If It Ain't Broke - Don't Regulate It; W. Brough

The federal government has regulations that affect almost every facet of daily life. Unfortunately, in cases such as the McCurdy Fish Co., regulations do not al ways benefit the public. Currently, the price tag for federal regulations is more than $500 billion per year-over $5,000 per house hold.2 This is roughly equivalent· to the typical family's federal income tax burden. Unlike the income tax, however, regula tions are hidden taxes that do not receive the public scrutiny of the typical tax hike. In stead, businesses face higher costs of pro duction, American companies have a tougher time competing in a global econ omy, and consumers pay more for goods and services. Proponents of regulation arMr. Brough is with Citizens/or a Sound Economy in Washington, D.C. Don't gue that federal regulations provide impor tant safeguards that justify the costs of the regulatory burden. 3 If, in fact, federal reg ulations generated $500 billion in benefits each year, critics of regulation would be hard-pressed to make a case for reducing regulations. But what are the benefits relative to the costs-of a hazardous waste cleanup that requires the dirt to be so clean that a child could eat one-half teaspoon a month for 70 years and not develop cancer?4 And how can the benefits of hazardous waste cleanups justify the costs of Super fund when 36 cents out of each of the $11 billion spent by the private sector through 1991 went to legal fees rather than to clean ing up waste sites?5 There are a number of legitimate concerns that can be raised when discussing federal regulations and regulators. But attempts to make government regulators more respon sive to the public's concerns have generated staunch resistance among environmental ists and other public interest groups. Last year, these groups mounted a major cam paign to defeat what they dubbed the "un holy trinity": requirements for cost-benefit analysis and risk assessment, stronger pro tections for private property rights, and restrictions on unfunded mandates imposed by the federal government on states and local communities.

In response to these concerns, Congress is considering an expansive regulatory re389 390 THE FREEMAN • JUNE 1995 form agenda. Perhaps the most important elements of regulatory reform are the use of cost-benefit analysis and risk assessment, tools that would require a careful assess ment of the impact of federal regulation in order to eliminate unnecessary or even counterproductive regulations. Cost-Benefit Analysis Requiring federal agencies to assess the costs and benefits of regulations is not new.6 President Ronald Reagan formalized the regulatory review process through Execu tive Order 12291, which gave the Office of Management and Budget the authority to review agency regulations to ensure that the benefits of regulations were commensurate to their costs. Simply put, the executive order proviQed guidelines to the federal agencies to ensure regulations met certain minimum standards. First, agencies were asked not to regulate unless they had suffi cient information. Second, agencies were to choose the least expensive method for meet ing a regulatory objective. Finally, agencie§ were not to regulate in those instances where the benefits of regulation did not exceed costs.

These guidelines for regulatory review had an immediate impact on the level of federal regulation. Direct measures of reg ulation are difficult to identify but a useful proxy is the number of pages in the Federal Register. The page count dropped from 87,012 pages in 1980 to 47,418 pages in 1986.7 Efforts to rationalize the regulatory burden proved beneficial to consumers as well. Economic regulatory reforms en hanced consumer welfare substantially-in the transportation sector alone, consumer welfare increased by more than $30 billion.8 However, these trends reversed in 1986as Congress mounted pressure for additional regulations and as agencies learned to "game" the system. Federal Register pages now have climbed to 69,688 pages-the highest level since 1980. In 1991, rules reviewed by OIRA had reached 2,523.9 The price tag of final major rules-those costing more than $100 million, or those with significant impact-jumped more than 57 per cent from 1991 to 1992.10 Moreover, Presi dent Clinton, upon entering office, altered the regulatory review process in a way that provides agencies with more discretion; the review procedures have also changed so that fewer rules are sent to the Office of Management and Budget (OMB). At a time of expanding agency authority and weak ened regulatory oversight, the Clinton ad ministration released the Regulatory Plan and Unified Agenda of Federal Regula tions, which identifies more than 4,300 rule makings now underway at federal agencies.

Risk Assessment In recent years, health, safety, and envi ronmental regulations have constituted the bulk of growth in the regulatory burden. The Environmental Protection Agency's own estimates suggest that environmental regu lations alone willcost more than $160billion annually by the year 2000.11 Risk assess ments have been in use by a number of agencies, from the EPA to the Department of Defense. However, the analysis is uneven at best, and important assumptions often lie hidden in the assessment. Currently, many risk assessments use extremely conserva tive assumptions that provide only an upper bound estimate of risk. In one case, the exposure level at the heart of a regulation is based on a resident that is "assumed to live 200meters from an industrial source of toxic air pollution breathing maximum predicted outdoor concentrations of a single chemical for 70 years, 24 hours per day. ,,12 This sketch of a hypothetical individual is hardly a description of the average person.

In addition to providing better informa tion for cost-benefit analysis, risk assess ment is an important tool for ensuring that scarce resources are not misallocated. We do not live in a zero-risk society; all human endeavors involve risk. Costly regulations that provide trivial reductions in risk divert resources away from more imminent dan gers. Consider, for example, a hazardous materials listing· requirement for a wood preservative. OMB has estimated that this IF IT AIN'T BROKE-DON'T REGULATE IT 391 regulation will divert one statistical death at a price of $5.7 trillion. 13 Avoiding such excessive regulations would allow consum ers to address more significant risks they face in their daily lives. It is important to remember that in a world of limited resources excessive spending on trivial risks may expose the public to new risks in other areas. Such "risk-risk" com parisons must be taken into account when determining the impact of regulations. For example, a regulation requiring parents to use a child safety seat for young children when flying may have the unintended effect of increasing risks to the public. The child safety seat requires families to purchase an extra ticket, causing more people to opt for driving-a far riskier activity than flying.

Another important factor to consider is the relationship between health and wealth. In general, wealthier people live longer and enjoy a higher quality of life because they have the resources necessary to purchase health care, more nutritious foods, and so forth. The costs imposed by regulations can reduce income and employment, leading to lower standards of living that could offset any potential benefits from the regulation. In fact, Peter Huber has stated that, "For a 45-year-old man working in manufacturing, a 15 percent increase in income has about the same risk reducing value as eliminating all hazards-everyone of them-from his workplace. ,,14 A number of academic stud ies have confirmed this relationship between health and wealth. 15 Costly regulations that do not address significant risks can have adverse effects on overall public health by reducing income and diverting resources from more important uses.

Why Reform Is Needed Reducing regulation makes good sense. Consider the example of Superfund. Origi nally established as a $1.6 billion trust fund to clean up toxic waste sites, the Superfund program now makes up 25 percent of the EPA's $6 billion budget. The typical cleanup currently costs $25 million, and based on current expenditures, the total costs of the program over the next 30 years will exceed $150 billion, on top of any legal fees in volved. 16 Unfortunately, many of the sites targeted by the EPA for cleanup do not pose great threats to the community. Analysis that exaggerates the risks by up to 10,000 times is used to identify future Superfund sites. Worst-case scenarios are used, such as the child eating dirt for 70 years. Conse quently, much of the risk identified by the EPA is imaginary, based on assumptions of fictitious, "maximum exposed individuals" (that is, the dirt-eaters). One study of 77 Superfund sites found that 92 percent of the cancer risk identified by the EPA was future risk that was dependent on the agency's assumptions about future behavior and yes, eating dirt. 17 To counter the "better safe than sorry"

arguments, it is important to emphasize that each cleanup has an average price tag of $25 million. As it stands, EPA uses conservative assumptions even in those instances where the possibility of human exposure is remote. The result, as Keith Schneider has stated, is high cleanup costs that provide few benefits: "More than ten years ago the federal gov ernment adopted the view that when there is any doubt, it is better to take the prudent approach than do nothing. But a decade later, the economic costs of this policy are painfully clear while the benefits remain largely unmeasurable. ,,18 Superfund is only one federal program. The federal government regulates every thing from airline safety to pesticide use. More effective cost-benefit analysis and proper risk management will help avoid situations where costly regulations offer few benefits to the consumer. Sound science and objective information provide a more rational approach to regulation than a sys tem driven by political pressure or media hype.

Conclusion Protecting the environment and improv ing health and safety are not inexpensive. These activities place a significant burden on the American economy. The expansive 392 THE FREEMAN • JUNE 1995 role of federal regulators was not envisioned by the Founding Fathers and there are only limited institutional constraints on their ac tivities. Government bureaucracies are not constrained by the incentives of the market place; regulators do not have the particular knowledge of time and place that is gener ated by market activities. A requirement to . eliminate regulations that provide no net benefits introduces an element of account ability that restricts bureaucratic discretion. Regulatory reforms such as risk assessment or cost-benefit analysis are important first steps toward deregulation-and much needed protection from unconstrained fed eral regulators. D 1. See, Brent Bowers, "FDA Regulatory Tide Swallows Up McCurdy Fish Co.," Wall Street Journal, May 18, 1993, p.

B-2. 2. See Thomas Hopkins, "Costs of Federal Regulations," in Regulatory Policy in the United States and Canada, Roch ester Institute of Technology, 1992. 3. The recent "Assault on Safety," by Public Citizen, Washington, D.C. (February 1995) provides a summary ofthis viewpoint. 4. James Lis and Melinda Warren, "Reforming Super fund," Policy Study Number 118, Center for the Study of American Business, February 1994. 5. "Fixing Superfund: Getting the Formula Right," Re search Brief, RAND, Institute for Justice, Santa Monica, California (July 1994). 6. See the Office of Management and Budget, Regulatory Program of the United States Government, April 1, 1988 March 31, 1989, U.S. Government Printing Office, Washing ton, D.C. (1989) for a history of the regulatory review process. 7. Regulatory Information Service Center, Washington, D.C. 8. See Clifford Winston, "Economic Deregulation: Days of Reckoning for Microeconomists," Journal of Economic Literature, vol. 31 (September 1993), pp. 1263-1289.

9. Office of Management and Budget, Regulatory Pro gram of the United States Government, April 1, 1992-March 31,1993, U.S. Government Printing Office, Washington, D.C. (1993). 10. Office of Management and Budget, Budget Baselines, Historical Data, and Alternatives for the Future, U.S. Gov ernment Printing Office, Washington, D.C. (1993). 11. U.S. Environmental Protection Agency, Environmen tal Investments: The Costs of a Clean Environment: A Sum mary, December 1990, Washington, D.C. 12. Quoted in "A Historical Perspective on Risk Assess ment in the Federal Government," Center for Risk Analysis, Harvard School of Public Health, March 1994. 13. Office of Management and Budget, Regulatory Pro gram of the United States Government, April 1, 1992-March 31, 1993, U.S. Government Printing Office, Washington, D.C. (1993). 14. Quoted in Aaron Wildavsky, "Riskless Society," in The Fortune Encyclopedia of Economics, David Henderson, ed. (New York: Warner Books, 1993).

15. For a survey of the health-wealth literature, see, Office of Management and Budget, Regulatory Program ofthe United States Government, April 1, 1992-March31,1993, U.S. Gov ernment Printing Office, Washington, D.C. (1993). 16. James Lis and Melinda Warren, "Reforming Super fund," op. cit. 17. See James Hamilton and W. Kip Viscusi, "Human Health Risk Assessments for Superfund, " paper prepared for New York University School of Law Conference on Reautho rizing Superfund, December 1994. 18. Keith Schneider, "How a Rebellion over Environmen tal Rules Grew from a Patch of Weeds," New York Times, March 24, 1993, p. 1. Summer Course in Market Economics July 31-August 10, 1995 Lecturers: Dr. Ronald Nash on the philosophy of freedom Dr. Burt Folsom on American economic history Mr. Steve Moore on the growth of government in the 20th century Dr. John Robbins on principles of economics T he Freedom School at College of the Southwest is sponsoring an inten sive two-week course in economics for both the general public and stu dents who wish to earn three hours toward a degree. Tuition is very low: $390. For more information contact Dr. John Robbins at 1 (800) 530-4400 or write The Freedom School, College of the Southwest, 6610 Lovington Highway, Hobbs, NM 88240.