The Benefits and Costs of Federal Regulation

WHAT?

On March 23, 2005, the federal Office of Management and Budget (OMB) published a Federal Register notice of its latest draft report to Congress on the benefits and costs of federal regulation. The notice followed a March 9 press release touting the Administration's report "Regulatory Reform of the U.S. Manufacturing Sector." The full draft report to Congress is here.

These reports are widely used by the Administration, Congress, and myriad interest groups to advance their respective policy agendas. As we become aware of them, we will update this post to include relevant links to other websites. Readers are encouraged to send links.

WHO?

OMB is the staff office within the White House that is responsible for managing the federal budget and overseeing its vast array of regulatory activities. This draft report was prepared by OMB's Office of Information and Regulatory Affairs (OIRA), but it represents the position of OMB generally on regulatory issues.

OIRA has a small political leadership and about 50 professional civil service staff members who work for the president irrespective of which political party is in power. OMB as a whole is about 10 times as large, with similar ratios of political appointees and career staff.

OIRA implements the White House's centralized regulatory oversight program. Centralized oversight was established by President Reagan via Executive order 12,291 (February 17, 1981) and modified by President Clinton via Executive order 12,866 (October 4, 1993). As the federal government's regulatory overseer, OIRA has broad and deep expertise concerning the consequences (both good and ill) of federal regulation.

WHY?

OMB is required to issue this report annually by the "Regulatory Right-to-Know Act" (Section 624 of the Treasury and General Government Appropriations Act, 2001). Congress established this requirement in the apparent hope that OIRA would generate an independent and objective accounting of the consequences of federal regulatory activity.

OIRA's many previous reports have complied at best with the letter but never with the spirit of this law. OIRA has generally suppressed the special knowledge gleaned from reviewing draft proposed and final regulations prior to publication, in deference to the views of the Executive branch departments and agencies it oversees. There are a number of reasons for this, including:

• Presidents (of both parties) generally do not like to display their administration's dirty laundry in public. OIRA staff work for the president; their advice is confidential and properly exempt from public disclosure. Thus, even when OIRA officials or professional staff vigorously disagree, it is extremely unusual for the Office to publicly contradict the views expressed by Executive branch departments and agencies over which the president has Constitutional (if not always actual) authority.
• Congress failed to write the law in a way that achieves its stated purposes. The law did not require OIRA to disclose its own views, and it is not clear how the law could have been written to do so. Neither was the law written to provide OIRA the tools to evaluate the relative quality of agencies' benefit-cost analyses against analyses prepared by others.

We will be examining the draft report to discern any instance in which OMB may be subtly telegraphing views at odds with the agencies it supervises.

In addition, we will be looking at other aspects of the draft report, including:

• Does the draft report adhere to OMB's own standards for information quality? In February 2002 OMB issued government-wide guidelines for information quality. Chapter III of the draft report discusses how well agencies have adhered to these guidelines. However, the Chapter appears to be silent with respect to OMB's own compliance.
• Which parts of the draft report present valid and reliable information, and which parts do not? A consistent pattern in previous reports has been undue emphasis on unreliable estimates of the aggregate benefits and costs of federal regulation. Aggregate estimates cannot be reliable if they are constructed from unreliable sources, nor are they useful if they have large gaps in coverage.
• What are the merits of OMB's specific suggestions for regulatory reform? In previous reports OMB has coyly refrained from offering specific suggestions for reform. The separate report on regulatory reforms for manufacturing clearly represents a significant departure from past practice. In addition, OMB has asked for public comment on a handful of specific procedural and analytical improvements, and we will offer our views on those as well.

WHERE?

Public comments on the draft report to Congress must be submitted to OMB by June 21, 2005. If you do not comment, your views will be ignored.

REGULATORY CHECKBOOK

We will be posting a series of comments as we prepare our public comments for submission to OMB. Readers are welcome to incorporate our views into their own public comments. Citations to our original work would be appreciated.

Welcome to Regulatory Checkbook

Welcome to RegCheck, a blog on regulatory issues sponsored by Regulatory Checkbook, a nonprofit and nonpartisan organization founded in 2001 whose mission is to enhance the quality of science and economic analysis used as the foundation for regulatory decision-making.

Unlike most public policy oriented nonprofits, Regulatory Checkbook does not engage in advocacy with respect to substantive public policy issues. Our advocacy is limited to:

• The use of unbiased scientific information, where unbiased means policy-neutral. Much of the scientific information used in regulatory decision-making has within it embedded and usually undisclosed public policy preferences. Information containing embedded policy preferences tends to lead to policy decisions that tilt in favor of those preferences.
• Technically correct economic analysis of the consequences of regulatory decisions, including the consequences of taking no action. Our framework is explicitly and unapologetically benefit-cost analysis properly applied, with rigor appropriate to the scale and scope of the consequences of regulatory decisions. By correct we mean free of material error in the application of fundamental concepts. We define a material error as one so great that, if corrected, it would alter a decision-maker's choice of alternative presuming that he or she is motivated to seek the greatest possible net social benefits.
• The use of information that meets appropriate data quality standards. Because there are no scholarly standards for information quality in these areas, we adhere generally to the government-wide guidelines established in 2002 by the federal Office of Management and Budget. OMB established a flexible regime in which the quality of information disseminated by federal agencies must satisfy standards of utility, integrity and objectivity that rise with the scale and scope of the information's significance.
• The use of peer review procedures appropriately designed for public policy applications. Traditional scholarly peer review is intended to achieve very limited purposes -- i.e., decide which grant proposals to fund and which scientific papers to publish. Fundamental "correctness" is not a criterion used in scholarly or academic peer review. Nevertheless, governments have borrowed these procedures for an altogether different purpose -- i.e., determining which inferences and conclusions drawn from vast scientific and economic literatures are "correct".
• The use of oversight procedures that (a) reward high-quality scientific data, economic analysis and logical reasoning, and (b) enhance the likelihood that material errors in science and economics will be detected and removed. Effective oversight requires, inter alia, broad public access to data, models and analytic methods so that appropriately trained professionals and scholars can reproduce (and perhaps improve upon) regulatory agency work products prior to their use in regulatory decision-making. Oversight procedures that deny public access to critical information or adequate review time inherently fail these tests of public accountability.

Regulatory Checkbook has produced a considerable amount of information on these topics, but little of it is widely available. I will be posting this archival information as time permits.

N. B. When we began conducting policy assessments and benefit-cost analyses in the 1970s, calculations were done by hand and statistical analyses required overnight use of a university's mainframe. An IBM Selectric was considered the ultimate in word processing capability. The best way to describe the changes that have occurred over the past 30 years may be to shamelessly borrow from economist Ben Stein, who said in Ferris Buehller's Day Off: "Wow."

This blog represents a controlled scientific experiment testing the hypothesis that old dogs cannot learn new tricks. In the great tradition of scientific method, we hope to falsify that hypothesis.