Regulatory ‘Rithmetic

A frequent talking point (e.g., like this) in this year’s presidential campaign is about the economic burden of federal regulations.  Given this focus, I thought it might be helpful to wade into the arithmetic behind this burden and the ways in which any president might alleviate it in the coming years.  I focus on the two points in turn.

Question 1: How Much Does Regulation Cost Us?

In general, policymaking through regulation has very small direct costs to taxpayers.  (For example, the total direct federal spending on regulatory agencies in 2012 is estimated to be just shy of $60 billion. To gain some perspective on this (it’s less than 2% of estimated total federal spending in 2012, see my post here.)   The beastly proportion of the burden, then, is through the various individual costs of compliance, foregone economic activity, and misallocation of resources.

Mitt Romney’s campaign has placed an emphasis on regulatory reform.  In fact, his campaign literature (linked above, page 3) states that regulations impose an annual cost burden of $1.75 trillion.

Digression.  The graphic used in the Romney policy brief compares the regulatory cost number with “all income taxes,” but omits payroll and Medicare taxes from this number.  While payroll taxes have an income ceiling (applies only to income up to a little more than than $110K/year), Medicare taxes do not and, more importantly, both are calculated as a percentage of earned income.  Total revenue from these two sources in 2012 is projected to be $779 billion.  Thus, since traditional income taxes and corporate income taxes are projected to total about $1.4 trillion, the total income tax burden is really in the neighborhood of $2.2 trillion.  This reality is indirectly implied, actually, by the source for the Romney’s numbers, a report commissioned by the Small Business Administration which states “…U.S. federal tax receipts, which equaled 21 percent of national income in 2008…” (p.6).

So, where does the astronomical figure of $1.75 trillion come from? As mentioned directly above, the number comes from a report by commissioned by the Small Business Administration and authored by Nicole V. Crain and W. Mark Crain, professors at Lafayette College. (Note: a critique of the methodology and lack of transparency in the Crain & Crain report is presented here. While one can always criticize an empirical study of anything with a scope such as that of the Crain & Crain report, it is safe to presume that federal regulations are in fact costly.  Accordingly, I am interested here only in the applicability of this number to the 2012 elections.)

Total Cost of Regulations

It is important to note at the beginning that the cost estimated by Crain & Crain is an estimate of total annual costs from federal regulations.  That’s a big point.  After all, as the report makes clear, the number includes costs from regulations that were promulgated (i.e., imposed) years and even decades before the current Administration took office.  At one level, who cares…right?  Romney’s campaign is running on a platform of shrinking government, regardless of where it was birthed.  On the other hand, Romney is running against Obama, and the policy piece linked to above directly proposes that a first step toward eliminating this burden is the repeal of various statutes and regulations passed during Obama’s administration.  Here are some quotes (pp.4-5):

  1. Repeal Obamacare. Mitt Romney has laid out a specific plan for dismantling Obamacare even without the congressional majorities required to strike it formally from the books…
  2. Reform Financial Regulation. As president, Mitt Romney will also seek to repeal Dodd-Frank and replace it with a streamlined regulatory framework…
  3. Reform Environmental Regulation. As president, Mitt Romney will eliminate the regulations promulgated in pursuit of the Obama administration’s costly and ineffective anti-carbon agenda…
  4. Review and Eliminate Obama-Era Regulations. One of the greatest problems with the federal bureaucracy is that each incoming presidential administration leaves in place much of what its predecessor constructed. The result is layer upon layer of often unnecessary or inconsistent regulation. Mitt Romney will not allow that practice to continue. On his first day in office, Romney will order all federal agencies to initiate repeal of any regulations issued by the Obama administration that unduly burden the economy or job creation. (Emphasis added.  You know, for emphasis.)

My point is that the Romney campaign is (quite understandably) pointing the anti-regulatory finger at the policies of Romney’s opponent, President Obama.  But, the cost referenced is by no means entirely attributable to his opponent’s policies, a point I return to  below.  Furthermore, if one looks at the source for his data about the annual costs of federal regulations, it is made clear (p.6) that the $1.75 trillion number is for 2008: The findings in this report indicate that in 2008, U.S. federal government regulations cost an estimated $1.75 trillion…

Digression. I personally find it odd, in light of the promise to circumvent Congress in “repealing” (or is it “dismantling”?) Obamacare and then to promise (p.5) “to restore a greater degree of congressional control over the agency rulemaking process. Our Constitution calls for our democratically elected Congress to make laws and for the democratically elected president to approve them.”
I will not even go into the arcane aspects of how it is hard (for me at least) to see how one can go beyond the Congressional Review Act in this regard without a dramatic reinterpretation/reversal of Supreme Court precedent established in INS v. Chadha.  Rather, I will simply note that the policy piece explicitly endorses both executive branch circumvention of Congress in pursuit of regulatory reform and promoting the legislative branch’s pride of place in the approval of federal regulations.


How Much Has the Cost Increased During the Obama Administration?

Another source of information for the Romney policy piece is the Heritage Foundation. (I think the piece they are referencing is this one, but I’m not sure.  Happy to be corrected, but I think that’s right, even though this is an updated version. To be clear, the two are very similar and I will clarify which one I am quoting from when needed: the earlier one will be called S11 (for Spring 2011) and the updated one will be referred to as F11.)  In the S11 report, the authors state on page 1:

Overall, the Obama Administration imposed 75 new major regulations from January 2009 to mid-FY 2011, with annual costs of $38 billion. There were only six major deregulatory actions during that time, with reported savings of just $1.5 billion.

Okay—to be clear, and comparing apples to apples with respect to the total cost figure of $1.75 trillion, this amounts to an increase in total regulatory costs since 2008 of about 2.2%.  In the F11 report, the authors state (again, on page 1): 

During the first three years of the Obama Administration, 106 new major federal regulations added more than $46 billion per year in new costs for Americans.

With this new data, the percentage increase in annual regulatory costs since 2008 is now a little under 2.7%.  To put this in historical perspective: according to Table 12 of the Crain & Crain report, the estimated per-household cost of federal regulation increased at an annual rate of slightly more than 2.8% between 2000 and 2004. (The Crain & Crain report suggests that its 2008 estimates are hard to compare to those for 2004, 2000, and 1995.  Accordingly, I’ll simply directed interested readers to take the time to look at Table 12 and think for a second about this disclaimer.)

Question 2: Which Regulations Are Costly, and Who is Responsible for Them?

Perhaps even more important for the presidential election than the total economic cost of regulations is the fact that the president is simply one actor in the regulatory drama. Regulations necessarily “fill in the blanks” for statutes passed by Congress.  Thus, it is important to consider where the new estimated costs are coming from in a statutory sense.  What laws are enabling/promoting costly regulation?

The F11 report describes the origins of the most costly regulations:

“The largest proportion of regulations by far stemmed from the 2010 Dodd–Frank financial regulation statute, which was responsible for 12 major rules increasing burdens in 2011, including six from the Securities and Exchange Commission, five from the Commodity Futures Trading Commission, and one from the Federal Reserve.”

Why is this relevant?  Regardless of one’s opinion about Dodd-Frank, it is important to note the following facts:

  • The SEC is an independent regulatory commission and, accordingly, beyond the scope of the president’s direct supervisory authority.
  • 3 of the 5 members of the SEC were appointed by George W. Bush.
  • Similarly, the CFTC is also an independent regulatory commission.
  • Also similarly, 3 of the 4 members of the CFTC were appointed by George W. Bush.
  • Finally, the Federal Reserve is an independent agency.

What this minutiae means in practical terms is that a president from either party has little to no control over these regulations.  Rather, Congressional action precipitated their promulgation and, barring a revision of our Constitutional understanding, similar action would be required to ensure these regulations are repealed.  In fact, this reality is acknowledged in Obama’s Executive Order 13579, which states that independent regulatory agencies

should consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned. … each independent regulatory agency should develop and release to the public a plan, consistent with law and reflecting its resources and regulatory priorities and processes, under which the agency will periodically review its existing significant regulations to determine whether any such regulations should be modified, streamlined, expanded, or repealed so as to make the agency’s regulatory program more effective or less burdensome in achieving the regulatory objectives.” (Emphasis added.)

Regarding the point to which I am speaking (i.e., that the President’s direct authority over independent regulatory agencies is at best constitutionally circumspect), consider the closely related Executive Order 13563, which states that agencies

shall consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned. … each agency shall develop and submit to the Office of Information and Regulatory Affairs a preliminary plan, consistent with law and its resources and regulatory priorities, under which the agency will periodically review its existing significant regulations to determine whether any such regulations should be modified, streamlined, expanded, or repealed so as to make the agency’s regulatory program more effective or less burdensome in achieving the regulatory objectives. (Emphasis added.)

The differences between the two orders are minor in appearance, but important in effect.  First, the word “should” is conveying a mere suggestion (as opposed to “shall,” which is a polite command): the president has no authority to direct the internal affairs of an independent agency (this is one of the two principal implications of their independence). Second, executive agencies are, in congruence with previous practice dating back to President Reagan’s Executive Order 12291, directed to forward their plan for regulatory review to the Office of Information and Regulatory Affairs, which is located in the Office of Management and Budget, which (accurately) describes itself as follows:

The core mission of OMB is to serve the President of the United States in implementing his vision across the Executive Branch.  OMB is the largest component of the Executive Office of the President.  It reports directly to the President and helps a wide range of executive departments and agencies across the Federal Government to implement the commitments and priorities of the President.

Thus, the plan submitted by an executive agency is subject to explicit review by an agent of the president.  On the other hand, independent regulatory agencies are merely requested to release their plans “to the public.”

In conclusion, from a very real and long-standing point of the understanding of the separation of powers, the president essentially has no direct supervisory powers over the SEC, the CFTC, or the Federal Reserve. Rather, those who wish to stymie or reverse the regulatory efforts of these entities must look to Congress as well.

Conclusions, or “So what?” 

Federal regulation is a fact of life.  Even if one could contemplate a politically feasible way to eliminate massive swathes of existing regulations, good taste dictates that one should “dance with the one who brung ya.” In this case, that means that the total estimated cost should be compared with the total estimated benefits.  The points I have tried to make is that, relative to the 2012 election, there are two key points to consider:

  1. Even as presented by the Romney campaign, the expansion of the estimated costliness of federal regulations since 2009 has been modest, growing more slowly than during President George W. Bush’s first term.
  2. The president, regardless of party, lacks the authority to directly control the regulatory activity of the independent agencies responsible for the recent regulations estimated to be the most costly.
My goal in making these points is to focus the debate on the costs and benefits of specific regulations.  These are important policies and deserve to be discussed on the merits, as opposed to aggregate estimates that lack context.  With that in mind, I leave you with this.