Conference Summary

The new AEI-Brookings Joint Center for Regulatory Studies was launched and held its first conference at the American Enterprise Institute on October 8, 1998. After opening remarks by Michael Armacost, President of the Brookings Institution, and Christopher DeMuth, President of the American Enterprise Institute, and a speech of strong support by Senator Fred Thompson of Tennessee, the purpose of the new center was outlined by its two principals, Robert Litan of Brookings and Robert Hahn of AEI, and by Clifford Winston of Brookings, a fellow of the Center. Finally, Messrs. Hahn and Litan were joined by Robert Crandall of Brookings and Randall Lutter of AEI in a panel devoted to a critique of the Office of Management and Budget's second draft report on the costs and benefits of regulation.

Mr. Armacost welcomed the conference participants and talked briefly about the history of collaboration between the American Enterprise Institute and the Brookings Institution. Mr. DeMuth discussed the scholarly consensus among economists on the distortionary effect of government regulation and the parallel consensus on how improving the implementation and design of regulations would save large sums of money. He noted, however, that the government has no incentive to implement regulations in a cost-minimizing manner because compliance costs fall mainly on the private sector. Therefore, the agencies are not subject to the usual budget constraints and only pursue the benefits of programs and not the costs. Furthermore, the regulatory process is generally "inside the beltway game," dominated by interest groups.

These problems have led all presidents since President Nixon to address the imbalances in the regulatory process by issuing various executive orders. The orders, "have required agencies to study and publish the studies of the costs and benefits of their rules, subjecting the agencies to some degree of oversight by offices within the Executive Office of the President." Mr. DeMuth also pointed out that Congress has tried to reinforce and improve the review process through legislation. There are inherent difficulties, however, with one government agency supervising other agencies. He noted that the Joint Center is an independent organization that can provide unbiased review of agency programs.

Senator Fred Thompson of Tennessee: Senator Thompson began by noting that Congress has not concentrated recently on regulatory reform. Congress, however, has laid the groundwork for focusing on it in the future. Nevertheless, we will not achieve important reform goals without bipartisan consensus. This fact makes the work of the new Joint Center vital to moving cost-benefit analysis, risk assessment, peer review and modest judicial review into the regulatory process. Senator Thompson believes the system works best if agencies know they will have to justify their rules in the future. We must pursue, therefore, the modest goals of more oversight, openness and accountability.

Senator Thompson went on to say that along with bipartisan consensus in Congress we must also have intellectual consensus. In this light, the formation of the Joint Center is exciting. Senator Thompson said, "The regulatory community now knows what is happening, they know the situation and they understand, you understand, that we can do a lot better than what we are doing." In particular, regulatory reform does not necessarily require fewer or more regulations, but rather better regulations. Part of the difficulty lies with the interest groups that want to maintain the status quo. He also raised concerns with the Administration's implementation of Executive Order 12866. On the one hand, the Administration has "the benefit of making a statement of doing something about the regulatory situation," but on the other hand "the benefit of not really doing anything" to upset interest groups.

Senator Thompson closed by expressing his "appreciation for what the Center is doing." He could not "overemphasize how important it is and how good it is for us who are up there to know that we have the underpinnings to call on." The Center's work gives integrity to the regulatory reform process, "to know we can go forward in confidence that our analysis is correct and so that a fraud can't be perpetrated on the American people".

Robert Litan, Co-Director of the AEI-Brookings Joint Center for Regulatory Studies: Mr. Litan outlined the mission of the Joint Center by saying it will "provide a check on the Federal government with respect to regulation." The Center will achieve this goal by pursuing a number of different avenues. First, the Joint Center will select a few new regulations, submit comments and evaluate the costs and benefits of those proposals before agencies promulgate the rules. The Joint Center will publish comments in working papers that will appear both in print and on the Joint Center's web page (www.aei.brookings.org). Second, the Joint Center will look at some existing regulation and identify those that most need to be changed, modified or eliminated. Third, the Joint Center will publish an annual report that assesses the status of federal regulation and "in effect shadows the OMB report that comes out every other year." Fourth, the Joint Center will examine areas for improvement in the process of promulgating regulations. Fifth, the Joint Center will sponsor conferences on selective regulatory issues, and lastly it will produce a Web site that will publish information on regulatory issues and provide an arena for dialogue with the community.

Robert Hahn, Director of the AEI-Brookings Joint Center for Regulatory Studies: Mr. Hahn stressed that the Joint Center plans to produce "hard-headed analysis" in real time that could influence the regulatory process. The Joint Center will also examine areas of deregulation to see if it is effective and will consider the consequences of re-regulation. Mr. Hahn went on to discuss his most recent work for the Joint Center, a paper on how agencies can use the Federal Register to improve the regulatory process. For the paper, he reviewed the Federal Register to determine what economic information agencies presented on their regulations. His conclusion was that little information was furnished that would be published at the beginning of a rules Federal Register notice, indicate the strengths and weaknesses of rules. Therefore, Mr. Hahn proposed that agencies complete a pre-publication form to ensure that summarizing all relevant economic information on a rule. In closing, Mr. Hahn reiterated the Joint Center's commitment to holding "lawmakers and regulators more accountable by providing objective, thoughtful analyses of existing and new regulations."

Clifford Winston, a scholar at the Brookings Institution and a fellow of the AEI-Brookings Joint Center for Regulatory Studies: Mr. Winston started by noting that the answer one obtains when conducting cost-benefit analyses is not always obvious. As an example, Mr. Winston discussed the paper he and his colleagues wrote on airplane noise. Noisy airplanes are presumed to be bad because they disturb homeowners in the flyways. The government's answer to this problem was to regulate the airline industry to internalize the negative externality of airplane noise by phasing in quieter airplanes. Although the costs and benefits of this regulation may seem obvious, research revealed that the benefits might not be as large as expected, because those who really object to the noise will move. Therefore, Mr. Winston and his colleagues found that the costs of the government regulation actually exceeded the benefits.

These findings raise a fundamental question: are problems solved best in the public domain? Mr. Winston's response: sometimes they are not. He confirmed his belief when he examined another area, public-funded urban transportation. He concluded that often the answer would be to privatize. Nevertheless, "sometimes it is difficult to push the optimal situation". Optimal regulation, he said, is an oxymoron and that must be realized. The final session of the conference was devoted to a discussion of the Office of Management and Budget's second annual draft report on the costs and benefits of regulation and the Joint Center's comment on that draft. The overall finding of the Joint Center was that the OMB had made substantial improvements from the original report, but the OMB can still make some constructive improvements.

Robert Crandall, a scholar at the Brookings Institution and a fellow of the AEI-Brookings Joint Center for Regulatory Studies: Mr. Crandall began by praising the OMB for their effort in compiling a comprehensive estimate of the benefits and costs of regulation. He believes, however, that to provide an aggregated estimate, "is an impossible task given the quality of the efforts in front of them." The draft also, "shows some of the limitations of one part of the administration attempting to tote up the impacts of what other parts of the administration are doing."

From the report, the typical reader would obtain the impression that federal regulation has created more than three and a half trillion dollars in net benefits. (The number is driven primarily by the benefits from the Environmental Protection Agency's (EPA) regulation of only two pollutants.) However, Mr. Crandall pointed out that Gross Domestic Product (GDP) grew less than that amount in the same time period (1970-1990). Nevertheless, the trillion-dollar number is already receiving wide currency. Mr. Crandall broadened his criticism of the net benefit estimate by saying that it is difficult to assess the total benefits and costs of a program that has existed for many years. The assessment is also problematic when an agency analyzes its own regulations. We should focus, therefore, on the marginal costs and benefits of regulation. Mr. Crandall said we should avoid aggregating costs and benefits because agencies will not quantify their most costly rules. Thus, the aggregate number will have serious sample selection bias. Furthermore, the OMB should only focus on health, safety and environmental regulations and avoid dealing with economic regulations.

Robert Litan: Mr. Litan provided highlights from a Joint Center Comment submitted by he and Mr. Hahn on the OMB's draft report. First, the OMB should rely on their own expertise when examining the costs and benefits of regulations rather than on the agency estimates. He did recognize that it is difficult for one agency within the Administration to criticize another agency. This observation led to the second recommendation: that OMB must provide independent assessments of agency rules. If the OMB can not maintain independence then Congress should create a separate congressional agency and conduct an official independent assessment. Third, the OMB must focus on the marginal benefits and costs of individual rules rather than the aggregated costs and benefits. Fourth, the OMB needs to furnish a better breakdown of the regulatory costs and benefits of individual programs. Fifth, the OMB must provide a list of regulatory programs or rules that should be reformed or eliminated; and lastly, each agency should produce its own cost-benefit report. These reports could then form "the grist for the mill for OMB's own collection of its government-wide assessments."

Randall Lutter, a resident scholar at the American Enterprise Institute and a fellow of the AEI-Brookings Joint Center for Regulatory Studies: Mr. Lutter provided his assessment of the EPA study that produced the main number driving the OMB's large estimate of net benefits of regulation. He started by stating that the EPA study was the "most ambitious benefit-cost analysis ever conducted," as there were fifty background documents and it went through six years of peer review. Despite all of this effort, however, there are major problems with the analysis. Therefore, one has to ask, "what other process would lead to a more credible estimate?" As an example of the problem, Mr. Lutter noted that the upper bound of the EPA number for benefits is $3.2 trillion and the central tendency is $1.3 trillion. These estimates do not seem plausible on their face when the lower number is 20 percent of GDP. Mr. Lutter went on to say that the quantitative estimates of benefits depend on, "seemingly arbitrary assumptions about the nature and value of health benefits." He said that "equally plausible alternative assumptions would lead to radically different conclusions."

Robert Hahn: Mr. Hahn summarized and concluded the conference by stating that the OMB draft report has many good elements and covers more material than the last report. The OMB does attempt to assess uncertainty in a more rigorous way by identifying upper and lower bound estimates. They have also developed a more comprehensive database of the costs and benefits of individual regulations. They did attempt to monetize benefits that agencies quantified but did not monetize. The OMB, however, did not say what they really think about the regulations they reviewed. If the OMB cannot be critical, then they should contract the report out to someone who can be. Mr. Hahn also endorsed the idea of the formation of a Congressional Office of Regulatory Affairs that would provide another credible source for information on the impacts and costs and benefits of regulation.