Setting the Record Straight: The Crain and Crain Report on Regulatory Costs
Center for Progressive Reform White Paper No. 1103
15 Pages Posted: 23 Apr 2011
Date Written: February 8, 2011
Critics of health, safety, and environment regulation have sought to buttress the case against regulation by citing a 2010 report by economists Nicole Crain and Mark Crain called The Impact of Regulatory Costs on Small Firms. Among the Crain and Crain report’s findings is one that has become a centerpiece of regulatory opponents’ rhetoric: the “annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008.”
It’s easy to see why the anti-regulatory critics have seized on the Crain and Crain report and its findings. The $1.75 trillion figure is a gaudy number that was sure to catch the ear of the media and the general public. Upon examination, however, it turns out that the $1.75 trillion estimate is the result of transparently unreliable methodology and is presented in a fashion calculated to mislead.
This report points out the severe flaws with the effort by Crain and Crain to estimate total regulatory costs. These flaws include:
Omitted benefits of regulation. A discussion of regulation is inherently incomplete – and distorted – if it focuses on costs without also considering benefits. The Crain and Crain report simply ignores the benefits of regulation, focusing solely on one half of the equation.
Questionable assumptions and flimsy data. The report’s estimate of “economic regulatory” costs – financial regulations, for example – which account for 70 percent of the total regulatory costs, is not based on actual cost estimates. Instead, this estimate is based on the results of public opinion polling concerning the business climate of countries that has been collected in a World Bank report.
Opaque calculations. Contrary to academic and government norms, Crain and Crain do not reveal their data or show the calculations they used to arrive at their cost estimates. As a result, it is impossible to replicate their results, a flaw so significant it would prevent the publication of their paper in any respectable academic journal.
Slanted methodology. The Crain and Crain report suffers from several methodological problems, all of which tilt the results towards an overstatement of regulatory costs.
Overstated costs. To estimate the cost of non-economic regulation, Crain and Crain almost always used the agency estimates of such costs that were submitted to OMB. Although OMB presents these costs as a range, Crain and Crain always used the upper bound estimate, effectively eliminating the agencies’ careful efforts to draw attention to the uncertainties in these calculations. Moreover, cost estimates are typically based on industry data, and regulated entities have a strong incentive to overstate costs in this circumstance.
Peer review rendered meaningless. The peer review process used by the SBA Office of Advocacy does not support the reliability of the report. Only two people examined the document. The authors ignored a significant criticism raised by one of the two reviewers concerning their estimate of economic regulatory costs. As for the second person, the entire review consisted of 11 words.
This report concludes that the Crain and Crain report is sufficiently flawed that it does not come close to justifying regulatory reform efforts, re which seek to limit protection of people and the environment. If Crain and Crain had used a more straightforward and generally accepted methodology, they likely would have reached a figure that was several orders of magnitude smaller. And, if Crain and Crain had properly considered regulatory benefits, they likely would have found that regulation is a net economic plus for society.
Keywords: regulatory process, regulatory reform
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