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January 1, 2011

The Burden of Regulation

Would a more intelligent touch from regulators halt our eroding competitiveness?

Karen Harned and Keith McCoy have aggravating stories to tell, stories of poorly conceived, overly expensive regulations that keep America's businesses so off balance that they are at a significant disadvantage in the new international world of commerce.

Harned is executive director of the Small Business Legal Center at the National Federation of Independent Business, in Washington, D.C., one of the nation's most active small business advocacy groups. McCoy is vice president of energy and resources, and all-around regulatory guru, at the National Association of Manufacturers. Both are seriously concerned about what they see as a potentially sharp turn in national regulatory policy that, intentionally or not, threatens the global competitiveness of American business and manufacturing large and small. The first two years of the Obama administration for them have blown away the more sympathetic reception they got in Washington for the previous eight years and even before. They have lost their ears in the White House and at important regulatory agencies, they say. And now, though the Congress may be gridlocked and the House controlled by Republican allies, the administration seemingly remains committed to far more aggressive and intrusive forms of regulation than in the past. Certainly there seems little doubt that the people who now run the Environmental Protection Administration, Department of Labor and its Occupational Safety & Health Administration, and most other regulatory agencies are of a different stripe than those of the George W. Bush era. Even liberal, pro-regulation groups that grumble that President Obama is too soft on business acknowledge that. “The appointees are dramatically different now,” says Rick Melberth, director of regulatory policy at Washington's OMB Watch. “There is a clear qualitative difference with people who are very committed to the agency and its mission.”

To be sure, the well-publicized failings of regulators who were supposed to protect the public from business fraud, corruption and health threats have created a deep skepticism about the agencies' competence. A few of the more flagrant examples: The Securities and Exchange Commission (Bernie Madoff comes to mind), The Federal Reserve and banking and financial services regulators in general (the collapse and bailout of the country's and the global economies may be the most notorious examples), and the Interior Department (think the Massey mine disaster and BP oil blowout).

The result has been a warmer embrace in the White House, at least, for moves designed to tighten business regulation and make oversight more effective. The administration's attitude has been pretty close, in fact to that of Melberth at OMB Watch. “It all results from the government's failure in its regulatory responsibilities,” he says. “It failed from an enforcement and a regulatory standpoint.”

But now, interviews with those who watch the Washington regulatory scene closely, whether from the left or from the right, reveal a significant change. Certainly there is plenty of pro-regulatory rhetoric from the White House. The president's abrupt reinstatement last December of a ban on offshore drilling in the Eastern Gulf of Mexico and Atlantic sent shudders through the oil industry and business community. Sharp, unexpected administration moves like that only fuel anti-business accusations aimed at it from the U.S. Chamber of Commerce, the Business Roundtable, the NFIB and others.

More than that, though President Obama may be considerably stymied by a gridlocked Congress and implacable Republican opposition, he retains considerable power and discretion that can bite ferociously into the conservative agenda. Listen to former presidential adviser John Podesta, now president of the Center for American Progress, which is pushing Obama on a decidedly liberal agenda:

“The U.S. Constitution and the laws of our nation grant the president significant authority to make and implement policy. These authorities can be used to ensure positive progress on many of the key issues facing the country through executive orders, rulemaking, agency management, convening and creating public-private partnerships, commanding the armed forces, and diplomacy,” Podesta said in a November report titled “The Power of the President, Recommendations to Advance Progressive Change.”

“The ability of President Obama to accomplish important change through these powers should not be underestimated.”

If the Government Accountability Office and the conservative Heritage Foundation are correct, the administration has not been a bashful regulator. “During the presidency of George W. Bush, which many mistakenly consider as a period of deregulation, the regulatory burden increased by more than $70 billion, according to agency regulatory impact reports,” The Heritage Foundation says in its latest “Red Tape Rising: Obama's Torrent of New Regulation” study. “In FY 2009, which spanned the Bush and Obama Administrations, rulemaking proceeded at a nearly unprecedented rate, with the addition of 23 major rules imposing $13 billion in new costs.

“But the available evidence indicates that regulatory costs increased last year at a far greater pace,” the study continues. “According to data from the Government Accountability Office, federal agencies promulgated 43 rules during the fiscal year ending September 30, 2010, that impose significant burdens on the private sector.”

The study notes that 15 of the 43 costly new rules were financial regulations, and five were from the new health care bill with more to come. But the most costly, at nearly $24 billion, it says, were 10 rules from the Environmental Protection Agency covering greenhouse gas emission reporting, car and truck fuel economy standards, and efficiency standards for heating equipment among others. The fuel economy requirements alone will cost the auto industry and consumers nearly $11 billion over the next five years, it said.

The Cost Estimates

Which brings us to the numbers, the costs and the benefits of this mountain of regulation, and how to sort them out. Safe to say, hardly anyone is very comfortable with pinning exact estimates on regulatory costs, or benefits, except when they are arguing. However dicey the calculations, those who would like to see more regulation of business relentlessly point to the benefits of these rules rather than the costs. The business community, on the other hand, talks mainly of the costs and the burdens. Just two years ago, for example, a study from The Heritage Foundation declared: “Since 2001, the federal government has imposed almost $30 billion in new regulatory costs on Americans. About $11 billion was imposed in fiscal year (FY) 2007 alone.

“Even more are on the way,” the foundation predicted, correctly. Over 50 agencies ranging from the Animal and Plant Health Inspection Service to the Bureau of Customs and Border Protection have a hand in federal regulatory policy. Together, they enforce over 145,000 pages of rules.

In September 2010, the Small Business Administration's Office of Advocacy declared: “The total costs of federal regulations have further increased from the level established in the 2005 study…from $727 billion to $1.172 trillion, a $445 billion increase.”

So have ObamaRegs imposed new, and unnecessary costs and burdens on business? Or perhaps have they made business regulation more effective and protective of the public? New, certainly, but when the talk turns to effective, even the pro-regulation critics would argue otherwise. “The agencies still don't have the money and resources they need,” says Matt Madia, a regulatory policy analyst at OMB Watch. “They can't even do what they are required to do. So with Obama, things have improved, but I would not call it dramatic.”

OMB Watch has issued its own series of reports pointing to chronic underfunding and understaffing of agencies ranging from EPA and the Occupational Safety and Health Administration to those responsible for food, toy and other product safety. Without sufficient staff and money, Madia and his colleagues say, regulations are toothless. Their concern now is that despite a wave of new rules aimed at a range of industries, the gridlocked Congress will fail to fund their enforcement.

Ms. Harned and Mr. McCoy, no surprise, say that the surge in new regulation is funded and enforced quite well, thank you. Well enough, in any case, to be annoying, aggravating, irrational, time consuming and, of course, costly. A notorious recent example that both mention: the new 2,000 page-plus health reform law requires businesses to file a federal tax form (IRS 1099) for any vendor with whom they spend more than $600 a year. Before, these 1099s were required only for independent contractors. Harned at NFIB is calling this a “nightmare.”

“We are now supposed to issue 1099s to every hotel we stay when we travel on business,” says Don Begneaud, founder and president of BEGNEAUD, a small precision sheet metal shop in Lafayette, Louisiana. “This will definitely cause additional staff in our accounting department.” There were a half-dozen repeal bills from both sides of the aisle in Congress pending as the year ended.

“The regulatory environment is definitely a lot more onerous for small business owners and all business owners than [it has been] in a decade,” says the NFIB's Harned. “We are seeing all the agencies ramping up and very eager to get a lot of things done.

“For instance, the jury is still out on the OSHA proposed rule that requires all firms of 10 or more employees to fill out an injury log. They added a new column for muscle skeletal disorders like carpal tunnel and back pain,” Harned said. “The agency argued it was just adding a new box to check, that it would only take small employers five minutes to understand the requirement and one minute to fill it out. But we said 'you are asking them to play doctor and assess an injury. I mean, does he have back pain from work or some other cause?'”

This same kind of seeming disregard for the burden on business came up when the EPA issued new rules for installing so-called maximum achievable control technology (MACT) for industrial boilers.

“Industrial boilers are like a furnace that you have in your house,” explains the NAM's Keith McCoy. “Everyone has one, no two are alike, and to make this wholesale change for something so ubiquitous has a very significant impact for manufacturing as a whole.” EPA, faced with withering business criticism, says it is reviewing this regulation and planned to issue revisions in January 2011.

The environmental agency is in the center ring of several major fights. The biggest, perhaps may be its attempt to impose greenhouse gas emission limits on carbon dioxide as an air pollutant under the 40-year-old Clean Air Act to help mitigate climate change.

NAM documents mainly quote the EPA's own cost estimates for its proposed vehicle and stationary source greenhouse gas limits—$58 billion and $78 billion, respectively, when fully implemented.

The EPA argues that the benefits—which include greater vehicle fuel economy, manufacturing efficiencies, significantly improved public health, creation of new green industries, and a U.S. leadership role in a crucial global health and economic problem, outweigh the projected industry costs by factors of three to 10, depending on how the estimates are done. Still, it is not at all clear that the Obama administration is now willing to risk alienating virtually the entire business community on this one. The smart betting is on some kind of compromise before the air clears.

Weighing Costs and Benefits

There is no doubt that federal, state and local regulations of all types impose substantial costs on American business. But industry, which basically would like to be just left alone, seems not to understand why its plea of “just trust me” to do the right thing gets, from some, a cynical laugh. The government, dating back at least to the Clinton years, has ordered its agencies to justify regulations with an analysis of costs and benefits. When the Office of Management and Budget and the agencies themselves look at benefits, they invariably outweigh the costs by factors of three to 11, again depending on who is counting.

To be generous, these are murky waters.

The OMB's 2010 accounting puts federal regulatory costs to business at between $43 billion and $55 billion for the year. Benefits, it says, range from $128 billion to $616 billion. But when the Small Business Administration (SBA) ran the numbers, its 2010 report found that, “The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008.” The SBA does not bother with trying to estimate benefits.

In any case, why are SBA's numbers so much larger than OMB's? SBA counts more and differently. As the OMB report put it, “Because these estimates exclude non-major rules and rules adopted more than 10 years ago, the total benefits and costs of all federal rules now in effect are likely to be significantly larger than the sum of the benefits and costs reported.”

The OMB also looks at factors SBA ignores. For example, it points to studies that show the cost of environmental regulations may be a nearly 2.6% “long term” reduction in GDP. It also cites a study showing these regulations increasing factory efficiency, and another showing they crowd out productive investment. The agency mentions a further study that found environment regulations produce “an increase in foreign investments in polluting industries by 5.3% and in foreign output by 8%; the results are concentrated in manufacturing.”

As usual, context is everything. The World Resources Institute for example, quoting from the 2005 U.S. Census Bureau Pollution Abatement Costs and Expenditures (PACE) Survey, concludes that for the average U.S. manufacturing facility, total environmental control costs amount to less than half of 1% of the total value of product shipments. “Compare this with total costs of materials, labor and energy, each of which represent roughly 54%, 16% and 2% of the average manufacturer's total value of product shipments,” the report says.

None of these numbers is as solid as, say, rocket science. And they suffer from an admitted self-reporting bias. First, the agencies get their cost numbers from business, which, to say the least, is unlikely to be underestimating. Then the agencies themselves do the cost-benefit calculations, which OMB reviews. But what self-respecting agency is ever going to devise a regulation with benefits that do not surpass the costs?

Even those who want to see more, tighter, and tougher rules recognize the limits of trying to calculate both costs and benefits. “We don't put a whole lot of stock in it, with these huge ranges,” says analyst Matt Madia at OMB Watch. “We agree that the benefits generally far outweigh the costs when you look at factors where you can put a price tag on it like lower health care costs, or lost days of work. Those are easy to monetize. But how do you measure the retarded neurological development of children exposed to pollutants, or the value of a clear blue sky?”

In any case, no one, except perhaps a few Tea Party fringe players, argues for no regulations. The plea generally is for more rational, collaborative rules that do not hold back business on the global stage.

A Drag on Competition?

An important question then is not whether the costs outweigh the benefits of most regulations. The question, as the global economy expands and the position of the U.S. shifts within it, is whether the expense of regulation keeps America from being as competitive as it could be. Critics from the right and left often make the same arguments about the complexity, overlapping jurisdictions, unconscionable delays, and poor focus of too many regulations. They even agree that the process for making regulations is badly flawed and that repairing it has rarely been a top priority for any administration.

But what concerns businesses of all types as they struggle to gain and expand their foothold in the global economy is that U.S. regulation may hold them back, tilt the playing field, and keep them from being as competitive as they could be. The U.S. Chamber of Commerce, Business Roundtable, and National Association of Manufacturers have been banging this drum for some time.

Each year, more than a half-dozen major organizations rank the global competitiveness of countries. In 2010, the United States remained in the top tier, meaning fifth or better, of every survey. But each one also noted an ominous slippage in the U.S rankings or potential. The burden of regulations is measured in most of these rankings. For the U.S., however, it is not a major factor in any of them.

Consultants Deloitte Touche Tohmatsu and the U.S. Council on Competitiveness surveyed more than 400 senior manufacturing executives worldwide to produce their 2010 Global Manufacturing Competitiveness Index. They put the U.S. 4th behind China, India, and Korea, in that order, with Canada in 13th place. But in five years, the executives said, the U.S. will have slipped a place to fifth while Canada will have retained its 13th position. “Even with the rise of China, India, and Korea and the overall competitive repositioning of nations, the United States, Germany, and Japan are still formidable and very competitive,” the study said. The international executives said intellectual property protection and technology transfer from academic and research institutions were this country's major strengths. The weaknesses? After tax structure, take a guess.

“Non-production expenses add almost 18% to U.S. manufacturers' costs relative to its major trading partners. Thus, a domestic manufacturer, on an average, spends 18% more on taxes, natural gas, employee benefits, torts, and pollution abatement than a foreign competitor making a similar product.”

The U.S fell to fourth from second, behind Switzerland, Sweden and Singapore, in the World Economic Forum's survey of 133 countries late last year. Canada moved down a notch to 10th from 9th.

“The level of innovation in the United States is second to none,” the WEF said in an analysis titled, “Is the U.S. losing its competitive edge?” “The country is endowed with top-notch scientific institutions (ranked 2nd) and companies that spend heavily on R&D (ranked 5th). Businesses and universities collaborate heavily in research, spawning centers of innovation.”

The survey, however, revealed considerable doubt about the soundness of the country's banks and other financial institutions, its ability to regulate those institutions and, most alarming, its growing deficits and national debt.

All of the above, it said, “have somewhat eroded the country's overall competitiveness potential over the past years.”

But while the WEF was criticizing the quality of U.S. financial regulation, the World Bank's rankings of World Governance Indicators gives the United States consistently high marks for regulatory quality and government effectiveness. The U.S. is fourth in the

world on regulatory quality, behind Canada, the United Kingdom, and Germany, and fifth for government effectiveness behind Canada, Germany, the U.K., and France, in that order. The Brits and Germans are better government regulators than we are? Go figure.

The World Bank's 2011 version of its highly respected Doing Business rankings of 183 countries world wide puts the U.S. in 5th place, the same as last year, but ahead of Canada, which jumped two places to 7th from 9th. The bank found that Singapore, Hong Kong, China, New Zealand, and the U.K. were all easier places to do business than the U.S.

Each of these studies and surveys is encouraging and troubling in its own way. It is nice to see that the U.S. (and Canada) remain relatively highly regarded around the world and that the United States remains a comparatively desirable place to do business. But the trends are not so encouraging. Each survey points to significant concerns for the future, with taxes, education, innovation, research, and development topping the lists.

And even though the U.S. may rank in the top half dozen worldwide, as Diane Katz, a research fellow at The Heritage Foundation says, “I don't think that is good enough.

“I am not one who would argue that no job should go overseas. I believe in global markets. But that is different than pushing business out of the U.S. by virtue of its costs. Fifth or sixth place isn't good enough.”

Perhaps not. But government regulation, while mentioned in these rankings, does not emerge as a primary barrier to keeping the United States competitive into the 21st century and beyond.

Reform Regulation?

A cumbersome, overly expensive, poorly coordinated regulatory system will not help the U.S. stay competitive. And there are plenty of perfectly sensible proposals for what can be done to streamline the process, target it more carefully at the public health and welfare problems it is meant to address, and ensure that the costs imposed on business are truly compensated for by the benefits received.

“I view regulation as strategic weapon. It's important that we have workplace and food safety standards and environmental standards,” says Jack McDougle, senior vice president at the Council on Competitiveness and former Commerce Department deputy undersecretary. “Look at some of these problems that are emerging in China. But one of the issues now is how the regulations are promulgated. If each agency can impose a regulation, and each one can say that implementation only hits say 1% of net profitability and that's fine. But if you have six agencies doing that, then all of sudden you have a 6% total impact. And we don't have anyone, or any agency looking at that, or a way of looking at it.

“Regulations should always include sunset clauses and clauses that automatically trigger a periodic review of the impact of regulations so we can respond to a more dynamic and flexible environment,” says McDougle.

At OMB Watch, the concern is also about focusing better and allocating resources. But, says analyst Matt Madia, “In many cases we do not know how much money it would take to have a cost effective, efficient regulatory framework in this country. To inspect all food processing facilities, for instance, we have no idea what that would cost.”

“And the agencies still do not have the manpower and capacity, or funding to deal with any new changes in crucial industries,” says his colleague Rick Melberth, “like nano technology for instance. The regulatory agencies are simply not in a position to take on new challenges.”

In any case, it is very difficult to see how anything substantive along any of these lines is going anywhere in the present political climate. Gridlock is the most common word used these days to characterize the Congress. And so far, the White House's priorities, even if the president could get something to happen in that Congress, have not prominently included regulatory reform.