June 20, 2005

OMB's 2005 Benefit-Cost Report to Congress

  • Susan Dudley

    Director, George Washington University Regulatory Studies Center
Key materials
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Highlights

The Report

  • Based on a tally of agencies' pre-rulemaking estimates, the Office of Management and Budget's 2005 Draft Report to Congress reports that the benefits of major regulations issued over the last decade are in the range of $68 to $260 billion, and costs are between $35 and $39 billion per year.
  • For the first time in this 8th annual report, OMB also reviews agency estimates of regulations issued since 1981, the beginning of the regulatory review program at OMB, and reports the annual costs of those at $117 billion per year.
  • Chapter II examines trends in regulatory activity, and summarizes existing studies of the ex post impacts of regulation.
  • Chapter III discusses implementation of the Information Quality Act.

Our Findings

  • The estimates of the total costs of regulation presented in OMB's 2005 draft report to Congress are significantly understated. The total benefits and costs presented in the Draft Report cover a fraction of the major regulations issued over the last decade. This year's estimates are based on agency estimates for eleven regulations-less than 0.3 percent of the final rules published in the Federal Register during the year.
  • As in previous years, OMB offers no independent assessment of the quality or usefulness of agency analyses, and correspondingly, the estimates presented in this report. The reported benefits and costs are based on agency estimates, without independent verification or any assurance that assumptions and methods are consistent across programs and activities. They are dominated by reductions in one pollutant.
  • Understanding the costs of regulations has value. OMB is correct that theoretically, net benefits is the best measure of the real impact of regulations. Nevertheless, tracking the costs of regulations, analogous to tracking fiscal expenditures through the budget, is important for keeping regulators accountable to Americans.
  • Ex post validation of costs and consequences of regulations is essential. Examining the consequences of regulations once they are in effect could address some of the problems with the estimates reported in the Draft Report.

By the Numbers

  • By excluding from its sample regulations for which agencies did not estimate both costs and benefits, OMB understates costs. Had OMB included cost data provided by agencies for major rules issued in 2004, its cost range would be $9 billion to $15 billion, almost three times OMB's reported estimate of $3.8 billion to $4.1 billion.
  • Annual cost estimates published by the Small Business Administration are over twenty times higher than those presented by OMB ($843 billion compared to under $40 billion).
  • OMB reports the cost of EPA water regulations at $3.2 to $3.7 billion per year, compared to the more comprehensive, yet still conservative, Mercatus Center estimate of $98 billion per year.
  • OMB only considers the cost of a few OSHA regulations to derive its workplace regulatory cost of $0.3 billion per year. Mercatus Center research puts the costs of workplace regulation at $91 billion per year.
  • OMB does not include estimates of regulations issued by independent agencies, such as the Federal Communications Commission. Mercatus Center research finds the costs of telecommunications regulation are $105 billion per year.

Recommendations

  • OMB should not limit its totals to rules for which agencies estimate both costs and benefits. It should also present Congress a review of other reliable estimates of regulatory impacts.
  • OMB should provide an independent assessment of the validity of agency estimates. It could identify strengths and weaknesses of the methodologies agencies use to estimate benefits and costs, and, at a minimum, include those observations in this report in the form of a "report card" on each analysis.
  • OMB should pursue efforts to examine the impact of regulations once they are in effect.