If It Ain't Broke - Don't Regulate It
Risk Assessment and Cost-Benefit Analysis Protect Us from Over-Regulation
JUNE 01, 1995 by WAYNE T. BROUGH
Filed Under : Regulation, Special Interests
Mr. Brough is with Citizens for a Sound Economy in Washington, D.C.
In 1990 the Food and Drug Administration demanded the McCurdy Fish Co. of Lubec, Maine—the last U.S. smoked herring company in the industry—to change its production process to reduce the dangers of botulism. The changes proved to be too costly and John McCurdy closed his doors, laying off all 22 workers. The FDA’s rule came after 20 years in business and 54 million fillets. Not one case of botulism was ever reported against McCurdy and the FDA found no problems in their almost yearly inspections of McCurdy’s fish.
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 always benefit the public. Currently, the price tag for federal regulations is more than $500 billion per year–over $5,000 per household. This is roughly equivalent to the typical family’s federal income tax burden. Unlike the income tax, however, regulations are hidden taxes that do not receive the public scrutiny of the typical tax hike. Instead, businesses face higher costs of production, American companies have a tougher time competing in a global economy, and consumers pay more for goods and services. Proponents of regulation argue that federal regulations provide important safeguards that justify the costs of the regulatory burden. If, in fact, federal regulations 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 clean-up 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? And how can the benefits of hazardous waste clean-ups justify the costs of Superfund when 36 cents out of each of the 11 billion dollars spent by the private sector through 1991 went to legal fees rather than to cleaning up waste sites?
There are a number of legitimate concerns that can be raised when discussing federal regulations and regulators. But attempts to make government regulators more responsive to the public’s concerns have generated staunch resistance among environmentalists and other public interest groups. Last year, these groups mounted a major campaign to defeat what they dubbed the “unholy trinity”: requirements for cost-benefit analysis and risk assessment, stronger protections 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 reform 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 assessment of the impact of federal regulation in order to eliminate unnecessary or even counterproductive regulations.
Requiring federal agencies to assess the costs and benefits of regulations is not new. President Ronald Reagan formalized the regulatory review process through Executive 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 provided guidelines to the federal agencies to ensure regulations met certain minimum standards. First, agencies were asked not to regulate unless they had sufficient information. Second, agencies were to choose the least expensive method for meeting a regulatory objective. Finally, agencies 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 regulation 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. Efforts to rationalize the regulatory burden proved beneficial to consumers as well. Economic regulatory reforms enhanced consumer welfare substantially–in the transportation sector alone, consumer welfare increased by more than $30 billion.
However, these trends reversed in 1986 as 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. The price tag of final major rules–those costing more than $100 million, or those with significant impact–jumped more than 57 percent from 1991 to 1992. Moreover, President 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 weakened regulatory oversight, the Clinton administration released the Regulatory Plan and Unified Agenda of Federal Regulations, which identifies more than 4,300 rule-makings now underway at federal agencies.
In recent years, health, safety, and environmental regulations have constituted the bulk of growth in the regulatory burden. The Environmental Protection Agency’s own estimates suggest that environmental regulations alone will cost more than $160 billion annually by the year 2000. Risk assessments 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 conservative 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 200 meters from an industrial source of toxic air pollution breathing maximum predicted outdoor concentrations of a single chemical for 70 years, 24 hours per day.” This sketch of a hypothetical individual is hardly a description of the average person.
In addition to providing better information for cost-benefit analysis, risk assessment 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 dangers. Consider, for example, a hazardous materials listing requirement for a wood preservative. OMB has estimated that this regulation will divert one statistical death at a price of $5.7 trillion. Avoiding such excessive regulations would allow consumers 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” comparisons 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–every one of them—from his workplace.” A number of academic studies have confirmed this relationship between health and wealth. 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. Originally 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 involved. 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. Consequently, 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.
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 government 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.”
Superfund is only one federal program. The federal government regulates everything 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 system driven by political pressure or media hype.
Protecting the environment and improving health and safety are not inexpensive. These activities place a significant burden on the American economy. The expansive role of federal regulators was not envisioned by the Founding Fathers and there are only limited institutional constraints on their activities. 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 generated by market activities. A requirement to eliminate regulations that provide no net benefits introduces an element of accountability 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 federal regulators.
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, Washington, D.C. (1989) for a history of the regulatory review process.
15. For a survey of the health-wealth literature, see, Office of Management and Budget, Regulatory Program of the United States Government, April 1, 1992-March 31, 1993, U.S. Government Printing Office, Washington, D.C. (1993).