Managing the regulatory state: the experience of the Bush administration.

• Author: Graham, John D.

The United States Office of Management and Budget (OMB), an organization within the Executive Office of the President, seeks to promote wise expenditures, regardless of whether those expenditures are made through budgetary programs or through unfunded mandates on states or the private sector. The lion's share of these unfunded regulatory mandates is aimed at businesses, but these rules also impact other entities such as state and local governments, unions, colleges and universities, and health care providers. (1)

One of the key roles of OMB's Office of Information and Regulatory Affairs (OIRA) is to review new rulemakings and stimulate modernization of existing rules. (2) OIRA performs its regulatory oversight with a team of about thirty career OIRA analysts who apply a "soft" benefit-cost test. (3) OIRA asks whether the quantified benefits of a rule exceed the quantified costs, but OIRA also strives to be sensitive to important "intangible" considerations. These unquantified factors may reflect basic issues of fairness, such as civil rights, or they may reflect a key efficiency concern that cannot yet be fully measured and expressed in monetary units (e.g., homeland security). Considering both matters of efficiency and fairness, OIRA analysts ask whether a rule has adequate supporting analysis and whether the benefits of a rule justify its costs. (4)

The distinction between budgetary rules and unfunded mandates is important. (5) The new prescription drug benefit under Medicare was authorized by legislation and implemented through rulemaking. (6) It is considered a budgetary program, however, not an unfunded mandate, because the expenditures are paid for by taxpayers through the federal government's Medicare appropriation. The Department of Transportation's Corporate Average Fuel Economy (CAFE) program, the goal of which is to save oil by boosting the fuel economy ratings of cars, sport utility vehicles, vans and pick-up trucks, is an unfunded mandate. (7) The costs of meeting these federal standards are not paid through the federal appropriations process; they are presumably incurred by consumers, investors, and employees in the motor vehicle industry. This Article focuses on unfunded mandates on the private sector.

The purpose of this Article is to explain how Presidential management of federal regulation, through OMB oversight, has been carried out in the first five years of the George W. Bush Administration, during the tenure of Dr. John Graham as the Administrator of OIRA. Part I traces the history of Presidential management of the regulatory state. Part II explores the concept of "smart regulations," and the associated emphasis on rigorous benefit-cost analysis, that Dr. Graham implemented as OIRA Administrator. Part III summarizes the various critiques that have been offered against the "smart regulation" approach, and addresses those arguments. Part IV explores future challenges in regulatory policy.

1. PRESIDENTIAL MANAGEMENT OF THE REGULATORY STATE

   Every President from Richard Nixon to George W. Bush has embraced centralized executive oversight of agency regulations. (8) Even critics of OMB acknowledge the legitimacy of a centralized oversight function. (9) Presidents have found regulatory oversight to be necessary and desirable because: (i) the regulatory state is a permanent part of the legal landscape of the United States; (ii) the economic costs of the regulatory state are substantial; (iii) a consensus is needed when executive branch disagreements about regulation arise; and (iv) federal regulations are often necessary to achieve legislative objectives and implement Presidential priorities and policy objectives. (10) Virtually all scholarship on this subject acknowledges the increasing importance of OMB's role in regulatory policymaking over the past thirty years. (11)

   1. President Nixon

      President Nixon initiated efforts to centralize regulatory review in 1971 through his "Quality of Life" program. OMB established "a procedure for improving the interagency coordination of proposed agency regulations, standards, guidelines and similar materials pertaining to environmental quality, consumer protection, and occupational and public health and safety." (12) The Quality of Life program focused on rulemakings that could be expected to impact other agencies, impose significant costs or "negative benefits" on non-Federal sectors or increase the demand for Federal funding. (13) Agencies were required to provide an explanation of the principle objectives of the rulemaking, the alternatives that were considered, and a comparison of the expected benefits and the costs associated with the alternatives. (14) OMB managed the interagency review process by circulating the proposed rules, gathering comments from other agencies, and arbitrating interagency disputes. The Nixon program served as a foundation for later efforts to build a strong, coordinated system of regulatory review within the executive branch. (15)

   2. President Ford

      In 1974, building on President Nixon's first steps, President Ford established the Council on Wage and Price Stability (CWPS) and the Review Group on Regulatory Reform to assess the inflationary aspects of government actions. (16)

      In that same year, President Ford issued Executive Order 11,821 (Inflation Impact Statements) which required that "major" regulatory proposals "be accompanied by a statement which certifies that the inflationary impact of the proposal has been evaluated." (17) OMB was directed to develop criteria for identifying rules subject to the Executive Order and in so doing to consider the following general categories of significant impact:

      a. cost impact on consumers, businesses, markets, or federal, state or local government;

      b. effect on productivity of wage earners, businesses or government at any level;

      c. effect on competition;

      d. effect on supplies of important products or services. (18)

      While OMB had day-to-day responsibilities under the Executive Order; the agencies were responsible for ensuring their own compliance. (19) And while regulatory costs were to be considered, stringent analysis was not required of agencies.

   3. President Carter

      President Jimmy Carter, a former small businessman, surprised some with his strong regulatory reform initiatives. (20) In 1978, President Carter issued an executive order (21) that required agencies to conduct a regulatory analysis of significant rules (22) that would include the economic consequences of the various alternatives considered by the agency. (23) Executive Order 12,044 stated that one of its purposes was to ensure that regulations "shall not impose unnecessary burdens on the economy, on individuals, on public or private organizations, or on State and local governments." (24) The Executive Order also directed the agencies to conduct a periodic review of existing regulations to ensure that policy objectives were being met. (25) President Carter also established the Regulatory Analysis Review Group (RARG), a cabinet-level entity responsible for reviewing the regulatory analyses of a limited number (26) of major regulations, and the new Regulatory Council, responsible for the semi-annual Agenda of Regulations established in Executive Order 12,044. (27)

      Perhaps more importantly, (28) in the late 1980s President Carter signed the Regulatory Flexibility Act (29) and the Paperwork Reduction Act (PRA). (30) The Regulatory Flexibility Act requires agencies to analyze and minimize regulatory impacts on small businesses. The PRA, which affects agencies intending to create additional paperwork, recordkeeping, or information collection burdens on ten or more members of the public, also created OIRA within OMB. (31) OIRA serves as the President's office of regulatory expertise and management, as well as overseer of paperwork burdens and information policy.

   4. President Reagan

      In his challenge to incumbent President Carter, Ronald Reagan ran on a platform of "regulatory relief" for businesses, since the "misery index" revealed serious economic problems: double-digit rates of unemployment, inflation, and interest. (32) The U.S. economy was entering the worst recession since the Great Depression. During his first days in office, President Reagan appointed a new Task Force on Regulatory Relief chaired by Vice President George H. W. Bush. (33) During the Reagan Administration, with the assistance of the newly-created OIRA, the focus shifted from agencies policing their own regulations to OMB review and oversight. (34)

      On February 17, 1981, President Reagan signed Executive Order 12,291 which revoked Executive Order 12,044. (35) Executive Order 12,291 took bold steps in the efforts to improve the quality of Federal regulations by mandating how and why costs and benefits of regulatory actions (36) must be considered. It provided that:

      a. Administrative decisions shall be based on adequate information concerning the need for and consequences of proposed government action;

      b. Regulatory action shah not be undertaken unless the potential benefits to society for the regulation outweigh the potential costs to society;

      c. Regulatory objectives shall be chosen to maximize the net benefits to society;

      d. Among alternative approaches to any given regulatory objective, the alternative involving the least net cost to society shall be chosen; and

      e. Agencies shall set regulatory priorities with the aim of maximizing the aggregate net benefits to society (37)

      Under Executive Order 12,291, an agency had to prepare a Regulatory Impact Analysis for every major rule. (38) OMB was authorized to designate rules as "major" rules (39) and review the Regulatory Impact Analyses of the major rules. (40) Agencies, however, were not permitted to publish these rules in the Federal Register until OMB concluded its review. (41) The Presidential Task Force on Regulatory Relief had oversight over OMB actions under Executive Order 12,291. (42) Thus...