SBA's Report on 'Costs of Regulation' Debunked

by Sidney Shapiro

February 08, 2011

Having voted to repeal health care legislation, House Republicans have now taken aim at government regulations, describing efforts to protect people and the environment as “job-killing.”  This claim conveniently papers over the fact that it was the lack of regulation of Wall Street that tanked the economy and caused the current downturn.  But nonetheless, seeking rhetorical points to boost their anti-regulations campaign, House Republicans are trumpeting a recent report, done for the Small Business Administration’s Office of Advocacy. The report, authored by Nicole Crain and Mark Crain, claims that regulation cost the U.S. economy $1.75 trillion dollars in 2008. Upon examination, it turns out that the estimate is the result of secret calculations, an unreliable methodology and a presentation calculated to mislead. 

Crain and Crain’s $1.75 trillion estimate is far larger than the estimate generated by the Office of Management and Budget (OMB)—the official estimate of the aggregate costs and benefits of federal regulations prepared annually for Congress. The 2009 OMB report, based on data from federal agencies under the Bush and Clinton Administrations, found that in the ten years ending in 2008 annual regulatory costs ranged from $62 billion to $73 billion (converted from 2001 into 2009 dollars). Crain and Crain attribute this massive difference to the fact that their report considers many more rules than do the annual OMB reports, including rules with estimated costs less than $100 million, rules that were put on the books more than 10 years ago, and rules issued by independent regulatory agencies.

A new report today by the Center for Progressive Reform (Setting the Record Straight: The Crain and Crain Report on Regulatory Costs) shows that much more is at work than that.   In areas where the OMB and Crain and Crain calculations overlap, Crain and Crain use the same cost data as OMB, but, unlike OMB, which presents regulatory costs as a range, Crain and Crain always adopt the upper end of the range for inclusion in their calculations. More significant, Crain and Crain’s calculations for the regulations not covered by OMB’s report appear to be based largely on a decidedly unusual data source for economists – public opinion polling, the results of which Crain and Crain massage into a massive, but unsupported estimate of the costs of “economic” regulations.  Because Crain and Crain have refused to make their underlying data or calculations public – apparently even withholding them from the Small Business Administration office that contracted for the study – it is difficult to know precisely how they arrived at the result that economic regulation has a cost of $1.2 trillion dollars, comprising more than 70 percent of the total costs in their report.  

Nevertheless, their calculations inspire great skepticism. For one thing, as noted, their numbers are based on the results of public opinion polling, specifically a poll concerning the business climate of countries that has been collected in a World Bank report. The authors of the World Bank report warn that its results should not be used for exactly the type of extrapolations made by Crain and Crain, because their underlying data are too crude.

But the bigger issue, and it’s a real howler, is that the Crain and Crain report completely ignores the other side of the ledger – the economic benefits of regulation. According to that OMB report from 2009, in 2008 the total benefits of regulation ranged from $153 billion to $806 billion, as compared to total regulatory costs of $62 billion to $73 billion (all figures were converted from 2001 to 2009 dollars.) And CPR has in the past demonstrated that OMB reports underestimate benefits and overestimate costs.

That means that regulations are an economic plus for the economy. And if you think about it for a second, that makes a lot of sense. Regulations generally don’t get approved today if the projected economic benefits don’t exceed the projected costs. Mind you, I’m no fan of the cost-benefit analysis that OMB applies. It’s slanted in favor of industry, accepting industry cost projections at face value, even though industry has every reason to furnish worst-case numbers. Neither does OMB’s methodology account well for items that defy monetization – the value of keeping people healthy rather than simply treating their pollution-caused illnesses, or the value of a great view from the top of a mountain that hasn’t been shorn clean by mountaintop mining. But even allowing for those shortcomings, all of which accrue to the anti-regulation side of the ledger, almost all regulations have greater economic benefit than cost.

But neither the Small Business Administration’s Office of Advocacy nor the economists they hired to conduct their study, Crain and Crain, show the slightest interest in those inconvenient facts. Neither for that matter, do the anti-regulatory forces gathering on Capitol Hill.

That determined bit of ignorance might have interested one of the nation’s greatest boosters of deregulation, Ronald Reagan, whose 100th birthday the nation marked this weekend. He liked to say that “facts are stubborn things.” And the fact is that regulation is a net plus for the economy that helps protect Americans from a variety of environmental, health, safety, workplace, economic and other hazards. The opponents of regulation would love nothing more than to re-litigate all the battles they’ve lost over the years on health, safety, the environment, worker safety, economic safeguards, and more, with the simple goal of rolling back progress on multiple fronts with one swoop. They’re free to try, but at the very least, they owe the American public an honest accounting. 

The SBA’s report isn’t it. So in addition to the CPR report today describing the failings of the SBA study, I’ve also sent a letter to the SBA and to its Office of Advocacy calling on them to withdraw SBA’s sponsorship of the fatally flawed Crain and Crain report.

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Sidney A. Shapiro holds the Fletcher Chair in Administrative Law at the Wake Forest University School of Law and is the Associate Dean for Research and Development. He is a member of the board of directors of the Center for Progressive Reform.

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