June 9, 2015

The Case for Legislative Impact Accounting

Jason J. Fichtner

Former Senior Research Fellow

Patrick McLaughlin

Director of Policy Analytics
Summary

For the first time in six years, Congress finally passed a budget resolution. The federal budget process, when it works, permits Congress to monitor and fund programs based on their fiscal impact. Yet every Congressional budget masks the true economic costs of federal spending. Mandatory spending, which makes up the vast majority of federal spending and includes interest on the national debt, Social Security, Medicare and Medicaid, is not part of the annual budget process.

For the first time in six years, Congress finally passed a budget resolution. The federal budget process, when it works, permits Congress to monitor and fund programs based on their fiscal impact. Yet every Congressional budget masks the true economic costs of federal spending. Mandatory spending, which makes up the vast majority of federal spending and includes interest on the national debt, Social Security, Medicare and Medicaid, is not part of the annual budget process. Also excluded from the annual budget process are the costs of regulations. In fact, the vast majority of economic costs induced by federal actions remain off the books.

We propose reforming the legislative and regulatory processes to put these costs on the books. After all, proper budgeting is about making trade-offs between competing wants and limited resources, and it requires planning, setting priorities and making difficult decisions. But these decisions cannot be made without a more complete understanding of the direct and indirect costs of proposed legislation and spending bills, and their regulatory progeny. Our proposal, called legislative impact accounting, would provide that information to Congress.

Estimates of the total cost of regulations vary widely, but by any account, they represent a significant cost to the economy. Government economists in the Office of Management and Budget tally up the direct compliance costs associated with rules created in the last decade that have an effect of more than $100 million annually. OMB’s most recent estimate was that annual costs fall between $57 and $84 billion. Conversely, economists John Dawson and John Seater estimated how the economy would look if federal regulations were held to 1949 levels—essentially asking the question: What if, instead of spending resources on regulatory compliance, businesses invested in research and development? The answer was shocking. In 2011, instead of $15.1 trillion, annual GDP would have equaled $54 trillion.

It’s important to realize that regulations ultimately stem from Congressional actions. For example, five years ago, the Dodd-Frank Act was signed into law, creating a new regulatory agency: the Consumer Financial Protection Bureau. Simultaneously, Dodd-Frank directed several other agencies to create about 400 new regulations, resulting in a surge of regulation from agencies such as the Commodity Futures Trading Commission, the Securities Exchange Commission, and the Treasury Department. In fact, it is estimated that Dodd-Frank would cause regulatory restrictions targeting the financial industry to increase by 32 percent.

Each new regulation carries several types of costs. At present, only the most obvious of regulatory costs are considered in scoring legislation, and these are the direct costs to the government—that is, changes in federal revenues and outlays induced by legislation. But there are other costs. Direct compliance costs include the costs of designing, building, or upgrading equipment to meet new standards plus the paperwork and labor that must be allocated to such activities. Yet regulation also creates indirect costs. For example, if a company manager has to spend her time filling out paperwork to assure regulators that some routine has been followed, that manager is unable to use that time to monitor employee actions or consider how to address new risks to the company or its workers.

Regulatory accumulation carries another sort of economic cost, because entrepreneurs aren’t faced with the prospect of paying for one regulation at a time. Instead, they have to deal with the totality of regulations. And the accumulation of regulations is undeniable: The number of pages published in the Code of Federal Regulations has more than tripled since 1970—going from 54,834 pages in 1970 to 175,496 pages in 2013. That’s a lot of forgone alternatives.

Our proposal, legislative impact accounting, would incorporate economic analyses of legislation and regulation into the budget process in two ways: First, when new legislation is proposed, an independent office—perhaps the Congressional Budget Office—would produce an estimate of the economic costs the legislation would create. Importantly, a legislative impact assessment would attempt to consider economic costs of proposed legislation, not just budgetary outlays. Examples of some of the effects that could be included as specific line items are: direct compliance costs, employment effects, technological hindrances, trade distortions, and changes to the cumulative regulatory burden. This type of analysis is not unprecedented. The European Commission provides impact assessments on all legislation considered by the European Parliament.

Second, legislative impact accounting would require retrospective analyses of the economic effects of legislation, starting five years after the legislation passed. The idea is to learn what the real effects have been, and to then update the original estimates produced in the first stage. This would effectively create a much-needed feedback loop that communicates information about the economic effects of legislation back to Congress.

One of Congress’ constitutional roles is to use the “power of the purse” to control the federal government’s spending. With that power, Congress could use the information from retrospective analyses to decide whether programs created by regulatory agencies are actually working as intended. If they aren’t working, are producing unintended consequences that are not justifiable, or if they are much more costly than originally anticipated, Congress would at least be able to make changes via the budget process.

While it may sound complex, legislative impact accounting is simple at its heart. Government actions—legislative, regulatory, or otherwise—create all sorts of costs that are not “on the books.” Our proposal would make those costs clearer to Congress and to voters.