The Regulatory Studies Program (RSP) at the Mercatus Center at George Mason University is dedicated to advancing knowledge of regulations and their social consequences. As part of its mission, RSP produces careful and independent analysis of agency rulemaking proposals from the perspective of the public interest. In 1998, we submitted comments on the Army Corps of Engineers' Proposal to Issue and Modify Nationwide Permits. These comments, and my testimony today, do not represent the views of any particular affected party or special interest group, but focus on the effect of the Corps's approach to wetlands protection on overall social welfare.

The Corps' authority under Section 404 of the Clean Water Act

Section 404 of the Clean Water Act of 1972 prohibits the dredging or filling of navigable waters of the United States without an Army Corps of Engineers permit. "Navigable waters" is defined in the CWA as "waters of the United States, including the territorial seas." However, over the last 25 years, the interpretation of navigable waters has evolved first to include wetlands adjacent to navigable waters, and subsequently to include all wetlands. Under the current federal government definition, there are over 100 million acres of protected wetlands in the United States. Over 80 percent of these wetlands are on private property.

The Corps considers its permitting duties to be a "public interest balancing process," which is guided, in part, by Section 404(b)(1) Guidelines developed by EPA. While in recent years the conflicts between EPA and the Corps over permitting under Section 404 have been mitigated through memoranda of understanding between the two agencies, EPA still retains veto authority over Corps decisions.

The Corps has developed a system of nationwide permits (NWPs) that allow certain activities in certain environments without time-consuming case-by-case permit reviews. However, through rulemakings over the last several years, the Corps has moved away from generic nationwide permits for certain activities and circumstances, and toward more case-by-case approval of individual activities.

In March 2000, the Corps issued a final rule that terminated NWP 26, which authorized the discharge of fill into up to three acres of wetlands without obtaining an individual permit. It replaced it with five new nationwide permits and also modified six others. The minimum acreage limit for eligibility for these new and modified permits is one-half acre (down from the previous limit of 3 acres). In addition, individuals considering activities that affect more than one-tenth of an acre must notify the Corps before proceeding.

Since approximately 90 percent of activities permitted under the Corps' Section 404 program are authorized through NWPs, the shift toward more case-by-case review poses not only serious challenges to small property owners but also to the Corps' ability to function efficiently.

The Corps estimates that under its new NWP regulations, the Corps will receive over 2,800 additional permit applications that will require a case-by-case review each year. It predicts the new requirements will impose direct costs on the public of $34 million per year. The National Association of Counties predicts much higher public costs, on the order of $300 million per year. These estimates of direct costs do not include the costs of increasing the already long delays Americans face when applying for permits. The Corps' budget has increased by 75 percent since 1980, and the increased work load created by the revised NWP regulations may well result in requests for more staff, further increasing costs to taxpayers.

Wetland economics

While wetlands offer important social benefits, not all wetlands are created equal. The term "wetland," as used by the Corps, covers not only picturesque stream banks and marshy expanses that offer important habitats for waterfowl and wildlife, but also small patches of land that may, under certain conditions, get wet. Moreover, the tradeoff is often not between a wetland in its natural state vs. urbanization, but as in the case of Mr. Poszgai, between discarded land used as an unofficial dumping ground vs. a cleaned-up and productive lot. The weighing of public and private values of these diverse wetlands requires recognition not only of their different social or environmental values, but their different private values.

OMB's Economic Analysis Guidelines directs agencies, before developing new regulations, to examine "whether the problem constitutes a significant market failure." Yet, in none of its regulatory actions over the last several years has the Corps stopped to ask the primary question: what market failure or systemic problem is its permit program designed to remedy? While Section 404 of the Clean Water Act of 1972 prohibits dredging or filling navigable waters of the United States without a Corps permit, understanding the fundamental reason for federal involvement is essential to the design of appropriate policy.

Navigable waters and, arguably, wetlands are public goods' they provide social benefits greater than the benefits obtained by the owner. Private landowners may gain private benefits by converting wetlands to alternative uses, such as agriculture or housing. The costs of such conversion to the private landowner may merit the conversion, but the broader social costs (loss in fish and wildlife habitat, increased flood potential, etc.) may exceed the social benefits of conversion. This does not mean, however, that wetlands are not subject to market pressures. It simply means that the public benefit of maintaining property in its undeveloped state is greater than that realized by the landowner.

In economic jargon, property rights are not specified fully, and the property owner cannot internalize the full social benefits of a wetland (or the social costs of dredging or filling a wetland). Thus, absent a market mechanism by which the public could make payments to the landowner, the amount of wetlands held by private landowners will be less than the amount desired by the public.

Federal role in wetlands protection

Up until the last 25 years, federal policy has exacerbated this public good problem with programs to encourage conversion of wetlands. Federal grants to States during the 19^th century paid for levees and drainage to facilitate conversion of wetlands for agricultural production. Until as recently as 1985, farm program payments were based on acreage, providing additional incentives to convert wetlands to crops. While the rate of wetlands conversion averaged 800,000 acres per year between the first settlement to 1954, government statistics for 1982-1992 reveal a conversion of less than 80,000 acres per year. Other statistics suggests that we are now achieving our goal of no net loss of wetlands, and indeed are actually seeing an increasing in net wetland acreage.

USDA economists suggest that policy changes are partly responsible for the decrease in wetlands conversion, but increased agricultural productivity and falling commodity prices have also reduced demand for agricultural land, and they are unable statistically to separate the market and policy factors.

The evolution of the Corps' permitting program, and the recent changes to NWPs in particular, have attempted to address the public good aspect of wetlands by regulating certain activities in navigable waters and adjacent lands. This approach, however, further exacerbates the problem of inadequately defined property rights. Regulations that attenuate land use options take away private property rights and thereby reduce private incentives to use land in ways that improve social welfare. As a result, the Corps' program to protect wetlands has not been as effective as those approaches that define private rights and rely on private incentives to internalize the external social benefits of protection.

The Corps' approach also raises an important and related constitutional question. The Fifth Amendment to the Constitution states that "private property [shall not] be taken for public use, without just compensation." Our forefathers recognized that such compensation was not only fair, but also necessary to align public and private interests. The issue of regulatory takings arises when government restricts what property owners can do with their property. When are such restrictions "takings" that must be compensated? This issue has been addressed in various courts and may arise in a case to be heard by the Supreme Court this term, which specifically deals with the Corps' jurisdiction over wetlands.

Private incentives offer better protection

Several authors have compared the effectiveness of the Corps' Section 404 program to public and private incentive-based programs for wetland restoration. The voluntary, incentive-based programs of the Interior Department's Fish and Wildlife Service (the Partners for Wildlife Program and the North American Waterfowl Management Plan), and the Department of Agriculture's Wetland Reserve Program, along with State, local and private efforts, such as those of Ducks Unlimited and other conservation groups, have been largely responsible for stemming the loss of wetlands since the mid-1980s. The Administration's Clean Water Action Plan recognizes the role these incentive-based programs have played, and will continue to play, in wetland conservation and restoration.

Tolman uses federally reported data to show that the U.S. has achieved the stated goal of "no net loss" of wetlands. However, he observes that:

The data suggests that the U.S. would still be experiencing "no net loss" of wetlands even if the 404 program disappeared. In fact, if the funds used to run the Corps of Engineers regulatory program were diverted to voluntary incentive programs, the rate of gain would likely be even greater.

The reasons for the ineffectiveness of the Corps' program, particularly when compared to the effectiveness of incentive-based programs, are clear.

Land-use restrictions reduce private incentives to protect and manage wetlands.

"Filled" land may sometimes be more valuable to the owners than wetlands. The permit program aggravates this underlying problem by reducing the private value of wetlands to landowners. Land use restrictions provide no incentives to property owners to devise creative solutions to manage and protect wetland resources. Instead, private owners are pitted against Corps' permit-writers because the nature of land-use restrictions creates an inherent conflict. This conflict leads to deadweight losses for society, as resources are expended to fight and enforce Corps permitting requirements.

The costs of permitting are borne by the property owners (and the users of the land, including families who purchase or rent residences in affected areas) while the benefits are enjoyed broadly. It should not be surprising that voluntary, incentive-based programs that attempt to internalize the external benefits of wetlands protection by compensating property owners who undertake restoration efforts, are more effective at achieving their goals. In contrast to the conflict inherent in the Corps' permit program, which imposes costs on property owners, these incentive-based programs foster cooperation by internalizing with the property owner the benefits of wetland preservation.

The federal government is unlikely to set socially optimal goals for wetland use and protection.

Absent a significant market failure, markets allocate scarce resources to their highest and best use, maximizing social welfare. When not left to the market however, determining the socially optimal quantity and quality of a public good, such as wetlands, requires careful balancing of competing goals and recognition of the opportunity costs of different actions.

In our 1998 comments on the Nationwide Permit proposal, we highlighted the Corps' lack of analysis regarding the social costs and benefits of its actions and its failure to determine what level of wetlands protection would maximize net benefits. The Corps had developed those proposals based on little if any analysis or information on the extent to which land in the U.S. would be affected by the NWP modifications, to say nothing of the benefits or costs associated with the more restrictive activity-specific permit requirements. After receiving public comment, and in response to a Congressional requirement, the Corps conducted an analysis of the consequences of its proposals. The results of this evaluation lead it to issue a final rule that included some cost-saving revisions.

However, even a careful analysis at the national level will obscure important information regarding the benefits and costs that accrue to local populations affected by wetlands. The approach adopted by the Corps in March 2000 still relies on case-by-case approval by federal officials.

The Corps permitting process is already widely recognized as being slow and expensive, and the trend toward increased reliance on case-by-case reviews rather than generic permits will exacerbate those delays or increase taxpayer costs. The delays themselves have opportunity costs, which are real costs to American consumers; they reduce the availability and increase the ultimate costs of residential housing and non-residential activities. Furthermore, there are significant costs both to the Corps and property owners associated with enforcing the new permitting requirements.

Retroactive designation as a wetland requiring a Corps permit also imposes significant burdens on unsuspecting property-owners. This uncertainty increases all property costs, thus increasing the cost of living for American families. These are real costs that will be diverted from more valued uses, such as actually restoring, enhancing or protecting valuable wetlands, or protecting the health and welfare of American citizens in other ways.

State and local solutions are more likely to meet goals of protecting valuable wetlands.

Alternative approaches, including those that rely on private incentives and state and local controls may be more effective at protecting valuable wetlands. For example, the Clean Water Action Plan presents a case study of California grape growers who voluntary created a no-crop buffer zone along streams based on an economic model developed by a local agency.

Under other sections of the Clean Water Act, and through local land use authorities, State and local governments already consider the potential impacts of projects on impaired and critical resource waters. States also conduct wetland protection programs, independent of the federal government, which are tailored to local ecological values. For example, many states protect wetlands through shoreline or coastal zone protection programs, and the states of Maryland and New York regulate wetland buffer zones (which the Corps does not). Many states also protect "critical areas" of ecological significance through special land use controls, and wetlands are also protected by local zoning ordinances. Wetlands have largely intra-state effects, so state and local authorities are in the best position to resolve any issues that cannot be resolved between private parties.

For wetlands that cross state boundaries, Anderson and Hill note:

an authority larger than a single state may be necessary to apportion water among the states and to determine water quality policy. This authority does not have to be the national government, however. Interstate commissions should clarify private rights to water quality and quantity, encourage water transfers across state borders, and establish water quality standards where appropriate.

Conclusions

The Corps' Section 404 program is characterized by burdensome review processes, lengthy delays, and enforcement actions that often appear incommensurate with the "violations." Private landowners are denied the use of their land without compensation and without fair consideration of the net social effects (both costs and benefits) of use restrictions. The burdens of smaller property owners who must face the permitting procedures and mitigation requirements are especially troubling because they often do not have the time or money necessary for extensive permitting procedures nor the resources with which to bargain.

The Corps' recent rulemakings, which reveal a trend away from generic nationwide permits for certain activities and circumstances, and toward more case-by-case approval of individual activities, are likely to increase these burdens. In March, it replaced NWP 26 with five activity-specific nationwide permits, and reduced the maximum size for which a generic permit would apply from three acres to one-half acre. This approach will increase the costs of the Section 404 program to American citizens, both as taxpayers and consumers, and it is not likely to increase the benefits American citizens derive from wetlands.

The costs associated with the increase in case-by-case permitting will be borne by Americans as taxpayers and consumers, as the new rules may well increase the bureaucracy, increase the time it takes to get NWP approval, and increase property costs (increasing the cost of living for American families). These social costs will be diverted from more valued uses, such as actually restoring, enhancing or protecting valuable wetlands, or protecting the health and welfare of American citizens in other ways. Moreover, federal data indicate that (1) despite lengthy reviews, the Corps disapproves less than one percent of the permits it processes and (2) voluntary incentive-based programs have been more effective at restoring wetlands than the Corps' Section 404 program. Thus, expanding the case-by-case review process to include more areas is unlikely to increase the quantity of the nation's wetlands, nor improve their condition.

The Corps' goal of "encouraging development that is planned and designed for the long-term protection of the nation's valuable aquatic resources" is a good one. However, by taking private property rights from property owners, the Corps' approach is ineffective and its recent regulatory actions move in the wrong direction. Rather than a lengthy, burdensome permit process and costly enforcement proceedings that will increase the cost of living for all Americans, the Corps could achieve its goals more effectively by returning property rights that have been taken away. By allowing planned developments in defined locations to proceed without a cumbersome review (as envisioned by the nationwide permit process the Corps has moved away from), the Corps would give State and local governments the flexibility to work with private parties to devise mutually satisfactory management plans that meet social goals. Clearly defined property rights will provide the best incentives to ensure the optimum level of wetland protection and environmental quality.

Rather than centralizing control over privately-owned, local resources, the Corps should endeavor to enhance private incentives to manage wetlands, and leave the resolution of specific intra-state issues to state and local government authorities. A greater reliance on generic nationwide permits would leave important decisions regarding activities in and around wetlands to parties that are best able to address them - property owners and state and local decision-makers.