COST JUSTIFICATION FOR REGULATIONS

Excessive government regulation is a significant inflationary factor. In fiscal 1979, the aggregate cost of government requlation is expected to reach $102.7 billion, a 30 percent increase over fiscal 1978 estimated cost of $79.1 billion.

The current cost of complying with government regulation now is estimated at $3,600 per year for every small business in the land. Most small firms are experiencing inordinate amounts of financial and managerial problems in their attempts to comply with the proliferation of regulations generated by federal agencies.

The time and energy spent on federal paperwork, and the large capital expenditures required to meet environmental standards, job safety standards or other mandatory standards can be a matter of life or death for a small business. The inability of a small business to finance the cost of mandatory compliance is reflected in the higher direct costs a small business incurs.

The current and preceding administrations have attempted to deal with this problem by means of Executive Orders and resolutions. They have not worked and have been adjudged by the courts to "not carry the full force and effect of law."

Many pieces of legislation have been introduced to remedy the situation, but in many cases these bills are too narrowly drafted and apply only to the independent regulatory agencies and do not cover the Executive branch.

S. 93, introduced by Senator Gaylord Nelson, chairman of the Senate Small Business Committee, and other Senators, cover all federal departments, agencies and instrumentalities, and would provide the type of regulatory relief needed by the small business community.

S. 93 would require federal agencies to undertake an analysis of the economic consequences of regulations they propose. This would include an analysis of the impact of the regulations as reflected in increases in consumer prices a significant cause of inflation.

RESOLVED

The Small Business Legislative Council urges passage of broadbased legislation to reform the regulatory system, by way of imposing cost justification requirements upon the regulators prior to implementation of regulations, and recommends that the same requirements be placed upon the legislative process.

Senator LEVIN. Thank you, very much, Mr. Fitch.
Next, Kathleen O'Reilly.

TESTIMONY OF KATHLEEN F. O'REILLY, EXECUTIVE

DIRECTOR, CONSUMER FEDERATION OF AMERICA

Ms. O'REILLY. My name is Kathleen O'Reilly, executive director of the Consumer Federation of America, a federation of 240 National, State and local organizations collectively representing 30 million consumers.

There is no question that regulatory reform in this Congress is a particularly popular fad. I believe it evidences a certain Washington perception that the American public seeks a rollback of regulation, and a streamlining of the regulatory process. No serious student of government could deny the need for good regulatory reform. But before any particular proposal is structured in a final way, it would be very instructive for Congress to look closely at what polls show with respect to public opinion.

The January-February 1979 issue of Public Opinion contains a very exhaustive study of what the polls reveal. Much to our gratification, it reveals that not only is the public not calling for a massive across the board rollback in regulation, but there is strong and growing support for many of the most important bodies of regulation.

For example, the 1976 Harris poll, which has been confirmed in subsequent polls, showed strong support for product safety regulation, environmental controls, protection on women issues, civil rights, and so forth. Even those polled recognize the cost of regulation, yet support remains high, for example, for even more regulation pharmaceutical companies if it could insure a tighter control of the market.

The last October 1978 Harris poll showed that by margins of 46 percent to 35 percent consumers would be willing to have stricter environmental controls even if that meant a higher cost to business and consumers. Last fall the Better Homes and Garden pollwhich probably represents the mainstream of America, showed that consumers, even in the face of higher food prices, would be willing to spend 1 or 2 cents more per food item if that meant they would receive good nutritional information.

Accordingly, it is important to stand back and look at the perception of the public before any proposals go across the board in a sweeping fashion.

As has been said, cost-benefit analysis is inherently difficult, if not impossible, because of the difficulty of quantifying benefits, and also because of the tendency-particularly of those who calculate "cost"-to lump costs together. They also tend not to distinguish between legitimate and excessive costs.

In 1975, for example, the Dow Chemical Co. reported that it spent $5 million on salaries and expenses for testimony on Federal regulatory matters, in just 1 year. This is obviously what they perceive to be a "cost" of regulation even though they themselves admitted that at least $750,000 of that cost was excessive. So many of those costs are cranked into the "cost," including lobbyist cost and high-priced Washington lawyer costs.

There is also a need to look at what is true "cost" as opposed to a wealth transfer. For example, if in order to have a safe lawnmower a consumer is forced to pay $15 more for a lawnmower, there is not only the psychological benefit of not incurring death or injury, there is also the reduced litigation costs, reduced insurance premiums and hospitalization. Beyond that, the dollars that are, so to speak taken out of the pockets of lawyers, doctors, and insurance companies, are dollars that are left in the pockets of the average

consumer.

Cost-benefit analysis, if it necessitated statements from every agency across the board, on significant or insignificant regulations, would be counterproductive. It would result in a boilerplate situation. One of the most dramatic examples of how it would work is to look at Congress itself. How has Congress performed under the selfimposed budget analysis requirements that commerced up in the 93d Congress?

Last year, a member of the staff of the Governmental Affairs Committee gave a very thought-provoking speech showing the results of a Library of Congress study on just what has been happening since those reforms were initiated.

For example, Senate rule 29 requires that all committee reports-except the Appropriations Committee-are supposed to address themselves to a budget analysis including impact on privacy, paperwork, how many people will be affected, et cetera. Yet in reviewing how Congress-and the Senate specifically-has performed in the vast majority of cases there has been either no such analysis whatsoever, or the analysis included but a few sentences often reaching the conclusion that there is no impact, or that it is impracticable to calculate.

This result is exactly what we would expect to find in Federal regulatory agencies; namely that: (A) they would either take advantage of loopholes and not comply; or (B) they would use relatively meaningless boilerplate language. That approach might reduce unemployment to lawyers and economists, but not help Congress achieve regulatory reform.

The area of regulatory reform which holds the most promise is in the area of reducing the time and cost inefficiencies in much of the process. That is why we urge Congress to examine closely potentials such as greater reliance on stipulations and arbitration. These mechanisms have been used successfully in the judicial process to bring down the cost of the process, sometimes by as much as onefifth of earlier costs.

As to changes in the administrative law judge area, more briefings, better staff backup, and inclusion under the umbrella of Administrative Conference are laudable. As to public participation, it is necessary if the regulatory process is to equitably balance biases. Unless we have a process where the present imbalance of representation is corrected, we will continue to have an overabundance of information coming from the regulated parties, and an underrepresentation of the very people who have the greatest stake in those regulations, the public.

The area of ex parte communications, is very complex. There are at least four levels of ex parte communications. One is the traditional source. The other, the more recent Skelly Wright approach

contained in his 1977 opinion. Third is the question of staff communication with Commissioners within a given agency. Fourth is a relatively new level, but also significant. That is when a particular regulatory agency has communications from other governmental agencies such as the Regulatory Reform Council, Domestic Council, and so forth.

Those implications should be reviewed, as well as the trade off between the need for regulators to have expert opinion and the need to reduce bias. Because there is not time to go into legislative veto, I would welcome the opportunity to submit for the record CFA's analysis of that issue because it is very important.

Thank you.

[The prepared statement of Ms. O'Reilly, with attachments, follow:]