The study measured incremental costs incurred in 1977 to comply with specific regulations

It is important to be aware of areas not included in the scope of the study

(1) The study did not attempt to measure the benefits of the regulations to society

operations in each industry in relation to United States totals. The proportions are shown for each of three bases: sales, capital expenditures and number of employees.

The study measured the incremental costs incurred in 1977 by participating companies to comply with regulations of the six agencies. Incremental cost in this study is the cost of an action taken to comply with a regulation that would not have been taken in the absence of that regulation. Figure 1-4 illustrates how incremental cost was calculated.

The incremental cost determination required each company to apply its best judgment to decide which actions it would have taken in the absence of regulation. The introduction of judgment into the calculation of incremental cost has been questioned by some. However, different companies do indeed make different judgments as to which actions to take in the absence of regulation. By requiring that judgment, the study was able to measure costs incurred to comply with regulations that would have been applied to other purposes in the absence of regulations. Arthur Andersen & Co. believes the focus on incremental cost to be a strength of the study.

The Business Roundtable Cost of Government Regulation Study represents the first attempt to measure the incremental costs of regulation with a methodology applied consistently across federal agency and industry lines. It is important to recognize the areas defined as outside the scope of the study.

The Business Roundtable understands that regulation is an important element in our economic system and provides many useful benefits to all Americans. However, benefits are often difficult to measure. They are usually evaluated on a community-wide basis and cannot be based solely upon the accounting and engineering records of business firms.

The data collected in this study are, by contrast, uniquely determinable from the business records of companies. For the first time, these data provide a snapshot of the incremental cost impact of regulation on an important segment of the business community in one year 1977.

Although the effort of collecting such costs in 48 firms has been substantial, it is a simpler task than measuring the benefits of government regulation. By

Figure 1-4 Calculation of Incremental Cost

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(2) The study did not measure all of the costs of the regulations to the companies and to society

identifying the incremental costs incurred in 48 companies in 1977 to comply with the regulations of six federal agencies, the Business Roundtable hopes to stimulate additional efforts to identify the benefits to society obtained from high cost regulations.

As stressed earlier, incremental costs of regulation did not include costs which the company decided it would have incurred anyway. For example, EEO requires affirmative action programs which in turn call for special recruiting and training; scholarships, internships and related programs; and facilities for the benefit of minorities, women and handicapped persons. Many of the costs for these actions can be attributed to the regulations and, hence, could be considered part of the total cost of regulation. However, most companies considered many of the actions to be ones they would have taken in 1977 even in the absence of regulation. In those cases, they excluded the costs from the incremental costs of regulation.

In addition to incremental costs of regulation, there are many less visible secondary effects which cause substantial costs to the companies and to society generally. Some companies collected information about secondary effects of regulation and the costs associated with them, but those costs were excluded from the incremental cost calculation.

Three examples of secondary effects excluded from incremental costs are:

• Opportunity costs

• Changes in productivity

• Costs of regulatory-caused delays

Companies pointed out that these costs often exceeded the incremental cost of compliance. For example, delays caused by regulation in constructing the Trans-Alaska pipeline and in bringing off-shore wells into production had a detrimental impact on jobs, supplies of petroleum, and the balance of payments. Excluded from incremental costs were hundreds of millions of dollars for opportunity costs on invested capital.

The costs of secondary effects are much more difficult to measure than incremental costs as defined. Therefore, it was decided to exclude them from

incremental costs because they could not be measured with reasonable precision from available accounting and engineering records. Figure 1-5 illustrates the conceptual relationship of incremental costs and the costs of secondary effects.

(3) The six agències account for only a part of overall regulatory impact

The six federal agencies chosen for study account for only a part of the regulatory impact that is imposed by all federal agencies with regulatory functions and the regulations of state and local governments.

All industry-specific agencies were excluded from the study, since the principal focus was on agencies having a cross-industry impact. While the automobile industry was represented in the study, the costs imposed by regulations of the National Highway Traffic Safety Administration were excluded; while the drug industry participated, the Food and Drug Administration was excluded; while the communications industry was in the study, the costs associated with the Federal Communications Commission were not counted; and while the banking industry participated, the costs for the Comptroller of the Currency's regulations were not included.

(4) Certain major industries were not represented in the study

Participating companies collected, reviewed and reported their data to Arthur Andersen & Co.; AA&Co. developed the methodology, trained the participants, provided support and reviewed and analyzed the results

Although this was a cross-industry study, certain major industries and many large companies were not represented since the study was confined to a volunteer group of Business Roundtable member companies. No small businesses were included.2

The major industries not represented were agriculture, airline transportation, construction, insurance, printing and publishing, retailing, textile and apparel manufacturing, real estate, the majority of service industries, and state and local government.

Several industries that reported substantial incremental costs, such as primary metals, fabricated metals, food and kindred products, electric and gas services and others, were represented by only a small number of companies in their respective industry.

The comprehensive and systematic methodology developed for this study required participating companies to meet a high standard of documentation and internal review before reporting results to Arthur Andersen & Co.

In addition to developing the methodology, Arthur Andersen & Co.

Trained companies' project leaders and participated in companies training meetings.

• Provided support through field reviews, a central hotline to answer questions and computer software for validation and analysis of companies" results.

• Reviewed results to ensure that each company had properly interpreted and applied the methodology, and that its results were both supported by adequate documentation and reasonable in relation to those of other companies within the same industry classification.

Arthur Andersen & Co. applied more than 400 professional months of effort to developing the methodology and conducting the study.