Why Congress Should Increase Funding for OMB Review of Regulations

Robert Hahn and
Robert Hahn
Robert Hahn Director of Economics - Smith School of Enterprise and the Environment at the University of Oxford, Former Brookings Expert
Robert E. Litan

October 15, 2003

The House recently included language in an appropriations bill (H.R. 2989) that would substantially reduce the budget for the agency within the White House Office of Management and Budget that reviews federal regulations with an eye toward exposing wasteful rules. If the House gets its way when it meets with the Senate as early as next week to reconcile differences in their bills, the Office of Information and Regulatory Affairs (OIRA) is slated for a $2.5 million budget cut. Indeed, if the Senate fails to prevail, it will be a sad day for American consumers, who will bear the brunt of less effective, less transparent, and more expensive regulation.

OIRA’s scientists, accountants, economists, and engineers review the benefits and costs of a wide array of federal regulations affecting agriculture, environmental protection, energy, telecommunications, homeland security, occupational safety and health, medicine, and health care. And to good effect: A study by Richard Morgenstern, the Environmental Protection Agency’s former chief economist, found that the economic analyses required in the OIRA regulatory review process frequently improved outcomes and lowered costs.

Cutting OIRA’s $7.5 million budget by one-third would be a classic case of saving pennies to waste dollars. OIRA’s 54 staff professionals annually review some 300 final regulations and 30 “major” regulations—each with an annual economic impact that typically exceeds $100 million. Calculated at OMB’s official 7 percent rate of discount for evaluating prospective regulations, the delay of just one bad regulation that has a net cost of $1 billion per year (round-off error by Washington standards), would generate a benefit of $70 million the first year. Similarly, if OIRA speeds the introduction of a regulation that confers $1 billion a year in net benefits, consumers stand to gain $70 million. It’s plain, then, that it doesn’t take much success for OIRA to pay its own way. In fact, by any plausible reckoning, the benefits of OIRA’s advice are several orders of magnitude greater than the costs.

As Nobel Laureate Kenneth Arrow and a wide cross section of leading economists suggest, the problem is not too much, but too little economic analysis of pending regulations. For example, the General Accounting Office reported that from 1991 to 1995, half of the EPA’s analyses made under the Clean Air Act failed to estimate dollar values for proposed environmental benefits, one-third failed to identify key economic assumptions, and a quarter failed to identify any alternatives that might produce a bigger bang for a buck.

Supreme Court Justice Stephen Breyer, who has written extensively on the subject, concludes that improving the quality and effectiveness of federal regulation will require a strengthening of OIRA’s role. In Breyer’s view, “balkanized” or uncoordinated federal regulators suffer from three maladies: “tunnel vision,…random agenda selection, and inconsistency.”

Justice Breyer argues that tunnel vision is an administrative disease that arises when an agency single-mindedly pursues a goal to a point that “the regulatory action imposes high costs without achieving significant additional safety benefits.” “Random agenda selection,” he suggests, results when agencies act against major perceived risks instead of focusing on the most important actual risks. Finally, Breyer notes that the regulation of small risks “can produce inconsistent results” and thereby “cause more harm to health than it prevents.”

John Graham, the current OIRA Administrator, and Tammy Tengs, his former colleague at the Harvard Center for Risk Analysis, estimated that better focused, smarter and more consistent governmental health and safety interventions could save an additional 60,000 lives per year with no increase in total expenditures. That is why leading economists like Arrow and leading jurists like Breyer call for expanding the role of economic analysis in regulatory decisionmaking and, in Breyer’s words, charging OIRA “with finding methods to spend risk-regulation resources more effectively.”

Transparency is another important reason for expanding OIRA’s regulatory review and oversight. Under the Regulatory Right-to-Know Act, OIRA is required to estimate the costs and benefits of federal regulations on an annual basis. Numerous studies show that the transparency that follows from such oversight is vital to the maintenance of public trust and crucial to the ongoing success of advanced democracies. We believe it impossible to overstate its importance. As Dr. Morgenstern observes:

“[E]conomic studies can grease the wheels of democracy by informing policymakers, legislators, and the general public about the consequences of regulation; helping build support for regulation that serves the public interest; and highlighting opportunities for regulatory or legislative improvements. . . . Such transparency is the essence of democratic decisionmaking. It arms citizens to think and representatives to deliberate.”

At a time of rising on-budget spending and spiraling federal deficits, Congress is increasingly tempted to mask new spending in the form of off-budget mandates, whose costs are hidden from public view. OIRA has estimated that regulations aimed at protecting health, safety, and the environment alone cost over $200 billion annually – about as much as Washington’s on-budget outlays for discretionary programs other than defense. And while the benefits of some regulations are substantial, a significant number don’t come close to yielding benefits in excess of costs.

The attempt to scuttle OIRA’s oversight functions speaks volumes regarding the issue of accountability. It is an ironic counterpoint to the Sarbanes-Oxley Act, which holds corporate leaders accountable to shareholders and to the public. The House says one thing when it comes to corporations, but quite the opposite when its own ox is being gored.

Finally, as Justice Breyer observes, OIRA is the “lineal descendant of efforts by Presidents Nixon, Ford, and Carter to achieve greater coordination within the huge Executive Branch.” Presidents Reagan, Bush, Clinton, and Bush all directed federal agencies to perform benefit-cost studies of major regulations. They implemented executive orders requiring OIRA to develop guidelines for conducting comprehensive, transparent economic analyses. The current OIRA has made a number of improvements to these analyses:

  • Making greater use of the Internet to inform Congress and the public;
  • Sending informal requests to agencies encouraging them to accelerate regulations with positive net benefits; and
  • Providing information on turnaround times for reviewing rules.

The only winners in reducing OIRA’s budget for regulatory review and oversight would be special interests that wish to pursue their agendas, unconstrained by objective analyses of the consequences. The public has a basic right to know whether a regulation will make it better or worse off, and by how much. That’s just common sense.