I’ve been asked to discuss the costs of regulations, particularly with respect to three proposed bills that would each amend the Regulatory Review Act. If I can be so bold as to characterize all three of these bills with broad brush strokes, I would say that their goals, at least as I understand them, are
- to require more review of existing regulations; and
- to create more oversight for the creation of new regulations.
Of course, neither regulatory review nor oversight of the creation of regulations can be effective without high- quality information about the effects of regulations. To your state’s credit, and judging by the existence of such terms as “acceptable data” in the Regulatory Review Act, you appear to have been concerned with the quality of information about regulations’ effects for some time. I hope that my testimony can help focus your concerns on some specific information that could help in both regulatory review and regulatory oversight, as well as spur you to consider what motivates those who provide that information.
I have three major topics that I will address. First, I will discuss what relevant information we might hope to have when reviewing existing regulations or analyzing the effects of new ones. This will include a discussion of what goes into a typical calculation of regulatory costs and what is often missing.
Second, although I acknowledge that it is technically demanding to perform a good economic analysis of a regulation, there are relatively simple steps that could be followed to ensure that at least some useful information is considered in the regulatory decision-making process. A simple, two-step process requiring analysts to clearly identify the problem that a regulation would attempt to fix and to evaluate alternative approaches to doing so could go a long way toward crafting an environment that fosters competitiveness and economic efficiency without sacrificing the outcomes that regulations are intended to achieve. I will demonstrate this using evidence from research on occupational licensing regulations.
Finally, I will address the incentives of those who are charged with analyzing regulatory costs and benefits. Economists and analysts in regulatory agencies are repeatedly instructed on what information they should provide and how to do it, yet the quality and quantity of information in their analyses never seems to satisfy legislators, or for that matter, the public. Why? Maybe these analysts incentives point them in a different direction.
WHAT INFORMATION COULD HELP IN ANALYZING REGULATION?
It is a difficult but valuable task to quantify the effects of regulation. In fact, not only is it difficult to quantify the effects of regulation, it is a monumental task to simply quantify regulation itself. What do we mean by regulation? A professor at the University of Pennsylvania aptly describes it: “at its most basic level, regulation seeks to change behavior in order to produce desired outcomes.” Regulatory reform bills are, in that sense, regulations themselves, as they would attempt to change the behavior of regulatory agencies. So I would ask some of the same questions of any proposed bills that I would ask of proposed regulations: what is the problem you are trying to fix, what changes in behavior do you want to elicit, and how will you know whether your intervention has succeeded?
IS THERE A PROBLEM TO BE FIXED?
Let me begin by discussing what I know about federal regulations. At the federal level, the analysis of the effects of a new regulation is called a regulatory impact analysis. Unfortunately, even though there are very clear instructions and guidelines for economists to follow, the typical regulatory impact analysis does not contain anything close to the amount of high quality information that it could.3 Despite the mediocre quality of regulatory impact analyses, the growth of regulation, at least at the federal level, continues unchecked, regardless of which party is in charge of the White House. Figure 1 shows one way of quantifying regulation, taken from a database on regulation called RegData that I established at the Mercatus center along with George Mason University professor Omar Al-Ubaydli.4 RegData measures regulation by analyzing the actual regulatory text in the Code of Federal Regulations—the federal equivalent of Pennsyvlania’s Administrative Code. The US Government Printing Office has made digital copies of the Code of Federal Regulations from previous years publicly available online for years 1997 onward. Our approach in creating RegData was to look for the words that indicate an attempt on the part of regulators to change behavior. As legislators, you will probably know these words well: they are words like, “shall,” “must,” “may not,” and “prohibited,” words that create a legal obligation to do something or a legal restriction from doing something. As Figure 1 shows, the quantity of these words, which we call “restrictions,” has grown consistently from 1997 to 2010. In 1997, there were about 835,000 restrictions. In 2010, there were over one million, and although the figure doesn’t show it, the number has continued to grow since then.