Archived Content

Toward Smarter Regulation

Executive Summary

America is experiencing a dramatic increase in government regulation, with the most significant growth in the environmental, health, and safety areas. While the goals of many of these regulations may be laudable, there is a growing realization that we are wasting resources: Legislatures and agencies simply are not allocating limited resources in a cost-effective manner. We could achieve as good or better protection of human health and the environment at far less cost by regulating smarter.

Regulations are like “hidden taxes” that impose costs that are not readily apparent, yet are enormous. Just as the public must pay for government spending programs through higher taxes, they must also pay a high price for regulations – as customers, employees, and stockholders. The soaring costs of regulation stifle productivity, wages, and economic growth. Regulations also undermine jobs and international competitiveness. The increasing strain on our nation’s resources brings into sharp focus the challenge for the ’90s and beyond: The nation must not only reduce regulation, but when we choose to regulate, we must regulate smarter.

Regulators cannot regulate smarter unless their leaders allow it and demand it. Strong leadership must change the current incentives that drive agencies to create new regulations with little restraint, but offer virtually no reward for reforming or eliminating existing regulations or obviating the need for new ones.

Business is not alone in calling for regulatory reform; taxpayers, state and local governments, academics, members of Congress, the President and the Vice President have all expressed concern about the rising tide of regulations. To provide a framework for smarter regulation, The Business Roundtable recommends that federal, state, and local governments implement the following twelve tenets of rational regulation: 

1. Risk-Based Priorities and Public Education: To provide more cost-effective protection to human health and the environment, regulatory priorities should be based upon realistic considerations of risk. Agencies must educate the public about the level of risks proposed for regulation compared to risks familiar to the public, as well as the cost of reducing that risk. The government should estimate the relative risks posed by different substances, products, or activities and decide whether, and how, to regulate based on those risks. Resources should be committed where the greatest risks can be reduced at the least cost. The government should ensure that the public understands the magnitude of each risk compared to more familiar risks, as well as the costs of reducing that risk. 

2. Risk Assessment and Risk Management: Risk assessment methodologies should be continuously improved, and agencies should establish a clear distinction between assessing risks and deciding how to manage them. The scientific process of risk assessment should be made as objective as possible, and uniform standards should be applied. Any necessary policy or scientific judgments should be disclosed. Cost-effective approaches to managing risks should be promoted. 

3. Sound Science: Agency decision making should be grounded on the most advanced scientific knowledge currently available. New regulations should be based on the most advanced and credible scientific knowledge, and existing regulations and methods should be regularly updated to incorporate scientific advances. In making decisions and setting priorities based on risk, agencies should use “best estimates,” not worst-case estimates of risk. 

4. Benefit-Cost Analysis: Benefit-cost analysis should be utilized by agencies when developing regulations, with preference given the least costly regulatory alternative that accomplishes program objectives. First, agencies should use benefit-cost analysis to determine whether or not a proposal should be considered for adoption. Second, agencies should use cost-effectiveness analysis to select the regulatory option that achieves regulatory objectives in the least costly way. 

5. Market Incentives and Performance Standards: Market-oriented solutions and performance standards should be favored over command-and-control regulation. Market-based regulatory approaches reproduce the efficiency of a free market by internalizing the cost of a regulated activity or substance. They allow regulated parties to meet or exceed regulatory goals in the least costly way. Moreover, market incentives and performance standards adapt to changed circumstances more quickly than government command-and-control regulation.

6. Productivity, Wages, and Economic Growth: Methodologies should be implemented and continuously improved to assess the impact of major regulations on productivity, wages, and economic growth, as well as the adverse impact on jobs and international competitiveness in industries that bear the burden of regulation. For our economy to grow, regulatory and economic goals must become complementary, not conflicting. Government must be more sensitive to the impact of regulation on wages, prices, jobs, and international competitiveness. 

7. Coordination Among and Within Agencies: Coordination of regulatory activities among and within agencies should be improved to eliminate inconsistencies, duplication, and unnecessary regulatory burdens. To address problems within the jurisdiction of multiple agencies, a strong interagency committee should engage in strategic planning and develop a coordinated response before regulations are proposed. Each agency should also coordinate its programs that address different aspects of the same problem. 

8. Openness: The entire regulatory process, including centralized Executive review and management of agency rule-making, should be open to public scrutiny, to promote the quality, integrity, and responsiveness of agency decisions. Secrecy should be removed from the regulatory development and review process. More rules should be developed through regulatory negotiation, which involves open negotiations between regulators and interested parties.

9. Periodic Review: Programs and regulations should be periodically reviewed for purposes of determining whether they should be reformed, discontinued, or consolidated. Periodic review allows for government-wide priority setting through reforming or eliminating regulations, updating scientific methodologies, reorganizing an agency, or reallocating responsibility among agencies. Where appropriate, legislatures can ensure a stricter review process by setting firm deadlines by which they will be compelled to evaluate and vote for continuation of a program, or the program will terminate.

10. Federalism: Regulatory authority should be more rationally allocated among the federal, state, and local governments, and federal regulatory programs should avoid unfunded mandates. Many activities and substances are controlled by a mix of federal and state regulation. Modern commercial realities demand a more cost-effective balance of federal and state regulation. The federal government is primarily responsible for achieving this balance and should carefully consider whether to preempt and regulate a field or leave the field to the states. The federal government should also refrain from directing state and local governments to administer or comply with federal programs without providing the necessary funds.

11. Paperwork Burdens: Paperwork burdens caused by regulatory programs should be expressly assessed and substantially reduced. The massive paperwork burdens imposed on business, the public, and governments themselves must be reduced. The Paperwork Reduction Act and OIRA’s paperwork control responsibilities should be strengthened. Moreover, administrative process costs – the inflexibility, unresponsiveness, and delay that characterize many regulatory programs – should be examined and reduced. 

12. Regulatory Budget: A framework should be developed to account for expenditures required by regulations and to promote greater fiscal restraint on regulatory programs. There is a pressing need for government to be more sensitive to the cumulative costs of regulations. Under a regulatory budget, agencies would have a powerful incentive to regulate in a more cost-effective manner; each agency could be limited in the amount of regulatory costs imposed on the economy each year.

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A unique opportunity for meaningful regulatory reform presents itself. There is a growing consensus not only on the need for regulatory reform, but also on how to achieve it: Government must assess the seriousness of risks proposed for regulation, compare risks to be regulated to risks familiar to the public, disclose the costs of regulation, regulate only if the benefits outweigh the costs, and select the most cost-effective, market-driven method possible. This is smarter regulation. And smarter regulation is better regulation, for consumers, governments, and business alike. President Clinton’s Executive Order on Regulatory Planning and Review espouses many of these principles for improving both regulations and the regulatory process itself.

However, the White House, Congress, agencies, and the states must all commit themselves to smarter regulation. The Business Roundtable recommends that governments at all levels implement these twelve tenets. Our nation cannot afford to ignore the challenge to regulate smarter.



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