How much is that regulation in the window?

Regulations that are issued by federal agencies in order to protect public health cost money. Much of this cost is imposed on businesses, which then either bear the costs or pass them on to customers or workers. As a result, agencies issuing a regulation have long been required to assess the costs (and the benefits) of their most significant regulatory efforts. While controversial, this requirement has been supported by the last five presidents.

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But how should people interpret the numbers they hear when agencies or their critics are describing the cost of regulation? The answer to this question is complicated by the fact that the cost of any particular regulation is often described differently by the agency, by outside parties, and by agency critics in Congress. For example, a regulation issued in 2012 curbing mercury emissions from power plants was described by the Environmental Protection Agency (EPA) as costing $9.6 billion. Sen. James Inhofe (R-Okla.) described the same regulation as costing $100 billion. When assessing the cost of all regulations issued in 2013, the Office of Management and Budget (OMB) used a figure of $2 billion. An outside assessment that has been frequently quoted had a much larger number, $112 billion.

Some of this difference is due to serious analytical questions. Economics is not a science and reasonable minds can come up with different estimates of the same cost. For example, the question of how many jobs are affected by an environmental regulation and the cost of those jobs lost or gained is a contentious and unresolved one. In a number of its analyses of regulations, the EPA has claimed that employment would be increased as a result of their regulations (jobs gained in green industries would outweigh those lost in dirtier ones). However, outside analyses have often put the numbers of jobs lost due to EPA regulations in the thousands. If one weighs each of those jobs lost as imposing a $100,000 cost on the economy, as one academic study has suggested, the difference adds up quickly.

Other differences can be ascribed to the way in which the cost numbers are reported. In the examples given above, the EPA and the OMB were describing the annual cost of a regulation. The American Action Forum (AAF) and Inhofe were describing the total cost. If a regulation imposes costs of $1 billion for each of the next 10 years, the total cost is $10 billion (actually a bit lower, but let's not worry about those details). One can describe the cost as $1 billion per year or $10 billion and neither is incorrect. But they leave very different impressions. And you can easily pick out which number a supporter of the regulation will use and which one a critic of the regulation will use. The OMB and the AAF also count different regulations in their overall assessment of regulatory costs.

Agencies have clear motivations when it comes to making the assumptions that will determine their assessment of the cost of their regulations. They don't want a regulation to appear too costly or they risk losing political support for the regulation. On the other hand, agency cost estimates are reviewed by the OMB, are subject to public comment and make up part of the record for the judicial review of the regulation. In other words, while their estimates may be problematic, agencies are not completely free to cook the books.

One cannot say the same thing about outside estimates. To be sure, some are done by very responsible organizations with a strong analytical capability like the AAF. Others are produced by industry groups that also have a clear motivation to produce numbers as high as possible to make regulations appear as burdensome as possible. These estimates also often neglect the benefits of regulation, unlike most agency estimates. Politicians looking to make their case against agency regulations as strong as possible will then use the highest cost number that anyone has produced. In other words, an estimate that is inherently likely to be higher than the true cost.

So how to answer the question at the beginning of this article? How should the public view the numbers they hear regarding the cost of regulations? The best answer is "with a grain of salt." Beyond that, I would suggest looking at the agency's estimate first and then look for critiques of this estimate that are as clear about why the agency estimate is incorrect as possible. And I would largely ignore any number that is used in a speech on the floor of Congress.

Shapiro is an associate professor and director of the Public Policy Program at Rutgers University and a member of the Scholars Strategy Network.