Examining the U.S. Regulatory 'Budget'
Batkins, Sam, Brannon, Ike, Regulation
The nation's federal budget deficit gets a lot of attention from policy wonks and political commentators, and for good reason. Most people agree that the rapid rise in deficit spending in the last several years represents a genuine threat to our long-term economic well-being. But government affects the economy not only by taxing, borrowing, and spending, but also by telling businesses how they need to spend their money, via the issuance of regulations. This can have just as much of an effect on the economy as the government's fiscal policies. And just like government spending, the cost to the economy from the expanding regulatory state has been steadily increasing as well. In the last decade, regulations issued by the federal government have forced businesses, individuals, and various state and local governments to spend at least $570 billion on compliance--and probably a lot more.
While that number by itself is instructive, it's even more illustrative to look at where regulations direct private spending. We examined 10 years of data and more than 230 regulations issued during that period, and we found that the bulk of the costs of regulations involve mandates to improve energy efficiency, with various environmental edicts coming in second place. Together, these two categories account for roughly two-thirds of the economy-wide cost of complying with various federal regulations.
The data | For the costs of various regulations, we compiled the regulatory costs reported in the Federal Register, which is the most inclusive source that exists for federal government regulatory activity. However, it does have a couple of important holes.
For starters, independent federal agencies routinely omit quantified cost-benefit analyses in their regulations. They are free to do this because Executive Order 12866, which mandates that executive branch agencies conduct such analyses for "economically significant" regulations, does not apply to independent agencies. This omission results in some obvious lacunae; for instance, the reported costs of complying with various financial regulations comprise only $24.9 billion, or less than 5 percent of the total regulatory compliance costs. The Federal Communications Commission, Consumer Product Safety Commission, Office of the Comptroller of the Currency, and the new Consumer Financial Protection Bureau are among the independent agencies that do not have to estimate the costs imposed by their regulations.
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The other problem is that the agencies issuing the regulations are the ones tasked with estimating the costs and benefits. Given that the Office of Information and Regulatory Affairs has the power to return proposed rules to the agency and request that changes be made, the agencies have an incentive to do everything they can to inflate benefits and deflate costs to keep that from occurring. Thus, we suspect that a wholly inclusive, objective analysis of the costs of regulation would be significantly larger and skew more toward those areas of the economy that our government largely regulates through independent agencies.
And while we include the costs that regulations impose on federal, state, and local governments to implement new regulations, we do not consider the cost of maintaining the bureaucracy that creates those regulations in the first place--a cost that is not trivial. Susan Dudley of George Washington University and Melinda Warren of Washington University in St. Louis estimate that cost as roughly $59 billion, or enough to support nearly 300,000 regulators.
Below, we divide the regulations that we examined into six categories and rank the categories by aggregate cost.
Energy efficiency | It might surprise some readers that energy efficiency regulations, including several recent changes to the Corporate Average Fuel Economy (CAFE) standards, provide the top regulatory cost burden, especially given that the recently passed Affordable Care Act (ACA) and Dodd-Frank finance law promise to significantly increase regulatory compliance costs for businesses in the health care and financial services industries. …