The costs of government regulation of business

    Front Cover
        Page i
        Page ii
    Letter of transmittal
        Page iii
        Page iv
    Table of Contents
        Page v
        Page vi
    Summary
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
    The new wave of government regulation
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
    The impacts of government regulation
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
    Approaches to regulatory reform
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
    Appendix. Federal expenditures for regulation of business
        Page 27
        Page 28
        Page 29
    Back Cover
        Page 30

T t. v J / -



951h Congress JOINT COMMITTEE PRINT
2d Session J







TIHE COSTh OF

GOVERNMENT REGULATIONS OF BUSINESS




A STUDY

PREPARED FOR THE USE OF THE

SUBCOMMITTEE ON ECONOMIC GROWTH
AND STABILIZATION

OF THE


JOINT ECONOMIC


COMMITTEE


CONGRESS OF


THE UNITED


STATES


Fl /


~5ox
'%~


APRIL 10,


Printed for the use of the Joint Economic Committee


U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1978


For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402


















JOINT ECONOMIC Cc('M.M I'TITE'


S" r" I,' li pirstu hL' to 1 *,'. 5 I ,f ]'t llI l.:,w 2"A 7''l I 'u Rg .)
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10'SE OF "l]'*RE-'.E.-NT'ATIVES
IIEN I1Y S. %I'i.i -PL..i. Ii.
I I.LIA.,NI S NMi ) I .1 FI. 1'.'ibi.v .ii i.i
I.E K II. i.AMIITtIN, li i. 'i.t
(il I.I.S W. LI I\' D I,'lS, 1,
PA iKEN J. ,MITl HEI.I., ,.ir\l>'I-i
'i..\ FN't' J. HiWi \"N fill,.)
GA Ri.lY I()\VN. M [hIg.inl
MAR. t A RET M. H Et 'K IK M.LS..,clil.s'tts
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SEN ATE
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.AK1 AI. IA.\1tl IIII'l I.H-'F, t'unii l lCcuI
F 1)\% A ItI) MN. K ENN N EI)Y, MNL:Utchuiu'ttis
(i;:E ilt; 1 I'- ,( )\"E RN, South ).ak'it.i
JA( (I K.JAXITS. Nrw York
\I I.Io..AM V. liT'll. JR., Dleiaware
JA.%ES .IEsA %1. i IA1 Idaho
ORItIN ; .IIAT( II, '1tih


JON,% I. STAR.K. l-'.rrci!br fDirectlr
L.oT is C. K RATII'TI;F .1.4A.is'inf InJ:rector
il.IIARD F. KAUFMAN, Genelrr('l C',irn.e

ECONOMISTS


TiIOMA4 F. DERMR R-'
KENT .H IIUI.HES


ClIARI .ES H. BRA.DFORD


L. Du',,1l.%1. LEE
'JlILIP M(MNIARTIN'

MINORITY
STMrI'.vE J. ENTIN
NMAK R. I'tL,.INSKI


DrTI"ORAi NoR...I I .MATZ.
(GLORGE jt. TYLLR


.M. CATIIERINE MfLLER


SI'IcoMir'I-nT:TE ON ECONOMIC GROWTH D .\N Sr.TABILIZATION

LLOYD BENTSEN, Texas, Chair,,an


SENATE
ABRAIANAM RIBIC'OFF, Cunn.,'"i'ut
(iEo)RGE Mr OVE RN, Siiilth i Dakota
JACOB K. JAVITS, New York
1A ILLIAM V. ROTH, JR., Delaware


HOUSE OF REPRESENTATIVES
RICI.TA RD ROLLING, Mi.ssouri
LEE It. HAMILTON, Indiana
GA R RY BR ItWN', MihLligan
MAR G A IRET M. ] I ECK LE 'R, Massachuset I s
(II)












LETTERS OF TRANSMITTAL


APRIL 6, 1978.
To the Momber. of the Joint Economic Committee:
Transmitted herewith for the use of the members of the Joint
Economic Committee and other Members of Con'2re,-s is the study
entitled "The Costs of Government Regulation of Business." This
study will be a useful aid for evaluation of the impact of Federal
rule, and regulations on the American private sector.
I would like to express my thanks to the author of the study,
Mr. Murray L. Weidenbaum. Mr. Weidenbaum is director, Center for
the Study of American Business at Washington University, St. Louis,
Mo. The views expressed in the study are those of the author and do
not necessarily reflect the views of the Joint Economic Committee,
individual members thereof, or members of the committee staff.
Sincerely,
RICHARD BOLLING,
Chairman, Joint Economic Committee.

APRIL 4, 1978.
Hon. RICHARD BOLLING,
Chairman, Joint Economic Commi;ttee,
U.S. Congress, Washington, D.C.
DEAR MR. CHAIRMAN: Transmitted herewith is a study entitled
"The Costs of Government Regulation of Business" by Mr. Murray
L. Weidenbaum. The study draws on original analyses prepared by
Mr. Weidenbaum and the staff of the Center for the Study of Americanl
Business at Washington University, St. Louis, Mo.
The analysis presented here estimates the Federal administrative
cost and related private sector cost of Federal regulation. It reveals
that taxpayers, consumers, homeowners, investors, and entrepreneurs
bear sizable burdens as a consequence of these regulations. Mr.
Weidenbaum has developed estimates of the burdens and found
these to be significantly larger than heretofore projected. In 1976,
for example, the aggregate impact on the private sector of govern-
ment rules and regulations was some 20 times larger than Federal
expenditures for such activities that year. Such information is essen-
tial to an informed judgment as to what is an appropriate level of
government regulation.
Many current regulations have been enacted in a vacuum, with
little or no credible information available on their ultimate economic
impact. The study by Mr. Weidenbaum is an attempt to use a new
and comprehensive technique to calculate this impact. I hope this
study, which draws on earlier work by the author as well, will stimu-
late further exploration of this technique and of this important and
timely subject.


(Ill)






rIv

I \\o'lll likt, to tlli!k :M r. \\' .,,IliLi ai, for prlp.irinI tllhis study.
,''\- ,XJirI'--'(,l ill it :i!'' tl -'o o f IIn' 1ul io lr iidl lo nolt iie'e.sarily
rjiiv-,.It tIl' v,'-w of tlh" 1,Ii-nl"r- o1 tipw .JoIint E' ioInilic" Commn it-
t,1,, tlI' S-l IIroInll1ntte'C ov l 1J 1o0 ii':c r t1 -nt ::il .S tabllization, or
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CONTENTS


Page
Letters of transmittalIII------- ----------in
THE COSTS OF GOVERNMENT REGULATION OF
BUSINESS
Summary-----_----------------------------------------------------- 1
The new wave of government regulation------------------------ 7
The impacts of government regulation--------------------------------- 12
Regulation and inflation---------------------------------------- 13
Regulation and innovation-------------------------------------- 17
Regulation and capital formation-------------------------------- 18
Regulation and employment------------------------------------ 19
Regulation and small business----------------------------------- 19
Regulation and entrepreneurial functions------------------------- 20
Approaches to regulatory reform------------------------------------ 22
Benefit-cozt analysis------------------------------------ ---- 22
Budgeting as a rnariagrrierit tool------------------------------23
Changing attitudes toward regulation---------------------------- 24
Alternatives to regulation------------------------------------- 25
Appendix. Federal expenditures for reziulation of busin'----------------- 27
(V)




















Digitized by the Internet Archive
in 2013














http://archive.org/details/costsofgove00unit













THE COSTS OF GOVERNMENT REGULATION OF
BUSINESS

By Murray L. Weidenbaum*
The process of regulation of business activity via governmental
rules and regulations generates a variety of impacts, direct and in-
direct, intended and unintended, desirable and unde'ii-able. Propo-
nents of governmental intervention stress the benefits that are ex-
pected to flow or the social problems to be solved. The costs which are
involved tend to be discounted or even ignored ("If we can put a man
on the moon, why can't we clean up the Mississippi?").
The purpose of this report is to examine the various costs that are
incurred in the process of government regulation.1 No judgments are
expressed on the value of the many regulatory efforts. By raising the
public information level, it is hoped that governmental decisionmaking
in this important area can become a more balanced process, giving equal
weight to the costs and other disadvantages as well as the benefits and
other advantages of proposed actions. The result, hopefully, will be
the attainment of important national objectives with greater effective-
ness than characterizes the present situation.

SUMMARY
The impacts of government regulation of business are being felt in
every part of the economy:
1. The taxpayer feels the effect.-Government regulation literally has
become a major growth industry, an industry supported by the tax-
payer. The cost of operating Federal regulatory agencies is rising more
rapidly than the budget as a whole, the population, or the gross
national product. (See fig. 1.) Outlays of 41 regulatory agencies are
estimated to increase from $2.2 billion in the fiscal year 1974 to $4.8
billion in fiscal 1979, a growth of 115 percent over the 5-year period.
*Director, Center for the Study of American Business, Washington University, St.
Louis, Mo.
I This paper draws on a variety of previous work by the author, iiidnlinm "Biisiis., Gnvernnirit, and
the Public," Engl-vwoo'iI Cliffs, New Jersey, Prentice-Hall, 1977;" Government-Manial,'. Price Inra' ..*'
Washington, American Enterprise Institute, 1'7'.; "Business and Governient: The C'hanging Relation-
ship," in Frank J. Bonello and Thomas R. Swartz, editors, "Alternative Directions in Economic Policy,"
Notre Dame, University of Notre Dame Press, 1978: "Redui.ing Inflationary Pressures by R4firniiiig
Government Regulation," in William Fellner, editor, "Contemporary Economic Problems," Was t il,.tii.,
American Enterprise Institute, l'.'7;.
(1)










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2. T1ic rntorist fcel.- fc ft ,,'.-IFdcrallv mandated safety and
environmental features incroea-e tlim price of the average passenger car
by S6t6 in 1978. (See fig. 2.) Compliance with those regulations thus
costs American cons1umCrz S7 billion a 'ear in the form of higher
priced cars. In addition, the add(d weight of the cars is increasing
tuel (onslifmption perliaps by n- muchl n. $3 billion annually. Thus,
thlie American motorist mav bIe pavin, in the neieLhborhood of $10
billion a year to meet Fedceral re'Uiilt ory requirements in the two
ar.,i of environment and safetv.








FIGURE 2.-Automobile price incr'a';es due to Federal :,ifety and emissioIns
control regulation.
(Retail Prices, Per Auto)

700 F

no r
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<... 441D P -ict n.rcise for/ .." '* ,, . ... .-'.. 'r '".. "- '-' .^.
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192 8 I-!- I'70 i 972 i; ]i4 i9 5 i5 B ]97 1
Years :'2' '. ;: : e St' .


3. The businessman feels the effect.-There are over 4,400 different t
Federal forms that the private sector must fill out each year. That
takes over 143 million man-hours, the economic equivalent of a small
army. The Federal Paperwork Commission estimated that the total
cost of Federal paperwork imposed on private industry ranges from $25
billion to $32 billion a year and that "a substantial portion of this
cost is unnecessary." The smaller business is hit disproportionately
hard by paperwork, as well as other types of government regulation.
4. The homeowner feels the efcfct.-Regulatory requirements imposed
by Federal, State, and local governments are adding between $1,500
and $2,500 to the cost of a typical new house. Using the midpoint of
that range of cost estimates ($2,000) and applying it to the 2 million
new homes built in 1977 results in an added cost to the homeowner of
$4 billion last year.


25-921-78-2








77w. r f ',*"o Hi,, ,, f;,/, 'fell, f f .- T Ili' ,(),- ,o ,'0;nl \, III" w,',ithl ',)vern-
It'lt A.:!ti I .- I I v In ut m IIx III'] to lItI 1 o -nnicr
Ill till, fol'Ill 4'l lI;l l< 11, 1 11 T hlt- ofjL~'L~l l c l' lllp~vl\ ,4it'; \\lh
F ,,l 'cd I I t.'b. l itt (*., ir-,. t,) .",- f'_S .'.) ,,hlli ,i i111 1'.9 76, o)r ,.,, S.. .( ) for
,,n 1l i ninri, \,,,ir;!ti, l, : ,1 liild il I i!l,, U n it,,l S t ,,... T i ,' (.-ti ni1t1 ,,l
.SG'J.9 billion o)f Ii r-t-, ;[i])i>~r'l on tlicl l, p iate .^(ctor 1 21) liinw, ttio
.. I Ahlll. i 'p)rlit to o[pri ;itp. till- 1-*'r-111111m w 11ZIlr Ci et ill thli -21111 y1 ;!, V .
( c(''s i..l 3 .) If ,Iji,'Ip tlie -ntii, 111 ultiiplier or 2() to itlt iiiinoiints
bul,',,t,,,l fo, ,', ,t,,rv .,'tiviti-\All, for m ov re ci' nt vcr-, \\e canti com e
tp) \, 2ll 1 111,i'xi,, imt.l, ofd t '. priv', 1, 0 .-*,'c t '- co-t of c M, plial,'('
a ,d thi-l\,w ithl tht tot.t l ,loll ;,lil"t:'t of '..'t',, inictit r,..,litioi. O
tli~i l>;-;", t < iri I .- -t l"Ibim lc th'ii tl< co-l s rji^ f on o c i n
riL ; (Ill~i of bli-nlil-- ( both 1l11. e()rir' f tI< hen~to y i~c cc
theill-elve'- [; \kI.H ;I, lc tot:i1ll(,1 $79.1 billi* i in the fi-,>c.l y,'ir 1,77 iiand imiay r-,i' li 9(67
hillio, ill thc U 'ii'r,' lt fi-,r'il y IP r. O () l1 tit, ) -i- of1' the k;ld.'t ('"tim ..tt
for tli' lii-c'il cv ,'r 1'J79t ill,' ziLLrvLr dtt co' t of I ov'Cnnl-1i'tit r,"trIlatiot
m.1.V 1,o v to ,1(12.7 billIOI, con0-.,-tin1, of S4.8 b llio o dir, c-t eXpjI) -I-'s
I1lV tlhe Fedcr~id rc_-li1ilitOryv wZ1,rcie, ?ild S97.9 bl~ilion of* vot-ts (if comn-
plianll((' ot tl lp:irt of tilte iPri\I'iLti ,tor.. \lt )io Iri tlitrt i-. lo ns-.-1r-
ai t<'(, lI:t Ieiri : b dl et t- fot edet'il rnliiltoy. Vrt iti-,. .,intt t I
(f'-o-tlilt multiplir (e'l'ct oil the private .,(','tor, tlhe amily-,i- in tlie
body ()of tli-. report tIid-, to -tio'w tli;it., the (l:ta ti-ed l' ( for pr)Ilvivt e
-','tot r,.v ala.toly co,.t.. are 'ie b-tln- tietial l ilt trler,-.imattd.








FIG1v IN. 3.-The multiplier effect: The cost of compliance with Federal regulation
in fi-ciAl 1979.


Administrative
Compliance

Total


$ 4.8 billion
97.9 billion

$102.7 billion


$97.97_Bi!i ion

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$4.8 Bi llion I


Administrative Compliance


Cost


Cost


SOURCE:


Centc r -, "C t7 o j,:'- :.--
of ', c'ca B:siczc


Regulatory Costs


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T*. 'J r ir, ',,r-'r f,, t ,, iTr (*.--GOvir!nm11 ,tt re elationon, albeit ln-
i[;t'i'.t'i ',llvI,1 :t111 l:v'', --i Iro il' n1v r'-o ,tT'ft- on i,, plovm ent. ''Theo
,I,;I,'*IIn'I IIIW L",. l:tw h I iw pi-. n d ,' I,,ndlr,,d- of i ,li- aT)f,," o pw pl. oit, of
l:,l(,Ir ,,:i,-k,'t- O( n, ino ';i ,( 1:1<' ,, h: -. I,,-,n Iln.h ,, ,on h,11 1ws.- of
'.1;,1-1 f l I',I''';'1'1, to iaivi, Ve'h1 ,',l( Iebyn,- i'1nioInIi 1)-r y '225),000,
\\ } i \ FOP 01'U i1iiii()11:11t1lv In L'' irnp:1mut oil nouwhitlc voiincrtiors.
M\i~iyV :i~iti l'v f:i'-liG1l 1o-1 id vint1r h f"I(tr:e-1(.h 11ave Ini (lO-dP(I d()\d-n-
-11hh 'll 11:11;; hunt iiiinl'~iiri)! oilc o m p ,( l'yincn t -becw 1;v
t,,y er'jlinmreiv' -.
7,. "'/,,i ",, .',fi f', rf ~t,' 'f. r-Appioxnfih'ly $10 billion of ne\\
plt f:i,' (a i t:1 -i,'diniz. 1- Ievoti'. p, I' \ yeCar to I ,p1tinrl (rovern-
i1,'iidtllv\ i tn,,i :tduit, env iit',v,, 1,1 l, -.aIfeHv, Iand linilar '- AT IInItionq
r:ithuir tl.I, u 1',.:.i. :,inv,'tdl in p"ofilt n;kin,: projet-. E'dwArd, e DeIisor1
Of thi' I ,,oo'kin,.- Tn-.ittution, h- '.tiInite tehat in recent years the-,e
lo 'l.*ct'iotn, of 1r1va-t,' inv,-itcint from prodluctive ,I.ev; have resilted
in ;1 lIn- of appro)xina:itely onr-fortth of the potential Rnnial increase
in Iro, iu tlvitvY. Althoui i, not di',ctlv r' l1:,bal)le, i f. rvsIlt is to
.x.iC,-rbl),Oe the .,'11,1y s1ro,. ifnitionlaIry prn''.,', in the American
econonmyv.
". TiC qf a..',,n a /. 7 whfc feeff tL, e-ffrc" of gierrriinrf rreula; 'on ;n
/'7,(7i '/l',zi.l,/.-Thlie Rd avr l con, cquen, ., rinPe from a .dowdown in the
:iv!.il)iliiy of new ]ptzirm:u1oentinal products to til, cancellation of
Till11001I<,m ll pciion ari;, Inltotal. ftipzzrc-,t rearponse to the
nun,,,o,,- -m:,11 ])cn-!,on l)1an ;. In total, thio ....' al ,l^o s lo.tt
prlil'.rti t ion of 1ovL(),rnnfwn't r,.eYla.tion is a ban-' burhetiucratization of
Am l b:-:'-.. 'Jlive imdrmnatic but ftndamentail efleits occur
I,.,n l,- of the divI.,ion of mnana'zment a tt,:ntion from traditional
product development, production and nmarketinc efl'orts de-ignedl to
prov\,de new and l)I.ttr products and service to meeting govern-
iment:dly inlpo -el ocial reqi,',ments.












THE NEW WAVE OF GOVERNMENT REGULATION
It is hard to overestimate the current rapid expansion of Govern-
ment involvement in business in the United States. Certainly the
majority of public policy cnsn, ,e: affecting busine---government rela-
tions in recent years has been in the direction of greater governmental
intervention-environmental controls, job safety inspections, equal
employment opportunity enforcement, consumer product safety r,.gu-
lations, energy restrictions, and recording and reporting of items
ranging from illnesses to foreign currency transactions. Indeed, when
we attempt to look at the emerging busimn..-.s-government relationship
from the businvs s executive's viewpoint, a very considerable public
presence is evident in what ostensibly, or at least historically, have
been private affairs.
No one who operates a business today, neither the head of a large
company nor the corner grocer, can do so without considering a
multitude of governmental restrictions and regulations. His or her
costs and profits can be affected as much by a bill passed in Wash-
ington as by a mitina'rment decision in the front office or a customer's
decision at the checkout counter. Management decisions fundamental
to the business enterprise are increasingly becoming subject to govern-
mental influence, review, or control, decisions such as: What lines of
business to go into? What products can be produced? Which invest-
ments can be financed? Under what conditions can products be
produced? Where can they be made? How can they be marketed?
What prices can be charged? What profit can be made?
Virtually every major department of the typical industrial corpo-
ration in the United States has one or more counterparts in a Federal
agency that controls or strongly influences its internal decisionmaking.
The scientists in corporate re-earch laboratories now receive much of
their guidance from lawyers in Federal, State, and local regulatory
agencies. The engineers in manufacturing departments must abide
by standards promulgated by Labor Department authorities. Mar-
keting divisions must follow procedures established by government
administrators in product safety agencies. The location of facilities
must be in conformance with a variety of environmental statutes.
The activities of personnel staffs are increasingly restricted by the
various executive agencies concerned with employment conditions.
Finance departments often bear the brunt of the rising paperwork
burden being imposed on busine-s by government agencies who seem
to assume that information is a free good-or in any event that more
is always better than le-s..
The newer types of governmental regulation of business are not
limited to the traditional regulatory agencies, such as the Interstate
Commerce Commniss-ion, the Civil Aeronautics Board, and the Federal
(7)








i |nin m il ie.'l' olll- C' f l,,V, l --I ull.t ill her, t In IIII,.- i" o 1.rl dll lllg1 de a"t I l-
;nli bureau-~l uf ::,i\,.Fiijii.*iit- I ie. I)Jpartmenti*' or Agzrieiulture; ( Th-
i,'rh; ealth di ie:i.?'oA and l \'Ifare; Inte.rior; + J tl-.i ',.v ; Labor;
T nii1-[,,,t't 41tio11 ; ;ti, I lt' T i -tIrI- I y are I ,, in+volv( ved in 1111c'l,,tio thI at
:,11'.- 't ,,!rtIall % evI'r v nir-[I .
1I et1'tu1- fr itlli;- eXp, dt iilt., .(rnri enii t ,partivipjation il eci millic(
;l l1,v) i eil -',c\, i d b vari't" of ('coi-lii lr f oli' -, iIviron-'
iii'ii tal orL".i!i/.at ii1,l 'ivil rights alvo(ate-, 1ul)Or Illilon-, anlc t oIher
nti/.,1't/A i l -tituti tII In I)II" f' ,-.,, n' iI'''i'r inv r,.,.lhtioi In r iflects
1I,1!:' aTl d cir,'--iil conr',i'U lltlisit tr t ltit d oi l "1Fe eratI i Sl .tate-
l],'t*l o'P,,' Tzni : lis' < h(i'lt l,'Ie e'ff('cti\'. T Ie, n \. wave ofi rr.illtition is
;[l-o r,';:forr d 1),l lIN tii' wli'f i liit tli Ji)ri\ate 'tctor it,',if i- re i xi,-lil)le
foi 1i.:1i of t4the I"r l),li'-i fa'cirl,. .- 'ic ty- pl)(,llition, (lis.triininitioi in
e(illi])ovivictt(, ili-+tfe pro, t .:, lilh+ilthi- v orkitll (*nviromnient:. nti -
,.i in'.z li tiinji'ial re|) t i(' i,', and so forth. le i t1)l'ntlt t ren ( in 'Fedleral
()\E'vl lilllt'1lt Ir',t lattlon)Ii in t li Un1itet d Strates dIV nS10t 0rerersent an
:I1rilpt l'lnart iir,' f'rom nzi iiealized free market economy, but rather
th1' raipidl intetlificat ion of the lon'-terln e.\()!inxion of government
iinflcii', over tlie private sector.
Government trein ti hiton at times caln 1)e ji -t ified(l as ta logical response
to inyerfection i m tlite private economy or what economists call
"failir"e in the normal market system. Examples of such situations
:ire iollution of tlie environment, inadequate industrial safety prac-
t ices, and loniz-terni health hazards. Voluhintary action to deal with
-l I )rob)leis- may place a firm under a competitive disadvantage.
Thle specific company attempting to correct the situation would tend
to bear the full costs, while the benefits of the improvement would be
widely dispersed in the society. "Free riders" who do not make the
e(xpelnsive changes may nevertheless share in tlhe benefits (those "ex-
ternalities" that economists write about).
An ('exanml)le of this situation is provided by the regulation of )olu-0 -
lion -tan(dar(Is in tlhe motor vehicle area. The basic justification for
rovI'rnment .ettinl- standards for automobiles-particularly in the
pollution area where so much of the benefit goes to society as a whole-
w:I- clveiirly stated 1by Jlohn J. Riccardo, president of Chrysler:
* n large part nf the public will not voluntarily spend extra money to
int:ill emnission control systems which vwill help clean the air. Any manufacturer
who in-t:isl- and charges for such equipment while his competition doesn't soon
find- h, i-, losing sales. and customers. In cases like this, a government standard
requiirirn, ,,V) 'r\"nc to have such equipment is the only way to protect bonh the
public and thtr manwiflcturer.
Thle iiurent wave of government regulation is not merely an intensi-
ficat ion of traditional activities. In good measure, it is a new departure
andl require' a Inew way of thinking. The standard theory of govern-
ment rel,,,iiation of bwsines, which is still in general use andl has
doiniiated l prof'<,ional and pubtllic thinking on the subject, is based
on the O model of tle Int rate (C'ommnerce Commission. Under this
ajpro.achI, I a F-di'ral coinimi-ion is established to regulate a specific
indu-try, with tiie\ r\li t1'( l' concern of j)romoting the well-being of that
indi-tirv. Often tlie public or consumer interest is viewed as subor-
dilate, W,r eCVe1 iJoed, ;is the ,_eWVncv fOtcu'le onl ile needs and con-
ernf of tlie ind,( -l\ tlt it i. rILrlntinL,.









In some ca<-s-because of the unique expertise possessed by the
members of the industry or its job enticements for regulators who leave
government employment-the regulatory commission may become a
captive of the industry which it is supposed to regulate. At least, this
is a popularly held view of the development of the regulatory proce-s.
Actual practice of course varies by Ngency and jurisdiction and over
time. In addition to the ICC, other examples of this development
which have been cited from time to time include the Civil Aeronautics
Board, the Federal Communications Commission, the Federal Power
Commission (now the Federal Energy Regulatory Commission), and
the Federal Maritime Commission.'
Although the traditional type of Federal regulation of business
surely continues, the new regulatory efforts established by the Con-
gress in recent years follow, in the main, a fundamentally different
pattern. Evaluating the activities of these newer regulatory efforts
with the ICC type of model is inappropriate and can lead to undesir-
able public policy. The new Federal regulatory agencies are simul-
taneously broader in the scope of their jurisdiction than the ICC-
CAB-FCC model, yet in important aspects are far more restricted.
This anomaly lies at the heart of the problem of relating their efforts
to national interests. (See fig. 4.)

FIGURE 4.-Variations in Federal regulation of business.

Cateor o f Industry' or Sectcr of the Econov
RaiIlroads Radio _____ '--Tr "____-
and and L': ,- Interest
Feggulatry :'er : Truckiren Airlines TV Utilities Druqs Autcs Products Other Group

Consumer Product Safety ______________ _______________________ Consu:7.er crops
Commission I
Occupational Safety a nd ____________________ Labor Lr.'s
Health Ad:.inistration I I I I


Equal Erploymrent Opportunity
Coirci ss ien

Environmental Protection


I---


Civil Righits
Groups

Ecolooists


1-Acency VJT V1 '1
ICC CAB FCC FERC FDA Traffic Renego-
Safety tiaticn
Admin- Board
istra-
tion

In the cases of the Environmental Protection Agency, the Equal
Employment Opportunity Commission, the Consumer Product Safety
Commission, the Occupational Safety and Health Administration,
and the Federal Energy Administration, the regulatory agency in so
limited to a single industry. For each of these relative newcomers to
the Federal bureaucracy, its jurisdiction extends to the bulk of the
private sector and at times to productive activities in the public sector
itself. It is this far-ranging characteristic that makes it impractical

1 See Marver Bernstein, "Regulating Business by Tndepen'lnt Commission," Princeton, Princeton
University Press, IV.1-';,: Georg, .1. "Ticler and Claire Friedland, "What Can Regulators Regulate? The CaiSe
of Electricity," "Journal of Law and Economics", 1962, No. 1; George J. St iier, "The Theory of Economic
Rezulaiionn." "Bell Journal of Economics and Maariae,.Tln'nt Si,'i.ni-e," Autumn, 1971; Richard A. Posner,
" Fh.ories ,if Eiminmic R-.ulat ion." "Bell Journal of Economics and Malmi.eTni 1 Science," Autumn 1974;
James Q. Wilson, "The Dead Hand of Rrgulai ion," "Public Interest," Fall l1172.









'e ^ ^
f,,:" :11 V -':..e ;,!dn l-tr it),t101'ltIin t' thelil-," rI .-.':d 0tor\'. n %'tiv itie 1 1n tile
I1~1,1111114 of Ilk' I i1ditionil il. W I '-jwcifir 11(11wI -;r-0111;:r to
't'' the EKAK( or OS)IA? (Or would haIve thlie ieillintive to do so?
h It UIi ,i, p.li-o, tI t,) ll,, old ''r i l..;e ori,. ted to .p,,-,ifi, indiis-
I ri,'., i 1 11:7i1v important w i-. he n1.itwvr "FedraIl rili.iu hitors operate
i 'i f:.r ,ii rw 'r .i 're. 'I'li' t i-. th, y iiI' not ron.tmrned, with the
toi :t!itv of i\ o'iip:; Iv o i i l tryt-r ltut only with 1lite liiited se'mnie it
Of ( ,il,, 1ii;-t 11i.iV itteontiwl to til' ,bi-i. riii--ioL of (r 1 trinukinm, indl-,try,
to ro\ ide' tr.in-o)(rition .-t'l : -Irv.- to the pulli,, a- pIrt of its nlper-
vi-:ov of :it,,- :iiidl nir" i ito the tr'iirkii n,-I.- i ii ..i,-. ['Iv'1 E1.A' s inter-
4-1t in th 1-111r k-inj-_ Indus~try, oni tli( otin'r hfindl i-I .'imio-t ('~ lozvhisv y
in the ,ifIt of trio,.kin,. opernlton- on thci'vi ,ronwii nt. This restric-
tion p revnet lie' :l- viwcvy from (If'vclolii' too 0 -Ioe c"Ionern with
tlic o(, rII w ,iell-1),il._ of m1 y (.o( i )n1)1Iy 3 Wor inc11 t-ryv. RatlirI, it can
p','1-11t ill a tottl 1;:i.k of ( onc,.rn over thlle effect' of it. .pieiici. actions
on a C( )i'iTy or industry.
If tlihre1 ;ly" .-.pecitl intere-t tlait .im .y omen to dominate s.r-h a
fuiic'tiont ,lv o!'i('elte(d lnr'0I *V'1y, it i- the ,,no thi t i- )ipreo'(.u)iped with its
.I ierifi zL~k-l\- ('*OOLI'I 'lITl nions, civ ri ihts '.Irou|- a ml on.limnrists.
ThI <. lit'.I, if ; anv att(ntiojo nmay Ie i i\(n to the basic mission of the
indlustry to provide foods a(ln: -crvices to tilie )liblic.. -Also ignored are
(-ro-- ittinr 4.cIce-0rns or i :.ltt' r.t lbrocider tlifn the spi)tcific charter of
the re'.izlitin,. l .eny, :.ch S. productivity, economic, growth em-
ployv ient, cost to the consii-nier, effect- on overall livin_ -.tandards
:i.iid itflIitionJiry ivnl)acts. \\Whil', ttlie tndlitional regulatory agencies
iziy 1)o ,;id ]'od(uctive effi.ieni.w, the newer programs i move to a different
te(,It. 'h'ieir ir petl- :comt- from sucli -ocial, (onsi(ldrntions as iniprov-
iML the q i;ility of life, 1)oth oi n :d off tlie jol, minld clianin., the dis-
tribution of in.omiWe so ;i< to awi:ev(' C ,'atcr ('luity vnmon'v_ tlie various
I oup1 I in the society.
To be i ire, thier, are iz mportnt .i-c.- which comlbinte a blend of tlhe
old and new form-, of reL_,ulaitiorT. The Seciuritie( and Exchane ("Corn-
mi--ion i- '_'o1 d example. IT one aspect of its activities, it reullates
, -', ;fi, 1l)r:nch of the economy, the -zer.irities ind. usutr. Yet, many
of it- rule.-. ;lo influence the way ilt which :i .zreat many companies
preLpare th.iir financial stat( l 1enmts and reports to shareholders. Econ-
omvwide rLriblitory a,.enciv-z are not a recent creation. The Federal
Trade C(oil s-lon lis. e-.isted for .ix decadees. .Moreover, a fewv one-
inudl .-tl'- a,_eniCes cont inue to )be created, notably the Commodity
Fut 1ure- Tl''r(liin._ Comnm1iss.,ion, wlWich relates the financial markets
de(alill. with iiroducts of w-ricultlre1 a1id other extractive industries.
V.rVinr ,llit.linces, arise in prowjiotirL, a given n type of regulatory
acti*t-or in pushii- for reform., 'lie b)uiness firms and labor
rcivty ol i 1 an'dI Jmsandlaortr
union-, in a. it reulated indli-trv often become strong supporters
of the traditional i ndu-,try-orintd (.commission which they have
learni-d to live with, if not to doiiiliate. ''ie ,y may join ranks to oppose
effort- hy (on-Irner l,,roup)s and ecortomi-ts to cut back on thle extent
of thle "proti,-tive"' r(,eulatioi. lThi- IL.as been most apparent in the
railroad, andi truckin. induistrie-.
Tii contra-t, (on-ulmer ,rou) p-. advocate expan(ling the newer types
of ri()--'iltttin'r or fimirtioi lt rert(, fl ition. In tlii- effort, tley often are
I-1. rf th y ote r







joined by labor groups, particularly in the occupational health area.
Here, reform efforts may be led by coalitions of business groups and
economists, who are concerned with the exc(..-ive costs and other
consequences of the specialized regulatory activities. These allianc.-,
may shift from time to time. Specific safety regulations for automobiles
may be opposed by unions and companies in the motor vehicle in-
dustry-although the two groups may differ strongly on job safety
standards. Labor, management, and local governments may present
a united opposition against specific environmental efforts which are
viewed as hurting the economies of their community, although some
of these groups may advocate general ecological advances. The older
consumer organizations may become more concerned with the ultimate
cost to the consumer of expanding governmental activities than the
newer and more militant groups that emphasize public control over
private sector activities.
Although the precise changes that will occur in the years ahead are
basically a matter for conjecture, the overall trend seems to be fairly
clear: On balance there is likely to be more and not less government
intervention in internal business decisionmaking. Despite differences
in philosophy and outlook changes both in control of the executive
branch and in the composition of the Congress and the Judiciary seem
to have little effect in altering that trend.
Government regulation, however, is a phenomenon still in the
process of development, rather than having attained a "steady state."
The basic factors causing the changes are diverse, ranging from the
concern by some with the quality of life to the desire by others to
increase the social responsiveness of business enterprise. Yet, proposals
for changes in public policy affecting business are virtually all varia-
tions on a single predictable theme: To increase the scope and degree
of governmental involvement while shifting costs from the Federal
Treasury to the products and services that consumers buy.
No balanced evaluation of the overall practice of government regula-
tion comfortably fits the notion of benign and wise officials always
making sensible decisions in the society's greater interests. Numerous
adverse side-effects and other costs are evident, as well as substantial
benefits to society.


25-921-78---3














T1IlI IMP\ ACTS OF G(O)VEIRNM\IENT I,(ULATI()N

i!,,0 iit ,il 1111 dir-iiet ,ll,,ts of ._,vrnm Pnft r-, tllation can be
inif h fitiTl 1>\ In- (Ih t ol t I'trLZrillatorv w ncui,-; ," l ,m.'lv,-,. rThese
_'-,\'. ,,niti,', *.1 outll;iv- uidi,,ih th( 'o)ts of reui.,ition which are borne
I,\ t'. t:,'i\p:,y,'-. I'i,,liniiiarl' li'.ires for the kical-. .ar 1979 show a
totl ) tf ,1.S- l) lt,, ni i ',-',edil expendtitl,,e-; to op1,rate 41 a1e'ncles
\vl ti ,,_-i1:if: 1)\i.s-;. 'T'hrtt d(1 ll, r' itre 1,o ,e than 1n, ,in t bbi; -,,_ {. ,1.:l. ,',. l;,1:,ttv"v + ,,,icil, i-. 171 1 i ,. no r'. ily dhian th, Federal
I>'I<_i',t l :i t wlhol,. the poiiiltin of tit,' '(oiint'y, tli, ross national
idl :!t, ir ii, : y oi,'i," ,iplip .:llfi ha-is for ,otrnp:ils 011.
.\A- I ,..:l iI t:ll,)' 1, the l)bulk of ti.' r,'_',il.ito,'y b ,iiisets, i-s devotedd
to t L n',.v" :,u'';- ,f -.oinuwl ',l,.Illtioll. sii:li ; j,) Iifet;o y, energy_ and
tit, tItvi,,' iT, ':i-,t, all (ind co1i-lII ( -:f'ty and hi";iltli. l\;ill()les of arePn-
,- uin\'' ,1v', 1 lu t'1i- ,,ii.'wer tyIpe of r,'iilationlar f the Environmental
'',t,.ti(,n -.,,,._ i}\t,. ().Occupational ,Safetv am II Health Administra-
t(,in t1 Pe ('o;',nr l'oduct Safety Cotommissionr, ;i,-0I the Department
of l'ihi ,cnrallvh }ive jurisdliction over individual indutstries, these agencies
over -irtalal ll companies, incluhdinfr many sectors of economic
ativity which are not generally thought of as boinz regulated by
0ov (1ernm11ent.
TABLE l.-EXPENDITURES ON FEDERAL REGULATORY ACTIVITIES
[Fiscal years; dollar amounts in millions]

Increase
Area of regulation 1974 1975 1976 1977 1978 1979 1974-79
(percent)

C'cnsur er safety ad health..................... $1,302 $1,463 $1,613 $1,985 12,582 S2, 671 105
Job aety an'J other ..orth ng conditions ...... . 310 379 446 492 562 626 102
Environment and enerv....------- .......--- 3.47 527 682 370 989 1,116 2
F n ." J re ?,-1..: an 1 other finjncial.... . .. .. 45 53 58 70 69 92
Industr,-: c ie:ulin ................... 245 29 270 309 340 341 39
Total.. ..- .... .... . 2,240 2,683 3,064 3,714 4,543 4,823 115

Note Percent distr;bution of FeJeral regulatory expenditures, fiscal yea; 1979:
Cn:uinmer safety and ,'-0,lth .--- -------- 56
Job safety and jlt',er working conditions ......--.............------.. .. -..-.........----- 13
Lnv ronment and ener,; -..........................- ..... ........ .......- .....--............--. .. 23
Finarcial re; -rWn, an other financial.- -I.......-- ... ....-- ....---.. ....---.---..-- ..--- 1
I ndustr,-s'ecifi: re;ulation .. ........ ....- ...................-.. ........-------- .--- ....-- 7
Ttal...................-..................................... ... -.. -.-....-.- .... 100
Source Center for the Study of American Business. See appendix for supporting detail,

'FThe figures displayed in table 1 reflect the fact that there has been,
an(l continues to be, a steady growth in the pace of regulatory activi-
ties. From a total of $2.2 billion in the fiscal year 1974, expenditures
on Federal regulatory activities have risen in each subsequent year,
with the largest increases occurring in the fiscal years 1977 and 1978.
The costs to tlhe taxpayer are obviously not trivial, but the key effects
of government regulation are in terms of the compliance by the private
sector.
S12)








REGULATION AND INFLATION
Of the many ways in which government can affect the rate of in-
flation, perhaps the least understood method is to require actions in
the private sector which increase the cost of production and hence the
prices of products and services sold to the public. Attention needs
to be focused on these regulatory policy instruments because their
use is becoming more widespread and neither the public nor government
decisionmakers realize their full inflationary effects.
In theory, the Federal Reserve System, could offset the inflationary
effects of regulation by maintaining a lower rate of growtlh of the
money supply than it otherwise would. In practice, however, public
policymakers, insofar as they see the options clearly, tend to prefer
the higher rate of inflation to the additional monetary lretraint and
the resulting decreases in employment and output. Also, to the ext'-itt
that regulation results in real resources, being devoted to low-payoff
activities, economic welfare is reduced.
At first blush, government imposition of socially desirable : quire-
ments on business through the regulatory procs appears to be an
inexpensive way of achieving national objectives. This practice ap-
parently costs the Government little and repr:-,nts no significant
direct burden on the taxpayer. But the public does not escape paying
the cost. Every time, for example, the Environmental Protection
Agency imposes a more costly (albeit less polluting) method of pro-
duction on any firm the cost of the firm's product to the consumer will
tend to rise. Similar effects flow from the other regulatory efforts,
including those involving product safety, job health, and hiring and
promotion policies.
These higher prices, however, represent the "hidden tax" of regula-
tion which is shifted from the taxpayer to the consumer. The regula-
tory "tax" would not be shifted in this manner if the mandated effort-
for example, environmental cleanup-were conducted or at least
financed by the government itself. Moreover, to the extent that gov-
ernment-mandated requirements impose similar costs on all price
categories of a given product (such as passenger automobiles), this
hidden tax tends to be more regressive than the Federal income tax
or State sales taxes. That is, the costs may be a relatively higher
burden on lower income groups than on higher income groups. It is
not inevitable that every regulatory activity increase inflationary
pressures. In those instances where regulation generates social benefits
(such as a healthier and thus more productive work force) in excess
of the social costs it imposes, inflationary pressures should be reduced.
At times the impact of regulation on the prices that consumers pay
is direct and visible. For example, in the case of the passenger auto-
mobile the Federal Government has required the producers to in-
corporate a wide array of specified safety and environmental features.
The Bureau of Labor Statistics each year costs out the effect on the
price. of the average car. Through 1976, the cumulative cost increase
per vehicle of these mandated features came to $557, or $3.7 billion
for all the vehicles sold in that year.1 (See table 2.)
1 Robert DeFina, "Public and Private Expenditures for Federal Regulation of Business," St. Louis, Mo.,
Washington University Center for the Study of American Business, Working Paper No. 22, November I177.







14

T',, 2.i-I':< AS: IN k i':I4L PRI.-L Of AUTOMOBILES DUE TO FEDERAL REQUIREMENTS. 1968-78


Initial
retail
M* ear and aon price


Total
Year adjusted for
total inflation I


S t n shoulder trltn . . -..I-I ..'. .
H .'. .', Ij, fr exhaust emissions systems. .......... ......
1 o:" '*
',. ,..t' ; and dep! n! s,stems.....................
,a .t'o' s'- - -- and.' a 'i. : slerrs. ... .....................
L' !*. i' ij h nie' ,s'e" .. ....... ... ...............

19:L
I .ui elle~t e de. ces arid associated equipment--------

I." -. ;etPe:t .e ie. 'ces and associated equipment.............
S'.1' Ja'ds for exhaust emission slternms.........................
1968 '0
Theft ,ie '. ," (steerin., transmission and ignition locking and
t u:: rp svitem). ........................................
OLu['a1t pr tclion in nti erior impact (glove box door remains
closed on inrpact ........................................
1971: Fuel e aporative systems ...................................
1972
Improved exhaust emiss jns standards requ red by Clean Air Act...--
Warranty changes resulting from Federal requirement that all
exhaust emissions systems be warranted for 5 yr or 50.000 mi....
Volun'iil, adJ.'d safety 1etuies in anticipation of future safety
reru',ements -- - ---- ------- -- --
Se.'t belt warning system and lnckinR device on retractors.........--
1972-73. Exterior protect-on (standard No. 215)....................-
1973.
Location identification. and illumination of controls improvements.
Reduced flammability of interior materials .......--.........
19,9-717 Improved side door strength .............................
197.:
Interlock system and other changes to meet Federal safety require-
ments .-.. ......... .. . ..------ -- --- ------- ---........ .
Improved exhaust emissions systems to comply with the Federal
Clean A r Act---- ......--.-----------....----..-----........----
1975:
Add'tiorial safety' f-atures associated with Federal motor vehicle
safety standards 'ios. 105, ?38. and 216 ......................
Installiht on of catalytic converter................................
1975-7i: Rem.val of interlock system (quality decrease) and additional
inst.llhtion .Lf catalytic converters net effects (October 1976).......-
1976:
FMVSS No. 105 hydraulic brake system.......................
FrvSS No. 215 improved bumpers .............................
FMVSS No. 301 leak resistant fuel system ....--..-....---.-......
Im';oved emissions control system---------------------.............................
1977:
FMVSS Nio. 215 improved bumpers-------------------- .....................----......
FMV3S No. 219 structural chinges............ ..............
FMVSS No. 301 leak resistant fuel system........................---
Improved emissions control system..........-----....-----..--..
1978 Redesion of emissions control systems to meet HEW air quality
standards .------.----------------.... -..--------....


$11.51
16.00
70
1.25
.55
6.30
16.65
4.00
5.50

7.85
.35
19.00
6.00
1.00
2.00
20.25
69.90
.60
5.80
15.30

107.60
1.40

10.70
119.20
18.00
6.50
4.80
2.10
7.60
1.30
.95
4.70
14.30
9.99


$27.51 . 47.84


. 8.80- 14.53
16.65 27.48

9.6-50 14.77


8.20
19.00


12.75
28.33


29.25 42. 37
69.90 95.29

16.40 8.72
15. 30 20.85


109.00


133.50


39.00 41.54


21.25 21.25


9.99


9.99


Total .- .-


519.65


519.65


665.87


I Yearly totals are expressed in 1977 dollars by use of the consumer price index.
Source: Compiled from data supplied by tMe U.S. Department of Labor, Bureau of Labor Statistics,

Government regulation increases the overhead cost of producing
goods and services by imposing a rising burden of paperwork. As of
November :0, 1976, there were 4,418 different types of approved
Federal forms, excluding tax and banking forms. Individuals and busi-
ness firms spend over 143 million man-hours a year filling them out,
according to the U.S. Office of Management and Budget. As shown
in table V8, regulatory reports have been the fastest growing portion of
the paperwork ,burden which the Federal Government imposes on the
private s't or.


129.'90' 146.66









TABLE 3.-REPETITIVE PUBLIC-USE REPORTS APPROVED FOR USE BY OFFICE OF MANAG'LM, I A'NT.) F UD'Er,
DECEMBER 1966 TO JUNE 1973-NUMBER OF FO MS AND MAN-HOURS REQUIRED TO COMPLETE, BY TYPE OF
FORM
IMan-hours in millions]

Administrative Statistical PF ul3f,:,i
Applcalicins reports reports reports Total
Num- Man- Num- Man- Num- Man- ';umrn- Man- Num- ,111-
As of Date ber hours ber hours ber hours ber hours ber hours

December 1966-----------............. 1,065 38.3 2,213 49.9 1,243 11.8 259 3.3 4,780 103.3
June 1967.---------------- 1,091 37.4 2,320 49.6 1,278 12.2 245 3.1 4, c 1 16?. A
December 1976..------------.......-. 1,110 43.8 2,369 51.1 1,273 12.3 239 3.0 4,991 10. 3
June 1968 ---------------- 1,107 45.6 2,448 51.7 1,278 12.2 247 3.1 5,080 112.6
December 1968------------............. 1,123 41.3 2,480 52.0 1,267 14.0 249 2.8 5,119 110.1
June 1969----------------.................. 1,145 41.5 2,520 52.5 1,265 14.2 246 3.2 5, 176 111.4
December 1969-----------............. 1,138 41.0 -2,544 52.1 1,268 14.2 252 3.3 5, 20u` 110.6
June 1971---------------.................. 1,187 44.6 2,705 57.1 1,339 14.7 268 6.0 5,499 122.5
December 1971----------- 1,152 46.8 2,570 57.5 1,318 11.4 2g8 14.8 5, _:-3S I ,J 5
June 1972....--. ------------1,207 41.6 2,613 66.0 1,314 13.3 271 15.1 5,405 136.0
December 1972..... ----------- 1,258 41.0 2,623 75.4 1,332 16.1 328 8.0 5,541 1,- '. 4
June 1973 --------------.................. 1,308 48.4 2,616 72.0 1,306 16.1 337 8.7 5,567 145.3
Percent change....------------ 22.8 26.4 18.2 44.3 5.1 36.4 390. 1 63.6 16.5 4u. 7

Source: U.S. Senate, Committee on Government Operations, "Improving the Coordination of Federal R.eprtiing Serv-
ices," hearings on S. 200 and S. 1812, Washn tj.n, Government Printing Office, 1973.

The paperwork and ancillary requirements of Federal agencies
inevitably produce a "regulatory lag," a delay that can run into years
and can be a costly drain on the time and budge(,ts of private managers
as well as public officials. The Federal Trade Commission averages
nearly 5 years to complete a restraint-of-trade case. It took the Federal
Power Commission 11 years to determine how to regulate the price of
natural gas all the way back to the wellhead. The regulatory 1"2
appears to be lengthening. Ten years ago, the director of planning of
the Irvine Co. obtained in 90 days what was then called zoning for a
typical residential development. In 1975, a decade later, the company
received what is now called entitlement to build for one of its develop-
ments, following 2 years of intensive work by a specialized group within
the company's planning department aided by the public affairs staff.
The preparation of environmental impact statements has become a
major source of paperwork. The report for one offshore oil field in the
Santa Barbara Channel, for example, required nearly 1,300 pages and
took 2 years to prepare.-
Other aspects of government regulatory activities also can be costly.
Several research efforts examining building regulations have docti-
mented repeated instances of increases in the price of housing as a
result of local building codes. Rutgers University reported that overly
stringent or outdated codes increase housing costs by somewhere be-
tween 5 and 10 percent of total unit costs.3
A study in Colorado found that changing regulatory requirements
and practices had added $1,500 to $2,000 to the cost of the typical newv
house built between 1970 and 1975. The added cost consisted of higher
water and sewer tap fees, increased permit fees, greater school and park

2 Richard M. Geiler, "Development Tlrgulations Must Be Reasonable," Urban Land, October 196;
Don Dedera, "What on Earth Is an EEE-EY.E-F.SS?," ESxxon USA", 1st Quarter 197i1.
3 George Sternlieb and David Listokin, "Building Codes, Slate of the Art, Sitraiegies for the Future,"
Report submitted to the HUD Housing Review Task Force, June 1V.),.






16

!;II (lhl d icationl i',iiinW'itiilirnt', ard new iiidiidte>- for wvide r anld thicker
c-.11. --, f'i't',-, i['r..d'T 'ind loto. .e -, atdtt evi\'lrollnmelntall ilipact

lii St. .Lii- ColntyV, Mo., the iie re:..i ill lot dev(elopinellt and
lii,:iiltiilildti, ro,' ,diie 1 to lill't ,llU g )ove't iille it '-Ui lerni elits d(iirilng
1J 0-775 ,';lnili- to A1,6!9lt 1o $.2,50()) for aI t\lpi'nal 1,600 1 q)i-are foot loiuse
on ;i 1,ll!)o) stli're fCoot IltN. The i" overieltlntallY itllposedi reqriire-
iliqirlt inclHuidedl tr.,i lithitiig, great l'o(llector s treiet widltlis, higher
i,;'i'i iit ;iinIid i>-le'Ot('tiOl Ii feecd, nd(l'lld fe-itii r'c, to cic'lCti'ial systems, anid
-!'nkt, det'tectors.
A tily cov'ri, ii 21 reideiitial dev(lelopinerit projerts in the New
Jer-\v ( o;is(ai Zolit e.-itinlitedl the directt regrllatory expenses for it
-it.,i fiiliiily lio eit.t $1,600 (l1iilit elie |)e-old 197'2-75. The costs
(,ovet'I' -d olli ;I --S ,'pllrtiely re(jIiiire(d permit <, including i)reliminary
pl;it, iterforintlice lini'-ovi'iel(it bol)(l, sewer plhii, tree reinovail permit,
fill pl.iis review, road draiiinrge peninit, inid coal-tll area facilities
,irr it. 4
(iV(ih111lrnelit iIi 'ectI'ors lr'e 1 (MCIreayiilzly fre(quellt, albeit ilnwel-
(nined, visitorI to bi-ineess pi'eniise-,. Milk )laints also experience an
extrordiiiIInairyV variety of inispections. More thain 20,000 State, coliunty,
In',l, ;iid Imllnicikl il milk jurisdictions exist in thle Uitlited States. A
USDI)A tudy reveals that milk plants are inspected about 24 times
aiitm mNlly, eveili though the Public Health Service recommends only
Itwo ;i year. IIn one State, each llimilk plant averagedl 95 inspections
during ; year. One milk plant, licesi-,ed by 250 local governments, 3
State.- an(l d 20 othlier agencies reported that it was inspected 47 times in
1 nimoith i n 1964.
Ill the more traditional areas, many regulations deal with natural
inoiiopolies, such ais in the case of utilities. In some of these one-
iidst ry regulatory efforts, however, the government actions may be
2lnticompetitive and thus ultimately costly to the consumer. Interstate
trucking furnishes, a cogent exampl)le, where Federal regulation is in
Slarge degree a barrier to entry protecting existing firms against possible
l1ew entralits.
A recent report prepared at the Center for the Study of American
iine.- at Washington University estimates that the aggregate cost
of oimplyiiug with Federal regulation came to $62.3 billion in 1976 or 20
1 iles the direct (ost to the taxpayer of supporting the major regulatory
wi 1ne 5(ci(. tSee Table 4.)
TABLE 4.-ANNUAL COST OF FEDERAL REGULATION, BY AREA, 1976
(In millions of dollars
Administrative Compliance
Aea cost cost Total

Conumrner afet, and health------------------------------------ ......................................--- 1,516 5,094 6,610
Job safety and wotuikin conditions............................ ...---------------------------------... 483 4,015 4,498
f'ierR, and the environment.................. ............... ....... 612 7, 760 8,372
financial reulation............ -----------------------------------------------104 1, 118 1,222
-i u' trv '.petilic.. ................................. .... ...... 474 26, 322 26,796
Pa;,ei dork....................................................... (1) 18,000 18,000
Total..................................................... 3,189 62, 309 65, 498
I Included in other C ato. or c ..
Sour'e. Center for the Study of Amr.--ican Business.
SI'.l, in Mhirra:. L. Wi i-liiil.*:iiiT, ", 'if ii ,., i R,'ilu,12 liin aii ld h. C'osi of Housing," Urban Iand,
Fbruar i7s.
I)L I Jin 'j' cit.








The basic approach followed in the study was to cull from tlhe avail-
able literature the more reliable estimates of the costs of specific
regulatory programs, to put those estimates on a consistent and re-
liable basis, and to aggregate the results for 1976. Where a range of
costs was available for a given regulatory program, the lower end of
the range was generally used. In many other cases no cost estimate-,
were available. Thus, the numbers in the study are low and under-
estimate the actual costs of Federal regulation in the United States.
The estimates of regulatory costs include costs incurred by the
Federal Government and costs incurred by economic units in response
to regulation. In the first category, administrative costs are the ex-
penditures arising from the operation of a regulatory activity by the
Federal Government. These 'include salaries of government workers,
office supplies, etc. They are the outlays for regulatory purposes which
are reported in the Federal budget. The second category, compliance
costs, are those costs incurred mainly by the private sector (and also
by State and local governments) in the process of complying with the
Federal regulatory mandates. These expenditures do not show up in
the Federal budget and were estimated.

REGULATION AND INNOVATION
As William D. Carey of the American Association for the Advance-
ment of Science has stated, "Government may imagine that it is
neutral toward the rate and quality of technological risk-taking, but
it is not * regulatory policies aimed at the public interest rarely
consider impacts on innovation." 6 The adverse effect of regulation on
innovation is likely to be felt more strongly by smaller firms and thus
have an anticompetitive impact. According to Dr. Mitchell Zavon,
president of the American Association of Poison Control Centers-
"We've got to the point in regulatory action where it's become so costly and
risky to bring out products that only the very largest firms can afford to engage(
in these risky ventures. To bring out a new pesticide you have to figure a cost of
$7 million and 7 years of time." 7
One hidden cost of government regulation is a reduced rate of intro-
duction of new products. The longer it takes for a new product to be
approved by a government agency-or the more costly the approval
process-the less likely that the new product will be created. In any
event, innovation will be delayed.
Professor Sam Peltzman of the University of Chicago has estimated,
for example, that the 1962 amendments to the Food and Drug Act are
delaying the introduction of effective drugs by about 4 years, as well
as leading to higher prices for pharmaceutical products.8 As a result
in large part of the more stringent drug regulations, the United
States was the 30th country to approve the antiasthma drug metapro-
terenol, the 32d country to approve the anticancer drug adriamycin,
the 51st to approve the antituberculosis drug rifampin, the 64th to
6 William D. Carey, "Mud'iiiig Through: Government and Technology," Science, April 4,1975.
7 Quoted in Sheila Rule, "Pesticide Regulations Called Too Stringenit," St. Louis Post-Dispatch, Sep-
tember 18, 1974.
8 Sam Peltzman, "An Evaluation of Consumer Protection Legislation: The 1972 Drug Amendments,"
Journal of Political Economy, September-October 1973.








ipprO 1 It\e' t ,e Int:,ller.II ,eniII illg ,riI, olldyn, antl tlhe 106th to approve
the, ,inti!, ,'ct ri ,l lr, iL; ,',-irilnu xiiz. le.9
A. ,.ori 1,- t, i i ''iim,- (i. .oiore of tlheil Hoover ln4titution at
St.iford I niver-ty, v..Lreil..tion by the Interstate (C'ommerce ('oM-
:--'In dlela:vI thIe introd li.ition of unit trains by ait least 5 years and
due!i \Cd full 11-. l- v tile S0outlern Railroad of lthe '"Big.John" cars used
to 1:0,r" gr:iZi .1. \bni Fredihinder lias estimated the loss in the rail-
r1,:Il inlidi-tr\ di,' io ret:inrded innovation at between $12 million and
$Q41 llillion ;I ycr.

E ;EGIULATION AND (CA PITAL FORMATION
F1,,,e,',l re,_.,1ilatioii al-i) ,ffets tlte pro.-pect. for economic growth
nn,1 l, ,diju'tivil 1, evyil a ciin on a rising slhalre of newV capital
for-l:titn 'I'li .,.li ct oI" re.,...il:ition is most evident in the environ-
li0it. :i ,lid -afelv ,ireva-. A(C(')rdini to) tlie U.S. Council on Eviron-
Iir.nt.il Qu,,iit, private Ci'pital otlay\ for pollution control in 1975
N\ ei $.S illioui li,_,hor than would hav-e been the case in the absence
of F'.ilenrl enviro-inmenit al rquiremients." Similarly, the McGraw-
1iill 1 ),epirtiucint of Eonomi,' e.t imate- the cost to American in-
di-rv d of nieet'ni tlte occupational health and safety regulations at
:a1 ,it s; billion a year. Thus these two programs alone account for
ci percent of total 'capital spending in the private sector of the American
euiiomy, which came to $113 billion in 1975.
Edward Dcni-on of tlhe Brookings Institution lias estimated the
lo.s of productivity experienced in the United States in recent years in
meeting .,overnlimint pollution and job safety standards. The loss in
pIr(ldiuctivityv reviults both from division of capital investment as well
:s from current expenses in meeting these regulatory requirements.
By 1975, output per unit of input in the nonre-idential business sector
of tlhe ecnoynv was 1.4 percent smaller than it would have been if
bii-ine-s lbad operated under the regulatory conditions of 1967. Of
tli> 1n1ouf.t, Deni-on a-,cribes 1 percent to pollution abatement and
0.4 pr(cent to ,employee ;nfety and health programs.13
IThe reductions lnhad been small in 1968-1970, but were rising rapidly
in the 1970's. The increase in the amount of such lost productivity cut
thoe annial ('alnge in output per unit of input by 0.2 percent in 1973,
0.4 percent in 1974, and 0.5 percent in 1975. The recent reduction in
gr, wth rnate- i; equivalent to a large portion of the recent rises in
' no,, ic' grov tll.14
('C, pit:il forinrmation and productivity may also be adversely affected
by tlhe uncertainty- about the future of regulations governing the
intro(Idction of new processes and products. An example is furnished
in the report of a ts-k force of the U.S. Energy Resources Council
S '1 1jT:.ir.yV 1, T)>-. Wil1 flinam a.!rl. University of Rochoster School of Melicine and Denlisiry. before
the -,r nfi. ( l mmitlee on 1 al',.r nd Public Welfarc, Siib'.oni:iilt '. on Health, Washington, D.C., Sept.
t ".,i (, .\I ','., n' before lhi, Senale Stilibcoiiimmiilter' on Transporlalion and Aronautics,
', ,i ] '....rr . "ial ",o '-' 79.
Ann 1i Ir.i 'l.I I'I, "1 ,' .,-'' il Costs of Regulaliig the Itilioads," American Economic Review, May
12 (, l i'. r, :; on Environmental Qyililv, f -'.F.i Annual r, porf, Washington, governmentt Printing
(' *i! . r.'T..
SEdwnrd F. T)r;,. ,, "i.F fTfe,., of( -r't r 'l:ang p in the Tns!iln(ii.Tial and Human Environment Upon
I .wiT l 1'. r U nLit of 1.il ," .* V r:; y of 1 i. ,rt f ,,I ., t J rne u ', '.riii 197s.
4 Ibid.








dealing with the possibility of developing a new synthetic fuel in-
dustry. In evaluating the impact of the Federal Water P'ollution
Control Act Amendments of 1972, the task force reported, "It would
be next to impossible at this time to predict the impact of these re-
quirements on synthetic fuels production."'15
In considering the National Environmental Policy Act of 1969,
the task force stated that the major uncertainty was not whether a
project would be allowed to proceed, but rather the length of time
that it would be delayed pending the issuance of an environmental
impact statement that would stand up in court. In assessing the
overall impact of government regulatory activity on the establishment
of a new energy industry, the task force concluded: "In summary,
some of these requirements could easily hold up or permanently
postpone any attempt to build and operate a synthetic fuels plant." 16

REGULATION AND EMPLOYMENT
Government regulations, albeit unintentionally, can have strongly
adverse effects on employment. The minimum wage law, for example,
has priced many teenagers out of labor markets. One recent study has
shown that the 1966 increase in the statutory minimum wage reduced
teenage employment in the United States by 225,000 below what it
otherwise would have been in 1972. Thus, as a result of that one change
in government regulation, the youth unemployment rate in 1972 was
3.8 percentage points higher than it would otherwise have been."7
In construction labor-where unemployment rates are substantially
above the national average-government regulation also acts to price
some segments of the work force out of competitive labor markets.
Under the Davis-Bacon legislation, the Secretary of Labor promulgates
"prevailing" wages to be paid on Federal and federally supported
construction projects. A variety of studies has shown that these
federally mandated wage rates are often above those that actually
prevail in the labor market where the work is to be done."8

REGULATION AND SMALL BUSINESS
Government regulation, often unwittingly, tends to hit small
business disproportionately hard.19 Most of this impact is uninten-
tional, in that the regulations typically do not distinguish among
companies of different sizes. But in practice, forcing a very small firm
to fill out the same specialized forms as a large company with highly
trained technical staffs at its disposal places a significantly greater
burden on that smaller enterprise. This general point is supported by
data and examples for such different governmental regulatory activities
as the Environmental Protection Agency, the Employee Retiremrent
15 Synfuels Interagoncy Task Force, "Recommendations for a Synthetic Fuels Commnerciali7ation Pro-
gram," report submitted to the President's En.rgy, Resources Council, Vol. 1, Washiiingtiun, D.C., Govern-
ment Printing Office, 1975.
i6 Ibid.
17 James F. Ragan, Jr., "Minimum Wages and the Youth Labor Market ." Publication No. 14, St. Toi,:i.
Center for the Study of American Business, Washington University, August 197.
i8 John P. Gould, Davis-Bacon Act. Washinvon, D.C., American Enio!prise Institute, 1971: Armalld 3.
Thieblot, Jr., The Davis-Bacon Act, Plhiladlphia. University of Peinnsylvania. The Wharton S ,.,. 1975.
10 This section draws heavily from KePnnioth W. ('hilt on, "The Impact of Federal Regulation on Ameican
Small Business," St. Louis, Washington University Center for the Study of American Business, March I1-.'






20

ITWinnme Se,'u rit Act. National Labor Relations Board, Occuipational
>.aftt 11 i( I Icallth IAdmini.-tration, aIndl the Sec'lrlties and Exchange

A ,rir'i11t exam ple if government 'regulation affecting small )llsiness
,t i- r>t1p ionltulat ;- 1 tle proposed standards for air-lead exposure
lcvel.- pruoru ll 1)tedl by the ( )'cupat ional Safety andi Hlealth Ad ministra-
tion. Tlle imlpaict of tlliese standards has been examIned in a recent
study by ('iairle-'. River A-ociates. In tlie battery ilndIistry-, which is
ma, ic up of 141 firm., ()SIIA lead regullations are estimated to result
ill mu 'ICh larger lper unit p)roducltion costss for smaller plants than for,
Ir i )er phi it-. Beause of large differential cots andl the fart that
Nat ter price, v.- would only rise to cover the unit costs of the larger firms,
smaller 1)lant operlatori would be forced to al)sorb the differential. in
o'-t-. Il maIlnv case- tile amount absorbed would eliminate entirely
the plant's 'profitability. According to the ( 'harles River A-ociazites
-tudy, about 113 single plant battery firms would be forced to clo-.e,
eli n..nalin, half of thle productive capacity not operated by the five
major ,battery companies.
It i- much more difficult to ase-s the impact of regulations that are
merely burlrdenm.ome to small bul.iness, such as filling out government
forms and responding to information requests by regulatory agencies.
'Tl1e Commis.ion on Federal Paperwork reports, that 5 million small
bil-ine-es spend $15-S$20 billion, or an average of over $3,000 each on
Federal paperwork. Not all examples of the heavier burden of regula-
tion on small business have to do with the newer regulatory agencies.
A National Labor Relations Board election is a ood example. Table 5
s.hiows-. thle total estimated cost per employee of an NLI.RB election by
,size of the company work force. clearly y the unit cost of meeting this
regulatory requirement is smaller for the large firm ($101.60 for
comnpl)aie, with over 1,000 employees) and larger for the small firm
($1:4.60 for firms with fewer than 100 workers).210
TABLE 5.-NLRB ELECTION COSTS PER EMPLOYEE
Number of employees eligible to vote
Cost c aegory 50 to 99 100 to 149 150 to 299 300 to 599 600 to 1,000 1,000 plus
Legal ............................ $26.00 $19.00 $15.50 $12.00 $8.00 $8.00
[ rmplIee tIme ........... .... 27.00 27.00 27.00 27.00 27.00 '77.00
Loss in productivity...-.............. 57.60 57.60 57.60 57.60 57.60 57.60
Executive tirre...................... 24.00 20.00 18.00 12.00 9.60 9.00


Total cost per employee........


134.60 123.60 118.10 108.60 102.20 101.60


Source. Michigan State University Business Topics.

REGULATION AND ENTREPRENEURIAL FUNCTIONS

One of thle unmeasurable effects of government regulation is what
it does to the basic entrepreneurial nature of the private enterprise
system. To the extent that management's attention is diverted from
traditional product development, production, and marketing concerns
to meeting governmentally imposed social requirements, a significant
bureaucratization of corporate activity results.
.iirlniiT Tlh,.rn-riiii. "ITow F-p, nsTiv,,L Is an NLRB Election?", Mihiga' State Universily Ilusiness
Ti,;i. :, :-iriiilni' i'17'.








In employee pension fund management, for example, the recently
enacted pension regulation has shifted much of the concern of fund.
managers from maximizing the return on the contributions to a more
cautious approach of minimizing the likelihood that the managers
will be criticized for their investment decisions. It thus becomes safer-
although not necessarily more desirable for the employees covered-
for the pension managers to keep more detailed records of their
deliberations, to hire more outside experts (so that the responsibility
can be diluted), and to avoid innovative investments.2
In the occupational safety and health area, professional safety
staffs are often diverted from their basic function of training workers
in safer operating procedures to filling out forms, posting notices, and
meeting other essentially bureaucratic requirements. OSHA directives,
for example, contain very specific requirements for virtually every-
piece of equipment used in the production of steel. These requirements
range from such major items as coke ovens all the way down to such
minutiae as the ladders used in plants and the mandatory 42-inch
height from the floor for portable fire extinguishers.
The results measured by any improvement in safety are almost
invariably disappointing. Two major studies of the occupational
safety and health (OSHA) program to date have yielded negative
findings. Nicholas A. Ashford concluded that "The OSHA Act has
failed thus far to live up to its potential for reducing job injury
and disease * OSHA has had little measurable impact in re-
ducing injuries and deaths."22
In a more detailed statistical analysis, Robert S. Smith reported
similar findings, "* * the estimated effects [of OSHA] on injuries
are so small that they cannot be distinguished from zero."'23 Appar-
ently, the original concern of the public and the Congress to reduce
accidents has been converted to obeying rules and regulations. The
disappointing results lead to a predictable reaction: Redouble the
existing effort-more rules, more forms, more inspection, and thus
higher costs to the taxpayer and higher prices to the consumer.
More recent statistics on occupational injuries and illnesses are
hardly reassuring. The reported overall accident and illness rate have
been declining, from 10.4 per 100 workers in 1974 to 9.1 in 1975.
However, the number of workdays lost to injuries and illnesses
per 100 workers actually rose, to 54.4 in 1975 from 53.1 in 1974.
On the average the affected workers took more time off than in the
previous year. This could indicate that the injuries and illnes-es
that did occur in 1975 were typically more severe. Apparently the
impact of OSHA occurred primarily in reducing the number of
minor accidents and illnesses.
21 Shoya Zichy, "How Small Funds Are Coping With the New Pension Law," Institutional Investor,
September 1975.
22 Nicholas A. Ashford, "Crisis in the Workplace: Occupational Disease and Injury," Cambridge, M IT
Press, 1976.
23 Robert S. Smith, "The Occupational Safety and Health Act," Wahinrgtnn, American Enterprisec
Institute, 1976.











APPROACHES TO REGUIA.TORY REFORM


A i,'w w:ivy of lookin-_.- at the microeconomic effects of regulatory
,,,.'jam- may h- hlelpfil' to public policymaking. A parallel can be
,l.:%% to inacro-econonilci matters, where important and at times con-
tli:' ;r' ,,jetivef are r'co,-nized and attempts at reconciliation or
lia I,-I-,ti" are n ade (for example, .-; amo,1-7 economic growth, employ-
ment, in' om' distribultion, and price stability). At the microeconomic
level, it may likewise be appropriate to reconcile the goals of specific
verrnent pro-Lramsn with national objective-R.
SIfealth working condition:, for example, are an important national
i.)j,-utive. 16it not the only important national objective. Society
'.p!-'edly -ihouild avoid Relectinc the most costly and disruptive
iii-t Iil- of achievin-Z a hilier deroe of job safety. Similarly, environ-
inzntal protection, product safety, and other reuiilatoryv efforts should
hi, .*olitd to (osts to the, consumer, availability of new products, and
thle employment of the work force. In part, this reconciliation can be
naile at the initial stares of the governmental process, when the
1Pre-idr,'nt propo-es and the Congress enacts a new regulatory program.

BENEFIT-COST ANALYST
One d,:vice for broadeninf tlie horizons of government policymakers
and administrators is the economic impact statement. Policymakers
,old lIe required to consider the costs (aind other adverse effects)
of their zitionz a; well as the benefits.
This i. not a novel idea. In November 1974, then President Gerald
Ford instructed the Federal agencies under his jurisdiction to examine
the *fflects of the major re,-rllatorv actions on costs, productivity, em-
ployment, and other economic factors. This. first step was subject to
-veral s-hortvomings. Many of the key regulatory agencies-ranging
froni lt, Cons.umer Product Safety (Commission to thie Federal Trade
Con-mmi--ion--are so-calle'd independent agencies, which are beyond
the Presid-.nt's j1]ri.diction in these matters.
'-eond, Teven in the ca.se of the regulatory activities that come
within presidential jurisdiction, the existing policy is limited to the
re'Ciila lions that, in the issuing agency's own estimation, are "major."
Third, the azenc:ies covered by the Executive order are only required
to examine the economic aspects of their actions; the weight they give
to economic factors remains in their discretion-to the extent that
(onLrP-,ional ,-tatute. pprminit them to give any consideration to eco-
nomic infltence- at all.
Within tlie--, con'traints, the ('ounril on Wage and Price Stability
lias inierve-nedl in many ,a.-2 of propo-ed regulation to offer its anal-
v-e-, of th l( benefits and tlhe cost- of tie lproposedf action. The agencies
hiiv, rarely wvelconied thiz advice, but the plublicitv given some of the
Co( ,.il's inal'.V s mmnv have, at itlims provided a deterrent to the more
tiradition:1lly minded peor-onnel of re,_iiatory ag.encies, as well as
srvin'r a hlar_,r public etidcational piurpose.
(22)






23


A broader approach may be warranted, one with a strong legislative
mandate. In the fashion of the environmental impact statements (but
hopefully without as much of the trivia), Congress could require each
regulatory agency to assess the impact of its proposed actions on the
society as a whole, and particularly on the economy. Much would de-
pend on the "teeth" put into any required economic impact state-
ment. Merely legislating the performance of some economic analysis
by an unsympathetic regulator would serve little purpose beyond
delaying the regulatory process and making it more costly. But limit-
ing government regulation to those instances where the total benefits
to society exceed the costs would be a major departure from current
practice.
To an electric economist, government regulation should be carried
to the point where the incremental costs equal the incremental bene-
fits, and no further. Indeed, this is the basic criterion that is generally
used to screen government investments in physical resources. Over-
regulation-which can be defined as regulation for which the costs
exceed the benefits-would be avoided under this approach.
Many of the proposals to reform government regulation involve the
"sunset" mechanism-the compulsory periodic review of each major
regulatory program to determine whether it is worthwhile to continue
it in the light of changing circumstances. A benefit-cost analysis would
provide a quantitative mechanism to aid in making those value
judgments.
BUDGETING AS A MANAGEMENT TOOL
Attention should be given to the role of the budget process in
managing regulation. In those cases where an agency's regulations
generate more costs than benefits, the agency's budget for the coming
year might be reduced. Budget reviewers, be they examiners in the
executive branch or committee staffs in the legislature, face the peren-
nial question of how to measure the effectiveness of an agency that
does not provide marketable outputs. The traditional response is to
concentrate on the inputs utilized (as, for example, workload sta-
tistics). Benefit-cost analysis, cost-effectiveness analysis (which is in
effect the search for least-cost solutions) or other quantitative forms
of program evaluation may provide useful alternatives in such canes.
Because the requested appropriations for the regulatory agencies
are relatively small portions of the government's budget, limited
attention has been given to these activities in the budget process.
In view of the large costs that they often impose on the society as a
whole (those "hidden taxes" shifted to the private sector), greater
attention than now given is warranted to the reviews of the appro-
priation requests for regulatory programs.
The wide dissemination of data on the economic impacts of govern-
ment regulation also may serve to alter the balance of forces now
exerted by interest groups on the decisionmaking process. At present,
interest groups are most often well aware of the benefits they would
receive from a proposed regulation, and thus they mobilize their forces
to promote that regulation. But information on the adverse conse-
sequences of the regulation, if widely distributed, might generate
countervailing pressures from other groups.'
1 Roland McKean, "Property Rights Within Government, and Devices To Increase E efficiency in G overn-
ment," Southern Economic Journal, October 1972.






24

( CJ.A NGING Ai ['I'I'I)E TOWARD. REGULATION
B:i-ir,'dl, hloeve,,r, it is- attittulde." tlhat imay need to be changed.
LxlriLn,'T with tIw jol) --afet pro.rnil ) provide, a t(og'ent example.
\Atlnil L til L,.()V.'vrln,'t'. s-lfe tv riulesh have re,,i ulted in billions of
oll:r 111: i:1iJ bli, 1 id 1)'riva 'te oiuttlays, the basi-l goal of a safer work
,'iv:'imiu,1i:'t h1-. not be'en achieved.
A iore, -;ti--fyin- t-w. I -er to impI)rovin.. thle efl'ctiveness of govern-
riii'-t rv.Lii ati(i of proiv'te activities requires a basic change in the
S:ip dIi to.li to rIl.at 0iti)n, inId o(he not limTited to the job safety program.
lidv eed.'. t ha t pr..-'r1in' is used here merely as sin illustration. rf the
obj,.tiv of lp ibli poli'v is to rto d(ue Uccilent-, theln public ])olicv
slt ,,ldl foi ,i,- dirt'('ly o I llIhe re(ldction of ail,.idnt-.. Excessivelv de-
t:1 Ii'i r,.Lrnliontal.- , r1itic .-iil)-titutIL,--for Ialiar ]policy do,,ision-.
Rt:1(her ti: in ,in(l l-.i-i ,being placed on i-.-.ing stationsns to employers
\ h1o f il to) Jill forl- outi correctly or who l do not 1)o-t the required no-
ti,',-, it :-liul I be 1) pled on the r(:guuilation of those employers with high
;nl ri-inC. incident rite,. Perhap- fines should l be levied on those estab-
fi-hllhent- with tlie wor-t .afetv records. As the accident rates decline
toward -.ome .-nsilil" averagee standard, the fine, could be reduced
or eliminated.
But the Government should not be much concerned with the way a
-peeiltic organization achieves a safer working environment. Some
, oiini .: maIy find it more efficient to ch ingce work rules, others to
buyv new equipmentt and( still others to retrain workers. The making of
ti i- choice is precisely tlhe kind of operational busine-- decisionmaking
thitt govewrnmn'nt should avoid, but that now dominates many regula-
1or\ programs. Without diminishing tlhe responsibility of the em-
loyer.-, the sninct ions under the Federal occupational safety and health
Ilaw -hiould 1)e extendled to employees, espeCcially those whose negligence
('fl'ln,,p,- other employ\-ee.. The purpose here is not to be harsh, but
t "t-to objectives. This can
to -ct up effective incentives to achieve society's objectives. Thi can
he i preferred alternative to government specifying the details of what
it cm,-;Iecrs to lbe "acceptable" private action.
A re('cent ca-e in point is provided by the proposed( job safety stand-
;rd- for expio-ire to lead in the workplace. OSLIA would require
-I-Wltt(''s, battery inninufacturers and other firms to install engineering
(.(nI rol- thnt reduce the maximum exposure level from its present 200
i,'rogrms of lead per cubic meter of air to 100 micrograms.
The U.S. Council on Wage and Price Stability has estimated that
iietingt the propo..ed stan(lairdls could cost the industries affected and
ultu Iv|ate]y con-.umers over $:00 million a year. The Council urges that
()SHIA allow elth company to use the most efficient way of achieving
til, IneW -tnlmrd,, whether that requires costly engineering controls or
-oi(' other met hod.2 Intensive eml)loyvee training might be one of those
nlternaite methodl-, if a s-tudy in the United Kingdom can serve as a
.iide. A.cord ing to a repIort in tlhe "British .Journal of Industrial
Med.icine," thle lead exposures of employees doing almost identical
job-. ,lil'ered by ratios of up to four to one. This was totally attributed
to per-onal d(liff'erences in working habits.3
2 U C,,iun, ii on Wag.- fr'l I'r.. Si atihiiv. "('iiT,'Iil (CIiln'.nt'.i on (')SIIA'S Proposed Standard on
T.I, :a ,." W "'i.|i'lrilgi i., ''l[A w ,,M,, ril. \t'r, h 1-.. 1,177.
% \i K. \\illiam ,. iE .F ,. iin', .Ilin Walford, l."An ,uvsiigaiinn of lA'a'l Absorption in an Electric Ac-
uu Ior' Fa, t,'rv W'i, t h hli !Use of 1'rrs'nal Samples, "Brit ish Journal of Indusitrial Medicine," 1969, No.





25


With reference to consumer protection regulation, an information
strategy may often provide a sensible alternative. For the many visible
hazards that consumers voluntarily subject themselves to, perhaps the
most important consideration of public policy is to improve the in-
dividual's knowledge of the risks involved rather than limit personal
discretion. In their daily lives, citizens rarely opt for zero risk alter-
natives. For example, many pedestrians voluntarily race across a busy
intersection rather than wait for the traffic light to change.

ALTERNATIVES TO REGULATION
The promulgation by government of rules and regulations restricting
or prescribing private activity of course is not the only means of ac-
complishing public objectives. Codes of behavior adhered to on a
voluntary basis may often be effective.4 Trade associates on occasion
have served such a socially useful function in upgrading the level of
business performance.
Government itself has available to it various powers other than the
regulatory mechanism. Through its taxing authority, the Government
can provide strong signals to the market. Rather than promulgating
detailed regulations governing allowable discharges into the Nation's
waterways, the Government could levy substantial taxes on those
discharges. Such sumptuary taxation could be "progressive," to the
extent that the tax rates would rise faster than the amount of pollu-
tion emitted by an individual polluter. Thus, there would be an
incentive for firms to concentrate on removing or at least reducing the
more serious instances of pollution.
The use of taxation would neither be meant to punish polluters nor
to give them a "license" to pollute. Rather it would be using the price
system to encourage producers and consumers to shift to less polluting
ways of producing and consuming goods and services. The cost of
removal of pollution for each organization, compared to the size of the
tax, would determine the level of environmental cleanup that it
pursues. Those that can control pollution more cheaply will clean up
more (and thus pay less tax). Those with higher control costs will clean
up less (and pay more pollution taxes). This approach attempts to
achieve a given level of environmental quality with minimum resource
use by equalizing the marginal cost of pollution control.5
In the case of the traditional one-industry type of government
regulation (as of airlines, trucking, and railroads) a greater role should
be given to the competitive process and to market forces. Unlike the
newer forms of regulation on which this paper concentrates, the older
forms of regulation are often mainly barriers to entry into a given
industry, protecting existing firms from competition by potential new
entrants. It is in this limited sense that deregulation is a viable option.
The elimination of regulation in the safety, ecology, and related areas
does not appear to be a realistic alternative in view of the Nation's
long-term social concerns.
Indeed, any realistic appraisal of government regulation must
acknowledge that important and positive benefits have resulted from
many of these activities-less pollution, fewer product hazards,
4 See Roland McKean, "Economics of Ethical and Behavioral Codes", Workiug Paper No. 11, St. Louis,
Center for the Study of American Business, Washington University, 1976.
s Marc J. Roberts and Richard B. Stewart, "Energy and the Environment," in Henry Owen and Charles
L. Schultze, editors, "Setting National Priorities: The Next Ten Years," Washington, the Brookilngs In-
stitution, 1976.






26
,re,'mn, pj,, ,l.-'rrIm:iati,'n :inil other s i lally desirable goals. of our
-,( 'etv. InBut thie "externalitie-''" genertted by' Federal regulation can-
ritit ju-t'fy government attemitin,, to regulate every facet of private
lwha'ut'\ 'i'. A. 1enry Owen and ('harles Schultze have pointed out, a
iaw-,naile nrjarjriaci to ti-R problem requires' great discrimination in
-''ti.nt out thlie hazards that it is important to regulate from the kinds
utf l,-.wr liazanis ti"nt (an best lbe dealt vith by "the normal prudence
(f .IL -uIIIC.I:, wiNVker-, and business firms;." *
* ii : r: ('wtn al 1 .:.,- I.. S..tu:tze, "Introdiuction," in ibid.

















Appendix. FEDERAL EXPENDITURES FOR REGULATION
OF BUSINESS

APPENDIX TABLE 1.-EXPENDITURES ON FEDERAL REGULATORY ACTIVITIES, CO'iSUrIER SAFETY AND HEALTH
[Fiscal years; in millions of dolla.-s]

Agency 1974 1975 1976 1977 1978 1979


Department of Agriculture:
Animal and Plant Health Inspection Service. -----..---.--.----- 314 345 377
Federal Grain Inspection Service-------------------.----------------------------
Food Safety and Quality Service.-------------..---.--------.---------------------


Subtotal-..........----------------------......---.--...--------- 314 345 377


Department of Health, Education, and Welfare: Food and Drug
Administration...----.....--- ....-..... ..--------------


Department of Housing and Urban Development: Interstate land
sales and other regulatory functions --.---.--.----..-....-


Department of Justice:
Antitrust Division..-.... .......----- ----- .------...-----
Drug Enforcement Administration 2 ----.--.-----.------.
Subtotal..---.......-............-....- ....- ...--


337 220
9 23
138 619


484 862 830


165 201 218 245 283


1 2 () 2 1 ()


112 150 167 193 225


Department of Transportation:
National Highway Traffic Safety Administration-.------------........ 157 150 151 169 206 246
Federal Railroad Administration 3-----------------------......................... 7 9 15 17 21 25
Coast Guard-----------------------------------............................................ 210 162 192 261 281 294
Federal Aviation Administration-..--..-------------------- 2 1 (l) 1 1 (1)
Federal Highway Administration...--------........----..----------------- 6 7 7 8 13


Subtotal.......--- .. ..----.- ------------------


376 328 365 455 517 578


Department of the Treasury:
Bureau of Alcohol, Tobacco, and Firearms-----------------
Customs Service---------------------------------------


Subtotal---------------- --------------------


79 95 103 117 127
228 299 334 436 510


307 394 437 553 637 668


Consumer Product Safety Commission----------------------......................... 19 34 38 40 42 40
National Transportation Safety Board------------------------ 8 9 11 13 15 15
Consumer protection activities----------------------------------------------------------------------- 4 3
Total------.......-......------.----------------------1,302 1, 463 1,613 1,985 2, 582 2,671

1 Less than $1,000,000.
2 Activities extend beyond business regulation (breakdown not available).
S Railroad safety only.
4 Costs of proposed consumer representation less saving from consolidating consumer protection activities.
Source: Computed from details in the "Budget of the United States Government, Fiscal Year 1979," Washington, Gov-
ernment Printing Office, 1978.

APPENDIX TABLE 2.-EXPENDITURES ON FEDERAL REGULATORY ACTIVITIES, JOB SAFETY AND OTHER
WORKING CONDITIONS
[Fiscal years; in millions of dollars]


Agency


1974 1975 1976 1977 1978 1979


Department of the Interior:
Office of Surface Mining, Reclamation and Enforcement I-------........--------...---..----...------------.....-. 16
Mining Enforcement and Safety Adm;rnistratin-------------- 59 68 84 98 53 (;


Subtotal......--------...----........-----...........
See footnotes at end of table.
(27)


59 68 84 98 69 1











APPENDIX TABLE 2.-EXPENDITURES ON FEDERAL REGULATORY ACTIVITIES. JOB SAFETY AND OTHER
WORKING CONDITIONS-Continued

[Fiscal years, in millions of dollars]

1974 1975 1975 1977 1978 1979


'P. .1'I 'P'I! -"f [ i*l-r
f..l e P, ,
t. i -,.. .. . ... .
LVt.." ',' ; "-' "tSi '' :3".at
l S. ; a3l t I'l \3(1t 1 Heath 1 :+ ,( 3t u1 .......... ..

..... ...Of 1' a i Hke3', U '.T s 5 . .
;~, ^ ; ""l r. i ... .................. . . . . . .

r "-? F- n [ ..^ ,m,'f1- Or iprti '.,*, "u.^' .. jn .. .... ... .. .... .
"+a a -.h Ri., 2., r
L .;.., .l, '3 ,,*Jl 2.] ': ana H t.,..:. K I'.*F, '. r ^. ,' 1.... . .......


2.
69
jig
149


55
5


Total.................... ........


............ 310


7- g' 6 7 77
"7 47 47 L-S 58
90 1I0 127 1.-9 i0
V) ( ) (-) ,' 124

;89 ;,0 Irs,5 iA09
% '9 ;'2 bS 08
,! 81 92 100
5 6 7 7 8
39 446 92 5U2 626


1Pe',.t; "h and te'h, ', only,
3i e3r la"3 MES3Aunctions we-et.ansfe'reJetothe Mine Safety and Healt'i *'Jmins at'.n un*e the Depart-
ment of Labor.
Sorce or utp1 f-om ,'el.Is in the "F'Budet of the Ur.,led Slates Governrrment. Fiscal Year 1379,"' W0sh.nton Gov-
ermet Pr ; '..ice. 197'.

A.r:'"',IX TABLE 3.-EXPE-'DITUR[S O0- FEDERAL REGULATORY ACTIVITIES. ENVIRONMENT AND ENERGY

(Fiscal years; in millions of dollars]


Agency


1974 1975 1976 1977 1978 1979


Depnivme'-tof EnergyI...................................... 33 121 13S 199 21S 284
C% ": I ci Environmental Oajlt-............................. 2 3 3 4 3 3
Environmental Pc.s.tion A enry............................. 232 317 363 436 473 522
.'r Regulatr Crmssion............................... 80 86 180 231 275 307


Total...--..-- - - ------------.- -- - - --.. . .. .


347 527 682 870 989


1.116


I ne'- information, r l LV, and re.u!ation.
Source: Co-iputel from details in the 'Budget of the United States Government.
G.ernment P;nt ng Ofice, 1978.

APPENDIX TABLE 4.-EXPENDITURES ON( FEDERAL REGULATORY ACTIVITIES,
OTHER FINANCIAL


Fiscal Year 1979," Washington,


FINANCIAL REPORTING, AND


(Fiscal years: in mIlions of dollars]


Aerc 1974

Cot c-'" n Standards Bnard--------------------------............................. 1
Council on f 'i3 p and Pr:e St.',-,lt-'....- ....- ...-- .....-- .........-- ...
Se.u' i e and Ex-hange Commission-------------------------.......................... 35


Total...............................................


1975 1976 1977 1978 1979


36 45 53 58 70 69


Less than S 1.000.0r'O.
S-i.j':p C-n,'-utJ from details in the "Budget of the United States Government, Fiscal Year 1979," Washington,
Go.e.,n-ir-.i' P; ril r,-i O ..e 1328.







29

APPENDIX TABLE 5.-EXPENDITURES ON FEDERAL REGULATORY ACTIVITIES, INDUSTRY-SPECIFIC REGULATION
[Fiscal years; in millions of dollars]

Agency 1974 1975 1976 1977 1978 1979

Civil Aeronautics Board-------------------------------................................... 89 81 91 103 101 9,'.
Commodity Futures Trading Commission...........---------------------- 13 13 11 14 15 1G
Federal Communications Commission------.....---------------- 38 48 53 56 70 66
Federal Maritime Commission ..----.. -----.........-..-..--..----- 6 7 8 8 10 10
Federal Power Commission..............----------------------------- 27 34 (2) (2) ( 2) (
Federal Trade Commission-----------------------------.................................. 32 39 44 52 b2 64
International Trade Commission---------------------------.............................. 7 8 10 11 12 13
Interstate Commerce Commission. -------. -------...........----..------- 38 44 47 59 64 69
Renegotiation Board..---..-----..---------.-------------- 5 5 6 6 6 7
Total........................--------------------------------------. 245 269 270 309 340 341

I Expenditures for Commodity E-change /' ut'ority.
2 Federal Power Commission functions have been transferred to the Department of Energy.
Source: Computed from details in the "Buiget of the United States Government, Fiscal Year 1979," Washington,
Government PrintUng Office, 1978.




UNIVERSITY OF FLORIDA


3 1262 09118 5909