James L. Gattuso and Diane Katz:
The number and cost of government regulations continued to climb in 2014, intensifying Washington’s control over the economy and Americans’ lives. The addition of 27 new major rules[1] last year pushed the tally for the Obama Administration’s first six years to 184, with scores of other rules in the pipeline. The cost of just these 184 rules is estimated by regulators to be nearly $80 billion annually, although the actual cost of this massive expansion of the administrative state is obscured by the large number of rules for which costs have not been fully quantified. Absent substantial reform, economic growth and individual freedom will continue to suffer.
President Barack Obama has repeatedly demonstrated his willingness to act by regulatory fiat instead of executing laws as passed by Congress. But regulatory overreach by the executive branch is only part of the problem. A great deal of the excessive regulation in the past six years is the result of Congress granting broad powers to agencies through passage of vast and vaguely worded legislation. The misnamed Affordable Care Act and the Dodd–Frank financial-regulation law top the list.
Many more regulations are on the way, with another 126 economically significant rules on the Administration’s agenda, such as directives to farmers for growing and harvesting fruits and vegetables; strict limits on credit access for service members; and, yet another redesign of light bulbs.
In many respects, the need for reform of the regulatory system has never been greater. The White House, Congress, and federal agencies routinely ignore regulatory costs, exaggerate benefits, and breach legislative and constitutional boundaries. They also increasingly dictate lifestyle choices rather than focusing on public health and safety.
Immediate reforms should include requiring legislation to undergo an analysis of regulatory impacts before a floor vote in Congress, and requiring every major regulation to obtain congressional approval before taking effect. Sunset deadlines should be set in law for all major rules, and independent agencies should be subject—as are executive branch agencies—to the White House regulatory review process.[2]
Measuring the Red Tape
The federal government does not officially track total regulatory costs, as it does with taxation and spending. Estimates of these costs from various independent sources range from hundreds of billions of dollars to over $2 trillion annually.[3] However, the number and cost of new regulations can be tracked, and both have grown relentlessly.
The most comprehensive source of data on new regulations is the Federal Rules Database maintained by the Government Accountability Office (GAO). According to this GAO database, federal regulators issued 2,400 new rules during the 2014 “presidential year” (January 21, 2014, to January 20, 2015). Of these, 77 were classified as “major.”
Forty-eight of the 77 major rules were budgetary or administrative in nature, such as Medicare payment rates and hunting limits on migratory birds. A total of 27 were “prescriptive” regulations, meaning that they increase burdens on individual or private-sector activity. (Two others were “deregulatory,” as explained below.) Altogether, during the six years of the Obama Administration, 184 prescriptive rules have been imposed. That compares to 76 such rules issued during the same period of the George W. Bush Administration.
Regulators reported new annual costs of $7.6 billion for the 2014 prescriptive rules based on the limited number of analyses performed by the agencies.[4] This total cost is 15 percent less than the $8.9 billion in costs imposed during the sixth year of the Bush Administration. However, cost calculations were incomplete for 12 of the 27 Obama rules issued last year.
There was also $1.8 billion in reported one-time implementation costs for the 2014 rules, bringing the Administration’s six-year total for such costs to about $17 billion.
Only two of the 2014 rules decreased regulatory burdens, bringing the Administration’s six-year “deregulatory” total to just 17—despite a widely touted “retrospective review” initiative that President Obama claimed would take outdated rules off the books. This compares to four deregulatory actions during President Bush’s sixth year, and his Administration’s six-year total of 23.
Overall, the cost of new mandates and restrictions imposed by the Obama Administration now totals $78.9 billion annually. This is more than double the $30.7 billion in annual costs imposed at the same point in the George W. Bush Administration.[5]
These figures are consistent with other measures of a growing regulatory burden. For instance, according to economists Susan Dudley and Melinda Warren, spending on federal regulatory agencies has increased from $20.7 billion in 1990, and $50.9 billion in 2009, to more than $53.6 billion in 2014 (in constant 2009 dollars). Similarly, total staffing at regulatory agencies has grown nearly 6.6 percent since 2009.[6]
Dodd–Frank Dominates in 2014
Regulation of securities and the banking system dominated rulemaking in 2014, accounting for 13 of the 27 major rules issued during the Obama Administration’s sixth year. The Securities and Exchange Commission (SEC) imposed the largest number of rules (seven), while the Federal Reserve, the Federal Deposit Insurance Corporation, and the Treasury Department’s Office of the Comptroller of the Currency jointly promulgated five rules, and the Commodity Futures Trading Commission issued one.
Eight of the 13 financial regulations were prompted by Dodd–Frank. Indeed, virtually no aspect of the securities and banking system remains unaffected by the act, which encompassed 850 pages of legislative text, and has spawned 19,000 pages of regulations—so far.
But Dodd–Frank rulemaking remains incomplete. At the end of the fourth quarter of 2014, only 58.5 percent of the 395 required rulemakings were finalized, and 23 percent had yet to be proposed.[7] The full effects of the act have yet to be felt, but many of the regulations have led to higher banking costs and fewer investment options.
The act was largely intended to reduce the risk of a major bank failure, but the regulatory burden is crippling community banks (which played little role in the financial crisis). According to Harvard University researchers Marshall Lux and Robert Greene, small banks’ share of U.S. commercial banking assets declined nearly twice as much since the second quarter of 2010—around the time of Dodd–Frank’s passage—as occurred between 2006 and 2010.[8] Their share currently stands at just 22 percent, down from 41 percent in 1994.[9]
The increased consolidation rate is driven by regulatory economies of scale—larger banks are better suited to handle increased regulatory burdens than are smaller banks, causing the average costs of community banks to rise.[10] The decline in small bank assets spells trouble for their primary customer base—small business loans and those seeking residential mortgages.
Ironically, Dodd–Frank proponents pushed for the law as necessary to rein in the big banks and Wall Street. In fact, the regulations are giving the largest companies a competitive advantage over smaller enterprises—the opposite outcome sought by Senator Christopher Dodd (D–CT), Representative Barney Frank (D–MA), and their allies. As Goldman Sachs CEO Lloyd Blankfein recently explained: “More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history. This is an expensive business to be in, if you don’t have the market share in scale.”[11]
DOE Power Play
The Department of Energy (DOE) ranked second in the number of major rules issued last year, with six. All of the rules restrict energy use by various appliances and other electrical gadgets, including power adaptors for cellphones and laptops, and coolers in ice cream parlors and grocery stores.[12] The DOE has imposed a dizzying array of such mandates based on the very broad authority granted to it by Congress under the Energy Policy and Conservation Act of 1975.
This broad law requires any new energy standards to be “technologically feasible” and “economically justified”—standards that the DOE has often ignored. For example, in March, the agency issued stricter energy-conservation standards for commercial refrigeration equipment—a revision of 2009 standards. A legal challenge was subsequently filed by the Air-Conditioning, Heating and Refrigeration Institute, the trade association that represents manufacturers of affected equipment. According to the lawsuit, the standards were not technologically feasible, as required by the statute. Similar complaints have arisen regarding many of the other DOE standards.
The regulatory benefits cited by the agency also appear to violate basic requirements of the Energy Policy and Conservation Act. As reported by Sofie Miller of the George Washington University Regulatory Studies Center, the DOE attributed some 97 percent of the regulatory benefits to the reduction of carbon emissions and consumers’ energy savings from more efficient refrigeration equipment.[13] But only 7 percent to 23 percent of the purported benefits from reduced carbon emissions would affect the United States. Nonetheless, the DOE scored the entire global reduction as a benefit.
Moreover, for each of these rules, the DOE counted as a benefit the energy savings to owners from more efficient equipment and appliances. But such “private benefits” constitute a substitution of the regulator’s preference for that of consumers and entrepreneurs. Whether energy savings are worth the higher cost of a more efficient item is a decision that consumers and business owners can and should make for themselves. Taking away their ability to make that choice is not a benefit; it is, in fact, a steep cost.
Highest Cost Rules of 2014
Of the 2014 rules for which regulators quantified costs, the most expensive was the “Liquidity Coverage Ratio” adopted jointly by the Department of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation. Estimated to cost $2.5 billion annually, the rule requires larger banks to hold more cash and other “high-quality assets” in their reserves.
While such a requirement may seem sensible, the assets in reserve are unavailable for profit-generating investment. And it is consumers who end up paying for those lost opportunities in the form of higher fees on banking products and services.[14] On the other hand, banks would be far more likely to maintain adequate reserves on their own had the government not proven so amenable to bailouts.[15]
Ranking second in cost was the Environmental Protection Agency’s (EPA’s) Tier 3 Motor Vehicle Emission and Fuel Standards, which the agency calculates will cost automakers and consumers some $1.5 billion annually. This rule imposes more stringent vehicle emissions standards to reduce methane emissions by 80 percent, decrease particulate emissions by 70 percent, and further limit the sulfur content of gasoline. A variety of studies have calculated much higher costs for the rule, including an estimate prepared for the American Petroleum Institute by the consulting firm Baker & O’Brien Inc., of $2.4 billion annually.[16]
Among other directives, the rule would require refiners to reduce sulfur in gasoline from 30 parts per million (ppm) to 10 ppm. But the industry already invested some $9 billion in the past decade to reduce the sulfur content from 300 ppm to 30 ppm. The additional reduction would not yield measurable environmental benefits.
Understated Costs
The actual cost of new regulations issued in 2014 is considerably higher than the totals reported by the regulatory agencies and detailed here. As a first matter, this report documents only “major” regulations. Cost-benefit-analyses are not typically performed for the thousands of non-major rules issued each year, although the costs could be substantial.
But even the costs of major rules often go unquantified. Regulators did not fully quantify costs for 12 of the 27 prescriptive regulations issued in 2014. In several instances, agencies only reported paperwork costs, not any others. Although such costs should be considered, they hardly reflect the largest burden in most cases.
The EPA, for instance, in its 2014 rule governing the withdrawal of cooling water from lakes or rivers by power plants and factories, calculated annual paperwork costs ($291 million annually) but not the expense of the technology necessary for compliance. The capital costs of retrofitting a cooling water intake structure to prevent the intake of aquatic organisms can be “astronomical”—upwards of $2 billion—not including the substantial costs of downtime needed for the retrofit.[17]
