By Saayee Arumugam, Summer Fellow. Original source: Regulatory Studies Center
On June 23, 2015, the Senate Committee on Homeland Security and Government Affairs and Committee on the Budget held a joint hearing to explore the possibility of a regulatory budget. Two GW Regulatory Studies Center Scholars participated in the hearing. Center Director Susan E. Dudley testified alongside Richard J. Pierce, Jr., Lyle T. Alverson Professor of Law at the George Washington University School of Law, and the Honorable Tony Clement, current President of the Treasury Board in Canada. During the hearing, senators expressed interest in controlling regulatory costs, which HSGAC Chairman Ron Johnson noted approached $2 trillion in 2014.
In 1980, President Carter’s Economic Report of the President discussed a regulatory budget to consider the total economic burden of regulations. The fiscal budget forces the President and legislators to set priorities and make explicit tradeoffs among social objectives and policies. However, despite the pervasiveness of regulatory activity, no such mechanism constrains the regulatory process.
Potential advantages and challenges
Dudley observed that a regulatory budget could increase transparency regarding the private sector resources consumed by regulations. Given a cost ceiling, agencies would consider the burden borne by firms, and ultimately consumers, in determining which objectives to pursue. Expected benefits would be weighed against the value of achieving certain goals. In this way, a regulatory budget could compel agencies to set priorities and make tradeoffs that they wouldn’t consider otherwise.
She noted that, despite these advantages, setting a regulatory budget would be an analytical challenge. Evaluating the effects of all existing regulations to determine a baseline budget would be an onerous process resulting in unreliable numbers. Gauging opportunity costs is a muddy exercise and even determining what constitutes a “cost” is contentious. Unlike expenditure budgets in which past outlays are known and future outlays can be predicted with certainty, the costs of existing and proposed regulations aren’t clear-cut.
Examining regulatory offsets
The hearing also explored the possibility of regulatory offsets. If issuance of a new rule were contingent on finding an offset, agencies would evaluate the efficacy of existing programs and limit overlapping action. Dudley observed that an incremental approach, such as a “regulatory PAYGO” or one-for-one approach, avoids some of the analytical challenges while maintaining the incentives of a regulatory budget. Rather than estimating costs for every existing regulation, agencies would only estimate costs for proposed rules and for potential offsetting regulations to be removed. Though it is a more modest proposal than a regulatory budget, offsets may be a more viable solution.
Canada’s track record of success
Clement spoke of Canada’s success with “one-for-one” offsets under his leadership. Through the offset program, each agency is required to complete an audit of existing regulations. The Treasury Board compiles a regulatory ledger from which agencies must determine an “out” for every new rule “in.” Such a system has even incentivized agencies to proactively eliminate rules to create credits for future rules. Budget Committee Chairman Michael Enzi lauded the approach for its annual estimated compliance savings of nearly 300,000 hours, time which now can be spent growing business and improving work. In short, the offset program has transformed a once additive regulatory regime into a subtractive one.
Pierce supported the idea of a regulatory budget, but only if it focused on net costs. Today, Executive Orders compel agencies to employ benefit-cost analysis and promulgate rules with net benefits. According to Pierce, an effective regulatory budget would emerge when these Executive Orders are complimented by requirements to rescind existing rules with a net cost. Under this budget, the regulatory ledger would only consist of rules logging net benefits, though aggregate costs would mount. Thus, a net cost approach indeed cuts some fat, but does not provide quite the same incentives for restraint or evaluation that the fiscal budget does on spending or the Canadian one-for-one policy does on regulatory costs.
Spending programs in the fiscal budget come with salient costs: the taxes (or debt) used to finance them. Regulations can accomplish similar policy objectives, but with less transparent costs and muted oversight. Both on-budget programs and regulations are designed to achieve policy goals, but without budgetary constraints, the American regulatory regime continues to be additive in nature and lacks incentives for retrospective evaluation of effectiveness.