Regulatory Reform: Assessing the Government's Numbers

Abstract

This paper provides the most comprehensive assessment to date of the costs and benefits of federal regulatory activities. The assessment, based on the government's own numbers, shows that the net benefits for final regulations promulgated from 1981 to mid-1996 approach a net present value of $1.6 trillion. The analysis also shows that the government can significantly increase the net benefits of regulation. Less than half of final regulations pass a neutral economist's benefit-cost test. Net benefits could increase by approximately $280 billion if agencies rejected such regulations. Net benefits could also increase if agencies replace existing regulations with more efficient alternatives, or if agencies substantially improve regulatory programs.

The efficiency of official regulations varies by agency and by the type of risk the regulation is designed to reduce. Regulations from the Department of Transportation comprise over half of the total net benefits of final regulations, although they account for less than 10% of all regulations. The net benefits of regulations from the Environmental Protection Agency account for only a third of total net benefits, primarily because of 19 Clean Air Act regulations with high net benefits, although two-thirds of all regulations are EPA regulations. On average, regulations that reduce cancer risk are less efficient than other social regulations, and EPA cancer regulations appear less efficient than other cancer regulations. Regulations that reduce the risk of car, fire, or work-related accidents are generally more efficient than regulations that reduce the risk of cancer and heart disease. The study also shows that the efficiency of regulations ha not declined over time, as some scholars suggest. Furthermore, the introduction of formal regulatory oversight by the OMB does not appear to influence the cost-effectiveness of regulations.

The paper shows that agency compliance with regulatory impact analysis requirements in Reagan's Executive Order 12291 and Clinton's Executive Order 12866, the basis for agency estimates of the costs and benefits or regulation, is usually superficial. As a result, the quality of such analyses is generally poor. Partly because of the poor quality of analyses, it appears that agencies do not often use the analyses to improve regulatory outcomes. If Congress and the White House are serious about regulatory reform, they must cooperate to enforce the regulatory impact analyses requirement. Successful enforcement requires high-level political support, statutory language requiring all agencies to adhere to established principles of economic analysis, and rigorous review of agency analyses by an independent entity. At this time, it is unclear whether law makes are willing to exert the political muscle necessary to achieve real reform.

Keywords: costs and benefits, regulations, regulatory activities, present value, diminishing marginal returns, regulatory, executive order 12291, executive order 12866

JEL Classification: R52, R38