Economic Foundations of the Current

PROYECTO PERSONAL DE INGLÉS

3º ENTREGA:

Análisis del Mensaje

Alumna: Fleitas Natalia

Profesora: Galizia María Laura

UNIVERSIDAD NACIONAL DE QUILMES

joumal of Economic Perspectives-Volume 1O, Number 3-Summer 1996-Pages 119-134

Economic Foundations of the Current

Regulatory Reform Efforts

W. Kip Viscusi

raditional economic regulation focused on issues such as antitrust and setting prices for public utilities. But in the last few decades, the emerging role of environmental and risk regulation has transformed the role of reg­

ulation in the American economy. Rough estimates of the economic costs of gov­ emment regulations exceed $500 billion (Hopkins, 1992). This total can be divided up in various ways. More than half the cost is attributable to papexwork require­ ments arising out of regulation, but there is also more than $200 billion in direct costs of regulation, including costs to business. More than half of this amount is due to environmental regulation, and much of the remainder is attributable to various forms ofrisk regulation. About $100 billion involves govemment transfers, such as the effects of the mínimum wage, while the rest involves costs paid by businesses. Regulatory benefits reduce the net burden of these efforts on society, but there are no good estimates of the total of regulatory benefits.

Regulatory interventions often have a sound economic foundation. Many econ­ omists would agree that markets have a difficult time spontaneously organizing to address all forms of environmental pollution and that consumers are unable to assess the risks associated with, say, prescription drugs. However, the existence of a rationale for sorne sort of govemment intervention in no way eliminates the need for obtaining the greatest benefit to society that can be derived from these regu­ latory expenditures.

During 1995 and 1996, the 104th Congress has considered a flurry of bilis intended to foster more cost-effective regulatory policies by imposing greater

• W. Kip Vzscusi isJohn Cogan,fr., Professor of Law and Economics, Harvard Law School, Camúridge, Massachusetts.

W. Kip Viscusi 120

structure on risk and environmental regulations.1 These legislative efforts were quite broad in scope; it's fair to say that they attempted to revolutionize the criteria for approval of government regulations. For example, rather than cleaning up haz­ ardous waste sites whenever hazardous chemicals are present, irrespective of the costs involved and whether any populations are actually exposed to the risk, the new legislative proposals were intended to require the Environmental Protection Agency (EPA) to assess the risks and to show that the social benefits ofthese actions exceeded the associated costs.

The need for economic balancing is inevitable in a world of constrained re­ sources. Suppose that we were to devote the entire U.S. gross domestic product to the prevention of fatal accidents. Even then, we would be only able to spend $55 million per fatality (Viscusi, 1992, p. 5). That expenditure would leave literally nothing for other goods, such as other risks or environmental pollution, let alone basics like food, housing and medical care. Unless mechanisms exist for placing bounds on our risk reduction efforts, we can end up pursuing policies of diminish­ ing marginal impact and diverting resources from more productive uses.

A frequent approach of government regulations is to eliminate fatality risks that are one in a million annually or greater.2 But risks of this magnitude are ubiq­ uitous. Death risks oLone in a million are incurred every time we have one chest x-ray, live two days in New York or Boston (air pollution), travellO miles by bicycle, eat 40 tablespoons of peanut butter (cancer from aflatoxin B) or drink Miami drinking water for one year.3 If agencies devote their efforts to eliminating trivial risks of this magnitude, they are likely to be missing opportunities for policies that could be of much greater benefit.

It is interesting to consider why current governmental efforts do not already put the design of regulations on a sounder footing. Why is a reform even needed to influence the guidelines for promulgating regulation? Why are agencies not more balanced? What can the possible objections be to legislation that would foster greater balance in the design of governmental regulatory efforts? Put somewhat differently, is the recent impetus for establishing economic criteria to assess regu­ lations simply a disciplinary concern of economists or does it, in fact, have substan­ tive implications for the design of regulatory policy? Surely, the spirited nature of the policy debate, the fact that no consensus regulatory reform bill has yet been passed by both houses of Congress, and the threat of a presidential veto tend to imply that issues of importance are at stake here.

This article will review the process by which legislative mandates give regulatory

1 All subsequent discussion of House and Senate bilis will refer to those introduced in the 104th Congress. In March 1995, the House ofRepresentatives inserted the regulatory reform bill H.R. 1022 into another piece of legislation, H.R. 9, which was passed.

2 The Food and Drug Administration (FDA) and EPA, for example, target lifetime risks of 1 in 100,000

which, over a 70-year assumed lifetime, are actually much smaller than 1 in a million. In the case of the EPA Superfund program, cleanup is mandatory for lifetime cancer risks in excess of 10-4 and discre­ tionary for risks between 10-4 and 10-6•

"See Wilson (1979) for a more comprehensive tally of one in a million risks.

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agencies the power to promulgate regulations. I will argue that regulatory reforms that place the assessment of r gulation on sounder footing and incorporate un­ biased risk assessment practices can potentially enhance the performance of regu­ latory policies.

Legislative Mandates

Congress does not typically promulgate govemment regulations, with a few rare exceptions. Instead, Congress establishes broad legislative guidelines for reg­ ulatory policy that define the objectives that should be promoted by regulations that will be issued by the various regulatory agencies within the executive branch. These regulatory agencies in tum propose regulations that go through a rule­ making process in which there is both a review by the Office of Management and Budget (OMB) as well as a public comment period, after which the agency can issue the regulation. In sorne instances, there is the threat that Congress will cut back funding if certain undesirable regulations are enacted.

The primary check on reckless regulatory policymaking is that if a regulation fails to be consistent with the legislative mandate defined by Congress, it can be challenged in court. However,judicial challenges or other reviews cannot overturn the legislative mandate itself (unless the mandate is unconstitutional} regardless of how restrictive it is. The Clean Air Act, for example, specifically excludes the con­ sideration of costs in EPA's setting of national ambient air quality standards. Simi­ larly, in its regulation of prescription drugs, the Food and Drug Administration (FDA) must ascertain the safety and efficacy of these products, but there is no overall benefit-cost test that must be met either by the drugs themselves or by the drug approval process. Since many useful drugs apparently become available more quickly to patients in western Europe, concern has been expressed that the U.S. drug approval process may be too cumbersome and cautious.

The principal judicial battleground over the breadth or narrowness of legis­ lative mandates has involved the regulations of the Occupational Safety and Health Administration (OSHA). The legislative mandate of that agency has a safety­ oriented character that is typical of other risk and environmental agencies. In par­ ticular, the Occupational Safety and Health Act of 1970 mandates the agency "to assure so far as possible every man and woman in the Nation safe and healthful working conditions."4 Other language in the bill mandates that OSHA undertake actions to protect workers against health hazards as far as is "feasible." The agency has interpreted these mandates in a very aggressive fashion, claiming there is no obligation to show that there is any relation between the benefits derived from the policies and the cost. Put somewhat differently, any risk reduction is justified as long as it reduces risk, regardless of how costly or inefficient it may be.

4 Section 26 of the Occupational Safety and Health Act of 1970, 29 U.S.C. §651 (1976).

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Not surprisingly, this agency interpretation has been the subject of several major court cases, which iiJ. turn have influenced other agencies' interpretation

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