Using a Compliance Cost Cap to Constrain Regulation

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Forthcoming paper proposes firm limits be set on costs of regulatory policy.

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 Federal regulations can achieve many benefits in terms of safety, health, and environmental protection – but not without cost. According to President Obama, regulatory policy has sometimes placed “unreasonable burdens on business…that have stifled innovation and have had a chilling effect on growth and jobs.”

Although there is no official account of total regulatory costs, a recent report by the Office of Management and Budget (OMB) suggests that the benefits of major regulations generally outweigh their costs. Nevertheless, conservative organizations such as The Heritage Foundation caution that agencies’ self-calculated estimates of benefits “need to be considered with skepticism” and may be inflated. Likewise, the Mercatus Center, a research institute at George Mason University, warns that agencies’ estimates of costs consistently ignore the economic effects of direct and indirect job loss in regulated industries, which may result in underestimation.

In an effort to lessen, as well as more accurately discern, the full costs of regulation, professor Scott Andrew Shepard of the John Marshall Law School has recently issued a paper proposing a “Cost Compliance Cap” (CCC). His proposed CCC system would work much like a regulatory budget, an idea advocated decades ago by Chris DeMuth, the former president of the American Enterprise Institute, and more recently by Eric Posner, a law professor at the University of Chicago. Just as a regulatory budget would constrain agencies from issuing regulations imposing costs greater than a congressionally enacted ceiling, Shepard’s CCC system would place a cap on the amount of compliance costs that a regulatory agency may impose on the rest of society.

According to Shepard, an emissions cap-and-trade regime serves as an even better analogy to the CCC system. Like pollutant-producing industries, regulatory agencies produce a societal benefit for which regulators are subsequently rewarded with job security and personal satisfaction. Also like pollutant-producing industries, agencies produce a corresponding byproduct – regulatory costs – dispersed across society rather than imposed on the regulators.

As with emissions caps, Shepard’s CCC program would be designed to cap, and then gradually reduce, the amount of costs that regulatory agencies may impose on society. Penalties for exceeding a specified threshold of compliance costs would force regulators to internalize costs rather than merely disperse them across society. As a result, Shepard believes the system would encourage regulators to take account of, and eventually minimize, costs.

Shepard acknowledges that administrators have already attempted to lower regulatory compliance costs by requiring executive agencies to perform a cost-benefit analysis (CBA) for major regulations. However, Shepard asserts that the current CBA requirements are “toothless.” Unlike with his proposed CCC program, agencies currently face little penalty if they fail to undertake an adequate CBA and face virtually no consequences if they fail to adhere to its recommendations, according to Shepard.  He says that his proposed CCC program would “remedy the shortcoming of CBA” and “establish a real, meaningful check on the growth of regulatory-compliance costs.”

According to Shepard, an independent review board should conduct the calculation of the compliance burdens that agencies’ regulatory policies inflict upon their regulated industries and society. The review board would adjudicate between the estimated valuations submitted by the agency and interested parties. Shepard believes that such a review process would improve the fairness and transparency of regulatory policy.

Shepard’s paper will be published in a forthcoming edition of the Administrative Law Review.