oversight

Regulatory Accounting: Analysis of OMB's Reports on the Costs and Benefits of Federal Regulation

Published by the Government Accountability Office on 1999-04-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to Congressional Requesters




April 1999
                REGULATORY
                ACCOUNTING
                Analysis of OMB’s
                Reports on the Costs
                and Benefits of Federal
                Regulation




GAO/GGD-99-59
      United States

GAO   General Accounting Office
      Washington, D.C. 20548

      General Government Division


      B-281445

      April 20, 1999

      The Honorable Fred Thompson
      Chairman
      Committee on Governmental Affairs
      United States Senate

      The Honorable Ted Stevens
      Chairman
      Committee on Appropriations
      United States Senate

      The Honorable Tom Bliley
      Chairman
      Committee on Commerce
      House of Representatives

      The Honorable David McIntosh
      Chairman
      Subcommittee on National Economic Growth,
      Natural Resources and Regulatory Affairs
      Committee on Government Reform
      House of Representatives

      The Honorable John B. Breaux
      United States Senate

      This report responds to your requests that we provide information on the Office of
      Management and Budget’s (OMB) 1997 and 1998 reports to Congress regarding the costs and
      benefits of federal regulations. Specifically, we were asked to describe, for each of four
      statutory requirements, (1) how OMB addressed the requirements in its reports and (2) the
      views of noted economists in the field of cost-benefit analysis regarding OMB’s responses in
      these reports.

      We are sending copies of this report to Senator Joseph I. Lieberman, Senator Robert C. Byrd,
      Representative John D. Dingell, and Representative Dennis J. Kucinich in their respective
      capacities as the Ranking Minority Members of the Senate Committee on Governmental
      Affairs, the Senate Committee on Appropriations, the House Committee on Commerce, and
      the House Committee on Government Reform’s Subcommittee on National Economic
      Growth, Natural Resources and Regulatory Affairs. We are also sending copies to the
      Honorable Jacob Lew, Director of OMB, and will make copies available to others on request.




      Page 1                                      GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
B-281445


If you have any questions about this report or would like to discuss it further, please contact
me on (202) 512-8676. Major contributors to this report are listed in appendix V.




L. Nye Stevens
Director, Federal Management
and Workforce Issues




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Page 3   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Executive Summary


             The process of issuing and enforcing regulations is a basic tool of
Purpose      government, but the costs that nonfederal entities pay to comply with
             federal regulations are not accounted for in the federal budget process.
             Some researchers have estimated those costs in the hundreds of billions of
             dollars, and some estimates of aggregate benefits are even higher.
             Congress decided that it needed more information on regulatory costs and
             benefits, so it required the Office of Management and Budget (OMB) to
             submit two successive annual reports to Congress providing (1) estimates
             of the total annual costs and benefits of federal regulatory programs; (2)
             estimates of the costs and benefits of each rule likely to have a $100
             million annual effect on the economy in increased costs; (3) an assessment
             of the direct and indirect effects of federal rules on the private sector, state
             and local governments, and the federal government; and (4)
             recommendations to reform or eliminate any federal regulatory program or
             program element that is inefficient, ineffective, or not a sound use of the
             nation’s resources.

             GAO conducted this review at the request of several Members of Congress.
             GAO’s objectives were to describe, for each of these four requirements, (1)
             how OMB addressed the requirements in its 1997 and 1998 reports and (2)
             the views of noted economists in the field of cost-benefit analysis
             regarding OMB’s responses in these reports.

             Conceptually, cost-benefit analysis is a rigorous procedure of weighing the
Background   costs and benefits of a proposed action and various alternatives and is
             generally regarded as an important and useful tool in regulatory
             decisionmaking. For nearly 20 years, both the executive and legislative
             branches have required federal agencies to prepare cost-benefit analyses
             for certain rules. Under Executive Order 12866, OMB reviews agencies’
             regulations and associated cost-benefit estimates to ensure that the
             regulations are consistent with applicable laws, the executive order’s
             principles, and the President’s priorities.

             The statutes requiring OMB to prepare its reports on regulatory costs and
             benefits do not prescribe how those reports should be prepared, and no
             clear legislative history exists to describe congressional intent. Some
             Members of Congress expressed their individual views that OMB should
             simply compile existing information about regulatory costs and benefits.
             However, other Members of Congress said that OMB should prepare an
             independent assessment of regulatory effects, not just report the results of
             agencies’ cost-benefit analyses.




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                     Executive Summary




                     OMB’s 1997 and 1998 reports contained some, but not all, of the elements
Results in Brief     Congress required. OMB provided estimates of total regulatory costs and
                     benefits and provided estimates for some (but not all) $100 million rules
                     issued within particular 1-year periods. OMB’s 1998 estimate of total
                     federal regulatory benefits was 12 times its 1997 estimate, driven almost
                     entirely by a 1998 Environmental Protection Agency (EPA) estimate of the
                     benefits associated with the Clean Air Act. However, OMB did not
                     separately assess the direct and indirect effects of federal regulations on
                     various sectors in either report. Also, although it discussed a proposal for
                     electricity restructuring and some previously announced agency initiatives
                     in its 1998 report, OMB did not provide any new recommendations to
                     reform or eliminate regulatory programs or program elements.

                     The cost-benefit analysis experts that GAO consulted were generally
                     critical of OMB’s performance, with regard to three of the four statutory
                     requirements. The experts said OMB’s 1998 upper-bound estimate of total
                     regulatory benefits was questionable or implausible, and they were
                     particularly critical of OMB’s unadjusted use of EPA’s Clean Air Act
                     benefit estimate. They also said OMB should not have simply accepted
                     agencies’ cost and benefit estimates for the “major” and “economically
                     significant” rules and should have provided new regulatory reform
                     recommendations. However, the experts said they understood why OMB
                     could do little to discuss the other statutory requirement regarding indirect
                     regulatory effects on particular sectors. Overall, they said OMB should
                     have been more than a “clerk,” transcribing the agencies’ and others’
                     estimates of costs and benefits. However, several of the experts also
                     recognized that, as part of the administration, OMB was politically
                     constrained from doing more than it did because providing independent
                     assessments would have required OMB to criticize positions approved by
                     the administration.

                     OMB has a responsibility to review agencies’ estimates of regulatory costs
                     and benefits in rules and reports before they are published. However, after
                     their publication, those rules and reports become statements of
                     administration policy. It is politically difficult for OMB to provide an
                     independent assessment and analysis of the administration’s own
                     estimates in a public report to Congress. If Congress wants an independent
                     assessment of executive agencies’ regulatory costs and benefits, it may
                     have to look outside of the executive branch or outside of the federal
                     government.

                     The first statutory requirement was that OMB provide estimates of the
Principal Findings   total annual costs and benefits of federal regulatory programs. In its 1997



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Executive Summary




report, OMB estimated that the annual cost of federal regulations was $279
billion and estimated annual benefits at $298 billion. In its 1998 report,
OMB estimated annual regulatory costs at between $170 billion and $230
billion and estimated annual regulatory benefits at between $260 billion
and $3.5 trillion. The decrease in the cost estimate between 1997 and 1998
was primarily because OMB did not include efficiency losses from
economic regulations in its 1998 summary table. Virtually all of the
increase in the benefits estimate was due to the inclusion of an EPA
estimate of the benefits associated with the Clean Air Act. The experts that
GAO consulted generally said that OMB’s 1997 and 1998 cost estimates
were reasonable, but most of the experts said the upper-bound benefits
estimate in the 1998 report was questionable or implausible. Most of the
experts criticized OMB for accepting agencies’ cost and benefit estimates
without adjustment or standardization and were particularly critical of
OMB’s unadjusted use of EPA’s benefit estimate. However, most of the
experts also said that OMB faced political constraints in adjusting
agencies’ cost and benefits estimates, noting that an independent
assessment of those estimates would potentially require OMB to criticize
its own administration’s policy positions.

The second statutory requirement was that OMB provide estimates of the
costs and benefits of each rule likely to have a gross annual effect on the
economy of $100 million or more in increased costs. OMB interpreted this
requirement broadly to include rules that were “major” or “economically
significant,” even if they did not necessarily result in $100 million in
increased costs. However, OMB narrowly focused on rules issued during
specific 1-year periods and did not include rules issued by independent
regulatory agencies in its summary tables. Also, OMB did not include all
rules that met its criteria and did not provide cost-benefit data for all of the
rules it included. Most of the cost-benefit experts that GAO consulted said
OMB should have included rules from independent regulatory agencies.
Several experts also said OMB should not have simply accepted the cost
and benefit estimates provided by the executive agencies, but some of
them also recognized that it was politically difficult for OMB to alter
agencies’ estimates in its report to Congress.

The third statutory requirement was that OMB provide an assessment of
the direct and indirect impacts of federal rules on the private sector, state
and local governments, and the federal government. Although OMB did not
separately assess the direct and indirect effects of federal regulation on
these sectors, OMB indicated that it believed it had discussed the direct
effects through the overall cost and benefit estimates that it provided in
relation to the first statutory requirement. OMB discussed the difficulty in



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                     Executive Summary




                     determining indirect regulatory effects in its first report but did not
                     provide any description of those effects in either report. The cost-benefit
                     analysis experts that GAO consulted were generally sympathetic toward
                     OMB’s treatment of this requirement, describing it as a lower priority than
                     the other requirements and difficult for anyone to satisfy.

                     The fourth statutory requirement was that OMB provide recommendations
                     to reform or eliminate any federal regulatory program or program element
                     that is inefficient, ineffective, or is not a sound use of the nation’s
                     resources. OMB’s 1997 report contained no such recommendations, with
                     OMB stating that existing data were inadequate. The 1998 report contained
                     an endorsement of 10 previously announced regulatory or statutory
                     changes and a discussion of restructuring the electrical generation
                     industry. All of the cost-benefit experts were dissatisfied with OMB’s
                     response to this requirement, and several said sufficient cost-benefit data
                     existed to support making some recommendations. However, several of
                     the experts also said that it was politically difficult for OMB to make
                     recommendations to Congress to eliminate or reform existing
                     administration programs.

                     GAO is making no recommendations in this report.
Recommendations
                     It is politically difficult for OMB to provide Congress with an independent
Matter for           assessment of executive branch agencies’ regulatory costs and benefits. If
Congressional        Congress wants an independent assessment, it may wish to consider
Consideration        assigning that responsibility to an organization outside of the executive
                     branch. That organization could include a congressional office of
                     regulatory analysis, which would have to be established, or an organization
                     outside of the federal government.

                     GAO requested comments on a draft of this report from the OMB Director.
Comments and GAO’s   OMB’s Office of Information and Regulatory Affairs (OIRA) said the report
Evaluation           raised a number of useful analytical issues regarding how regulatory costs
                     and benefits can most appropriately be estimated and reported. However,
                     OIRA stated that it disagreed fundamentally with several of the statements
                     attributed to the experts in the report, saying their comments reflect a
                     significant misunderstanding of OMB’s role in developing, overseeing, and
                     coordinating the administration’s regulatory policies. OIRA also said that it
                     had provided original estimates of regulatory costs and benefits, that the
                     EPA estimate of the benefits associated with the Clean Air Act had been
                     peer reviewed, and that it had provided Congress with the estimates that
                     Congress directed it to prepare.




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Executive Summary




GAO believes OIRA’s comments buttress its conclusions and matter for
congressional consideration. It is politically difficult for OMB to disagree
publicly with agencies’ statements of regulatory policy, particularly
because OIRA staff typically participates in developing those policies.

GAO also obtained the views of six of the seven cost-benefit experts that it
consulted on the draft report. The experts generally said the report
accurately reflected their statements, but some of them suggested
particular clarifications, which GAO has incorporated into this report
where appropriate.




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Page 9   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Contents



Executive Summary                                                                                      4


Chapter 1                                                                                             14
                         Background                                                                   15
Introduction             Objectives, Scope, and Methodology                                           23


Chapter 2                                                                                             27
                         OMB’s 1998 Upper-Bound Benefits Estimate Was 12                              27
Experts Questioned         Times the 1997 Estimate
OMB's 1998 Estimate      Experts Said OMB Should Have Done More, but Political                        34
                           Environment Limits OMB’s Role
of Regulatory Benefits
Chapter 3                                                                                             39
                         OMB Provided Data for Only Certain Rules in Both                             39
OMB Did Not Provide        Reports
Cost-Benefit Estimates   Experts Suggested Changes in OMB Major Rule                                  44
                           Information
for All $100 Million
Rules
Chapter 4                                                                                             47
                         OMB Reports Contained Little Discussion of Third                             47
OMB Did Not                Statutory Requirement
Separately Assess        Experts Were Sympathetic to OMB’s Treatment of                               48
                           Requirement
Direct and Indirect
Impacts of Rules
Chapter 5                                                                                             49
                         OMB Provided No New Recommendations                                          49
Experts Criticized       Experts Criticized OMB, but Noted “Constraints”                              51
Lack of New
Recommendations in
OMB Reports
Chapter 6                                                                                             53
                         Matter for Congressional Consideration                                       56
Conclusions              Comments and Our Evaluation                                                  56




                         Page 10                 GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
             Contents




Appendixes   Appendix I: Individual Views of Members of Congress                           60
               Regarding Regulatory Accounting Requirements
             Appendix II: Biographical Information of Regulatory                           65
               Experts
             Appendix III: Rules Meeting Specific Statutory                                69
               Requirements for OMB's 1997 Report
             Appendix IV: Rules Meeting Specific Statutory                                 73
               Requirements for OMB's 1998 Report
             Appendix V: Major Contributors to This Report                                 76


Tables       Table 2.1: Cost and Benefit Estimates From OMB’s 1997                         30
               Report (in 1996 dollars)
             Table 2.2: Cost and Benefit Estimates From OMB’s 1998                         33
               Report
             Table 3.1: Rules That Met OMB’s Criteria but Were Not in                      42
               OMB’s 1997 Report
             Table 3.2: Rules Meeting OMB’s Criteria But Not Included                      44
               in the 1998 Report
             Table III.1: Rules Likely to Have Gross Impact On                             70
               Economy of $100 Million in Increased Costs
             Table IV.1: Rules Likely to Have Gross Effect on the                          74
               Economy of $100 Million in Increased Costs


Figures      Figure 2.1: EPA’s Section 812 Data Substantially                              34
               Increased Upper-Bound Benefit Estimate Between
               1997 and 1998




             Page 11                  GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Contents




Abbreviations

AEI         American Enterprise Institute
CORA        Congressional Office of Regulatory Analysis
EPA         Environmental Protection Agency
FCC         Federal Communications Commission
HHS         Department of Health and Human Services
NPRM        notice of proposed rulemaking
OIRA        Office of Information and Regulatory Affairs
OMB         Office of Management and Budget
OSHA        Occupational Safety and Health Administration
RISC        Regulatory Information Service Center
SBREFA      Small Business Regulatory Enforcement Fairness Act of 1996
SEC         Securities and Exchange Commission
UMRA        Unfunded Mandates Reform Act of 1995
USDA        United States Department of Agriculture


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Page 13   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Chapter 1

Introduction


               Regulations serve as the means by which statutory requirements are
               implemented and specific requirements are established. Like taxing and
               spending, the process of issuing and enforcing regulations is a basic tool of
               government. Although the cost of operating federal regulatory agencies is
               captured in the federal budget process, the budget does not reflect the
               costs that nonfederal entities pay to comply with federal regulations. Some
               researchers have estimated that the direct cost of complying with all
                                                                             1
               federal regulations is in the hundreds of billions of dollars. Some
               estimates of the benefits that federal regulations provide to society are
                                            2
               even higher than the costs.

               Conceptually, cost-benefit analysis is a rigorous procedure that involves
               weighing the costs and benefits of various alternatives to a proposed
               action and underlies most if not all attempts to assess the cumulative
                                                 3
               effects of regulations on society. Both Congress and the executive branch
               have required certain federal agencies to conduct cost-benefit analyses on
               their most significant rules. Cost-benefit analysis is generally recognized as
               an important and useful tool in making decisions about particular
               regulations. However, applying cost-benefit analysis to major regulations
               can be a complex and controversial undertaking. Also, there is
               disagreement regarding the weight that the analyses should receive in the
               decisionmaking process.

               Although cost-benefit analysis for a single rule can be controversial,
               estimating the costs and benefits of all federal regulations can be even
               more controversial. Some questions center on whether certain types of
               regulatory costs or benefits should be included in the totals. Other
               questions are even more basic, focusing on whether developing accurate
               estimates of total federal regulatory costs and benefits is feasible or, if so,
               how policymakers should use those estimates.

               Congress decided that it needed more information on total regulatory
               costs and benefits, so in 1996 and 1997 it required the Director of the
               Office of Management and Budget (OMB) to submit reports to Congress
               providing (1) estimates of the total annual costs and benefits of federal

               1
               See, for example, Thomas D. Hopkins, Regulatory Costs in Profile, Policy Study 132, Center for the
               Study of American Business, August 1996.
               2
                For example, in “Regulatory Reform: What Do the Government’s Numbers Tell Us?” in Risks, Costs,
               and Lives Saved (Washington, D.C.: The AEI Press, 1996, pp. 208-253), Robert W. Hahn states that
               “using government agency data, it would appear that there is a present value of about $280 billion in
               net benefits to government regulation” in the areas of environment, health, and safety.
               3
                   Cost-benefit analysis is also referred to as benefit-cost analysis and regulatory impact analysis.




               Page 14                                 GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
                            Chapter 1
                            Introduction




                            regulatory programs; (2) estimates of the costs and benefits of each rule
                            likely to have a gross annual effect on the economy of $100 million in
                            increased costs; (3) an assessment of the direct and indirect effects of
                            federal rules on the private sector, state and local governments, and the
                            federal government; and (4) recommendations to reform or eliminate any
                            federal regulatory program or program element that is “inefficient,
                            ineffective, or is not a sound use of the Nation’s resources.” On September
                            30, 1997, OMB published its Report to Congress On the Costs and Benefits
                            of Federal Regulations in response to the 1996 requirement. On February 5,
                            1999, OMB published its second report to Congress in response to the 1997
                            requirement. Both the OMB reports and the requirements that generated
                            them have been the subject of considerable controversy.

                            The federal government has long regulated economic activity, often
Background                  through independent regulatory agencies such as the Securities and
                            Exchange Commission (SEC) and the Federal Communications
                            Commission (FCC). Social regulation in such areas as environmental
                            quality, workplace safety, and consumer protection grew dramatically in
                            the 1960’s and 1970’s with the creation of such agencies as the
                            Environmental Protection Agency (EPA) and the Occupational Safety and
                            Health Administration (OSHA). However, by the 1980’s, concerns began to
                            be raised about whether the benefits that these regulations and regulatory
                            agencies were attempting to achieve were worth the costs associated with
                            compliance.

Executive and Legislative   Every president in recent years has taken steps intended to reduce the
                            burden of federal regulations. Those presidential initiatives often involve
Branch Efforts to Control   OMB, whose stated mission is to help the president carry out his
Regulatory Burden           responsibilities. For example, in 1981, President Reagan issued Executive
                            Order 12291, which required executive departments and agencies to
                            prepare cost-benefit analyses identifying the benefits, costs, and
                            alternatives of all proposed and final “major” rules, and to submit those
                            analyses to OMB. A major rule was defined in the executive order as any
                            regulation that was likely to result in (1) an annual effect on the national
                            economy of $100 million or more; (2) a major increase in costs or prices
                            for consumers, industries, governments, or geographic regions; or (3)
                            significant adverse effects on competition, employment or investments,
                            productivity, innovation, or the international competitiveness of U.S.
                            enterprises. The executive order also required agencies to submit all of
                            their proposed and final rules to OMB for review before being published in
                            the Federal Register to ensure consistency with administration policies. To
                            the extent permitted by law, the order said agencies should not issue




                            Page 15                   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Chapter 1
Introduction




regulations unless the potential benefits “outweigh” the potential costs to
society.

In 1993, President Clinton issued Executive Order 12866 revoking
Executive Order 12291 but reaffirming the legitimacy and basic framework
of OMB’s regulatory review process. Like its predecessor, the executive
order explicitly excludes from OMB review regulatory actions issued by
independent regulatory agencies such as the FCC or the SEC. The order
states that OMB’s review is “necessary to ensure that regulations are
consistent with applicable law, the President’s priorities, and the principles
set forth in this Executive order,” and that OMB’s Office of Information
and Regulatory Affairs (OIRA) is the “repository of expertise concerning
regulatory issues . . . .” The order also says OMB shall provide guidance to
the agencies and assist the President, the Vice President, and other
regulatory policy advisors to the President. Noting that some costs and
benefits are difficult to quantify, the order says agencies should adopt
regulations only if the benefits “justify” the costs. Also, one of the order’s
stated objectives is “to reaffirm the primacy of Federal agencies in the
regulatory decision making process.”

Executive Order 12866 states that agencies should submit detailed cost-
benefit analyses to OIRA for all economically significant regulatory
actions. The order defines an “economically significant” regulatory action
as one “that is likely to result in a rule that may have an annual effect on
the economy of $100 million or more or adversely affect in a material way
the economy, a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local, or tribal governments
or communities.” The agency issuing the regulation must submit an
assessment, including the underlying analysis, of the anticipated benefits
associated with the action, the anticipated costs, and the costs and
benefits of reasonably feasible alternatives to the action (e.g., economic
incentives instead of “command and control” regulations).

In January 1996, OMB issued guidance to federal agencies on “best
practices” for preparing cost-benefit analyses under Executive Order
12866. Developed by a group that was co-chaired by the OIRA
Administrator and a Member of the Council of Economic Advisors, the
guidance says cost-benefit analyses should be guided by the principles of
full disclosure and transparency regarding their data, models, and
assumptions, but it allows analysts to use their professional judgment in
precisely how the studies should be conducted. The guidance also says
that agencies should focus on incremental changes—i.e., the costs and
benefits that are solely attributable to the regulation at issue.



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Chapter 1
Introduction




Congress has also taken steps intended to reduce regulatory burden
through oversight and increased analytical requirements. For example,
Congress passed the Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612),
which requires federal agencies to analyze the anticipated effects of rules
they plan to propose on small entities or they certify that the rules will not
have a “significant economic effect on a substantial number of small
entities.” Also in 1980, Congress passed the Paperwork Reduction Act,
which created OIRA within OMB to provide central agency leadership and
oversight of governmentwide efforts to reduce unnecessary paperwork
burden and improve the management of information resources. The act
also made the OIRA Administrator subject to Senate confirmation.

More recently, title II of the Unfunded Mandates Reform Act of 1995
(UMRA) says that, unless otherwise prohibited by law, agencies must
assess the costs and benefits of any rule containing a federal mandate that
may result in the expenditure of $100 million or more in any 1 year by
                                                                              4
state, local, and tribal governments, in the aggregate, or the private sector.
Also, the congressional review provisions of the Small Business Regulatory
Enforcement Fairness Act of 1996 (SBREFA) require agencies to submit all
of their rules to Congress and us before they become effective. On the date
of submission, SBREFA also requires the agency issuing the rule to submit
to us and make available to each House of Congress a copy of any cost-
benefit analysis and the agency’s actions relevant to certain provisions of
                                                               5
UMRA and other analytical requirements. For “major” rules, we are
required to provide a report to the committees of jurisdiction in each
House within 15 calendar days, assessing the agency’s compliance with
required procedural rulemaking steps.

Between 1994 and 1998, Congress considered a number of other bills that
would have increased requirements for agencies to conduct cost-benefit
analyses, but none of them were enacted. For example, the Regulatory
Improvement Act of 1998 (S. 981) would have required agencies to
prepare, among other things, a cost-benefit analysis and to place that
analysis in the rulemaking file before publishing a notice of proposed
rulemaking (NPRM) for any major rule. The bill also would have required
agencies to prepare a similar analysis before publishing the final rule. (In


4
 However, our analysis of title II indicated that these requirements do not apply to most economically
significant rules. See Unfunded Mandates: Reform Act Has Had Little Effect on Agencies’ Rulemaking
Actions (GAO/GGD-98-30, Feb. 4, 1998).
5
The statute defined a “major” rule in essentially the same manner as Executive Order 12291. Copies of
our major rule reports can be obtained at www.gao.gov.




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                        Chapter 1
                        Introduction




                        March 1999, the Regulatory Improvement Act was reintroduced as S. 746,
                        again requiring cost-benefit analysis of major rules.)

                        Another bill introduced during the 105th Congress (H.R. 1704, 105th Cong.
                        2d Sess [1998]) would have established a “Congressional Office of
                        Regulatory Analysis” (CORA). The bill would have required CORA to
                        provide a report to the committees of jurisdiction in each House for each
                        major rule that would include an assessment of the issuing agency’s
                        compliance with certain analytical requirements and an analysis of the
                        rule’s benefits, costs, and net benefits. According to the bill, CORA would
                        allow the legislative branch to obtain accurate and reliable information on
                        which to base its decisions as it carried out its responsibilities for
                        congressional review under SBREFA. CORA would have also been
                        required to issue an annual report including estimates of total costs and
                        benefits of all existing and anticipated federal regulations. The bill’s
                        principal sponsor said CORA was needed to provide Congress with
                        independent analyses of regulations and to supplement what she believed
                        to be unreliable information being provided by executive branch agencies.
                        However, critics of the proposal said it would duplicate functions
                        preformed by agencies in the executive branch.

Congress Requires       One of the more recent regulatory reform initiatives has been a series of
                        requirements for an accounting of regulatory costs and benefits. Section
Regulatory Accounting   645(a) of the Treasury, Postal Services and General Government
                        Appropriations Act for fiscal year 1997, enacted on September 30, 1996,
                        required OMB to provide a report to Congress by September 30, 1997, that
                        included several specific elements:

                        (1) estimates of the total annual costs and benefits of federal regulatory
                        programs, including quantitative and nonquantitative measures of
                        regulatory costs and benefits;

                        (2) estimates of the costs and benefits (including quantitative and
                        nonquantitative measures) of each rule that is likely to have a gross annual
                        effect on the economy of $100 million or more in increased costs;

                        (3) an assessment of the direct and indirect impacts of federal rules on the
                        private sector, state and local government, and the federal government;
                        and

                        (4) recommendations from the Director and a description of significant
                        public comments to reform or eliminate any federal regulatory program




                        Page 18                   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
                              Chapter 1
                              Introduction




                              that is inefficient, ineffective, or is not a sound use of the nation’s
                              resources.

                              Section 645(b) of the act directed OMB to obtain comments on the draft
                              report before submitting it to Congress. On July 22, 1997, OMB published
                              the draft report for comment, and on September 30, 1997, OMB issued its
                              first Report to Congress on the Costs and Benefits of Federal Regulation.

                              On October 10, 1997, OMB was required to produce a second report on the
                              cost and benefits of federal programs by September 30, 1998. The
                              requirement was in section 625(a) of the Treasury and General
                              Government Appropriations Act for fiscal year 1998 and contained the
                              same four requirements that were in section 645(a) of the 1997 act. OMB
                              published a draft of the 1998 report in the Federal Register on August 17,
                              1998, and established a 30-day comment period. Because of requests from
                              both the public and Members of Congress, OMB extended the comment
                              period until October 16, 1998. On February 5, 1999, OMB published its
                              second regulatory accounting report.

                              On October 21, 1998, legislation was enacted requiring regulatory
                              accounting for another year. Section 638 of the Treasury and General
                              Government Appropriations Act for fiscal year 1999 requires OMB to
                              provide Congress with a regulatory accounting statement and report for
                              calendar year 2000 that is similar to the previous requirements. The
                              statement and report are to be submitted with the budget and the report is
                              to include “an estimate of the total annual costs and benefits . . . of Federal
                              rules and paperwork, to the extent feasible (A) in the aggregate; (B) by
                              agency and agency program; and (C) by major rule.” Section 638 also
                              requires OMB to issue guidelines to agencies standardizing agencies’
                              measures of costs and benefits and the format of their accounting
                              statements. Finally, it requires OMB to provide for independent and
                              external peer review of the guidelines and each accounting statement and
                              associated report.

Views of Individual Members   The regulatory accounting provisions that required OMB to provide the
Regarding Regulatory          1997 and 1998 reports to Congress have limited legislative histories. A
Accounting Requirements       Senate Appropriations Committee report for the Treasury, Postal Service,
                              and General Government Appropriations Act for fiscal year 1997 stated
                              that “[r]egulatory costs and benefits should be quantified to the extent
                              feasible and, where applicable, should be based on most plausible
                              estimates. Most of the needed information is already available to the OMB.
                              Executive Order 12866 requires cost-benefit analysis of significant rules,
                              and private studies are available.” These general comments are of limited



                              Page 19                     GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Chapter 1
Introduction




value in determining how Congress intended OMB to carry out its
responsibilities under the provision or what types of regulations OMB
should include in its reviews.

During consideration of the provision that established the first of these
regulatory accounting requirements, several Members of Congress
expressed their individual views regarding OMB’s responsibilities to carry
out this provision in comments recorded in the Congressional Record. (See
app. I for a more complete discussion of these Members’ comments.) Some
of the Members indicated that OMB should simply compile existing
information about regulatory costs and benefits. For example, during
Senate consideration of this provision, one Member said the sponsors of
the amendment were aware of OMB’s resource constraints and intended
that the report be based on a compilation of existing information rather
than new analysis.

However, other Members indicated that OMB should not simply rely on
existing cost and benefit information. For example, the principal sponsor
of the first regulatory accounting provision said “OMB should use the
valuable information already available, and supplement it where needed”
when preparing the estimates of total annual costs and benefits.
Subsequently, during the Senate debate, another Member said “(w)here
there are gaps, OMB must supplement existing information.” He also said
OMB should “quantify costs and benefits to the extent feasible, and
provide the most plausible estimate.”

Several Members of Congress also commented on OMB’s final and draft
reports in letters to the OMB Director, expressing their view that OMB
should not have simply relied on existing information to carry out its
responsibilities. For example, on October 29, 1997, the Chairmen of the
Senate Committees on Governmental Affairs and Appropriations said that
OMB should “exercise leadership to assure the quality and reliability of
information reported” by, among other things, providing an “independent
assessment” of the information provided by the agencies. They also said
OMB staff should be directed to “critique the quality of the estimates
provided to them, not to simply compile data presented by the agencies.”
On the same day, the Chairmen of the House Committees on Commerce
and Transportation and Infrastructure and the Chairman of the House
Committee on Government Reform and Oversight’s Subcommittee on
National Economic Growth, Natural Resources, and Regulatory Affairs
wrote that “Congress expected OMB to assure the reporting of meaningful
information and provide an independent assessment of regulatory effects,”




Page 20                  GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
                           Chapter 1
                           Introduction




                           not merely to perform the “ministerial function of reporting information
                           provided by other agencies.”

Nongovernmental Groups     A number of organizations outside of the federal government are also
                           examining federal regulatory programs and issues. Some of these
Also Study Federal         organizations have taken public stands for or against federal regulatory
Regulatory Programs        activity. Other organizations are affiliated with academic institutions or
                           public policy research organizations. For example, Carnegie Mellon
                           University, with the cooperation of the University of Washington, in
                           Seattle, WA, has established a Center for the Study and Improvement of
                           Regulation housed within its Department of Engineering and Public Policy.
                           According to its mission statement, the Center intends to combine studies
                           to obtain a deeper understanding of particular issues and synthesize
                           research to, among other things, (1) elaborate a framework for considering
                           the risks to health, safety, and the environment; and (2) help improve
                           health, safety, and environmental regulation at the federal, state, and local
                           level. The Center is funded by grants from the National Science
                           Foundation and from several corporations, foundations, and trade
                           associations.

                           In 1998, the American Enterprise Institute (AEI) and the Brookings
                           Institution established a Joint Center for Regulatory Studies with four
                           primary missions:

                         • to publish timely, objective analyses of a number of important regulatory
                           proposals before they are formally adopted;
                         • to publish analyses of existing regulations and approaches to regulatory
                           reform, with recommendations for modifications (including proposals to
                           strengthen rules where the benefits appear to justify the costs as well as
                           proposals to eliminate or relax rules where the reverse may be true);
                         • to publish essays that evaluate the impact of regulatory policies and
                           suggest ways to improve the regulatory process; and
                         • to publish an annual report on the state of federal regulation, including an
                           independent assessment of both the total and marginal costs and benefits
                           of federal regulation, broken down into useful categories.

                           According to the Center’s mission statement, both AEI and Brookings
                           “believe that the media and the policy community will look to the Joint
                           Center as an objective, highly respected source of information on
                           regulatory policy issues.” The Joint Center is funded solely by foundation
                           grants.




                           Page 21                   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
                            Chapter 1
                            Introduction




Our Previous Reports on     We have issued a number of reports examining the costs and benefits of
                            agencies’ rules and estimates of total regulatory costs. For example, in
Regulatory Costs/Benefits   April 1984, we said that cost-benefit analysis is a useful tool for estimating
                                                                                  6
                            the costs and benefits of various regulatory actions. We also said that its
                            role might become increasingly critical because complying with federal
                            environmental regulations could mean billions of dollars in costs and
                            benefits. However, we also said that gaps in underlying scientific data,
                            legal restrictions, and EPA’s partial implementation of Executive Order
                            12291 had hampered cost-benefit analysis.

                            In December 1993, we reported that none of the studies released by the
                            federal banking agencies and several of the major banking industry trade
                            associations provided a comprehensive discussion of regulatory burden or
                                                                                               7
                            the cost-benefit trade-offs associated with particular regulations. We also
                            found that estimates of regulatory compliance costs reported in the
                            industry were of little value due to serious methodological deficiencies.

                            In March 1995, we reported that there was a great deal of uncertainty
                            about the costs and benefits of regulations, with estimates varying,
                                                                                               8
                            depending on assumptions about what constitutes regulatory cost. For
                            example, we noted that many economists argue that economic “transfers,”
                            such as the added cost a consumer pays for goods in the marketplace
                            because of agricultural price supports, should not be included in aggregate
                            cost estimates. We also said that some economists are concerned about
                            including process costs because of measurement concerns and because
                            any change associated with this category may be difficult to achieve (since
                            most of the estimate derives from completing tax forms). Finally, although
                            one researcher estimated that total regulatory costs increased between
                            1977 and 1994, we noted that the percentage of the gross domestic product
                            devoted to the costs of federal regulations decreased during this period.

                            In November 1996, we concluded that, although perhaps not impossible, it
                            is very difficult to measure the incremental cost of all federal regulations
                                                      9
                            on individual businesses. Therefore, we said, users of aggregate regulatory
                            6
                             Cost-Benefit Analysis Can Be Useful In Assessing Environmental Regulations, Despite Limitations
                            (GAO/RCED-84-62, Apr. 6, 1984).
                            7
                             Regulatory Burden: Recent Studies, Industry Issues, and Agency Initiatives (GAO/GGD-94-28, Dec. 13,
                            1993).
                            8
                            Regulatory Reform: Information on Costs, Cost-Effectiveness, and Mandated Deadlines for
                            Regulations (GAO/PEMD-95-18BR, Mar. 8, 1995).
                            9
                             Regulatory Burden: Measurement Challenges and Concerns Raised by Selected Companies
                            (GAO/GGD-97-2, Nov. 18, 1996).




                            Page 22                           GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
                         Chapter 1
                         Introduction




                         cost studies need to be aware of the inherent difficulties and assumptions
                         involved in producing such measures. We said questions need to be raised
                         and answered regarding which regulations are included in such studies
                         and whether they focus on incremental costs before policy makers use
                         them to make decisions.

                         In May 1998, we reported that some of the 20 economic analyses that we
                         reviewed did not incorporate the best practices set forth in OMB’s
                                                                                                   10
                         guidance and often did not disclose why the guidance was not followed.
                         We also found that only 1 of the 20 analyses received an independent peer
                         review. Nevertheless, agency officials said the cost-benefit analyses played
                         a valuable role in regulatory decisionmaking.

                         Our objectives in this review were to describe, for each of the four
Objectives, Scope, and   statutory requirements underlying OMB’s 1997 and 1998 reports to
Methodology              Congress, (1) how OMB addressed the requirements and (2) the views of
                         noted economists in the field of cost-benefit analysis regarding OMB’s
                         responses in these reports. As noted previously, Congress required OMB to
                         submit reports in 1997 and 1998 providing (1) estimates of the total annual
                         costs and benefits of federal regulatory programs; (2) estimates of the
                         costs and benefits of each rule likely to have a gross annual effect on the
                         economy of $100 million in increased costs; (3) an assessment of the direct
                         and indirect effects of federal rules on the private sector, state and local
                         governments, and the federal government; and (4) recommendations to
                         reform or eliminate any federal regulatory program or program element
                         that is “inefficient, ineffective, or is not a sound use of the Nation’s
                         resources.”

                         To describe how OMB addressed each of these four requirements, we
                         analyzed the reports’ contents and interviewed officials from OIRA.
                         Specifically, to determine how OMB addressed the first statutory
                         requirement, we reviewed chapter II of the 1997 report and chapter I of the
                         1998 report, focusing on such issues as the data sources and methodology
                         used to prepare the two reports. To determine how OMB addressed the
                         second statutory requirement, we reviewed chapter III of the 1997 report
                         and chapter II of the 1998 draft report as well as relevant tables and
                         appendixes. In both reports, OMB interpreted the statutory requirements
                         to include all final rules on which OIRA concluded its review in the 1-year
                         time periods that OMB specified and that were either (1) “economically
                         significant” under Executive Order 12866, (2) “major” under the

                         10
                          Regulatory Reform: Agencies Could Improve Development, Documentation, and Clarity of Regulatory
                         Economic Analyses (GAO/RCED-98-142, May 26, 1998).




                         Page 23                          GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Chapter 1
Introduction




congressional review requirements of SBREFA, or (3) met the threshold
under title II of the Unfunded Mandates Reform Act of 1995. To determine
whether OMB reported cost/benefit information on all rules that met its
own criteria, we compared OMB’s list to (1) our database of major rules
submitted pursuant to the congressional review provisions of SBREFA and
(2) a list of economically significant rules provided by the Regulatory
                                                               11
Information Service Center (RISC) for the same time periods. To
determine which rules were “likely to have a gross annual effect on the
economy of $100,000,000 or more in increased costs,” we identified only
those rules in either databases that the agencies indicated had an annual
estimated cost of $100 million or more (excluding those rules that were
either “economically significant” or “major” because they had benefits of
$100 million or for other reasons).

To determine how OMB addressed the third requirement, we reviewed
chapter II from OMB’s 1997 report and chapter I of its 1998 report. In both
reports, OMB stated that the direct impacts of the regulations were
accounted for in the total annual cost and benefit estimates, so we also
reviewed those sections of the reports. To determine how OMB addressed
the fourth requirement, we reviewed chapter IV of both the 1997 report
and 1998 reports. We also examined the Unified Agenda of Federal
Regulatory and Deregulatory Actions to determine when the agency
                                                             12
initiatives listed in OMB’s 1998 report were first announced.

To describe the views of noted economists in the field of cost-benefit
analysis regarding OMB’s 1997 and 1998 reports and the four statutory
requirements, we first selected the experts with whom we wanted to
consult. We made our selections based on how frequently authors were
cited in the bibliographies of OMB’s 1997 report and its August 1998 draft
report and in a computer-generated literature search of books and articles
on cost-benefit analysis. Then, based on a suggestion from OMB officials,
we noted which authors on this list participated on EPA’s Science
Advisory Board and in developing the AEI publication, “Benefit-Cost
Analysis in Environmental, Health, and Safety Regulation: A Statement of




11
   RISC works closely with OMB to provide information to the President, Congress, and the public about
federal regulatory policies. Its primary role is to coordinate the development of the Unified Agenda of
Federal Regulatory and Deregulatory Action, a comprehensive listing of proposed and final regulations.
12
   The Unified Agenda is compiled by RISC for OIRA and has been published twice each year since 1983.
It is used to satisfy the requirements in the Regulatory Flexibility Act and other requirements that
agencies identify rules that they expect to propose or promulgate.




Page 24                            GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
  Chapter 1
  Introduction




                      13
  Principles,” and the AEI-Brookings Institution publication “An Agenda for
                             14
  Federal Regulatory Reform.”

  We developed a preliminary list of 12 experts, based on those who had the
  most citations in the OMB reports and the literature search, had served on
  the EPA panel, and/or had helped develop the AEI and Brookings
  publications. However, five of these experts declined to participate
  because of time constraints or because they said they did not have
  expertise in the areas covered by the OMB reports. The remaining seven
  experts that we interviewed and their affiliations were the following:

• Robert W. Crandall, Senior Fellow, Brookings Institution, Washington,
  D.C.;
• Robert W. Hahn, Director, AEI-Brookings Joint Center for Regulatory
  Studies, Washington, D.C.;
• Thomas D. Hopkins, Professor of Economics, Rochester Institute of
  Technology, Rochester, NY;
• Lester B. Lave, Professor of Economics, Carnegie Mellon University,
  Pittsburgh, PA;
• Robert E. Litan, Co-Director, AEI-Brookings Joint Center for Regulatory
  Studies, Washington, D.C.;
• Paul R. Portney, President, Resources for the Future, Washington, D.C.;
  and
• Murray L. Weidenbaum, Chairman, Center for the Study of American
  Business, Washington University, St. Louis, MO.

  Biographical information of these experts and citations of some of their
  relevant work are provided in appendix II of this report.

  OMB officials reviewed our final list of cost-benefit analysis experts and
  had no objections to those included. The officials did not suggest
  additional experts that they believed we should consult and said that the
  experts we consulted are among the leading economists in the field of
  cost-benefit analysis research. However, the list of experts that we
  contacted is not the only such list that could have been developed. At the
  direction of the requesters, we focused on economists and did not include
  experts in other professions that have examined cost-benefit issues (e.g.,
  legal experts or statisticians). Also, we focused our literature search on
  those economists who are knowledgeable about cost-benefit analysis in

  13
       Kenneth J. Arrow, et. al., 1996.
  14
       Robert W. Crandall, et. al., 1997.




  Page 25                                   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Chapter 1
Introduction




the federal government. Therefore, other experts with an extensive
background in cost-benefit analysis were not included in our initial list.

We first obtained the experts’ comments in late 1998 on OMB’s 1997 report
and on OMB’s August 1998 draft report and obtained additional
information from them after the final 1998 report was published in
February 1999. We also consulted with them during the preparation of our
report to ensure that we had accurately characterized their views. The
views attributed to them are their own and do not necessarily reflect those
of the organizations with which they are affiliated or our views.

We conducted our work between June 1998 and March 1999 at OMB in
Washington, D.C., and at the sites of our interviews with the cost-benefit
experts (Washington, D.C.; Rochester, NY; Pittsburgh, PA; and St. Louis,
MO), in accordance with generally accepted government auditing
standards. At the end of our review, we sent a draft of this report for
comments to the Director of OMB. On April 7, 1999, we met with the
Acting Administrator of OIRA to obtain OMB’s comments, which are
presented in chapter 6, along with our evaluation.




Page 26                   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Chapter 2

Experts Questioned OMB's 1998 Estimate of
Regulatory Benefits

                        OMB said in both its 1997 and 1998 reports that it had to confront a
                        number of intractable problems in developing estimates of the total annual
                        costs and benefits of federal regulatory programs. Those problems
                        included (1) determining the baseline against which regulatory costs and
                        benefits should be measured (i.e., what costs and benefits would have
                        occurred if the regulations had not been issued) and (2) the “apples and
                        oranges” problem of adding together the diverse (and sometimes dated)
                        set of previously conducted regulatory studies. OMB qualified the
                        estimates in both reports by stating that “it remains difficult, if not
                        impossible, to estimate the actual total costs and benefits of all existing
                        Federal regulations with any degree of precision.”

                        In its 1997 report, OMB estimated federal regulatory costs at $279 billion,
                        and benefits at $298 billion. In its 1998 report, OMB estimated regulatory
                        costs at between $170 billion and $230 billion, and estimated regulatory
                        benefits at between $260 billion and $3.5 trillion. The increase in the
                        benefits estimate between 1997 and 1998 was almost entirely due to the
                        inclusion of an EPA estimate of the benefits associated with the Clean Air
                        Act. The decrease in the cost estimate was primarily because OMB did not
                        include efficiency losses from economic regulations in its 1998 summary
                               1
                        table. The experts we consulted generally said that OMB’s 1997 and 1998
                        cost estimates were reasonable but said the upper-bound benefits estimate
                        in the 1998 report was questionable or implausible. All of the experts
                        criticized OMB for accepting agencies’ cost and benefit estimates without
                        adjustment or standardization and were particularly critical of OMB’s use
                        of EPA’s benefit estimate. However, most of the experts also said that
                        OMB faced “political constraints” in adjusting agencies’ cost and benefits
                        estimates, noting that an independent assessment of those estimates
                        would require OMB to criticize its own administration’s policy positions.

                        OMB used similar but, somewhat different, data sources and methods of
OMB’s 1998 Upper-       presentation in its 1997 and 1998 reports. The 1997 report presented the
Bound Benefits          cost and benefit estimates in four categories, but in its 1998 report OMB
Estimate Was 12 Times   used somewhat different categories of regulation. In the 1997 report, OMB
                        included costs associated with paperwork and disclosure requirements,
the 1997 Estimate       whereas in the 1998 report that information was reported separately
                        without an estimate. However, the biggest difference between the reports
                        was OMB’s use of an EPA study on the costs and benefits of the Clean Air
                        Act, which increased OMB’s upper-bound benefit estimate in its 1998
                        report to 12 times what it had been in the 1997 report.

                        1
                         OMB said efficiency losses associated with economic regulations result from higher prices and
                        inefficient operations that often occur when competition is prevented from developing.




                        Page 27                            GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
                      Chapter 2
                      Experts Questioned OMB's 1998 Estimate of Regulatory Benefits




OMB’s 1997 Report     In its 1997 report, OMB presented its estimates of federal regulatory costs
                                                                   2
                      and benefits in four categories and in total. The four categories were:

                    • Environmental regulations that focus on improving the quality of the
                      environment and include those issued by EPA (which has issued the vast
                      majority of these regulations) and the Departments of Transportation,
                      Energy, and the Interior;
                    • Other Social regulations that are designed to advance the health and safety
                      of consumers and workers, promote social goals such as equal
                      opportunity, equal access to facilities, and protect the public from fraud
                      and deception. They also include the disclosure of information about a
                      product, service or manufacturing process where inadequate information
                      might place consumers or workers at a disadvantage;
                    • Economic regulations that directly restrict business’ pricing and output
                      decisions as well as limit the entry or exit of businesses into or out of
                      certain types of industries. These regulations often affect the agriculture,
                      trucking or communications industries; and
                    • Process regulations that involve paperwork, such as filling out income tax
                      forms and immigration papers.

                      In its table summarizing the cost and benefits estimates, OMB did not
                      include estimates for one other category of regulation—the “transfer”
                      costs and benefits of economic regulations. Transfers refer to regulations
                      that move payments from one group in society to another, (e.g., federal
                      Social Security payments and agricultural price supports). OMB estimated
                      those transfers at $140 billion in costs and benefits but said it did not
                      include these estimates in its totals because it considered transfers to be
                      payments that reflect a redistribution of wealth rather than social costs to
                                          3
                      society as a whole.

                      OMB used a variety of academic and agency studies to develop estimates
                      of the costs and benefits associated with the four regulatory categories
                      included in the 1997 report. Those sources were

                    • a 1991 article by Robert W. Hahn and John A. Hird that reviewed and
                      synthesized the work of more than 25 prior studies assessing the impact of

                      2
                      These categories had been previously used in a series of studies of federal regulatory costs by Thomas
                      D. Hopkins of the Rochester Institute of Technology. For the most recent of these studies, see Thomas
                      D. Hopkins, “Regulatory Costs in Profile,” Policy Sciences, 31 (Dec. 1998), pp. 301-320).
                      3
                       OMB noted that its 1996 “best practices” guidance states that transfers should not be added to the cost
                      and benefit totals included in cost-benefit analyses but should be discussed and noted for
                      policymakers.




                      Page 28                            GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
    Chapter 2
    Experts Questioned OMB's 1998 Estimate of Regulatory Benefits




                    4
    regulations. The authors refined the results of these studies and created
    their own estimates of the costs and benefits of regulation. OMB said its
    review of the literature indicated that this was the only comprehensive
    study that attempted to estimate the total costs and benefits of all federal
    regulations. However, OMB pointed out in its 1998 report (p. 14) that there
    are gaps and weaknesses in underlying studies that Hahn and Hird rely on
    for their estimates and that not all the costs and benefits of social
    regulation are captured in these estimates;
•   a 1990 EPA report (known as the Cost of Clean report) responding to
    requirements in section 312(a) of the Clean Air Act and section 516(b) of
    the Clean Water Act that presented data on environmental pollution
                                            5
    control costs between 1972 and 1987. The data used in this report were
    based primarily on surveys of actual spending conducted by the
    Department of Commerce and others;
•   agencies’ cost-benefit analyses (1987 through 1996) prepared pursuant to
    Executive Orders 12291 and 12866;
•   a 1996 study by Hahn estimating the cost and benefits of major
                                                                                 6
    environmental, health, and safety regulations from 1990 through mid-1995;
    and
•   a 1992 study of the costs associated with economic regulations, prepared
                             7
    by Thomas D. Hopkins.

    To develop its cost estimates, OMB first established an estimate of the cost
    of environmental regulations and other social regulations, as of 1988 based
    on information contained in the Cost of Clean report and the 1991 Hahn
    and Hird article, respectively. OMB then updated those figures with the
    results of agencies’ cost-benefit analysis conducted between 1987 and 1996
    to develop the total environmental and other social cost and benefit
    estimates. To develop the cost estimate for economic regulations, OMB
    used the results of Hopkins’ 1992 study ($81 billion) but reduced the
    Hopkins estimate by $10 billion to take into account the deregulation of
    financial services and telecommunications that occurred after Hopkins’



    4
    Robert W. Hahn and John A. Hird , “The Costs and Benefits of Regulations: Review and Synthesis,”
    Yale Journal on Regulation, 8 (Winter 1991), pp. 233-278.
    5
    “Environmental Investments: The Cost of a Clean Environment, Report of the Administrator of the
    Environmental Protection Agency to the Congress of the United States.” (1990).
    6
    “Regulatory Reform: What Do the Government’s Numbers Tell Us?” in Risks, Costs, and Lives Saved:
    Getting Better Results From Regulation (Washington, D.C.: The AEI Press, 1996, pp. 208-253).
    7
    “Cost of Regulation: Filling the Gaps,” Report Prepared for the Regulatory Information Service Center,
    Washington, D.C., (Aug. 1992).




    Page 29                            GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
                                        Chapter 2
                                        Experts Questioned OMB's 1998 Estimate of Regulatory Benefits




                                                       8
                                        estimate. OMB’s estimate for the cost of federal paperwork and disclosure
                                        requirements focused only on those costs imposed by independent
                                        regulatory agencies because it said the costs associated with other
                                        agencies’ paperwork was already included in the environmental and other
                                        social estimates. Estimates of the independent agencies’ paperwork costs
                                        were drawn from their burden-hour estimates (390 million hours at the end
                                        of fiscal year 1997) multiplied by an estimate of the cost per hour to
                                                                                    9
                                        complete the paperwork ($26.50 per hour).

                                        To estimate the benefits of environmental and other social regulations in
                                        the 1997 report, OMB used data from the 1991 Hahn and Hird article as the
                                        1988 baseline and updated that baseline with information from Hahn’s
                                        1996 article. OMB did not provide estimates of the benefits of economic
                                        regulations or of federal paperwork and disclosure requirements, saying
                                        “significant benefits remain to be quantified.”

                                        Table 2.1 presents the cost and benefit estimates that OMB presented in its
                                        1997 report in total and for each of the four categories of regulation. OMB
                                        noted that “other social” regulations have large net benefits (i.e., benefits
                                        minus costs) and said most of these net benefits were produced by
                                        highway safety regulations.


Table 2.1: Cost and Benefit Estimates
                                        Type of Rule                              Costs (billions of dollars)    Benefits (billions of dollars)
From OMB’s 1997 Report (in 1996
dollars)                                Environmental                                                  $144                              $162
                                        Other social                                                      54                               136
                                                                                                                                              a
                                        Economic (efficiency costs)                                       71
                                                                                                                                              a
                                        Paperwork/disclosure for                                          10
                                        independent regulatory
                                        agencies
                                        Total                                                            279                              298
                                        a
                                            OMB said that the benefits of economic and paperwork/disclosure “remain to be quantified.”
                                        Source: Report to Congress on the Costs and Benefits of Federal Regulations, OMB, 1997.


                                        As noted previously, OMB did not include $140 billion in estimated transfer
                                        costs and benefits in these totals. OMB also excluded (1) tax paperwork
                                        costs (also estimated at $140 billion) because, OMB said, “the burden of
                                        filling out income tax forms . . . are not what one usually thinks about
                                        when worrying about the cost of regulation;” and it excluded (2) the costs
                                        of regulations issued between 1987 and 1996 with impacts on the economy
                                        8
                                         Hopkins, in turn, had updated an estimate of the cost of economic regulations in Hahn and Hird’s 1991
                                        article.
                                        9
                                         Burden-hour estimates were presented in OMB’s Fiscal Year 1998 Information Collection Budget of
                                        the U. S. Government.




                                        Page 30                              GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
                      Chapter 2
                      Experts Questioned OMB's 1998 Estimate of Regulatory Benefits




                      of less than $100 million (and therefore were not covered by the executive
                      order’s cost-benefit analysis requirements).

OMB’s 1998 Report     OMB presented regulatory cost and benefit information somewhat
                      differently in its 1998 report, and also used some additional data that it had
                      not used in preparing the 1997 report. For example, OMB broke out the
                      costs and benefits of the “other social” category of regulations into three
                      separate categories for the 1998 report: labor, transportation, and other
                      social regulations (mainly regulations from the Departments of Health and
                      Human Services, Energy, and Agriculture). However, OMB dropped two
                      categories of regulations from its summary table in 1998 that it had used in
                      its 1997 report—economic regulations and paperwork/disclosure
                      requirements. OMB said that including the indirect costs of economic
                      regulations with the direct costs of social regulations in its 1997 report was
                      “more misleading than helpful.” OMB listed estimates of disclosure costs
                      ($7 billion) and benefits (“expected to be significant”) with other types of
                      regulations that it did not consider “true regulations” or did not believe
                      should be considered in the same category as social regulations.

                      Therefore, OMB presented cost and benefit information for four categories
                      of regulations in its summary table: environmental, labor, transportation,
                      and other social rules. OMB reported other types of regulatory costs and
                      benefits separately, including

                    • efficiency costs of economic regulations (estimated at $71 billion but
                      benefits “not estimated but expected to be small”);
                    • tax compliance costs (estimated at $140 billion in the August 1998 draft
                      report but not estimated in the final report);
                    • transfer costs and benefits (estimated at $140 billion in costs and benefits);
                      and
                    • federal expenditures for social regulations (estimated costs of $13 billion,
                      benefits of between $30 billion and $3.3 trillion) and economic regulations
                      (estimated costs of $3 billion, benefits “likely to be significant”).

                      The data and methodology that OMB used to develop its 1998 estimates in
                      these categories were similar in some respects to the way OMB prepared
                      the 1997 report. For example, OMB again used Hahn and Hird’s 1991 study
                      and the EPA Cost of Clean report to establish a 1988 baseline for the cost
                      estimate. However, OMB changed its methodology in some other ways.
                      For example, it used new estimates of the regulations that OMB reviewed
                      between 1995 and 1998 to update the baseline and presented the cost and
                      benefit information in terms of ranges rather than the point estimates used
                      in the 1997 report. OMB developed the new estimates by “monetizing” (i.e.,



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                             converting to dollars) some of the quantified benefits in the agencies’ cost-
                             benefit analyses (e.g., the number of lives expected to be saved as a result
                             of the regulations).

EPA’s Section 812 Report     A notable change in OMB’s methodology in the 1998 regulatory accounting
                             report was its use of data from EPA’s 1997 report on The Benefits and
                             Costs of the Clean Air Act, 1970 to 1990. Prepared because of requirements
                             in section 812 of the 1990 Clean Air Act Amendments, the EPA report
                             (hereinafter referred to as the “Section 812 report”) estimated that the
                             monetized benefits of the Clean Air Act from 1970 to 1990 were between $6
                             trillion and $50 trillion (present value in 1990 dollars). The report
                             estimated direct compliance expenditures, research and development
                             costs, and government costs were roughly $0.5 trillion during this period.

                             OMB noted that EPA’s Section 812 report was the result of a 6-year effort
                             and was peer reviewed by EPA’s Science Advisory Board’s Council on
                             Clean Air Act Compliance Analysis and that the Council said that the
                             report’s findings “are consistent with the weight of available evidence.”
                             OMB also noted that the Council’s review closure letter stated that the
                             report “is a serious, careful study and employs sound methods along with
                             the best data available. However, OMB also described several elements of
                             the analysis that it said “deserve further discussion in order to understand
                             the basis for the benefit estimates.” For example,

                           • OMB noted that the Section 812 report “assumed that no additional air
                             pollution controls would have been imposed by any other level of
                             government or voluntarily initiated by private entities after 1970. OMB said
                             that “considerable uncertainty” surrounds this assumption and that any
                             attempt to construct aggregate benefit and cost estimates are “somewhat
                                           10
                             speculative;”
                           • OMB also noted that although the monetized benefit estimates associated
                             with reducing exposure to fine particulate matter accounts for 90 percent
                             of the report’s total benefits estimate, there is “little discussion” in the
                             report about the uncertainty associated with the presumed causal
                             relationship between particulate matter levels and mortality; and
                           • OMB noted that the Section 812 report assumed that reductions in
                             particulate matter yields contemporaneous reductions in the mortality and
                             chronic health risks associated with long-term exposure. However, OMB
                             noted that it is “quite possible” that there is a lag in these health effects and

                             10
                                OMB noted that the Section 812 report acknowledge that this is an obvious oversimplification and
                             that state and local governments and the private sector were responsible for an important fraction of
                             the estimated benefits and costs between 1970 and 1990.




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                                        mortality, and that other researchers have assumed that these effects
                                        require 15 years of exposure. Applying a 15-year lag to the report’s
                                        calculations and a 5-percent discount rate would, OMB said, reduce the
                                        estimated present value of the report’s mortality benefits by a factor of
                                        two.

                                        In summary, OMB said the results of the Section 812 report, like other
                                        studies, appeared to be “sensitive to choices made concerning the baseline
                                        for the analysis and the translation of the reduction of air pollution into
                                        human health benefits.” OMB also noted in a footnote that “several
                                        agencies held different views pertaining to several key assumptions” in the
                                        study, but that these concerns were not resolved because of a court
                                        deadline. Therefore, OMB said the Section 812 report “reflects the findings
                                        of EPA and not necessarily other agencies in the Administration.”

                                        Table 2.2 presents the cost and benefit estimates from OMB’s 1998 report.
                                        The ranges in OMB’s estimates of total regulatory costs and benefits reflect
                                        substantial uncertainty regarding the estimates of environmental costs and
                                        benefits. Over 95 percent (or $3,200 billion) of the environmental
                                        category’s upper-bound benefit estimate was drawn from EPA’s Section
                                        812 report.



Table 2.2: Cost and Benefit Estimates
                                        Type of Regulation                   Costs (in billions)      Benefits (in billions)
From OMB’s 1998 Report
                                                                          Lower-bound Upper-bound Lower-bound Upper-bound
                                        Environmental                            $120            $170      $93            $3,300
                                        Transportation                             15              18        84              110
                                        Labor                                      18              19        28               30
                                        Other                                      17              22        53               58
                                        Total                                     170             230      260             3,500
                                        Note: Numbers are as reported in OMB’s report.
                                        Source: Report to Congress on the Costs and Benefits of Federal Regulations, OMB, 1998.

                                        OMB’ s estimate of the cost of federal regulations declined by between $49
                                        billion and $109 billion between its 1997 and 1998 reports. This decline was
                                        largely because OMB excluded $71 billion in costs associated with
                                        economic regulations that had been in the 1997 summary table and
                                        presented it in a separate table in the 1998 report. As figure 2.1 shows,
                                        OMB’s upper-bound benefit estimate increased by about $3.2 trillion
                                        between 1997 and 1998, virtually all of which was because of the inclusion
                                        of estimates from EPA’s Section 812 report.




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Figure 2.1: EPA’s Section 812 Data
Substantially Increased Upper-Bound
Benefit Estimate Between 1997 and 1998




                                         Source: Report to Congress On the Costs and Benefits of Federal Regulations,OMB, 1997 and 1998.




                                         According to most of the cost-benefit analysis experts that we consulted,
Experts Said OMB                         OMB should have done more than simply record the costs and benefits
Should Have Done                         from the various sources it consulted. Most of the experts expressed
More, but Political                      particular concern about OMB’s unadjusted use of the Section 812 report’s
                                         benefit estimate. However, the experts also said that OMB faced political
Environment Limits                       constraints in adjusting agencies’ estimates. Most of the experts agreed
OMB’s Role                               with OMB’s decision to report the costs and benefits of transfers and tax
                                         paperwork separately from the summary tables but differed as to whether
                                         economic benefits and federal expenditures should have been included in
                                         the totals.

Experts Said OMB Should                  The experts that we consulted all indicated that OMB faced a daunting
                                         task estimating the costs and benefits of all federal regulation. Most of the
Not Be “Clerk,” but Doing                experts said that OMB’s general approach of aggregating the results from
More Is Politically Difficult            diverse studies was the only real option available. For example, Hopkins



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said that although one would ideally like to have consistency in the studies
aggregated, he also said he did not think that consistency was obtainable.
However, Crandall said using different studies to derive a total figure is
“problematic,” and that the data in some of the studies forming the basis of
OMB’s estimates was “pretty thin” and unreplicated. Lave expressed
similar concerns, saying that OMB should have used studies with uniform
approaches.

Several of the experts said that OMB’s cost estimates were reasonable—in
Litan’s words, “in the ballpark.” However, most of the experts said that
OMB’s upper-bound benefits estimate in the 1998 report was questionable
or even “implausible.” Lave said the major increase in the benefits estimate
between the 1997 and 1998 reports “is an indication that these numbers are
not very good.” Weidenbaum said that when the benefits of regulations are
so large in comparison to the costs, “it stretches that credibility of the
report.”

Noting that the 1998 benefits estimate was driven, in large part, by the
inclusion of data from EPA’s Section 812 report, many of the experts
voiced specific concerns about that report’s assumptions and conclusions.
Virtually all of those concerns were similar to the concerns that OMB
discussed in its report—(1) the assumption that air quality would have
deteriorated significantly between 1970 and 1990 in the absence of the
Clean Air Act, (2) the assumed health effects from limiting exposure to
particulate matter, and (3) the methods used to estimate the value that
individuals would place on reducing health and mortality risks. Therefore,
all of the experts said they believed that the benefits estimate in the
Section 812 report (and therefore in the OMB report for 1998) was too
high. For example, Portney said that although he believed that the benefits
of the Clean Air Act are greatly in excess of its costs, EPA’s (and OMB’s)
assertion that those benefits are as much as one-sixth of the gross
domestic product “doesn’t pass the common sense test.” Weidenbaum said
OMB’s use of the Section 812 report’s upper-bound benefits estimate
“makes a mockery of the whole exercise.”

Because of these concerns about the accuracy of the benefits estimate,
most of the experts said they believed that OMB should have adjusted the
Section 812 report’s benefits estimates before including them in its report.
For example, Hahn said that OMB could have followed the procedure it
outlined in its report and accounted for the likely time lag between
reducing particulate matter and any health effects (which he said would
have reduced the benefits by a factor of two).




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The experts’ views regarding adjustment of the Section 812 report’s
benefits estimate were part of an overall view by most of the experts that
OMB should have played a more assertive and independent role in the
preparation of its aggregate benefit and cost estimate. Several of the
experts said that OMB had simply played the role of “clerk,” transcribing
the estimates from previous studies by academicians and agencies without
adjustment. For example, Weidenbaum said that agencies would naturally
emphasize the good that their regulations are doing and that OMB should
have done a “serious evaluation” of the agencies’ figures before including
them in its report. He said the “spirit” of the statutory requirement was for
OMB to come up with its own estimates of regulatory costs and benefits
and the absence of independent review of the benefit estimate of the Clean
Air Act by OMB “puts a cloud over the report.” Similarly, Litan said he
believed the intent of the statutory requirements was for OMB to be more
than a “clerk,” and that Congress was asking for OMB’s “own judgment”
regarding regulatory costs and benefits. Hopkins said OMB should
encourage agencies to provide independent assessments, and make
adjustments where needed to account for “overblown” estimates. Lave
said OMB should have monetized those benefits and costs that the
agencies did not monetize (e.g., when agencies provided quantified, but
                                            11
not monetized, estimates of lives saved).

Despite their view that OMB be more than a “clerk” and exercise
independent judgment in adjusting agencies’ cost and benefit estimates,
many of the experts also indicated that it was politically difficult if not
impossible for OMB to make such adjustments. In general, they indicated
that agencies’ regulations are ultimately approved by agency heads and, in
some cases, the President or the Vice President. OMB’s responsibility in
the rule-review process is to ensure that agencies’ regulations are
consistent with applicable law, the President’s priorities, and the principles
in Executive Order 12866, including the cost-benefit analysis requirements.
Although there may be great deliberation within and among agencies
during their development, once a rule is promulgated it becomes a public
statement of the administration’s policy. At that point, OMB’s
responsibility is to support and defend that statement of policy. Therefore,
requiring OMB to provide an “independent” view of those rules and their
associated estimates of costs and benefits, altering those estimates when
appropriate, would significantly change OMB’s current role of supporting
the administration’s position and initiatives. In general, the experts said
that it was politically difficult to ask OMB to criticize the administration of
which it is a part.
11
     As noted previously, OMB did monetize some of the agencies’ quantified estimates.




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                             Hahn said that he did not believe the report reflects the collective wisdom
                             that resides at OMB on these issues. Although OMB staff had the technical
                             expertise needed to develop its own “best estimate” of the effects of the
                             Clean Air Act, he said it would be politically very difficult to publish such
                             an estimate. Hahn also said that it would be more likely for OMB staff to
                             say what they think if there were competition from some other group that
                             would also examine agencies’ cost and benefit estimates.

                             Litan said adjustment of the Section 812 report’s benefit estimate was a
                             “dicey issue,” and that OMB was in “an inherently difficult position” on
                             whether to use EPA’s widely varying estimate. He said the reality of the
                             situation is that the President and the Vice President are ultimately
                             responsible for anything that comes from an executive branch agency and
                             that “OMB will always be politically constrained in this process.” Crandall
                             said that OMB “responds within a political environment,” and was not in a
                             position to make an independent judgment contrary to that of EPA.
                             Likewise, Hopkins said it was politically difficult for OMB to adjust the
                             cost-benefit estimates “if OMB is supposed to be representing a President,
                             a unified administration, a common party line.” He said this is true
                             regardless of which party occupies the White House.

Experts Differed Regarding   All but one of the experts we consulted believed that OMB’s exclusion of
                             transfer costs and benefits from the summary tables was appropriate. For
Inclusion of Certain Costs   example, Portney said that transfers should be presented separately
and Benefits in Summary      because they are not a social cost like environmental, health, and safety
Tables                       regulations. Hahn said such transfers should not be included in regulatory
                             cost or benefit totals but said estimating the size of such transfers can be
                                                       12
                             useful for other reasons. Hopkins said that although basic economic logic
                             says efficiency and transfer costs should not be mixed, he believes OMB
                             should have included transfer costs in the totals to illustrate the magnitude
                             of federal regulatory activity.

                             The experts also generally agreed with OMB that tax paperwork should
                             not be included in the summary tables. Portney said including such costs
                             would have been inappropriate and said he does not think of IRS as a
                             regulatory agency. Weidenbaum said he believes that tax paperwork
                             should be reported separately because the taxing power of the federal
                             government is separate from its power as a regulator. Hahn said such costs
                             should not be included because one cannot talk about the costs of the

                             12
                              See Robert W. Hahn, “Government Analysis of the Benefits and Costs of Regulation,” Journal of
                             Economic Perspectives, 12 (Fall 1998), pp. 201-210 for a complete discussion of Hahn’s views on this
                             issue.




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current tax system without knowing the alternative to that system.
However, Hopkins said the costs of tax paperwork should have been
included in OMB’s report. He indicated that the alternate to the current tax
system could be a flat tax system and that OMB claimed in an earlier
report that “[w]hen people speak of regulatory burden, they are usually
                                                                          13
referring to record keeping or reporting requirements—i.e., paperwork.”

The experts were divided about whether the costs and benefits of
economic regulations should have been included in the OMB report’s total
cost and benefit estimates. Crandall said it does not make sense to include
economic regulations with the total. Similarly, Lave said that these
regulations differ from the social regulation should be reported separately.
However, Hopkins and Litan said economic regulations should be
included. Litan said that if economic regulations constitute a “deadweight
efficiency loss, then it is a cost.” He said it is particularly important that
they be included “when we know the benefits are likely to be zero.” Hahn
said that estimating the costs and benefits of economic regulations was
useful, but whether they are combined with social regulations “depends on
what you want to do.” Although price and entry regulations are generally
considered different from social regulations, he said there is “no right or
wrong way to go.” Still others cited difficulties associated with these rules.
For example, Portney said that it is difficult to measure the effect of
regulations that affect the entrance to a market or, in the case of FCC
regulation, to measure the benefits of public airwaves. Crandall said it was
difficult for OMB to include these effects in its reports when agencies are
not conducting the analyses.

With regard to federal regulatory expenditures, both Lave and Crandall
said the amount involved is so small in comparison to other regulatory
costs and benefits that it doesn’t make much difference whether the costs
are included in OMB’s summary totals. However, Weidenbaum and Litan
said federal expenditures should be included as regulatory costs.
Weidenbaum said such costs are the “hardest” data available—straight out
of the federal budget. However, he said OMB’s presentation of the benefits
of these expenditures (up to $3.3 trillion) was already captured in the other
categories, so presenting them as OMB did could be double counting.
Hopkins, however, said it makes more sense to show federal expenditures
as part of the fiscal budget, not in an accounting of off-budget regulatory
costs.


13
 OMB, OIRA, More Benefits Fewer Burdens: Creating A Regulatory System that Works for the
American People, Dec. 1996, p. 28.




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OMB Did Not Provide Cost-Benefit Estimates
for All $100 Million Rules

                           The second statutory requirement was that OMB provide estimates of the
                           costs and benefits of each rule likely to have a gross annual effect on the
                           economy of $100 million or more in increased costs. OMB interpreted the
                           requirement broadly to include rules that were “major” or “economically
                           significant” even if they did not necessarily have $100 million in increased
                           costs. However, OMB narrowly focused on rules issued during specific 1-
                           year periods and did not provide cost or benefit data for rules issued by
                           independent regulatory agencies. Also, OMB did not include all rules that
                           met its criteria and did not provide cost-benefit data for all of the rules it
                           included. Most of the cost-benefit experts that we consulted said OMB
                           should have included rules from independent regulatory agencies and
                           several said OMB should not have simply accepted the cost and benefit
                           estimates provided by the executive agencies. Nevertheless, several of the
                           experts also noted that it was politically difficult for OMB to alter agencies’
                           estimates in its report to Congress.

                           The statutory provisions mandating both the 1997 and 1998 reports
OMB Provided Data          required OMB to provide “estimates of the costs and benefits (including
for Only Certain Rules     quantitative and non-quantitative measures) of each rule that is likely to
in Both Reports            have a gross annual effect on the economy of $100,000,000 or more in
                           increased costs.” The requirements did not exempt rules issued by
                           independent regulatory agencies or only apply to rules issued within a
                           specific time frame. However, the requirements only applied to rules with
                           expected regulatory effects of $100 million or more in increased costs.

                           In the 1997 and 1998 reports, OMB interpreted these statutory
                           requirements to include all final rules promulgated by executive
                           departments and agencies and reviewed by OIRA under Executive Order
                           12866 during 1-year time frames that met any of the following criteria:

                         • Rules designated as economically significant under Executive Order 12866;
                         • Rules designated as major under the congressional review provisions of
                           the Small Business Regulatory Enforcement Fairness Act (SBREFA)1; or
                         • Rules designated as meeting the threshold under title II of the Unfunded
                                                                 2
                           Mandates Reform Act of 1995 (UMRA).



                           1
                            The congressional review provisions of SBREFA define a major rule as one that the Administrator of
                           OIRA finds has resulted in or is likely to result in (1) an annual effect on the economy of $100 million
                           or more; (2) a major increase in costs or prices for consumers, individual industries, government
                           agencies, or geographic regions; or (3) significant adverse effects on competition, employment,
                           investment, productivity, innovation, or the ability of U.S.-based enterprises to compete with foreign-
                           based enterprises in domestic and export markets.




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                    For the 1997 report, the 1-year time frame was between April 1, 1996, and
                    March 31, 1997; for the 1998, report the time frame was between April 1,
                    1997, and March 31, 1998. OMB did not include any rules issued by
                    independent regulatory agencies because those agencies’ rules are not
                    reviewed by OIRA pursuant to Executive Order 12866. Neither did OMB
                    include any rules that were issued outside of the specific 1-year time
                    frames it established. Therefore, in these respects, OMB’s criteria were
                    narrower than those set forth in the statute. In other respects, OMB’s
                    criteria were broader than the statute’s requirements because they
                    included rules that were economically significant or major for reasons
                    other than requiring $100 million in increased costs. For example, a rule
                    may be economically significant or major because it has $100 million in
                    benefits to the economy or because it adversely affects in a material way a
                    sector of the economy, productivity, competition, jobs, or state and local
                    governments, not because it requires $100 million in increased costs.

OMB’s 1997 Report   In its 1997 report, OMB identified 41 rules that met its criteria, of which it
                    said 21 were social rules and 20 were transfer rules. The Department of
                    Agriculture (USDA) issued the largest number of these rules (12), followed
                    by the Department of Health and Human Services (HHS) (8), and the
                    Environmental Protection Agency (EPA) (7). OMB reported the cost and
                    benefits data that the issuing agencies included in the 21 social rules but
                    did not provide any cost or benefit information for the 20 transfer rules.
                    OMB said it did so because these transfers represent payments from one
                    group to another that redistribute wealth and are not social costs.
                    Although OMB recognized that these rules may have some associated
                    costs and benefits, it said estimates of those costs and benefits are
                    typically not available.

                    OMB noted in the report that there was “a wide variety in the type, form,
                    and format of the data generated and used by the agencies” in their cost-
                    benefit analyses for the social rules. For example, some of the analyses
                    contained monetized cost and benefit estimates, some contained
                    quantified but not monetized estimates (e.g., the number of deaths or
                    injuries expected to be avoided or tons of a particular pollutant expected
                    to be eliminated), and some contained qualitative estimates (e.g., increased
                    efficiency or improved product quality). OMB said most of the analyses
                    contained a combination of these estimates. OMB also said that agencies
                    used a variety of reporting formats within these categories, including

                    2
                     The threshold under title II is for any proposed rule or any final rule for which a proposed rule was
                    published that included any federal mandate that may result in the expenditure of $100 million or more
                    in any one year by state, local, and tribal governments, in the aggregate, or the private sector.




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                                                                                      3
annualized values, present values, and constant annual values. To present
the information in a more consistent way, OMB made some basic
adjustments to the agencies’ data. However, OMB did not adjust the
underlying information in the agencies’ estimates and did not impose
uniform assumptions across the agencies.

As noted previously, OMB did not include any rules in its report that had
been issued by independent regulatory agencies. OMB said it did not
believe the exclusion of independent agencies’ rules was significant
because “we believe that few of their individual regulations meet the
statutory criteria of section 645(a)(2).” However, between April 1, 1996,
and March 31, 1997, independent regulatory agencies submitted a total of
23 major rules to us pursuant to the congressional review provisions of
SBREFA. The FCC issued the largest number of these major rules (13
rules), followed by the SEC (5 rules), and the Federal Energy Regulatory
Commission and the Federal Reserve Board (each with 2 rules).
Independent regulatory agencies are not covered by the cost-benefit
requirements in Executive Order 12866, and the agencies did not conduct
cost-benefit analyses for 20 of these 23 rules. However, in one SEC rule,
the agency estimated that the rule would have nearly $160 million in
benefits.

To determine whether OMB had identified all of the rules that met its
criteria, we obtained a list from the Regulatory Information Service Center
of economically significant final rules on which OMB had completed its
review between April 1, 1996, and March 31, 1997. We also developed a list
of final major rules that agencies submitted to us pursuant to our review
responsibilities under SBREFA that OMB reviewed during this period. We
did not attempt to identify rules that met the UMRA threshold because
                                                            4
those rules are a subset of economically significant rules. We identified
nine rules that met OMB’s criteria but were not in OMB’s 1997 report—five
social rules and four transfer rules. Those nine rules are listed in table 3.1.




3
 According to OMB, “annualized values” spread out variable effects into yearly sums that are financially
equivalent to the actual temporal schedule. “Present values” convert effects over time into an
immediate lump sum. “Constant annual values” reflect effects that have been estimated (or are
assumed) to be fixed each year over the time horizon in which the regulation applies.
4
 See Unfunded Mandates: Reform Act Has Had Little Effect on Agencies’ Rulemaking Actions
(GAO/GGD-98-30, Feb. 4, 1998).




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Table 3.3.1: Rules That Met OMB’s
                                      Type of   Department or
Criteria but Were Not in OMB’s 1997
                                      rule      Agency             Rule
Report
                                      Social    Department of      Migratory Bird Hunting; Late Seasons and Bag and
                                      rules     the Interior       Possession Limits for Certain Migratory Game Birds
                                                                   Migratory Bird Hunting; Final Rule on the Establishment of a
                                                                   Youth Waterfowl Hunting Day for the 1996-1997 Migratory
                                                                   Bird Hunting Season
                                                                   Migratory Bird Hunting; Seasons and Bag Limits for the 1996-
                                                                   1997 Youth Waterfowl Hunting Day
                                                                   Migratory Bird Hunting Regulations on Certain Federal Indian
                                                                   Reservations and Ceded Lands for the 1996-97 Late Season
                                                Environmental      Control of Air Pollution: Final Rule for New Gasoline Spark-
                                                Protection         Ignition Marine Engines; Exemptions for New Nonroad
                                                Agency             Compression-Ignition Engines at or Above 37 Kilowatts and
                                                                   New Nonroad Spark-Ignition Engines at or Below 19 Kilowatts
                                      Transfer Department of       Food Stamp Program; Child Support Deduction
                                      rules    Agriculture
                                               Department of       Medicare Program; Physician Fee Schedule Update for
                                               Health and          Calendar Year 1997 and Physician Volume Performance
                                               Human               Standard Rates of Increase for Federal Fiscal Year 1997
                                               Services            Medicare Program; Inpatient Hospital Deductible and Hospital
                                                                   and Extended Care Services Coinsurance Amounts for 1997
                                                Department of      Compensation for Disability Resulting From Hospitalization,
                                                Veterans           Treatment, Examination, or Vocational Rehabilitation
                                                Affairs
                                      Source: OMB’s 1997 Report to Congress on the Costs and Benefits of Federal Regulations (OMB,
                                      September 30, 1997); Regulatory Reform: Major Rules Submitted for Congressional Review During
                                      the First 2 Years (GAO/GGD-98-102R, Apr. 24, 1998); and Economically Significant Rules (RISC).


                                      We then reviewed the agencies’ cost and benefit estimates for all 50 of the
                                      rules issued during the 1-year period that met OMB’s criteria and
                                      determined that 20 rules met the specific requirements of the statute—i.e.,
                                      rules that the agencies believed were likely to have a gross annual effect
                                      on the economy of $100 million in increased costs. Ten of these 20 rules
                                      were social rules and 10 were transfer rules. (App. IV lists these 20 rules by
                                      agency with their cost and benefit estimates.)

OMB’s 1998 Report                     OMB used essentially the same criteria to identify rules for its 1998 report
                                      as it had in its 1997 report—rules on which OMB concluded its review
                                      during a 1-year period that were either “economically significant” under
                                      Executive Order 12866, “major” under the congressional review provisions
                                      of SBREFA, or that met the threshold under title II of UMRA. The 1-year
                                      period that OMB focused on in its 1998 report was from April 1, 1997, until
                                      March 31, 1998.

                                      As was the case in its 1997 report, OMB did not provide cost or benefit
                                      data for rules that were issued by independent regulatory agencies
                                      because OMB did not review them under the executive order. However,



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OMB Did Not Provide Cost-Benefit Estimates for All $100 Million Rules




OMB included in its 1998 report a discussion of major rules issued by these
agencies between April 1, 1996, and March 31, 1998, based on data
provided to us under the congressional review provisions of SBREFA.
                                                                 5
Citing our report on the major rules submitted under SBREFA, OMB noted
that independent regulatory agencies submitted 44 major rules to us during
this period, 41 of which were issued by 5 agencies (FCC, SEC, the Federal
Reserve Board, the Nuclear Regulatory Commission, and the Federal
                                   6
Energy Regulatory Commission). Of these 41 rules, OMB said 12 had some
discussion of costs or benefits, 4 had monetized cost information, and 1
had monetized benefit information. Because only one of these rules
contain an estimate of costs or benefits exceeding $100 million (an SEC
rule allowing electric storage for brokers or dealer reporting, which the
industry estimated would reduce costs by $160 million), OMB concluded
that our reports on the 41 rules contained “no information useful for
estimating the aggregate costs and benefits of regulations.” However, OMB
relied on the information in our major rules reports; it did not ask these
agencies if they had any other information about the costs or benefits of
these rules.

OMB identified 33 rules that met its criteria—22 social rules and 11
transfer rules. EPA issued the largest number of the social rules (nine),
followed by USDA and HHS (three each). As it did in its 1997 report, OMB
reported the cost and benefits data that the issuing agencies included for
the 22 social rules but did not report cost or benefit information for the
transfer rules.

To determine whether OMB identified all of the rules that met its criteria,
we obtained a list of economically significant rules on which OMB
concluded its review between April 1, 1997, and March 31, 1998, and
developed a list of major rules that OMB reviewed during the same period
of time. We identified five rules that met OMB’s criteria but were not in
OMB’s 1998 report—four social rules and one transfer rule. Those rules are
shown in table 3.2.




5
 Regulatory Reform: Major Rules Submitted for Congressional Review During the First 2 Years
(GAO/GGD-98-102R, Apr. 2, 1998).
6
    Actually, all 44 rules were issued by these 5 agencies.




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                                          OMB Did Not Provide Cost-Benefit Estimates for All $100 Million Rules




Table 3.2: Rules Meeting OMB’s Criteria
                                          Type           Department or
But Not Included in the 1998 Report
                                          of rule        agency            Rule
                                          Social         Department of     Migratory Bird Hunting; Early Seasons and Bag and
                                          rules          the Interior      Possession Limits for Certain Migratory Game Birds in
                                                                           the Contiguous United States, Alaska, Hawaii, Puerto
                                                                           Rico, and the Virgin Islands
                                                                           Migratory Bird Hunting; Regulations on Certain Federal
                                                                           Indian Reservations and Ceded Lands for the 1997-1998
                                                                           Early Season
                                                                           Migratory Bird Hunting; Late Seasons and Bag and
                                                                           Possession Limits for Certain Migratory Birds
                                                                           Migratory Bird Hunting; Regulations on Certain Federal
                                                                           Indian Reservations and Ceded Lands for the 1997-1998
                                                                           Late Season
                                          Transfer       Department of     Child Nutrition and WIC Reauthorization Act
                                          rules          Agriculture       Amendments
                                          Source: OMB’s 1998 Report to Congress on the Costs and Benefits of Federal Regulation; our 1998
                                          report,Regulatory Reform: Major Rules (GAO/GGD-98-102R, Apr. 24, 1998); and RISC.


                                          We then reviewed the agencies’ cost-benefit estimates for all 38 of the
                                          rules issued during the 1-year period that met OMB’s criteria and
                                          determined that 22 rules met the specific requirements of the statute—
                                          rules that the agencies estimated were likely to have a gross annual effect
                                          on the economy of $100 million in increased costs. Thirteen of these 22
                                          rules were social rules and 9 were transfer rules. (App. V lists these 22
                                          rules by agency with their cost and benefit estimates.)

                                          Most of the cost-benefit analysis experts that we consulted had few
Experts Suggested                         comments about OMB’s listings of individual rules in relation to the second
Changes in OMB Major                      statutory objective. They most frequently said that OMB should have
Rule Information                          included rules issued by independent regulatory agencies in its listings.
                                          Several also indicated that OMB should have made adjustments to the
                                          agencies’ cost-benefit estimates, particularly to provide a consistent
                                          monetary estimate of the value associated with the reduction of mortality
                                          rates. However, they also recognized political difficulties associated with
                                          adjusting agencies’ estimates.

Experts Said Include                      Most of the experts that we consulted indicated that OMB should have
                                          included cost and benefit estimates in its reports for the major rules issued
Independent’s Rules, Adjust               by the independent regulatory agencies. For example, Weidenbaum said
Agencies Estimates                        there was no reason to exclude these agencies’ rules, and described their
                                          exclusion as a “shortcut.” However, several of the experts noted that
                                          Executive Order 12866 does not cover these agencies, thereby limiting the
                                          information that OMB receives from them and what could be included in
                                          OMB’s reports. Similarly, Hopkins and Hahn said that if Congress wanted
                                          OMB to include independent regulatory agency’s rules in its reports,



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Congress could require those agencies to produce cost and benefit
analyses. Weidenbaum said that despite the limitations in the statutes and
the executive order, OMB interacts with independent regulatory agencies
through the budget process and through its responsibilities in carrying out
the Paperwork Reduction Act. Therefore, he said, OMB could have gone to
these agencies and asked them to provide their best estimates of the costs
and benefits associated with their major rules.

Similar to their comments on OMB’s response to the first statutory
requirement, several of the experts that we consulted indicated that OMB
should have conducted more independent analysis of the agencies’ cost
and benefit estimates instead of simply performing as a “clerk” and
including the estimates without adjustment. These experts said that OMB
should have provided its own analysis and adjusted those estimates that it
considered to be in need of refinement. In particular, Hopkins, Lave, Litan,
and Weidenbaum said OMB should have monetized some of the data when
the agencies did not do so (e.g., converting the number of lives saved into
monetized estimates). Weidenbaum said it did not make sense for some
agencies to provide monetized estimates of the benefits associated with
reductions in mortality while other agencies do not. Hopkins said that if
OMB were to make its own critical judgements regarding the agencies’
estimates, the agencies would be more likely to provide good estimates in
the first place. He said OMB should place its own critical appraisals of
agencies’ estimates in the public record. As a result, he said, the agencies
would improve their estimates because they do not want to be publicly
criticized for overstating regulatory benefits.

However, Hahn, Hopkins, and Weidenbaum also noted political and
organizational difficulties associated with OMB adjusting agencies’ cost or
benefit estimates. Hopkins said OMB’s “clerical” function in this regard
was driven by OMB’s organizational placement within the Executive Office
of the President and the interplay between the President, OMB leadership,
and the political appointees in the executive agencies. He said that OMB
could have been more aggressive regarding agencies’ cost and benefit
estimates if the President wanted an energetic OMB pressing on the
agencies. In the absence of such direction, Hopkins said those wanting a
critical analysis of agencies’ cost or benefit estimates will need to look
outside of OMB. Weidenbaum said that OMB is trapped between two
roles—one in which it challenges agencies to do better cost-benefit
estimates and the other in which it is forced to defend those agencies’
estimates after they have been approved. Hahn said that the report does
not reflect the collective wisdom that OMB staff has regarding regulatory




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costs and benefits, and the problem is “how do you get them to really tell
you what they think.”

Several of the experts also questioned why OMB limited its presentation of
major rules to those it reviewed within selected 1-year periods. For
example, Weidenbaum said he did not interpret the statutory requirement
to be limited to 1-year’s worth of regulations. However, he said OMB may
have done so because of data limitations and because including all $100
million rules would have been a “big chore.” Hopkins said it was “curious”
that OMB established a time frame for these rules despite the absence of
any such time limits in the statute. Lave said it would have been better to
include more data than for just 1 year, but he added that this issue was
“not high on my list of concerns” about OMB’s report.

None of the experts expressed concerns about OMB including
economically significant and major rules that did not have $100 million in
increased costs. Weidenbaum and Hopkins said they preferred the
inclusive definition that OMB used because it included a larger set of rules
than would have been included by sticking strictly to the statutory
language. Lave said he also agreed with OMB’s approach.

Overall, Hopkins said it was “astonishing” how little information executive
branch agencies had on regulatory costs and benefits despite 17 years of
executive orders requiring agencies to provide such information. Crandall
said that a “selection bias” might be in operation here, with agencies not
conducting cost-benefit analysis or not placing a value on certain elements
in the analyses when doing so would demonstrate that the rule would not
pass a cost-benefit test. In order to overcome this problem, he said, OMB
would need a lot of expertise in each of the regulatory areas—expertise
that he doubted OMB possessed.




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Chapter 4

OMB Did Not Separately Assess Direct and
Indirect Impacts of Rules

                        The third statutory requirement was that OMB provide an assessment of
                        the direct and indirect impacts of federal rules on the private sector, state
                        and local governments, and the federal government. OMB indicated that it
                        believed it had satisfied the “direct” portion of this requirement through
                        the overall cost and benefit estimates that it provided in relation to the first
                        statutory requirement. OMB discussed the difficulty in determining
                        indirect regulatory effects in its first report but did not provide any
                        description of those effects in either report. The cost-benefit analysis
                        experts that we consulted were generally sympathetic toward OMB’s
                        treatment of this requirement, describing it as a lower priority than the
                        other requirements and perhaps impossible for anyone to satisfy.

                        Unlike the first two statutory requirements, OMB did not have a separate
OMB Reports             chapter of its 1997 report devoted to the third requirement on the direct
Contained Little        and indirect costs and benefits of federal rules on the private sector, state
Discussion of Third     and local governments, and the federal government. Instead, OMB
                        included a brief discussion of this requirement within the chapter that
Statutory Requirement   addressed the first requirement on total regulatory costs and benefits.
                        OMB indicated that its estimates of the direct costs and benefits of all rules
                        in relation to the first requirement satisfied the portion of the third
                        requirement regarding an assessment of direct impacts. The report then
                        discussed indirect effects by first noting that several studies have found
                        those effects to be significant, and then describing several problems
                        associated with using those studies (e.g., they only examine indirect costs,
                        and it is impossible to validate models or view their assumptions). Overall,
                        OMB emphasized the methodological difficulties associated with
                        determining the indirect effects of federal rules.

                        OMB had less discussion of the third statutory requirement in its 1998
                        report. In the introduction to the report, OMB said that the first chapter on
                        the total annual costs and benefits of federal regulatory programs also
                        discusses such factors as economic efficiency losses, federal on-budget
                        regulatory expenditures, and “the possible indirect effects of regulation on
                        the economy as directed by Section 625(a)(3).” For example, in that
                        chapter OMB explained that it did not include the “indirect, mostly
                        consumer surplus, losses of economic regulation” in its summary table
                        because it concluded that those indirect losses may have significantly
                        different long term effects than direct compliance costs. However, other
                        than these types of references, OMB did not specifically discuss the direct
                        or indirect effects of federal regulations on the private sector, state and
                        local government, or the federal government in its 1998 report.




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                       OMB Did Not Separately Assess Direct and Indirect Impacts of Rules




                       In its response to comments on the first report, OMB acknowledged that
                       its summary of the literature on the direct and indirect effects of regulation
                       on the economy “did raise more questions than it answered,” but said that
                       it was a fair summary of the existing knowledge in the area. OMB also
                       noted that Executive Order 12866 calls on agencies to examine and
                       consider the distributional and equity effects of regulations and said that
                       both OMB and the agencies could do a better job in estimating those
                       effects. Responding to comments on the second report, OMB again said
                       that more information about indirect effects is needed and said it planned
                       to do more searching for next year’s report.

                       Most of the cost-benefit analysis experts we consulted were generally
Experts Were           sympathetic to OMB’s admittedly sketchy treatment of this statutory
Sympathetic to OMB’s   requirement. For example, Litan said that it would be “horrendously
Treatment of           difficult” to obtain any other data besides direct compliance costs from the
                       private sector. Although Hahn said this requirement was useful, he said
Requirement            OMB “punted” with regard to the requirement because data on indirect
                       costs by sector are extremely limited, and suggested that this analysis be
                       completed for only a select number of regulations to increase this
                       requirement’s usefulness and feasibility. Hopkins said that it would be
                       difficult to be literally responsive to the requirement, but said more work
                       needed to be done in this area. Several of the experts said that this
                       requirement was a low priority and/or should not have been required of
                       OMB. For example, Weidenbaum said he would not have included it in the
                       legislation because the requirement itself “probably would not now pass a
                       cost-benefit test.” Portney said OMB’s treatment was the best it could do
                       given the time and resources available and said he was not sure how
                       reasonable it was to impose this requirement. Crandall said that OMB’s
                       lack of response to this requirement “does not seem to be a bad trade-off
                       given their resources.”

                       However, Lave said OMB’s approach to this requirement was “clearly not
                       right,” and did not believe that OMB had satisfied this requirement. He said
                       determining the distributional effects (who bears the costs, who receives
                       the benefits) of some types of regulations is very important and noted that
                       studies already conducted on provisions of the Clean Air Act indicated that
                       it is possible to make these types of estimates.




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Chapter 5

Experts Criticized Lack of New
Recommendations in OMB Reports

                      The fourth statutory requirement was that the OMB Director provide
                      recommendations to reform or eliminate any federal regulatory program or
                      program element that is inefficient, ineffective, or is not a sound use of the
                      nation’s resources. The 1997 report contained no such recommendations,
                      but the 1998 report contained an endorsement of 10 previously announced
                      regulatory or statutory changes and a discussion of restructuring the
                      electrical generation industry. All of the cost-benefit experts disagreed
                      with OMB’s response to the requirement, and several said sufficient cost-
                      benefit data existed to support making some recommendations. However,
                      several of the experts also said that it was politically difficult for OMB to
                      make recommendations directly to Congress to eliminate or reform
                      existing administration programs.

                      In its 1997 report, OMB concluded that it could not make any
OMB Provided No New   recommendations that would meet the statutory requirement. In
Recommendations       explanation, OMB said

                      “[W]e do not…believe that the existing evidence on aggregate costs and benefits rises to
                      the level that would support a recommendation to eliminate any regulatory program.
                      Virtually all of the evidence . . . is based either on dated studies of existing regulation or on
                      estimates for proposed regulations. These data are not appropriate for determining whether
                      existing regulations should be repealed or significantly modified because of the sunk costs
                      and rising baseline problems discussed above. Before supportable recommendations are
                      made to eliminate existing regulatory programs or elements of programs, empirical
                      evidence based on analytical techniques designed to solve the methodological problems
                      discussed above must be developed.”

                      However, OMB did include in the report a number of recommendations to
                      improve the quality of regulatory data and analysis, including (1) that OIRA
                      lead an effort to improve agencies’ regulatory analysis by promoting
                      greater use of its January 1996 “best practices” guidance, (2) that an
                      interagency group conduct a peer review of a selected number of agency
                      regulatory analyses, and (3) that OIRA continue to develop a database on
                      the costs and benefits of major rules.

                      In its 1998 report, OMB again indicated that data quality problems
                      prevented it from making definitive recommendations on specific
                      regulatory programs. However, OMB said it had identified some general
                      themes during its review of the academic literature and analysis of data on
                      the economic impacts of regulations and noted the general success of large
                      scale procompetitive regulatory reforms. Within that theme, OMB then
                      described the Clinton Administration’s legislative recommendation for
                      reform of electricity generation. OMB said this electricity restructuring
                      proposal was an illustration of how regulatory reform can achieve “the



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  Chapter 5
  Experts Criticized Lack of New Recommendations in OMB Reports




  economic benefits of competition in a manner that is fair and improves the
  environmental performance of the electricity industry.”

  OMB also said that agencies continue to reform their regulatory programs,
  which are described in the Regulatory Plan located in the fall edition of the
  Unified Agenda of Federal Regulatory and Deregulatory Actions. OMB said
  these initiatives were important to the administration and then listed nine
  such efforts that it endorsed in its 1998 report. We examined the Unified
  Agenda and discovered that many of these initiatives had been announced
  by the agencies years before the issuance of the OMB report. For example,

• the Department of Agriculture’s Food Safety and Inspection Service first
  indicated that it was determining whether to convert some of its
  “command and control” regulations to performance standards in 1995 and
  issued an NPRM to convert those regulations to performance standards in
  May 1996;
• HUD issued an NPRM to provide consumers with increased disclosure
  concerning mortgage brokers’ function and fees, and to provide greater
  clarity regarding the application of the Real Estate Settlement Procedures
  Act to mortgage broker fees in September 1995;
• the Department of Transportation began reviews of its side impact
  protection and heavy truck conspicuity regulations in October 1994 and
  September 1995, respectively; and
• the Department of Labor’s Office of Federal Contract Compliance
  Programs issued an advance notice of proposed rulemaking in July 1981 to
  streamline, clarify, and reduce the paperwork burden of the regulations
  that govern the nondiscrimination and affirmative action obligations of
  federal contractors, and issued an NPRM in May 1996.

  OMB also noted in its 1998 report that the Clinton Administration offered
  “Remediation Waste Legislative Specifications” in early 1998 to provide
  changes to the Resource Conservation and Recovery Act land disposal
  restrictions, minimum technology requirements, and permitting
  requirements for hazardous remediation waste. Although this appeared to
  be a new legislative proposal, EPA issued an NPRM related to this issue in
  May 1992. However, OMB officials told us during this review that the
  administration determined that EPA could not take this action
  administratively, so additional statutory authority was needed.




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                     All the experts that we consulted indicated that OMB’s responses to this
Experts Criticized   statutory requirement did not adequately address the requirement. For
OMB, but Noted       example, Weidenbaum said he was “amazed” that OMB could not come up
“Constraints”        with a single program or regulation that it believed needed changing.
                     Similarly, Portney said the lack of any recommendations “strains
                     credulity.” Hopkins said OMB’s practice of citing the lack of perfect data is
                     “a recipe for complete inaction.” He said government always has
                     incomplete and uneven data but that does not stop it from preparing fiscal
                     budgets or implementing the tax laws.

                     Several of the experts specifically said that they did not believe OMB’s
                     endorsement of agencies’ previously announced regulatory reform
                     initiatives in its 1998 report addressed the statutory requirement. For
                     example, Weidenbaum said that it was difficult to see how initiatives put
                     forward by the agencies can be seen as recommendations from the OMB
                     Director. Because these initiatives had already been proposed by the
                     agencies, he said they should not be considered recommendations. Hahn
                     said OMB needs to use its own expertise and institutional knowledge to
                     help reform regulations, not simply rely on agencies for initiatives.

                     Some experts were also critical of the report’s discussion of electricity
                     restructuring in the 1998 report. For example, Hopkins said this discussion
                     was “ridiculous,” and found it interesting that OMB would include this
                     proposal regarding an issue over which it has very little influence or data
                     after asserting that it could not make recommendations with regard to
                     issues that it can exert influence and has at least some data.

                     Several of the experts also said that enough cost-benefit data existed to
                     support the reform or elimination of particular regulations or regulatory
                     programs. For example, Hahn pointed to one of his recent articles in which
                     he suggested a number of laws and regulations that could be eliminated,
                     including certain international trade restrictions, USDA milk, average fuel
                                                                                       1
                     economy standards, marketing orders, and the Davis-Bacon Act.
                     Weidenbaum suggested reform of agricultural marketing orders and the
                     Maritime Commission. Portney said current regulations on coal-fired
                     power plants should be replaced with performance standards. Portney
                     noted that some regulations are in place in which the costs exceed the
                     benefits because of statutory requirements that only Congress can change.



                     1
                     Robert W. Hahn, “Government Analysis of the Benefits and Costs of Regulation,” Journal of Economic
                     Perspectives , 12 (Fall 1998), pp. 201-210.




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Experts Criticized Lack of New Recommendations in OMB Reports




Although most of the experts were critical of the lack of recommendations
in OMB’s reports, several of them also indicated that OMB may be unable
to make recommendations for the reform or elimination of existing
regulatory programs because of the previously discussed “political
constraints.” For example, Lave said he believed that OMB staff would
have relished making recommendations to reform some of the programs
they review, but were unable to do so because of the political environment
that exists within OMB. “In the end,“ he said, “these are political issues and
it lies with the President to make these political decisions.”




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Chapter 6

Conclusions


              Although the precise dimensions of federal regulatory costs and benefits
              are unclear, there is general agreement that, in the aggregate, federal
              regulations have a substantial impact on the economy. Measuring the costs
              and benefits associated with a single rule can be extremely difficult, and
              developing accurate estimates of the effects of all federal regulations is
              even more complex. OMB’s two reports on regulatory costs and benefits
              are notable initial attempts to provide Congress with information that it
              needs to gauge the extent of federal regulatory activity and to determine
              whether the benefits associated with federal regulations justify the related
              costs.

              OMB addressed some, but not all, of the specific statutory requirements in
              its 1997 and 1998 reports. In both reports, OMB provided estimates of the
              costs and benefits of federal regulations both in total and for most (but not
              all) major or economically significant rules issued within particular 1-year
              time frames. To develop its estimates of total regulatory costs, OMB relied
              on previous estimates published in the professional literature, the
              agencies’ published estimates for particular rules, and (in the 1998 report)
              EPA’s Section 812 report estimate.

              However, OMB’s reports did not fully address other statutory
              requirements. First, OMB did not, as directed, discuss the direct and
              indirect effects of federal rules on particular sectors of the economy. In
              OMB’s defense, most of the experts we consulted indicated that OMB’s
              reluctance was understandable given the lack of data clearly documenting
              those effects. Some of the experts said this requirement was a lower
              priority than the other requirements. Second, OMB had no
              recommendations in its 1997 report and, although it discussed a number of
              previously announced agency and administration initiatives, it did not
              provide any new recommendations to eliminate or reform federal
              regulations or regulatory programs in its 1998 report.

              Most of the cost-benefit analysis experts that we consulted during our
              review indicated they would have preferred that OMB provide an
              independent estimate of regulatory costs and benefits and not simply
              transcribe the estimates provided by federal agencies and others. In
              particular, the experts believed OMB should have adjusted EPA’s Section
              812 report estimate of the benefits associated with the Clean Air Act
              instead of using the unadjusted estimate that dominated the benefits
              estimate in OMB’s 1998 report. Although the legislative history of the
              statutory provisions that established the reporting requirements is limited
              and does not demonstrate the intent of Congress in enacting these
              provisions, the comments of some individual Members of Congress



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Conclusions




indicated that they wanted OMB to provide an independent regulatory
accounting statement. Specifically, they said OMB should adjust published
estimates of benefits and costs where necessary to reflect the agency’s
best professional judgment regarding those estimates.

In some cases, OMB used its professional judgment and adjusted the
published estimates that it used to produce its estimates of total regulatory
costs and benefits. For example, in the 1997 report, OMB subtracted $10
billion from Hopkins’ $81 billion estimate of the efficiency losses
associated with economic regulations to account for deregulatory actions
that took place after the estimate was published. OMB performed the same
adjustment in its 1998 report but did not include the efficiency loss
estimate in its summary of total regulatory costs. OMB also monetized
some of the agencies’ quantified estimates for individual rules before using
them to develop the total cost and benefit estimates for the 1998 report.

However, OMB did not materially adjust any of the published cost or
benefit estimates from federal agencies—most notably EPA’s Section 812
report estimates and the agencies’ estimates for individual rules. Although
many of the cost-benefit analysis experts said OMB should have adjusted
the agencies’ estimates, they also recognized that OMB faced political
constraints in doing so. Specifically, they noted that OMB is part of the
administration that issued those estimates and therefore would find it
politically difficult if not impossible to disagree with those estimates in a
report to Congress.

OMB has a responsibility under Executive Order 12866 to review the
agencies’ estimates of the costs and benefits of proposed and final rules
before they are published in the Federal Register. Similarly, with the
Executive Order establishing OIRA as the “repository of expertise on
regulatory issues,” OMB had a responsibility to provide EPA with its
expert opinions during the development of the cost and benefit estimates
in EPA’s Section 812 report. However, after their publication, those rules
and reports (and their associated estimates of costs and benefits)
represent the administration’s policy positions. OMB, as part of the
administration and particularly as the staff office to the President
responsible for regulatory policy, cannot realistically be expected to alter
or dispute the administration’s own estimates of regulatory costs and
benefits in a public report to Congress. Doing so would also unilaterally
substitute OMB’s judgment for the mutually agreed upon results of its
consultations with the agencies during the review process or, in the case of
the section 812 report, reverse the judgment of EPA’s Science Advisory
Board.



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Conclusions




If Congress wants a truly independent analytic perspective on executive
branch agencies’ regulatory costs and benefits, it may have to assign that
responsibility to individuals or organizations located outside of the
executive branch. One such organization could be the Congressional
Office of Regulatory Analysis (CORA) that Congress considered
establishing last year. Under that proposed legislation (H.R. 1704), CORA
would provide a report to Congress on each major rule providing an
independent perspective on the rules’ costs, benefits, and net benefits. The
proposed legislation also would have required CORA to provide an annual
report including estimates of the total costs and benefits of all existing
federal regulations. Although the proposed legislation would not have
required CORA to assess the direct and indirect costs and benefits of
federal regulation on particular sectors of the economy or to provide
recommendations for reform or elimination of existing rules, such
additional responsibilities could be added to future legislation if Congress
believes them desirable.

Another way to obtain an independent perspective of executive branch
agencies’ regulatory costs and benefits is to look to organizations outside
of government that are already engaged in the types of analyses that
Congress envisioned. For example, according to the AEI-Brookings Joint
Center for Regulatory Studies’ mission statement, the Joint Center will
publish an annual report that will include “an independent assessment of
both the total and marginal costs and benefits of federal regulation, broken
down into useful categories.” The Joint Center also intends to publish
objective analyses of selected forthcoming regulations, and
recommendations for modifications or elimination of existing rules based
on their benefits and costs.

An independent perspective on regulatory costs and benefits from outside
of the executive branch could be either a substitute for the current OMB
requirement or a supplement to that requirement. Requiring an
independent perspective in addition to the existing OMB requirement
could be a considerable duplication of effort, with both organizations
obtaining information from regulatory agencies. However, a somewhat
similar dual-track process is currently in place in the federal budgetary
process, with both OMB and the Congressional Budget Office providing
independent estimates of federal revenues, spending, and budget deficits
or surpluses. Federal regulatory agencies and OMB may be prompted to
develop better estimates knowing that another entity outside of the
administration will be providing an independent perspective.




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                   Conclusions




                   Regardless of which entity provides those estimates, agreement is needed
                   among all parties regarding the types of regulations that should be
                   included and other methodological issues. Agreement on these issues can
                   prevent (or at least lessen) disputes regarding the accuracy of such
                   estimates after they are developed. For example, the experts we consulted
                   generally suggested focusing on the costs and benefits of health, safety,
                   environmental, and other social regulations, and tallying economic and
                   transfer rules separately. Other issues in need of agreement include
                   whether (and if so, how) reductions in mortality risks should be
                   monetized, whether agencies’ assumptions should be standardized to
                   permit interagency and interrule comparisons of regulatory costs and
                   benefits and the degree to which regulatory costs and benefits should be
                   disaggregated to allow the relative net benefits of regulatory programs to
                   be compared. Also, although cost-benefit analysis is conceptually a
                   valuable tool in regulatory decisionmaking, the results of any such
                   analyses must be carefully examined to ensure that the estimates are
                   properly developed, and care must be exercised in using any such
                   estimates in public policy decisionmaking. Finally, whatever entity is
                   charged with the responsibility of providing this kind of independent
                   analysis of regulatory costs and benefits, those analyses will be most
                   useful to policymakers if the entity has sufficient resources to do a proper
                   job.

                   It is politically difficult for OMB to provide Congress with an independent
Matter for         assessment of executive branch agencies’ regulatory costs and benefits. If
Congressional      Congress wants an independent assessment, it may wish to consider
Consideration      assigning that responsibility to an organization outside of the executive
                   branch. That organization could include a congressional office of
                   regulatory analysis, which would have to be established, or an organization
                   outside of the federal government.

                   On April 7, 1999, we met with the Acting Administrator of OIRA and other
Comments and Our   OMB staff to discuss a draft of this report, and we had subsequent
Evaluation         discussions with OIRA regarding its views on the draft report. OIRA stated
                   that the draft report reflected a substantial amount of work on our part,
                   and that it raised a number of useful analytical issues regarding how
                   regulatory benefits and costs can most appropriately be estimated and
                   reported.

                   However, OIRA stated that it disagreed fundamentally with several of the
                   statements attributed to the experts in the report. OIRA particularly noted
                   that, at a number of points throughout the draft report, we quoted one or
                   more experts who expressed strong opinions about what they believe



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Chapter 6
Conclusions




OMB should have done in reviewing and evaluating agencies’ cost-benefit
analyses. OIRA fundamentally disagreed with these statements, which it
said reflect a significant misunderstanding of OMB’s role in developing,
overseeing, and coordinating the administration’s regulatory policies.
OIRA said it analyzes and evaluates agency work products and works with
them to develop better quality analyses, evaluations, and policies. It said
the role of OMB is not to play “gotcha” with the agencies but to work
cooperatively with them, ensuring that their economic estimates are
accurate and that administration policies and programs are faithfully
executed.

We believe that OIRA’s comments regarding OMB’s role buttresses our
conclusions and our matter for congressional consideration. It is politically
difficult for OMB to disagree publicly with agencies’ statements of
regulatory policy, particularly because OIRA staff typically participate in
developing those policies. The experts that we consulted indicated that, to
be responsive to the statutory requirement, OMB should have adjusted
agency cost-benefit estimates that it believed were in error. However, the
experts also recognized the political constraints inherent in OMB’s role of
supporting the administration’s position and initiatives, particularly when
operating under an executive order that has as one of its stated objectives
“to reaffirm the primacy of Federal agencies in the regulatory decision
making process.”

OIRA also pointed out that it had provided original, updated, and more
refined estimates of the costs and benefits of regulations and regulatory
programs, which the experts had evidently overlooked. In addition, OIRA
noted that EPA’s Section 812 report had been peer reviewed by the EPA
Science Advisory Board’s Council on Clean Air Act Compliance Analysis
and that OMB had reported its concerns with some of the assumptions
behind the estimates and had used the benefits estimate to establish an
upper bound for the governmentwide estimate.

OIRA’s statement that the experts overlooked original, updated, and more
refined estimates of the costs and benefits for regulations and regulatory
programs is not entirely correct. As we noted in the draft report, OMB did
make some changes to published cost or benefit estimates to derive the
governmentwide estimate in its 1998 report. However, OMB did not adjust
the benefits estimate in the Section 812 report that constituted more than
90 percent of the governmentwide estimate. Neither did OMB adjust any of
the agencies’ cost or benefit estimates in relation to the second statutory
requirement regarding rules with $100 million in increased costs. Also, we
noted in the draft report that EPA’s Section 812 report had been peer



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Conclusions




reviewed by EPA’s Science Advisory Board and that OMB reported its
concerns with some of the assumptions behind the report’s estimates.

OIRA stated that Congress recognized, when it directed OMB to prepare
these reports, that OMB would be relying for the most part on existing,
available information, including the agencies’ cost-benefit analyses. OIRA
therefore believes that OMB presented Congress with the estimates that
Congress had directed it to prepare. However, OIRA did not specifically
comment on our matter for congressional consideration.

Contrary to OIRA’s assertion, neither the statutory language that required
OMB to provide the 1997 and 1998 reports to Congress nor the limited
legislative history of these provisions specifies that Congress expected
OMB to rely on existing information to prepare its reports on the costs and
benefits of federal rules. Although some individual Members of Congress
indicated that OMB should simply compile existing information about
regulatory costs and benefits, other Members said OMB should
supplement that information where needed and provide an “independent
assessment” of the effects of federal regulation.

OIRA offered comments on several additional points in the draft report.
For example, OIRA disagreed that the recommendations that OMB
provided in the 1998 report were simply a recitation of initiatives that had
previously been put forward by the agencies. OIRA said they were major
administration initiatives and met the statutory requirement that OMB
provide recommendations. OIRA also offered suggestions to improve the
presentation of certain issues, which we incorporated into this report as
appropriate. For example, OIRA noted that some of the experts were
critical of OMB for not assigning a dollar value to the costs and benefits of
certain rules, but pointed out that OMB had, in fact, monetized some of the
agencies’ estimates. We agreed to add a footnote to the experts’ comments
noting that OMB had assigned monetary values to some of these estimates.

We also obtained comments on the draft report from six of the seven cost-
benefit analysis experts that we consulted on the draft report. (Portney
said he was unable to review the draft because of time constraints.) In
general, the experts said the report accurately reflected their statements.
However, some of them suggested particular clarifications or
modifications to their statements and bibliographic references, which we
incorporated where appropriate.




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Page 59   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Appendix I

Individual Views of Members of Congress
Regarding Regulatory Accounting
Requirements
              As pointed out in the body of this report, the legislative history of the
              regulatory accounting provisions that required OMB to provide the 1997
              and 1998 reports is of limited value in determining how Congress intended
              for OMB to carry out its responsibilities. However, several Members of
              Congress expressed their individual views regarding these requirements
              during floor consideration of the legislation. For example, on September
              11, 1996, Senator Ted Stevens (the sponsor of the first regulatory
              accounting provision) said “OMB should use the valuable information
              already available, and supplement it where needed” when preparing the
              estimates of total annual costs and benefits called for in subsection
              645(a)(1). He also said that “(w)here agencies have, or can produce,
              detailed information on the costs and benefits of individual programs, they
              should use it. I expect a rule of reason will prevail.”

              On September 12, 1996, Senators John Glenn and Carl Levin also discussed
              their views regarding subsection 645(a)(1). Senator Glenn said OMB
              should compile “existing analyses and estimates of regulatory costs and
              benefits.” He said that the sponsors of the amendment “are aware of
              OMB’s resource constraints and intend that the report be based on a
              compilation of existing information, rather than new analysis.” Senator
              Levin said the amendment would ask OMB to “come up with its best
              estimate” of the costs and benefits of regulatory programs, but he noted
              that the amendment

              “does not require OMB to conduct new studies or analyses or develop new data or information. That
              would be a time-consuming, and expensive use of taxpayer money. . . . (T)his amendment simply
              directs OMB to put together the already available information that it has on existing Federal regulatory
              programs and use that to estimate the total annual costs and benefits of each.”


              Similarly, on September 30, 1996, Senator William V. Roth, Jr. said OMB
              “should draw upon the wealth of studies and reports already done” to
              generate the estimate of total costs and benefits. However, he also said
              that “(w)here there are gaps, OMB must supplement existing information.
              To conserve its resources, OMB should issue guidelines to the agencies to
              gather the needed information, as OMB does for the fiscal budget process.”
              He also said OMB should “quantify costs and benefits to the extent
              feasible, and provide the most plausible estimate.”

              In relation to the requirements in subsection 645(a)(2), Senator Levin said
              that “reporting on the costs and benefits of major rules is expected to
              require no more than reporting, in an organized and readable manner, the
              cost-benefit analyses of the major rules in effect that were already done
              prior to promulgation.” However, he also said that “(t)o the extent there is




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Individual Views of Members of Congress Regarding Regulatory Accounting Requirements




updated information that would change the estimates in those analyses,
such updates should be included in this part of the report if it is available.”

Regarding the requirements in subsection 645(a)(3) for an assessment of
the direct and indirect impact of the rules on different sectors, Senator
Stevens said he believed that regulation “creates a drag on real wages,
economic growth, and productivity,” and that OMB “should discuss the
serious problem of unfunded Federal mandates and inform Congress”
about the problem. However, he also said that “OMB should use available
information, where relevant, to assess the direct and indirect effect of
federal rules.” Senator Levin said the assessment of impacts

“is intended to be a narrative discussion of OMB’s opinion on this subject. It does not require
additional information gathering; rather, the intent, here, is that the Director use the information
contained in the report on the costs and benefits of Federal regulatory programs and describe the
expected impacts of such programs on State and local governments, business, and individuals.”


Senator Glenn said the recommendations for reform required by
subsection 645(a)(4) should include programs that should be eliminated or
altered because they are too burdensome “as well as programs that should
be strengthened to more effectively implement public policy.” Senator
Roth said that OMB should “highlight those programs or program elements
that are inefficient, and it should provide recommendations to reform
them.”

Overall, Senator Stevens said he expected OMB to produce “a credible and
reliable picture of the regulatory process—a picture that highlights the
costs and benefits of regulatory programs and that allows Congress to
determine which programs and program elements are working well, and
which are not.” Likewise, Senator Roth said OMB “must provide Congress
with a credible and reliable accounting statement on the regulatory
process.

The legislative history accompanying the second set of reporting
requirements in section 625 of the fiscal year 1998 appropriations act is
even more limited than for the first requirements. However, during Senate
consideration of the legislation on July 17, 1997, Senator Fred Thompson
expressed his support for the new requirements and suggested that certain
information sources be used (e.g., existing studies by nonfederal experts
and agencies’ cost-benefit analyses conducted under Executive Orders
12291 and 12866). He said “regulatory accounting should not create a
resource drain for OMB. OMB should issue guidelines requiring the
agencies to compile needed information, just as OMB does in the fiscal
budget process.” In relation to the requirement in subsection 625(a)(1) that



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                             Appendix I
                             Individual Views of Members of Congress Regarding Regulatory Accounting Requirements




                             OMB estimate total annual costs and benefits, Senator Thompson said
                             OMB should “do its best to estimate and quantify that figure on the cost
                             side,” and explain what benefits are being achieved for those costs. Where
                             agencies such as EPA can provide detailed information on particular
                             programs, he said OMB should make full use of this information. In
                             relation to subsection 625(a)(3) requirement to assess the direct and
                             indirect effect of federal rules, Senator Thompson said OMB need not
                             “devote vast resources” to the development of complex economic models,
                             but rather “may use available reports, studies, and other relevant
                             information. . . .” In particular, he said OMB should discuss the “serious
                             problems posed by unfunded federal mandates for State, local and tribal
                             governments.”

                             Senator Thompson also offered some specific suggestions regarding what
                             costs and data should be included in OMB’s reports. First, he said OMB
                             should estimate the total costs of paperwork, including tax paperwork.
                             Second, he said OMB’s estimate of indirect effects should include costs
                             associated with product bans and marketing limitations; the benefits
                             associated with preservation of endangered species; and the impact of
                             regulation on wages, innovation, employment, and income distribution. To
                             do these analyses, he said, OMB could leverage the expertise and
                             resources of other agencies, especially the President’s Council of
                             Economic Advisors. Finally, Senator Thompson said OMB’s
                             recommendations to improve the regulatory process and particular
                             programs and regulations “do not have to be based on perfect empirical
                             data.”

Congressional Responses to   On October 29, 1997, Senator Thompson and Senator Stevens, acting as the
OMB’s Initial Regulatory     Chairmen of the Senate Committees on Governmental Affairs and
Accounting Reports           Appropriations, respectively, sent a letter to the Director of OMB saying
                             that the first regulatory accounting report was “an important foundation
                             for improving the regulatory system.” However, they also said they
                             believed there were several opportunities for improvement. First, they
                             recommended that the report adhere to the specific statutory requirements
                             by recommending improvements and assessing the indirect impacts of
                             federal regulation. Second, they said the report should more fully
                             implement the legislation, breaking down costs and benefits by program or
                             program element where feasible and estimating transfer costs and the
                             costs of all paperwork requirements, including tax paperwork. Finally, the
                             Chairmen said OMB should “exercise leadership to assure the quality and
                             reliability of information reported” by, among other things, providing an
                             “independent assessment” of the information provided by the agencies.
                             They said OMB staff should be directed to “critique the quality of the



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Appendix I
Individual Views of Members of Congress Regarding Regulatory Accounting Requirements




estimates provided to them, not to simply compile data presented by the
agencies.”

On the same day, Representatives Thomas J. Bliley, Jr. and David
McIntosh, the Chairmen of the House Committee on Commerce and the
House Committee on Government Reform and Oversight’s Subcommittee
on National Economic Growth, Natural Resources, and Regulatory Affairs,
respectively, wrote a similar letter to the OMB Director. They said the
OMB report fell short of their expectations in that it (1) did not fully
comply with specific statutory requirements (e.g., lacked
recommendations); (2) reflected a narrow interpretation of the
congressional mandate (e.g., provided estimates for only a small number of
major rules issued during the previous fiscal year); (3) revealed the lack of
any systematic approach to collecting, analyzing, and reporting data on
regulatory impacts; and (4) failed to reflect the leadership role that
Congress intended OMB to play. In relation to the last point, they said
“Congress expected OMB to assure the reporting of meaningful
information and provide an independent assessment of regulatory effects,”
not merely to perform the “ministerial function of reporting information
provided by other agencies.

On August 28, 1998, Representative McIntosh provided his Subcommittee’s
comments on OMB’s August 1998 draft report. He said the Subcommittee
continued to have some of the same concerns mentioned in its October
1997 letter and said it was difficult to believe that OMB could not
recommend any regulatory programs for reform or elimination other than
electricity restructuring. He also said that OMB should have monetized
costs for all rules issued by independent regulatory agencies and should
have sought out research or reports on the direct and indirect impacts of
federal rules on the private sector, state and local governments, and the
federal government.

On October 10, 1998, Senators Thompson and Stevens, again acting as the
Chairmen of the Senate Committees on Governmental Affairs and
Appropriations, respectively, also provided comments on OMB’s August
1998 draft report. They said they remained concerned that OMB had “not
sufficiently used its expertise” in the draft report, and said OMB should not
simply compile data presented by the agencies but should synthesize and
evaluate the information “and provide an independent assessment.” They
indicated that OMB should prepare its best estimates of costs and benefits
in the aggregate and for individual rules and programs and compare those
estimates with agency estimates. In particular, they noted that OMB did
not provide an independent assessment of EPA’s estimates of the costs



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Appendix I
Individual Views of Members of Congress Regarding Regulatory Accounting Requirements




and benefits of the Clean Air Act. They also said that OMB should have
done more to provide recommendations for the reform or elimination of
federal rules, and “provide guidance on programs where the costs
outweigh the benefits using its best judgment and input from regulatory
scholars.




Page 64                      GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Appendix II

Biographical Information of Regulatory
Experts

Robert W. Crandall      Robert W. Crandall is a senior fellow in the Economic Studies Program at
                        the Brookings Institution, Washington, D.C., where he has worked since
                        1978. He is a former deputy director of the Council on Wage and Price
                        Stability during the Ford and Carter administrations, and a former faculty
                        member at the Massachusetts Institute of Technology, the University of
                        Maryland, and George Washington University. He also has been a
                        consultant to the Environmental Protection Agency (EPA), the Antitrust
                        Division of the Federal Trade Commission, and the Treasury Department.
                        He has written widely in such fields as antitrust, the automobile industry,
                        competitiveness, deregulation, environmental policy, mergers, regulation,
                        and telecommunications policy.

Selected Publications   An Agenda For Federal Regulatory Reform, with Christopher DeMuth,
                        Robert W. Hahn, Robert E. Litan, Pietro S. Nivola, and Paul R. Portney
                        (Washington, D.C.: American Enterprise Institute for Public Policy
                        Research and the Brookings Institution, 1997).

                        Regulating the Automobile, with Howard Gruenspecht, Ted Keeler and
                        Lester Lave (Washington, D.C.: Brookings Institution, 1986).

                        “What Ever Happened to Deregulation?” in David Boaz (ed.) Assessing the
                        Reagan Years (Washington, D.C.: Cato Institution, 1988).

                        Economic Deregulation and Customer Choice: Lessons for the Electric
                        Industry, with Jerry Ellig (Center for Market Processes, George Mason
                        University, 1997).

Robert W. Hahn          Robert W. Hahn is director of the American Enterprise Institute (AEI)-
                        Brookings Joint Center for Regulatory Studies, Washington, D.C. He is also
                        a resident scholar at AEI and a research associate at Harvard University.
                        He also served as a senior staff member of the President’s Council of
                        Economic Advisers for 2 years and has served as a consultant to
                        government and industry on a variety of issues involving regulation and
                        privatization. His research interests include the reform of regulation in
                        developed and developing countries and the design of new institutions for
                        reforming regulation.

Selected Publications   “The Costs and Benefits of Regulation: Review and Synthesis,” with John
                        A. Hird, Yale Journal on Regulation (Vol. 8, No.1 (Winter 1991)).

                        Improving Regulatory Accountability, with Robert E. Litan, (Washington,
                        D.C.: AEI and the Brookings Institution, 1997).




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                        Appendix II
                        Biographical Information of Regulatory Experts




                        Risks, Costs, and Lives Saved: Getting Better Results from Regulation
                        (ed.), (Washington, D.C.: Oxford University Press and AEI Press, 1996).

                        “Regulatory Reform: Assessing the Government’s Numbers” in Revising
                        Regulatory Reform: A Global Perspective, (AEI-Brookings Institution,
                        forthcoming).

                        “Policy Watch: Government Analysis of the Benefits and Costs of
                        Regulation,” Journal of Economic Perspectives (Vol.12, No. 4 (Fall 1998)).

Thomas D. Hopkins       Thomas D. Hopkins is Interim Dean of the College of Business and Arthur
                        J. Gosnell Professor of Economics at the Rochester Institute of
                        Technology in Rochester, NY. He is also Adjunct Fellow for the Center for
                        the Study of American Business, Washington University, St. Louis, MO.
                        From 1975 to 1984, he served on the staff of the Council on Wage and Price
                        Stability and as Deputy Administrator of the Office of Information and
                        Regulatory Affairs in the Office of Management and Budget. His published
                        work includes a series of policy projects for the Organization for
                        Economic Cooperation and Development, the Regulatory Information
                        Service Center, and the Small Business Administration.

Selected Publications   “Regulatory Costs in Profile,” Policy Study 132 (St. Louis: Washington
                        University, Center for the Study of American Business, Aug. 1996).

                        “Progress in Developing Standards for Review of Government
                        Regulations,” Business & the Contemporary World (Vol. IX, No. 4 (1997)).

                        “OMB’s Regulatory Accounting Report Falls Short of the Mark,” Policy
                        Study 142, (St. Louis: Washington University, Center for the Study of
                        American Business, Nov. 1997).

                        “Regulatory Costs in Profile,” Policy Sciences (Vol. 31, No. 4 (Dec. 1998)).

Lester B. Lave          Lester B. Lave is University Professor and the Higgins Professor of
                        Economics in the Graduate School of Industrial Administration and
                        professor of engineering and public policy in the College of Engineering
                        and Public Policy at Carnegie Mellon University, Pittsburgh, PA. He has
                        consulted to EPA, the Office of Safety Administration, and other federal
                        agencies on the theory and application of cost-benefit analysis.

Selected Publications   Benefit-Cost Analysis in Environmental, Health, and Safety Regulation: A
                        Statement of Principles, with Kenneth J. Arrow, Maureen L. Cropper,
                        George C. Eads, Robert W. Hahn, Lester B. Lave, Roger G. Noll, Paul R.



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                        Appendix II
                        Biographical Information of Regulatory Experts




                        Portney, Milton Russell, Richard Schmalensee, V. Kerry Smith, and Robert
                        N. Stavins (Washington, D.C.:AEI, 1996).

                        “Benefit-Cost Analysis: Do The Benefits Exceed the Costs?” in Robert W.
                        Hahn, ed., Risks, Costs, and Lives Saved: Getting Better Results from
                        Regulation (Washington, D.C.: Oxford University Press and AEI Press,
                        1996).

Robert E. Litan         Robert E. Litan is the codirector of the AEI-Brookings Joint Center for
                        Regulatory Studies and serves as director of Economic Studies Program
                        and Cabot Family Chair in Economics at the Brookings Institution. He has
                        served as deputy assistant attorney general in the Antitrust Division of the
                        Department of Justice, as Associate Director of the Office of Management
                        and Budget, and as a regulatory and legal staff specialist for the President’s
                        Council of Economic Advisors. He has also consulted for numerous
                        organizations, public and private, and testified as an expert witness in a
                        variety of legal and regulatory proceedings.

Selected Publications   Reforming Federal Regulation, with William D, Nordhaus (New Haven, Ct.:
                        Yale University Press, 1983).

                        An Agenda For Federal Regulatory Reform, with Robert W. Crandall,
                        Christopher DeMuth, Robert W. Hahn, Pietro S. Nivola, and Paul R.
                        Portney (Washington, D.C.: American Enterprise Institute for Public Policy
                        Research and the Brookings Institution, 1997).

Paul R. Portney         Paul R. Portney is president of Resources for the Future, Washington, D.C.
                        He was previously the organization’s vice president and director of its
                        Center for Risk Management and its Quality of the Environment Division.
                        He also has been a visiting professor at the graduate school of public
                        policy at the University of California at Berkeley and a visiting lecturer at
                        Princeton University’s Woodrow Wilson School. He previously served as
                        chief economist at the Council of Environmental Quality in the Executive
                        Office of the President, as a member of the Board on Environmental
                        Studies and Toxicology of the National Research Council, and as a
                        member of the National Oceanic and Atmospheric Administration’s Panel
                        on Contingent Valuation. From 1994 to 1997, he was a member of the
                        Executive Committee on EPA’s Science Advisory Board and was chairman
                        of the Board’s Environmental Economics Advisory Committee.

Selected Publications   “Economics and the Clean Air Act,” Journal of Economic Perspectives
                        (Vol. 4 (1990), pp. 173-181).




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                        Appendix II
                        Biographical Information of Regulatory Experts




                        Benefit-Cost Analysis in Environmental, Health, and Safety Regulation: A
                        Statement of Principles, with Kenneth J. Arrow, Maureen L. Cropper,
                        George C. Eads, Robert W. Hahn, Lester B. Lave, Roger G. Noll, Milton
                        Russell, Richard Schmalensee, V. Kerry Smith, and Robert N. Stavins
                        (Washington, D.C.: AEI, 1996).

Murray Weidenbaum       Murray Weidenbaum is the Mallinckrodt Distinguished University
                        Professor and Chairman of the Center for the Study of American Business
                        at Washington University in St, Louis, MO. Before joining Washington
                        University, he served as Corporate Economist at the Boeing Company. He
                        was Assistant Secretary of the Treasury for Economic Policy during the
                        Nixon administration. In 1980, he chaired the Task Force on Regulatory
                        Reform for President-Elect Ronald Reagan. In 1981 and 1982, he was
                        Chairman of the Council of Economic Advisers, and subsequently served
                        as a member of the President’s Economic Policy Advisory Board.

Selected Publications   Government-Mandated Price Increases (Washington, D.C.: AEI, 1975).

                        The Cost of Federal Regulation of Economic Activity, with Robert DeFina
                        (Washington, D.C.: AEI, 1978).

                        “Regulatory Process Reform,” Regulation (Winter 1997).

                        A New Approach to Regulatory Reform (St. Louis: Washington University,
                        Center for the Study of American Business, 1998).




                        Page 68                       GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Appendix III

Rules Meeting Specific Statutory
Requirements for OMB's 1997 Report

                 Section 645(a) of the Treasury, Postal Services and General Government
                 Appropriations Act for fiscal year 1997 required the Office of Management
                 and Budget (OMB) to estimate the costs and benefits of each rule “that is
                 likely to have a gross annual effect on the economy of $100,000,000 or
                 more in increased costs” in a report to Congress. In its September 30, 1997,
                 report, OMB interpreted this requirement broadly to include all final rules
                 promulgated by an executive branch agency and reviewed by OMB’s Office
                 of Information and Regulatory Affairs (OIRA) between April 1, 1996, and
                 March 31, 1997, that met any of the following:

               • Rules designated as “economically significant” under section 3(f)(1) of
                 Executive Order 12866;
               • Rules designated as “major” under 5 U.S.C. 804(2); and
               • Rules designated as meeting the threshold under title II of the Unfunded
                 Mandates Reform Act (2 U.S.C. 1531-1538).

                 A rule could meet one or more of these criteria and not have a gross
                 annual effect on the economy of $100 million or more in increased costs.
                 For example, a rule may be economically significant because it has a $100
                 million beneficial effect on the economy, or because it has material effect
                 on a sector of the economy, the environment, or state or local
                 governments.

                 Table III.1 lists the 20 rules that OIRA reviewed during the 1-year time
                 frame that we determined had met the specific requirements of the
                 statute—i.e., rules that the agencies believed were likely to have a gross
                 annual effect on the economy of $100 million in increased costs. Ten of the
                 rules were “social” regulations (which include environmental, health and
                 safety rules) and 10 were “transfer” rules (which involve payments from
                 one group to another that redistribute wealth).

                 Two of these rules were not included in OMB’s 1997 report to Congress but
                 met OMB’s criteria for inclusion in its report: (1) the Department of
                 Veterans Affairs’ rule on disability compensation and (2) EPA’s rule on
                 control of air pollution for new gasoline spark-ignition marine engines.




                 Page 69                   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
                                          Appendix III
                                          Rules Meeting Specific Statutory Requirements for OMB's 1997 Report




Table III.1: Rules Likely to Have Gross
Impact On Economy of $100 Million in      Type       Department                                            Costs     Benefits
Increased Costs                           of rule    or agency     Rule                           (millions/year) (millions/year)
                                          Social     Department    Conservation Reserve                     $970           $2,200
                                          rules      of AgricultureProgram—Long Term
                                                                   Policy
                                                                   Pathogen Reduction:                $100-$120       $70-$2,800
                                                                   Hazard Analysis and
                                                                   Critical Control Point
                                                                   (HACCP) Systems
                                                     Department    Regulations Restricting                  $180 $9,900-$11,000
                                                     of Health and the Sale and Distribution
                                                     Human         of Cigarettes and
                                                     Services      Smokeless Tobacco to
                                                                   Protect Children and
                                                                   Adolescents
                                                     Department    Occupational Exposure to                 $110             $90
                                                     of Labor      Methylene Chloride
                                                     Environmental Accidental Release                       $100            $170
                                                     Protection    Prevention Requirements:
                                                     Agency        Risk Management
                                                                   Programs Under Clean Air
                                                                   Act Section 112(r)(7)
                                                                   Regulation of Fuels and                  $150      $120-$350
                                                                   Fuel Additives:
                                                                   Certification Standards for
                                                                   Deposit Control Gasoline
                                                                   Additives
                                                                   Acid Rain Program;                       $190    $430-$2,000
                                                                   Nitrogen Oxides Emission
                                                                   Reduction Program
                                                                   Motor Vehicle Emissions            $200-$250       $130-$760
                                                                   Federal Test Procedure
                                                                   Revisions
                                                                   Control of Air Pollution                 $640    $230-$1,000
                                                                   From New Motor Vehicles
                                                                   and New Motor Vehicles
                                                                   Engines: Voluntary
                                                                   Standards for Light-Duty
                                                                   Vehicles
                                                                   Control of Air Pollution:                $270     $$150-$680
                                                                   Final Rules for New
                                                                   Gasoline Spark-Ignition
                                                                   Marine Engines;
                                                                   Exemptions for New
                                                                   Nonroad Compression-
                                                                   Ignition Engines at or
                                                                   Above 37 Kilowatts and
                                                                   Nonroad Spark-Ignition
                                                                   Engines at or Below 19
                                                                   Kilowatts




                                          Page 70                       GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Appendix III
Rules Meeting Specific Statutory Requirements for OMB's 1997 Report




Transfer   Department       Food Stamp Program:                $7-$207
rulesa     of Agriculture   Certification Provisions of
                            the Mickey Leland
                            Childhood Hunger Relief
                            Act
                            Food Stamp Program;              $125-$145
                            Child Support Deduction
           Department       Medicaid Program:                   $1,105
           of Health        Limitations on Aggregate
           and Human        Payments to
           Services         Disproportionate Share
                            Hospitals; Federal Fiscal
                            Year 1996
                            Individual Market Health          $50-$200
                            Insurance Reform;
                            Portability From Group to
                            Individual Coverage;
                            Federal Rules for Access
                            in the Individual Market;
                            State Alternative
                            Mechanisms to Federal
                            Rules
                            Medicare Program;                     $250
                            Physician Fee Schedule
                            Update for Calendar Year
                            1997 and Physician
                            Volume Performance
                            Standard Rates of
                            Increase for Federal Fiscal
                            Year 1997
                            Medicare Program;                     $610
                            Inpatient Hospital
                            Deductible and Hospital
                            and Extended Care
                            Services Coinsurance
                            Amounts for 1997
           Department       Inspection and Expedited              $205
           of Justice       Removal of Aliens;
                            Conduct of Removal
                            Proceedings; Asylum
                            Procedures
           Department       Compensation for              $166.5-$504.3
           of Veterans      Disability Resulting From
           Affairs          Hospitalization, Treatment,
                            Examination, or Vocational
                            Rehabilitation
           Departments      Interim Rules for Health          $50-$200
           of Health and    Insurance Portability for
           Human            Group Health Plans
           Services,
           Labor and
           the Treasury




Page 71                        GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Appendix III
Rules Meeting Specific Statutory Requirements for OMB's 1997 Report




             Social Security Supplemental Security                       $90-$185
             Administration Income; Determining
                             Disability for A Child
                             Under Age 18
a
 According to OMB, transfer rules are payments from one group to another that redistribute wealth.
Therefore, OMB said, there are no real costs to society as a whole; the "benefits" of these rules are
equal to the "costs."
Source: Regulatory Information Service Center and Federal Register.




Page 72                            GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Appendix IV

Rules Meeting Specific Statutory
Requirements for OMB's 1998 Report

                Section 625(a) of the Treasury and General Government Appropriations
                Act for fiscal year 1998 required OMB to estimate the costs and benefits of
                each rule “that is likely to have a gross annual effect on the economy of
                $100,000,000 or more in increased costs” in a report to Congress. In its
                February 5, 1999, report, OMB interpreted this requirement broadly to
                include all final rules promulgated by an executive branch agency and
                reviewed by OIRA between April 1, 1997, and March 31, 1998, that met any
                of the following:

              • Rules designated as “economically significant” under section 3(f)(1) of
                Executive Order 12866;
              • Rules designated as “major” under 5 U.S.C. 804(2); and
              • Rules designated as meeting the threshold under title II of the Unfunded
                Mandates Reform Act (2 U.S.C. 1531-1538).

                A rule could meet one or more of these criteria and not have a gross
                annual effect on the economy of $100 million or more in increased costs.
                For example, a rule may be economically significant because it has a $100
                million beneficial effect on the economy or because it has material effect
                on a sector of the economy, the environment, or state or local
                governments.

                Table IV.1 lists the 22 rules that OIRA reviewed during the 1-year time
                frame that we determined had met the specific requirements of the
                statute—i.e., rules that the agencies believed were likely to have a gross
                annual effect on the economy of $100 million in increased costs. Thirteen
                of the rules were “social” regulations (which include environmental, health
                and safety rules) and nine were “transfer” rules (which involve payments
                from one group to another that redistribute wealth).




                Page 73                   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
                                           Appendix IV
                                           Rules Meeting Specific Statutory Requirements for OMB's 1998 Report




Table IV.1: Rules Likely to Have Gross
Effect on the Economy of $100 Million in   Type      Department                                               Costs      Benefits
Increased Costs                            of rule   or agency        Rule                             (in millions) (in millions)
                                           Social    Department       Environmental Quality Incentives          $200          $290
                                           rules     of Agriculture   Program
                                                     Department       Energy Conservation Program for           $260   $700-$760
                                                     of Energy        Consumer Products: Energy
                                                                      Conservation Standards for
                                                                      Refrigerators, Refrigerator-
                                                                      Freezers, and Freezers
                                                     Department       Quality Mammography                        $40   $200-$280
                                                     of Health and    Standardsa
                                                     Human
                                                     Services
                                                     Department       Respiratory Protection                     $120 $590-$2,700
                                                     of Labor
                                                     Departments      Interim Rules for Mental Health            $464      Not
                                                     of Health and    Parity                                            estimated
                                                     Human
                                                     Services,
                                                     Labor and
                                                     the Treasury
                                                     Environmental    Emission Standards for                      $80    $230-$900
                                                     Protection       Locomotives and Locomotive
                                                     Agency           Enginesb
                                                                      Control of Emissions of Air                $140    $220-$990
                                                                      Pollution from Highway
                                                                      Heavy-Duty Engines
                                                                      Effluent Limitations Guidelines:           $250     $10-$250
                                                                      Pulp and Paper
                                                                      National Emission Standards for            $120 ($970)-$1,100
                                                                      Hazardous Air Pollutants for
                                                                      Sources Category: Pulp and
                                                                      Paper Production
                                                                      Standards of Performance for        $71-$146         Not
                                                                      New Stationary Sources and                        estimated
                                                                      Emission Guidelines for Existing
                                                                      Sources:
                                                                      Hospital/Medical/Infectious
                                                                      Waste Incinerators
                                                                      National Ambient Air Quality         $17,000     $11,000-
                                                                      Standards for Particulate Matter                  $59,000
                                                                      National Ambient Air Quality           $4,500 $770-$4,300
                                                                      Standards for Ozone




                                           Page 74                       GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Appendix IV
Rules Meeting Specific Statutory Requirements for OMB's 1998 Report




                                Addition of Facilities in Certain  $143-$226                  Not
                                Industry Sectors, Toxic Chemical                           estimated
                                Release Reporting, Community
                                Right-to-Know
Transfer Department             Child and Adult Care Food          $857-$876
rulesc   of Agriculture         Program: Improved Targeting of
                                Day Care Home Reimbursement
                                Amendments to the Peanut
                                Poundage Quota Regulationsd
            Department          Medicaid Program; Coverage of $340-$1,540
            of Health           Personal Care Services
            and Human           Medicare Program; Changes to           $6,000
            Services            the Inpatient Prospective
                                Payment Systems and Fiscal
                                Year 1998 Rates
                                Medicare Program; Fee              $160-$780
                                Schedule for Calendar Year
                                1998; Payment Policies and
                                Relative Unit Adjustments
                                Medicare Program; Limit on the      $91-$114
                                Valuation of a Depreciable Asset
                                Recognized as an Allowance for
                                Depreciation and Interest After
                                Change of Ownership
                                Medicare Program: Schedule of           $570
                                Limits on Home Health Agency
                                Costs Per Visit for Cost
                                Reporting Periods Beginning on
                                or after October 1, 1997
                                Medicaid Program: State            $200-$400
                                Allotment for Payment of
                                Medicare Part B Premiums for
                                Qualifying Individuals: Federal
                                Fiscal Year 1998
            Department          Affidavit of Support on Behalf of $301-$1,701
            of Justice          Immigrants
a
 Although the annualized costs for this rule is less than $100 million, according to the agency, initial
costs will exceed $100 million and then decrease. This rule is also an unfunded mandate.
b
 Although the annualized costs for this rule are less than $100 million, according to the agency there
are a number of years where the associated costs will be more than $100 million. In addition, this rule
is an unfunded mandate.
c
 According to OMB, transfer rules are payments from one group to another that redistribute wealth.
Therefore, OMB said, there are no real cost to society as a whole; the "benefits" of the rules are equal
to the "costs."
d
 The cost estimate for this rule is reported only in the aggregate. The total cost associated with the
Amendments to the Peanut Poundage Quota Regulations are $1.75 billion (1996-2002). In order to
compare and summarize the annual costs of all the rules, the cost associated with this rule will not be
included.
Source: Regulatory Information Service Center and Federal Register.




Page 75                             GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
Appendix V

Major Contributors to This Report


                        Curtis W. Copeland, Assistant Director, Federal Management and
General Government      Workforce Issues
Division                Steven G. Lozano, Evaluator-In-Charge
                        Joseph L. Santiago, Senior Evaluator


                        Joseph D. Kile, Assistant Director
Office of the Chief
Economist

                        Alan K. Belkin, Assistant General Counsel
Office of the General
Counsel




                        Page 76                   GAO/GGD-99-59 Analysis of OMB’s Cost and Benefit Reports
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