill would enshrine into law a cost-benefit requirement, which to these critics, reduces human lives to dollars and cents. In fact, the bill only requires that agencies conduct a cost-benefit analysis. Moreover, the definitions in Section 621 of the bill make clear that both costs and benefits consist of both quantifiable and nonquantifiable effects. This clearly means that if agencies are unable to quantify, let alone monetize, the value of a certain benefit--such as the social value of preserving a forest or a pristine body of water--then at the very least they can identify the estimated impact so that agencies, the Congress, and the public can compare it to the social cost of attaining that benefit. This is essentially what the Congress now does in appropriating funds for many, if not most, government programs, whose benefits often are unquantifiable but very real (as in the case of national defense).
A second, related concern may be voiced over the bill’s requirement that the regulatory analyses become part of the record that courts review if rules are challenged. Is this not a backdoor way of sneaking a generic cost-benefit requirement into all rulemaking? We do not believe an across-the-board cost-benefit standard is an evil; to the contrary, it is to be welcomed as a way of leading to more rational and consistent regulatory outcomes. Indeed, in 1996, the American Enterprise Institute published A Statement of Principles, which endorsed the use of cost-benefit analysis in setting environmental, health, and safety regulations and which was authored by a distinguished group of economists, including Nobel Laureate Kenneth Arrow.5 We believe this statement to be representative of the views of the overwhelming majority of professional economists familiar with regulatory issues.
Nonetheless, it should be clear that S. 981 does not mandate a cost-benefit standard where none currently exists in a particular statute. Instead, the bill only requires that the cost-benefit analyses and the risk assessments (and peer reviews) become part of the record which the court reviews to determine whether the "arbitrary and capricious" standard has been satisfied. This language does not change the underlying substantive statutes, some of which may (unfortunately, in our view) limit the consideration of costs in setting the actual standard.
A third possible objection may be that the bill’s regulatory analysis requirement, coupled with a mandate that the analyses be peer reviewed, could lead to "paralysis by analysis," delaying the implementation of rules vital to protect the public health and safety. One quick response to this argument is that the federal agencies have been doing these analyses for about two decades and certainly by now have acquired the expertise and experience to carry them out in an expeditious fashion. Moreover, peer review is commonplace in academic circles and at think tanks, where the stakes are often much smaller than they are for the billion-dollar regulations routinely written by federal officials. Smart agencies will factor peer review into their schedules to minimize the potential delay. Indeed, we would note that our institutions routinely send draft manuscripts by our scholars to outside experts with deadlines to respond in four to six weeks (in some "rush" cases, even more quickly). There is no reason why agencies can’t do the same thing. 6 It is not asking too much of our government to get an independent review of the scientific underpinnings of its major regulations before they are adopted.
In fact, there is a good case to be made that peer-reviewed regulatory analyses actually will expedite the implementation of rules that are vital to protecting the environment, health, and safety, such as those affecting meat inspections, tobacco sales to children, and the removal of lead from the environment. As the members of this Committee are well aware, regulatory proposals of this kind often can be quite controversial, enlisting the strong opposition of the parties to be regulated. However, rules that are supported by well-done regulatory analyses that have been peer reviewed are much more likely to withstand that opposition, either in Congress (which may face pressure to thwart regulators from taking necessary action) or in the courts. Indeed, well-done analyses actually can deter legal challenges because rules need only pass an "arbitrary and capricious" test, which should be easy for an agency to meet if its regulatory analyses have passed peer review with flying colors.
Conclusion
In sum, S. 981 reaffirms two important principles: first, that the public has a right to know the basis for regulatory decisions; and second, that regulatory decision making can be improved through careful analysis of the benefits and costs of different regulatory proposals. We believe this bill will help ensure that appropriate regulatory activity is carried out in a rational, cost-effective manner. It deserves prompt action by this Congress.
Notes
[1] Robert W. Hahn is a Resident Scholar at the American Enterprise Institute and a Research Associate at the John F. Kennedy School of Government, Harvard University. Robert E. Litan is Director of Economic Studies and the Cabot Family Chairholder of Economics at the Brookings Institution. The views expressed here are our own and not necessarily those of the institutions with which we are affiliated.
[2] In addition, both of us have had experience reviewing regulatory analyses and proposals while we served on the staff of the Council of Economic Advisers.
[3] Robert W. Crandall, Christopher DeMuth, Robert W. Hahn, Robert E. Litan, Pietro S. Nivola, and Paul R. Portney, An Agenda for Federal Regulatory Reform (Washington, D.C.: American Enterprise Institute and The Brookings Institution, 1997) and Robert W. Hahn and Robert E. Litan, Improving Regulatory Accountability (Washington, D.C.: American Enterprise Institute and The Brookings Institution, 1997).
[4] The study results are reported in Tammy O. Tengs and John D. Graham, “The Opportunity Costs of Haphazard Social Investments in Life-Saving,” in Robert W. Hahn, ed., Risks, Costs, and Lives Saved: Getting Better Results from Regulation (New York and Washington, D.C.: Cambridge University Press and AEI Press, 1996), pp. 177-80.
[5] Kenneth J. Arrow, Maureen L. Cropper, George C. Eads, Robert W. Hahn, Lester B. Lave, Roger G. Noll, Paul R. Portney, Milton Russell, Richard Schmalensee, V. Kerry Smith, and Robert N. Stavins, Benefit-Cost Analysis in Environmental, Health, and Safety Regulation: A Statement of Principles (Washington, D.C.: American Enterprise Institute, 1996).
[6] It is also worth noting that, in describing the risk assessment requirement, Section 624(B)(ii) of S. 981 states that the assessment “shall be commensurate with the significance and complexity of the decision and the need to adequately inform the public, consistent with any need for expedition, and designed for the nature of the risk being assessed” (emphasis added). This language allows agencies substantial flexibility in carrying out their risk assessments, which in any event, are already implicitly embodied in the regulatory analyses currently required by the Executive Order (but which the language of S. 981 would make more explicit).
Robert W. Hahn is a resident scholar at AEI.
