Pareto Policy Solutions, LLC

advancing innovation through smart regulation

Pareto Policy Solutions, LLC is a policy analysis and advocacy firm committed to advancing sustainability through “smart” regulation: regulation that rewards, and does not penalize, superior performance.  Often, such actions leverage advances in science and technology and make the regulatory program itself more effective as well as more efficient.

Federal Regulation in Perspective

With legislative activity at a low point, the Obama Administration is using its regulatory authority to press its agenda.  Since coming into office in 2009, President Obama has expanded the reach of federal regulators, especially into the areas of health care, finance, energy, and environment.  Some of this is a consequence of enactment of major legislation (e.g., the Affordable Care Act), and some of it is due to the policy preferences of agency officials.  It is expected that a new wave of major regulations will be issued after the November election.

It seems now is an appropriate time to answer three common questions designed to put regulation into perspective.  Answers are my own; feel free to comment or disagree or provide a different take.  (Future blogs will answer other common questions about regulation.)

Q:  Is federal regulation growing?

A:  Yes. The growth of regulation has been in an upward trend for a very long time, spanning multiple Presidents, Republican and Democrat alike, including President Obama.

All federal regulations are compiled in the Code of Federal Regulations (CFR), and the CFR is updated on a rolling basis, to account for new regulations or changes to existing regulations since the previous edition. If one wants to account for the overall growth of regulation, one should consider changes in the length of the CFR over time.  In 1938, the initial CFR was contained in two volumes accounting for about six inches of shelf space in a library.  Currently, the CFR accounts for more than 25 feet of shelf space.  (It is also available electronically.)

It is common for some to use the number of pages in the Federal Register to measure the growth of rulemaking, but this is a very bad measure as only a small portion of the Federal Register contains the actual text of a regulation that finds itself into the CFR.  Using the Federal Register to measure regulation is like using the Congressional Record to account for the growth of new laws enacted by Congress.  Neither yardstick is very accurate.

Q:  How many new federal regulations are issued every year?

A:  About 3,200 final regulations are issued every year, of which a small subset (between 2%-3%) are likely responsible for the vast majority of costs and benefits, and these receive the greatest scrutiny and debate. 

Using Government Accountability Office (GAO) data from 2003-2012, the average number of final rules issued in a year is about 3,200.  The vast majority of these final rules are minor and non-controversial.  About 10%, or 320, of the total number of final rules are “significant”, meaning they merit review by the Office of Management and Budget pursuant to Executive Order 12866.  Roughly 2%-3% of the total number of final rules (or between 64 and 96) are designated “major rules”, meaning they have a relatively large ($100 million per year) impact on the economy, or a sector of the economy or on the US treasury.  And roughly 1.75%-2.75% of the total number of final rules (or between 48 and 72) are major rules from “covered agencies”, meaning they are reviewed by OMB and typically require a benefit-cost analysis.  (OMB does not have authority to review regulations from agencies that are not covered under Executive Order 12866. About 25% of all major rules are issued by non-covered agencies.)

Q:  What are the costs of federal regulation to the country?

A:  The aggregate costs are roughly on the order of hundreds of billions of dollars per year.  There is much uncertainty in this estimate!

A few years ago, the Small Business Administration (SBA) Office of Advocacy sponsored a study that pegged the cost of regulation at $1.75 trillion.  This study has been criticized for its methodology by the Congressional Research Service and by other regulatory experts, who believe it is a vast overestimate. 

According to a recent OMB report, cumulatively since FY2003, economically significant regulations for which both benefits and costs have been quantified (a very limiting constraint!) are estimated to produce $57-$84 billion in costs.  This OMB number is most certainly low because of the many economically significant regulations that are not included in its aggregate estimate. 

Michael Greenstone, an MIT economist who served as a member of President Obama’s Council of Economic Advisors, once testified that the actual cost is probably on the order of hundreds of billions of dollars per year, which would make it roughly equivalent in magnitude to annual revenue from US corporate income taxes.

 

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