Background on Regulatory Cost Issues
The aggregate cost of Federal regulations
The well-known Crane & Crane study conducted for the Small Business Administration estimates the total annual compliance cost for all Federal regulations at $1.7 trillion. (TRILLION not billion).
· The Crane estimate is for all regulations in effect as of 2008 (study was released in 2010). Regulations adopted since 2008 will result in higher total cost.
· This cost estimate was developed by adding together the estimated costs of four categories or types of regulation: economic regulations (estimated at $1.236 trillion); environmental regulations ($281 billion); tax compliance ($160 billion); and regulations involving occupational safety and health, and homeland security ($75 billion). Note: Economic regulations include regulations on banks, securities, financial transactions, international trade, and labor markets. For example, the Fair Labor Standards Act is an economic regulation because it regulates labor market transactions. Similarly, affirmative action rules are economic regulations.
· Had every U.S. household paid an equal share of the federal regulatory burden, each would have owed $15,586 in 2008. While all citizens and businesses pay some portion of these costs, the distribution of the burden of regulations is quite uneven. The portion of regulatory costs that falls initially on businesses was $8,086 per employee in 2008. Small businesses, defined as firms employing fewer than 20 employees, bear the largest burden of federal regulations. As of 2008, small businesses face an annual regulatory cost of $10,585 per employee, which is 36 percent higher than the regulatory cost facing large firms (defined as firms with 500 or more employees).
· The Crane estimate reflects compliance cost for all existing Federal regulations, including reporting and recordkeeping requirements of all types (including tax forms and records).
· The Crane study shows that regulations have a major effect on the economy: $1.7 Trillion is about 12% of Gross Domestic Product. The interpretation is that we give up about 12% of goods and services that we would otherwise have had available for consumption or investment in order to “buy” the “benefits” of regulation. The Crane study does not estimate the value of benefits of regulations.
· Certainly there are benefits from regulations, and no one is advocating elimination of all regulations, but the point of focusing on the cost of regulations is that with such a major “expenditure” of resources we need to be alert to the potential for waste and duplication.
o We need to look carefully at all existing and proposed new regulations to ensure that their purposes are justified and are worth the cost.
o Thorough and accurate analysis of regulatory costs and impacts can help to achieve policy objectives in an efficient, less costly way.
· The Crane study is not based on an examination of detailed costs of each individual regulation. It is based primarily on a macro-economic analysis comparing GDP performance across countries that have different degrees of regulation.
· The Crane study has generated criticism, but it remains the only comprehensive estimate of regulatory economic impact. Even if it is off the mark by half (which is doubtful) the annual cost of regulations would still be significant and, therefore, worthy of careful attention to eliminate waste and excessive burdens. Many critics cite lower numbers from Office of Management and Budget (OMB) reports to Congress on the costs and benefits of major regulations.
· The Crane study differs from the reports produced by OMB as it only examines the cost of regulations. In other words, although regulations may produce benefits (such as healthier air to breathe if emissions are reduced), the Crane study does not estimate the monetary value of regulatory benefits to society.
· OMB’s most recent report to Congress on regulatory costs and benefits estimates that the annual cost of MAJOR rules adopted between 2001 and 2011 was about $53 billion:
o BUT this is based only on the small number of regulations that OMB reviewed based on individual agency calculations of costs over $100 million per year for each rule. Because of the limitation of its analysis to major rules, OMB looked at only 531 of the 38,000 new rules adopted over the last ten years – 1.4% of the 38,000 new rules.
o OMB ignored compliance costs for 98.6% of the new rules adopted over the last ten years; and
o OMB ignored the compliance costs for 100% of the thousands of pages of regulations that were already in place prior to 2001.
o There is a major flaw in OMB’s assessments of regulatory costs: OMB assumes that after 10 years a regulation has been “absorbed” and there is no noticeable compliance cost to the economy. This assumption ignores the reality that regulatory compliance continues to use citizens’ scarce time and other resources: If a rule requires employers to pay for chicken inspectors, the cost of hiring chicken inspectors is still a real annual regulatory cost to society today, regardless of when the rule was first adopted.
o The Crane study addressed the cost of all rules-- regardless of when adopted.
o If the 37,469 rules adopted in the last 10 years that OMB omitted from its analysis each had a cost of just 10% of the $100 million threshold cost of OMB’s 531 “major” rules (i.e., $10 million per year per rule), the aggregate annual cost of rules adopted during the last 10 years would be $432 billion -- and that would still be leaving off the cost of currently effective regulations that were already on the books in 2001.
o From this perspective the Crane estimate for the cost of all regulations seems plausible. The new rules adopted over the last 10 years account for 20% (one-fifth) of the total page count of the Code of Federal Regulations. If the annual cost for that one-fifth of the rules was $432 billion then the cost of all the rules on the books could be $2.16 trillion (=5 x $432 billion) -- even more than the Crane estimate.
· The growth of regulations over time
o Over the past 10 years Federal agencies have issued over 38,000 new final rules, adding to or amending the vast body of regulations already on the books.
o In 2011, the Code of Federal Regulations comprised 169,301 pages, an increase by a factor of 2.4 from the 71,244 pages in 1975.
o Since 2001 the page count has increased from 141,281, an increase of 20% in 10 years.
o For 2009 – 2011 (the first three years of the current administration), the page count has grown by 11,327 pages -- a 7.2% increase over three years or 2.4% per year.
Errors and Omissions in Calculation of the
Costs of New Rules by Federal Agencies in the Labor Area
Federal agencies covered by Executive Orders 12866 and 13563 are required to estimate, to the extent feasible, the costs and benefits of proposed and final regulations, and to submit their estimates to OMB’s Office of Information and Regulatory Affairs (OIRA) for review if the estimated cost exceeds $100 million per year. The $100 million threshold triggers an OMB requirement for full cost and benefit economic analysis. The $100 million per year threshold is also important for compliance with laws that govern the regulatory process, like the Unfunded Mandates Act and the Congressional Review Act. The $100 million threshold triggers obligations and reviews that agencies must undertake for “major” regulations.
· All regulations require some analysis of costs just to determine whether or not the $100 million threshold obligations are triggered.
· Even if the cost is clearly under $100 million, examination of likely compliance cost is useful to help an agency design a regulation that is efficient and not unnecessarily burdensome.
The Chamber’s examinations of proposed regulations from the Labor Department and related agencies have revealed that agencies often omit significant regulatory compliance cost elements and erroneously underestimate others. The result is that many regulations that should have been classified as economically significant were left off of that list. OMB review was absent or more limited in such cases and Congress did not get the advance notice to which it is entitled under the Congressional Review Act.
Examples of recent errors and omissions in regulatory cost calculations by Federal agencies in the labor area include:
1. DOL’s Office of Labor Management Standards (OLMS) estimated the cost of its proposed “Persuader” regulation at less than $1 million per year. DOL’s estimate was not based on any factual evidence from field surveys or other empirical sources. USCC’s analysis, based on real data from real companies, showed that the proposed rule could cost employers over $900 million the first year of implementation and between over $286 million every year thereafter.
2. DOL’s Office of Federal Contacts Compliance (OFCCP) revised affirmative action plan requirements in related two rules (veterans’ affirmative action plans and disabled workers affirmative action plans) and estimated the combined annual cost of these two regulations at less than $100 million per year. The most egregious flaw in the DOL analysis was the total omission of the cost of holding newly required annual affirmative action plan training sessions which 22 million or more employees of companies with any government contract must attend. The combined costs of these holding these sessions alone would amount to over $700 million per year – a cost that DOL omitted. It seems that the agency that enforces wage and hour laws “forgot” that employees must be paid for their time to attend regulatory-mandated job-related training meetings. The cost is even greater if one considers the lost productivity of pulling workers off the production line to attend these government-required sessions. Correction of other errors and omissions bring the combined costs of these two proposed regulations to more than $2 billion per year.
3. Outside of the Department of Labor, the National Labor Relations Board has proposed (and recently finalized) new rules that will add burdens to employers faced with union organizing campaigns. The NLRB “ambush election” regulation was hurried through the regulatory process in record short time, and NLRB did not give sufficient consideration to the cost impacts of its proposal – especially on small business. NLRB seriously underestimated the cost of the proposed rule by limiting its analysis to an estimated 6,000 firms that are subject to union election petitions on average each year, but ignored the reality that no employer can predict whether or not it will be one of those petition recipients. The effect of the rule is to force every one of 5 million employers to prepare in advance for the possible receipt of a union election petition and to meet the new requirements by learning new regulations and compiling information needed to respond to a possible union petition. Even a small preparation cost (e.g. $1,000 per year) applied across 5 million employers would amount to a $5 billion compliance burden. NLRB claimed that there would be no significant cost.
4
September 7, 2012