The Rising Risks of Regulation

By Jay Palmer

The business of regulating business is one of the fastest-growing areas of government. It is also fast becoming one of the most criticized, even though nobody denies the need for some regulation or the benefits of clean air, pure water, safe products, healthy workers and employed minorities. An alliance of liberals and conservatives now protest that regulation is excessive and the benefits are not worth the price. They have found an ally in Jimmy Carter, who promises to battle regulatory excess as part of his Stage II anti-inflation plan. And not a moment too soon. "Our regulatory system," asserts Assistant Commerce Secretary Jerry Jasinowski, "is out of control."

America's regulatory history dates back to the creation of the Interstate Commerce Commission 91 years ago, and big growth came during the New Deal, when such agencies as the Civil Aeronautics Board and the Securities and Exchange Commission were started. But most of the excesses that are drawing fire were born in the mid-1960s and early 1970s, when the focus turned from industry control to social reform and a large number of new bureaus were formed, including the Environmental Protection Agency, the Occupational Safety and Health Administration, the Equal Employment Opportunity Commission and the Consumer Product Safety Commission.

Certainly, reformers do not want an end to all regulation. But most agree that many of the pre-1960s agencies have outlived much of their usefulness and that their rules, once necessary to curtail the old robber barons, now work to inhibit natural competition and accelerate inflation. These agencies do little if anything to improve the quality of life, and deregulation, as proved by the CAB'S move to free air fares and the SEC's loosening of brokers' commission rates, can quickly and dramatically cut prices.

Where newer agencies like the EPA and OSHA are concerned, even the most ardent deregulators want some rules to remain, admitting that it is impossible to put a dollar price on social welfare. But at the same time they argue that there are now too many silly, contradictory and ineffective rules that snarl enterprise in red tape. Above all, they see a need to identify and enact sensible changes that would allow regulation to achieve much the same social goals in a less wasteful way and with a much smaller damage to other, equally important economic goals, including job-creation.

Often the newer agencies are headed by enthusiasts who see a mission to push new rules without regard to price. As a result, they have made little attempt to apply the most elementary cost-benefit analyses. Cheaper solutions that could achieve the same ends or almost the same ends have been ignored in favor of overkill. America has just not got value for money from its red-tape spending spree.

The full costs of federal regulation are difficult to determine and open to bitter dispute. One of the most widely accepted estimates has been made by Economist Murray Weidenbaum, head of the Center for the Study of American Business at Washington University. He divides the costs into two categories. The first is administrative costs, which consist of visible federal spending on regulatory agencies. These have rocketed from $745 million in 1970 to $4.8 billion this fiscal year. Large as this is, it only hints at the real burden.

The second category is compliance costs, which are what employers have to spend to meet the regulations, and the multiplier effect can be large. For example, the EPA's 1976 spending was only $416 million, but its rules forced industry to spend at least $7.8 billion. In a long and complex study, Weidenbaum estimated that total administrative costs of $3 billion in 1976 generated compliance costs that add up to a staggering $63 billion, equivalent to a hidden tax of $307 on every person in the U.S.

The cost has risen sharply since then as business has found it progressively more difficult and more expensive to meet the tougher and tougher standards coming into effect. Small businessmen and big companies are only now beginning to feel the high costs of complying with far-ranging regulations like the 1975 Hazardous Materials Transportation Act and the 1976 Toxic Substances Act.

As a result, many estimates put next year's cost of regulation at more than $100 billion, an amount that approaches Government spending on defense.

Industry usually passes these expenses on to consumers. Administration economists estimate that regulations--good and bad, necessary and unnecessary --have added at least three-quarters of a point to the nation's current 10% annual inflation rate. Carolyn Shaw Bell, economics professor at Wellesley College, suggests some of the many reasons:

Antipollution laws push domestic steel prices up by $8 a ton and put U.S. steelmakers at a big competitive disadvantage.

Building code and materials regulations require so much extra work that buyers of new houses must pay $1,500 to $2,500 more than they otherwise would have to spend.

Automobile safety and emission devices add an average of $600 to car prices.

Sometimes new regulation can be the straw that breaks a company's back. The Lead Industries Association estimates that 45 lead plants, which account for some 80% of total U.S. lead smelting and refining capacity, will be unable to meet the EPA'S strict new air standards. Environmental and safety regulations have forced dozens of foundries and a few older steel plants to close. The Employee Retirement Income Security Act (ERISA) demanded such strict reporting and actuarial record-keeping that thousands of smaller firms dropped their private pension plans for employees rather than try to comply.

Probably the most criticized agency is the Occupational Safety and Health Administration. OSHA mandates in lavish detail characteristics that machinery must have rather than simply setting standards for safety on the job and letting companies devise their own ways for meeting them. On construction sites, the agency simultaneously demands that trucks and other heavy-duty vehicles have loud back-up horns and that workers wear hearing protectors to cut down noise levels. Although the agency has widely trumpeted its recent attempts to eliminate some of its sillier rules, many still remain.

Contradictions are common among the plethora of regulations laid down by different agencies. While the Department of Energy was busy regulating for greater industrial use of domestic coal to cut oil imports, the EPA was penalizing companies for polluting the air with coal smoke. There are also unnecessary inefficiencies: New York City has been ordered by the Department of Transportation to build subway ramps and elevators for the handicapped at a cost of $1.5 billion, even though impecunious city fathers contend that it would be cheaper to give the disabled free cab rides for life.

Regulatory excess cuts into spending for research and development and for capital investment in new plant and equipment. Corporate cash is spent on devices to clean the air and protect workers rather than on modern machinery that will produce goods more cheaply and efficiently. While that may appear to be an acceptable tradeoff, it leads to fewer jobs for the unemployed and fewer technical discoveries that will benefit the nation. Yale Economist Paul MacAvoy estimates that the shift of investment from productive projects to programs mandated by regulation has cut the growth of the U.S. gross national product by one-quarter to one-half of a point every year since the early 1970s.

Since the 1960s, the average annual increase in the nation's productivity has fallen from 3% to about 1%, and the blame lies partly with excessive regulation. In a landmark study, Economist Edward Denison of the liberal-oriented Brookings Institution calculated that environmental, health and safety regulations cut 1.4 points per year from U.S. productivity growth between 1967 and 1975. "There can be no doubt," says a study by the President's Council on Wage and Price Stability, "that much of the productivity collapse in mining and in utilities can be attributed to social legislation that protects the environment and safety of miners."

These estimates are contested by the pro-regulation lobby, which consists of some consumerists, some labor leaders and many of the regulators themselves. They argue that the costs of regulation are inflated by businessmen. They also claim that such calculations fail to take into account the hidden costs of dirty and dangerous production and do not allow for the social and invisible economic benefits of regulations. How, they ask, can anybody put a price tag on life and health? What is a few billion dollars here or there if thousands more workers will not suffer and die from cotton-dust poisoning or asbestos-caused cancers? Says Labor Secretary Ray Marshall, in support of stern safety and health regulations to protect workers: "A relaxation will increase the real social costs that our traditional economic indexes do not measure."

Such arguments have force, but unfortunately the choice is not a simple one between life and money. The deregulators are not uncaring or unthinking. To them, the choice is between excessive, strangling regulation and something less.

They note that while the aims of regulations may often be admirable, the same cannot be said of the means. Over the years, the thrust has changed for the worse. In the early days, the purpose was to guard against abuse by telling employers what they were forbidden to do. Today business people commonly echo the complaint of Willard Butcher, president of Chase Manhattan Bank: "Washington has begun to dictate not only what we must do but also how we must do it." Alfred Kahn, the former head of the CAB who is now Carter's anti-inflation chief, insists that "the best lesson is to minimize coercion. Regulators should be less precise and let businesses find their own way."

Some regulations will always be necessary, and not only to avoid abuses of workers or a return to the pre-Nader days of unsafe cars. If there were no mandatory standards set by Government, companies willing to spend hard cash on antipollution and safety gear would lose orders to competitors that refused to make those social investments; the callous companies would have lower costs. The nation desperately needs to find a sensible midpoint between too much regulation and too little.

This search for a reasonable balance is not new. Ever since the days of F.D.R., critics have argued that the regulators are a too independent, too powerful and too free-spending fourth arm of Government. "The agencies today," says a leading eco nomic policymaker in the Carter Administration, "are inde pendent baronies. They're like castles on the Rhine in the Middle Ages, when each castle stopped boats and collected a toll. Each agency collects its toll."

Now Jimmy Carter is turning some of his anti-inflation guns on the castles.

His first new idea, announced last month, was to give the Office of Management and Budget the authority to preview and if necessary delay all new regulatory programs that would cost the economy $100 million or more.

But the agencies' opposition was so intense that Carter backed down. Instead, he has created a Regulatory Council that will be staffed by appointees of the agencies themselves and assigned to weeding out duplicating rules and studying their cumulative impact. Even this could be a key reform, but there is one problem. Regulators have never before managed to regulate themselves.

Carter has plenty of opportunities to make further change. One popular proposal is to create an apolitical board to review all regula tions, set priorities and eliminate much of the confusion and expense of conflicting laws. At the same time, all regulatory agencies and their current rules could be made subject to a "sunset law" that would require a regular examination of whether or not the original aims were being achieved and were still necessary.

Regulation could be made much easier and more efficient if companies were simply told what standards they had to meet and what fines they would face if they 'failed to comply.

It would be wise to replace extremists in the agencies with individuals dedicated to a sen sible balance between economic development and regulatory protection.

Even if the regulators were brought under strong central control, many would still require a much tighter hand on the purse strings. This could be achieved by requiring "economic impact statements," which would spell out the costs of new rules against the benefits. Alternatively, a new regulatory board could draw up for Congress an annual regulatory budget or calendar that would set out, in time for opposition to be heard, the costs and benefits as well as a timetable for new rules. Either idea would focus attention on the climbing cost of regulation and go a long way toward dampening Congressmen's ardor for enacting new laws for the agencies to enforce.

Today's excessive regulation is not only painful, it is also un necessary. Straitjacket rules imposed by a bulging bureaucracy lift unemployment, slow technical progress, reduce U.S. competitiveness in the world, hamper exports and thus further weak en the dollar. The imperial regulatory juggernaut has clearly gone too far and, in an inflationary and recession-threatening age, the nation can no longer afford the luxury of costly and in efficient Government control.

--Jay Palmer

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