comments. This is due to the fact we have such large attendance here. I do want to give every Senator an opportunity to ask questions. Mr. Millar's testimony really backs up Mr. Cary's.

Would you want to make a few comments? Your entire statement will go in the record.

Mr. MILLAR. Thank you, Mr. Chairman.

I will make just two points and refer to some charts that might be helpful in your questioning.

First, I appreciate this opportunity to appear before you today to describe this study that we have conducted for the Roundtable. Because of the growing national debate over the impact of Government regulation, we have found this study to be especially challenging.

In an area of intensely subjective argument, where there has been far more conjecture than fact, we have introduced a method for calculating the direct incremental costs of specific regulations. The results provide a highly reliable measure of a way in which specific regulations result in direct incremental costs.

With respect to our role as a firm in this study, I would like to be sure that it is noted that this was not a situation where we simply released a questionnaire to be filled out. We first of all developed, on the left end of the table here, a very thorough set of procedures. That stack is one single copy of the procedures. We trained all of the participating companies in how to apply those procedures in their organization. Then our personnel worked with them throughout the course of the data collection period to be sure that the methodology was followed and was understood, because it was somewhat complex.

The report that you have seen is the Executive summary, this copy right here. The full report, a copy of which is on the table right below it, will be released and will be available to you, should you be interested, next week.

I would like to, I think, simply close with a reference to the contribution that we think this study has made to this subject matter before us.

First of all, as Mr. Cary suggested, the introduction of the incremental cost concept we believe is a new feature in the study of regulation and one that helps us to focus on the costs that are really critical; that is, those costs that are incurred solely because of a regulation and not simply because they happen to be covered by a regulatory act.

Second, on the chart back here on the left, we were able to identify several attributes of high cost regulations. We, of course, at this very early stage have not had an opportunity to test those on new regulatory programs. But we think here, too, that this is the first step in having a list, if you will, a screen, against which to measure new proposed regulations, to try to identify or to predict those that will have a high incremental cost impact on business. With some additional work, we think that might be very helpful in the kind of screening program that you anticipate.

Third, we believe that the methodology, of course, at this point has been proven, and we in fact are applying it to several additional studies. Arthur Andersen has been requested by one manufacturing industry organization to conduct a similar study using the

consistent methodology to determine the costs being incurred for that industry. We also intend to conduct a study exactly like the one we are just finishing for the year 1978 so that we can identify trends between 1977 and 1978.

I might add that in this last study, we are going to try very hard to interest a number of very small organizations in participating in that study so that we can determine how the impact varies between the very large and the very small companies.

Thank you very much.

Chairman RIBICOFF. Thank you very much, Mr. Millar.

In all fairness to the entire panel, if there is no objection, we will limit the first round of questioning to 5 minutes for each one of us. Then we can go a second round.

Mr. Cary, I would like to get from you, a leading businessman, and from you, Mr. Millar, a leading accountant, your estimate of the inflationary impact of Federal regulations.

Mr. CARY. I think the inflationary impact is dependent entirely upon what your estimate is of the total incremental costs, both direct and indirect.

In this particular study, if the direct costs that the companies reported were passed along to the consumers, it would have required a price increase of a little bit more than 1 percent.

We know, of course, that that is only a very small portion of the total cost of regulation. So depending upon what you estimate the total cost to be, I think all of the incremental costs of regulation are in that sense inflationary.

Chairman RIBICOFF. Mr. Millar, you are one of the leading accountants. One percent of an increase in cost would amount to how many dollars?

Mr. MILLAR. In effect, it is $2.6 billion of incremental costs, which we identified in the study.

Chairman RIBICOFF. That is in the study. But if you had a 1 percent increase for the country as a whole, what would that amount to?

Mr. MILLAR. Approximately $35 billion.

Chairman RIBICOFF. Let me ask you, I gather from your testimony that it was a very difficult task to estimate the costs, let alone the benefits, of regulation. If it is that hard, how hard will it be for the Federal agencies to collect cost data on cost and benefit?

Mr. MILLAR. To apply the incremental concept will be difficult and will be a burden on each of the companies that has to participate in that data collection effort. The reason for that is that the companies typically do not maintain their records in such a fashion as to isolate the costs directly attributable to regulation. That requires going back over records which are already in place, following this kind of a methodology to try to get at those numbers. Chairman RIBICOFF. I think one of the problems we have, if we are going to try to put something in place, is not to increase the cost on business and the consumer.

Mr. MILLAR. That is right.

Chairman RIBICOFF. We would like a little help and some suggestions along that line so that we don't increase the burden instead of lessening it.

Mr. MILLAR. One thing that would be possible in that regard is to begin with a really solid random sample of organizations. As Mr. Cary suggested, we are not able to extrapolate in this case because the sample of participating companies was not randomly selected. But it would be possible to establish a random selection of companies and do a thorough analysis on those organizations and then extrapolate that result to the economy as a whole.

Chairman RIBICOFF. On page 12 of your statement, Mr. Cary, you suggest the need to provide confidentiality for certain business information supplied to agencies in connection with the regulatory analysis.

If this information is confidential, how can the public comment on the analysis? How do we get comments from others?

Mr. CARY. Well, I don't know that it is necessarily very useful to have public comment on the particular information that comes from an individual company. I would think that the information is primarily valuable to the regulatory agency in trying to assess what the costs of a particular regulation are. Then the agency performs the necessary economic impact analysis, which is what the public is primarily interested in, rather than the specific information from an individual company. If appropriate, an agency can release aggregate data from number of companies, as we did in our cost study.

Senator Ribicoff, I think we all agree that the best regulator in our society is competitive private enterprise, with emphasis on the competitive. I think that if we want to preserve that, we have to take some steps to preserve the truly proprietary information that individual companies might be required to furnish. I don't see any real conflict in doing that and fulfilling the regulatory agency's role.

Chairman RIBICOFF. Mr. Millar, in the executive summary of your study, you state that the costs of truth-in-lending disclosures were considered to be excessive in light of their perceived benefit. Now, your study didn't consider benefits. How do you make the judgment?

Mr. MILLAR. This was one of several places where we were quoting the participating companies. You are quite right, Senator, that in our study we did not collect any data on benefits. But in this case the participating companies which were affected by that regulation consistently reported to us that in their view that was the case. This is a quote from them.

Chairman RIBICOFF. As I listened to the testimony, the biggest part of that $2.6 billion cost was attributable to EPA. Yet, I would assume that all of us agree that EPA does contribute some substantial benefits to society as a whole.

Mr. MILLAR. Yes. We would certainly concur on that score. I think that each of these agencies makes a substantial contribution. As Mr. Cary pointed out, our focus was entirely on the cost side, without having anything at all to say about the benefits.

Chairman RIBICOFF. This was borne out. Last winter, I was in Pittsburgh at a meeting sponsored by the University of Pittsburgh's Business School. The session was held on the top of a building where you could look at what's known in Pittsburgh as the golden triangle.

I remember that area in Pittsburgh long before there was an EPA. When you look around at what has happened in downtown Pittsburgh, you realize that while all these large companies certainly incurred great costs in tearing down old buildings and abandoning old methods that were polluting that city, the benefits to those companies and Pittsburgh as a whole were enormous. So we do have the question of weighing benefits at all times to make sure that the benefits we receive are worth the incremental costs of the regulations.

Mr. MILLAR. I think that is exactly right. The example you outlined is a good one to point up the difficulty in trying to quantify benefits. We are able to measure and quantify costs. As a matter of fact, we can quantify the cost of several alternatives that might all lead to the same benefit. But it is very difficult from the financial records of any individual company to measure the contribution that that company has made to clean air or clean water. That is one of the reasons that the benefit side of the equation is so difficult for us to deal with.

Chairman RIBICOFF. But that is our obligation, to try to figure that out in writing the law.

Mr. MILLAR. That is right.

Chairman RIBICOFF. Senator Percy?

Senator PERCY. I would like to comment, Mr. Cary, on your observation that the sunset process might have a pilot run with S. 445 in using regulatory agencies.

We did a pilot run 4 years ago in this committee on a much smaller basis, on Presidential advisory committees. I haven't found any of them that ended in 10 years, with a couple hundred more a year-we sunset those-where we had to have them reinstituted. The OMB has reported to us that we have ended in the last couple of years 800 of them, saving millions of dollars. No one even knows they are gone. So the process does work. We now think we can go into the regulatory agencies and have a forcing mechanism there. I would like to ask you, on page 3 of the study, the most striking costs to me were manufacturing companies studied, where there was $5.4 billion invested for total research and development. That is the whole new product process that is the lifeblood of these companies. They had an incremental cost of regulation for six agencies of only $2.3 billion. That is better than 40 percent required to be spent by them where it doesn't add a thing to the quality of the product, lower their cost of production, anything like that, or help them develop new products; just mandated.

Is that one of the reasons possibly, the heavy regulation of our companies and the costs they are bearing, that we are sliding behind constantly now in research and development against other countries that are not required to make that kind of expenditure?

We are getting less competitive. The balance of payments is going down. We are weakening the dollar around the world. Could this be one of the reasons for that situation?

Mr. CARY. Certainly it can, Senator Percy. I hesitate to suggest that though, not having studied the regulations of other countries and the effects of those regulations on their industry. But certainly I would testify from my own company's experience in operating in many, many countries around the world, that I think many other

governments are much more sensitive and perhaps even sensible in the way in which they promulgate regulations on their industry. Certainly they work much more closely and cooperate much more closely with their industry in trying to achieve a particular goal. Also I think it is a part of our system that we have a kind of adversarial relationship between Government and business many times. And I think these situations contribute to our problems. Senator PERCY. Mr. Millar, the steel industry tells me that about a third, 30 percent, of their total investment every year is to meet regulations and standards that they are mandated by the Government to meet. What is the writeoff time for depreciating and amortizing those costs, generally speaking? Over how many years? Mr. MILLAR. I am going to let Jerry Walker, an audit partner in Arthur Andersen, respond to that.

Mr. WALKER. Senator, as part of the study, that statistic would not have arisen. However, from my own experience, I would say typically it would be 10 to 15 years.

Senator PERCY. Now, I am working with Bill Miller, the Chairman of the Fed, to try to find ways to accelerate this depreciation. When an expenditure is required, while we are working on a 1010-1-10 years of the structure and buildings, 10 for equipment, and 1 year-if it is mandated by the Government and not an optional expense, it would be incurred by the Government.

Would it help a great deal if the company could write it off, if they are mandated to spend on equipment, not to improve the product or not to lower their cost or anything, but just to meet certain standards? Would it help American companies a great deal if they could expense that and count that as costs in the year in which it is incurred? Would that help us then, not reduce standards at all, but help the cash flow of these companies that have to capitalize that over 10 or 15 years? It is nothing that they want to expend themselves.

Mr. WALKER. I would invite Mr. Cary and Vic to both comment on that, but certainly my own opinion, Senator, is it certainly would help.

Mr. CARY. I think all of the companies would welcome such an opportunity.

Senator PERCY. I think having the Chairman of the Fed backing this program is an immense help now. I think again certainly Senator Ribicoff and the Finance Committee will be asked to look at it.

My feeling is that we are way behind other countries. That is what is causing some of this lag.

Mr. MILLAR. Senator Percy, I didn't really describe the chart on the right over there, but that summarizes the allocation of costs incurred in the four classifications: product, research and development, the largest operating and administrative, and capital.

Now as a practical matter, the point you are addressing is the capital cost, which is about a third of the total incremental cost dollars that we have addressed.

Senator PERCY. Mr. Cary, A.T. & T. is one of the companies that was included in this study. Their profit margin-their return on investment-is regulated to be between 9.5 and 10 percent. But I noticed in the Washington Post that it is getting to the point where