tion," in particular, Vol. IV, "Delay in the Regulatory Process" and Vol. VI, a "Framework for Regulation."

Based on this strong foundation, S. 262 deserves and will receive very serious consideration.

Also deserving serious attention this morning is the recently released study by the business roundtable and the Arthur Andersen Co. of the Cost of Government Regulation on 48 Selected American Corporations. Although the study is limited to these 48 companies and to the regulations of 6 agencies, and does not measure net costs, i.e., gross costs minus benefits, it is a significant contribution to the overall measurement of the incremental costs of Government regulation. Its methodology deserves close examination by the Congress and the agencies.

With regard to S. 262, it's my hope that the bill can be improved and strengthened during the hearing process we begin today.

We're all concerned about the impact of regulation: we also need to be concerned about the impact of regulatory reform.

We must be certain of course that the net effect of our efforts will be to reduce unnecessary regulation and speed up the decisionmaking process and not to increase the growing mountain of Federal paperwork.

I also have other questions for which I'll be seeking answers during these hearings:

What can we do to:

Reduce delays in the issuing of necessary regulations?

Discourage agencies from changing regulations in the middle of programs? Allow for increased flexibility in regulatory compliance, particularly for small business and local governmental units?

Reduce inconsistent or duplicative regulations?

Should a lower threshhold than $100,000,000 be adopted for the undertaking of a regulatory analysis of a proposed rule?

Should the question of whether an agency uses a design or a performance standard in a proposed rule be reviewed by the agency in its regulatory analysis? Should the regulatory analysis be subject to judicial review-independent of the rulemaking?

As part of the full administrative record?

Not at all?

Will extensive reporting requirements of sections 644-645 deter agencies from reviewing more than one existing rule per year and deter the review of 100's or 1000's of other existing rules?

Are oral testimony and cross-examination as significant causes of delay in agency proceedings as the "general hearing process" proposed in S. 262 suggests they are? Will this amendment to the administrative procedure act overly restrict such testimony and examination?

Should the continual use of dilatory tactics subject a lawyer to agency disciplinary sanctions?

Should the administrator of a restructured administrative conference have both renewal authority and authority to bring a complaint against an administrative law judge before the merit systems protection board?

What should the functions and authority be of the restructured administrative conference?

These are just a few of the questions I know we will thoroughly address during these important hearings we begin today.

I'm pleased to be a co-sponsor of S. 262 and I look forward to working with you Mr. Chairman and the other members of the committee in shaping the most responsible and responsive regulatory reform legislation we can produce.

Senator PERCY. Mr. Chairman, Senator Javits would want to be here to welcome Frank Cary, who is a valued constituent of his. Senator Javits will try to get over here, but he is in a markup right now. He also welcomes Mr. Millar.

Chairman RIBICOFF. Senator Durenberger?

Senator DURENBERGER. I will pass.

Chairman RIBICOFF. Senator Cohen?

Senator COHEN. No statement.

Chairman RIBICOFF. You may make your statement, Mr. Cary.

TESTIMONY OF FRANK T. CARY, CHAIRMAN OF THE BOARD, INTERNATIONAL BUSINESS MACHINES CORP., AND CHAIRMAN OF THE BUSINESS ROUNDTABLE TASK FORCE ON GOVERNMENT REGULATION; VICTOR E. MILLAR, DEPUTY VICE CHAIRMAN OF ARTHUR ANDERSEN & CO., ACCOMPANIED BY MICHAEL E. SIMON, AND JERRY WALKER, PARTNERS IN ARTHUR ANDERSEN & CO.

Mr. CARY. I have submitted a written statement for the record, Mr. Chairman.

Chairman RIBICOFF. The entire statement will be placed in the record in full at the conclusion of your testimony.

Mr. CARY. Thank you, Mr. Chairman.

Mr. Chairman, members of the Governmental Affairs Committee: On behalf of the Business Roundtable, I want to express my appreciation for the opportunity to testify at these very important hearings. We are grateful for the initiatives which this committee and the Carter administration have taken on the subject of regulator reform, and we welcome the chance to address the issues raised by the chairman's bill, S. 262, and Senator Percy's bill, S. 445, the other legislation before you.

The Business Roundtable established its Task Force on Regulation in 1974. In early 1978, as part of our effort, the Roundtable commissioned a regulatory cost study. The purpose of the study was to develop a suitable methodology for measuring specific regulatory costs. The results of that study have just been published, and we would like to spend a little time later on telling you about them.

With me today to handle most of that task is Victor Millar, deputy vice chairman of Arthur Andersen & Co. Arthur Andersen was responsible for developing the methodology and for drafting the final report. Mr. Simon and Mr. Walker are both partfers in Arthur Andersen.

Our testimony today will deal mainly with the provisions in title I and title III of S. 262 requiring economic analysis of proposed regulations and periodic review of existing regulations.

The Business Roundtable is not prepared to comment in detail on the provisions in S. 262 which are aimed at expediting agency procedures. These provisions appear to have substantial and complex effects which differ from agency to agency.

The Business Roundtable also takes no position on proposals to authorize financial assistance to organizations that might otherwise be unrepresented in agency proceedings.

When our review of these proposals is completed, we will be happy to give you our views in writing.

The Business Roundtable strongly supports the concept of regulatory analysis that is embodied in President Carter's Executive Order 12044 of March 1978 and in various bills before the committee.

We reject the notion that economic analysis amounts to an indirect attack on the principle of Government regulation. The Business Roundtable supports the basic goals of Federal programs to achieve a clean and healthy environment, to assure a safe and healthy workplace, to provide for equal employment opportunity, and many other regulatory goals.

We acknowledge that some regulations are necessary to gain the desired results. But we also believe that some new regulatory programs have caused excessive and unintended costs. While providing important benefits, they have sometimes created conflicts with other national policy goals, such as controlling inflation, reducing unemployment, and improving productivity.

Therefore, we believe that the cost of regulation must be analyzed in determining both the appropriate level of regulation and the means employed to reach it.

We believe also that regulators ought to examine a range of options, including the possibility of relying on market disciplines or other nongovernment procedures, such as voluntary industry standards. We think that the most cost effective approach capable of meeting the goals established by Congress ought normally to be selected.

We frankly do not understand why requiring an economic analysis as part of the process of developing major regulations should even be a matter of controversy. The economic resources available to our society are limited. If they are employed for one purpose, they cannot and will not be available for another.

The determination of priorities in the use of resources is as essential to intelligent decisionmaking in Government as it is in private business. And even the advocates of regulation ought to be interested in assuring that scarce resources are appropriately employed.

Economic analysis is simply a technique for providing decisionmakers with information on which to base judgments about the cost effectiveness of various regulatory alternatives.

There are some very difficult conceptual and practical problems involved in measuring regulatory costs, and there are perhaps more difficult problems inherent in trying to quantify the benefits of regulation.

Additional effort is unquestionably needed to develop better analytical techniques. But the fact that something cannot be measured exactly does not mean that it is impossible to generate useful information on the subject.

We believe that the methodology developed for the Business Roundtable's Cost of Regulation Study will prove useful as a contribution to the analytical tool kit.

However, it is important to point out that the Roundtable was not attempting to perform the broad type of economic analysis required in the Executive order and proposed in S. 262. Let me just take a few minutes to tell you about our study.

It was a first effort aimed at collecting data from a number of companies and different industries on a variety of regulatory programs administered by six different regulatory agencies. That meant that the methodology had to be as unambiguous as a yardstick.

Moreover, since the study was ultimately intended for publication as a contribution to the debate on regulatory reform, the Roundtable decided that it was essential to confine the data to expenditures which were directly linked to a particular regulation and which were capable of being measured objectively.

Two consequences flowed from that decision. First of all, the data collected in the Roundtable Cost of Regulation Study reflect only incremental costs borne directly by the companies themselves; that is, costs incurred during 1977 as the result of an action taken to comply with the regulation that would not have been taken in the absence of the regulation. And second, because the task force felt that our numbers had to be firm, measurable in the strict accounting sense, no attempt was made to collect data on the indirect costs to the companies. Indirect costs are very real in economic terms. They include such items as costs resulting from regulatory delays, losses in productivity, misallocation of resources, adverse effects on international competitiveness, et cetera.

In contrast to the strict incremental cost accounting approach of the Roundtable study, S. 262 calls for the identification and measurement of all the economic effects of a proposed regulation.

The Roundtable study shows the 1977 incremental costs to 48 Business Roundtable member companies of programs administered through six regulatory agencies.

Chairman RIBICOFF. Without objection, the list of these 48 companies will appear in the record at this point. [The information referred to follows:]

Mr. CARY. For the six agencies, the overall incremental cost reported for 1977 was $2.6 billion, of which EPA accounted for $2 billion or 77 percent. To put these numbers in perspective, it may be useful to compare them to other key figures for the companies studied.

For example, the $2.6 billion amounted to 10 percent of the total capital expenditures by the 48 companies during 1977. It was 15.7

percent of net income and 43.3 percent of reseach and development costs.

For the manufacturing companies alone, the incremental cost of regulation was $2.3 billion or 17.2 percent of total capital expenditures, 22.5 percent of net income, and 42.6 percent of research and development.

Mr. Millar will cover the results for you in greater detail in his testimony, including an analysis by agency.

The costs reported in this study represent only the tip of the regulatory iceberg. I have already explained why we collected the data only on direct incremental costs. However, some companies reported that the indirect costs were greater than the direct costs. The study also did not include the principal regulatory agency for many of the participating companies. While the automobile industry was represented in the study, the National Highway Traffic Safety Administration was excluded. The drug industry was in, but the Food and Drug Administration was not. The communications industry was represented, but not the FCC. Banks were included, but not the Comptroller of the Currency. There were no small business firms included. Some important industries, such as construction and retailing, were not represented. State and local government regulations were not measured. Finally, the cost to the Government of administering those agencies' programs was not included in the study. For the six agencies we measured, this cost alone amounted to $9.7 billion in 1977.

How much of the regulatory iceberg lies beneath the surface? Well, frankly, we don't know. We have no solid basis from which to extrapolate direct incremental costs and no basis today for measuring the secondary effects described earlier.

In order to determine whether our results were comparable with those found in other studies of regulation, we did undertake our own comparison. In our opinion, our results are not inconsistent with various studies which have attempted to estimate the cost of regulation for all companies. These include the study of Edward Denison of the Brookings Institution which estimated the cost to protect the environment and worker safety and health at $10.5 billion in 1975; the study by the Council on Environmental Quality which estimated pollution abatement costs at $12.8 billion in 1977; and the study by Murray Weidenbaum and Robert De Fina estimating the total cost of Federal regulation in 1977 at $79.1 billion. The Business Roundtable agrees with S. 262 that all regulatory agencies, both those in the executive branch and the independent agencies, should be required to prepare preliminary and final economic analyses on major rules. The proposed $100 billion annual threshold in S. 262 would appear to be appropriate in terms of overall economic impact. A lower threshold along the lines of that suggested in S. 93 by Senator Eagleton should be adopted for the case of rules which have a disproportionate impact on individual industries, geographic areas, or levels of government.

Our cost study, for example, clearly demonstrated the widely divergent impacts a particular regulatory program can have on different industries.