Methods of Estimating the Total Cost of Regulations

Maeve P. Carey for the Congressional Research Service: “Federal agencies issue thousands of regulations each year under delegated authority from Congress. Over the past 70 years, Congress and various Presidents have created a set of procedures agencies must follow to issue these regulations, some of which contain requirements for the calculation and consideration of costs, benefits, and other economic effects of regulations. In recent years, many Members of Congress have expressed an interest in various regulatory reform efforts that would change the current set of rulemaking requirements, including requirements to estimate costs and benefits of regulations. As part of this debate, it has become common for supporters of regulatory reform to comment on the total cost of federal regulation. Estimating the total cost of regulations is inherently difficult. Current estimates of the cost of regulation should be viewed with a great deal of caution. Scholars and governmental entities estimating the total cost of regulation use one of two methods, which are referred to as the “bottom-up” and the “top-down” approach.

The bottom-up approach aggregates individual cost and benefit estimates produced by agencies, arriving at a governmentwide total. In 2014, the annual report to Congress from the Office of Management and Budget estimated the total cost of federal regulations to range between $68.5 and $101.8 billion and the total benefits to be between $261.7 billion and $1,042.1 billion. The top-down approach estimates the total cost of regulation by looking at the relationship of certain macroeconomic factors, including the size of a country’s economy and a proxy measure of how much regulation the country has. This method estimates the economic effect that a hypothetical change in the amount of regulation in the United States might have, considering that economic effect to represent the cost of regulation. One frequently cited study estimated the total cost of regulation in 2014 to be $2.028 trillion, $1.439 trillion of which was calculated using this top-down approach. Each approach has inherent advantages and disadvantages.

The bottom-up approach relies on agency estimates of the effects of specific regulations and can also be used to estimate benefits, because agencies typically estimate both costs and benefits under current requirements so that they may be compared and evaluated against alternatives. The bottom-up approach does not, however, include estimates of costs and benefits of all rules, nor does it include costs and benefits of regulations that are not monetized—meaning that the bottom-up approach is likely an underestimate of the total cost of regulation. Furthermore, the individual estimates produced by agencies and used in the bottom-up approach may not always be accurate.

The top-down approach can be used to estimate effects of rules that are not captured by the bottom-up approach—such as indirect costs and costs of rules issued by independent regulatory agencies, which are not included in the bottom-up approach—thus theoretically capturing the whole universe of regulatory costs. Its results are, however, entirely reliant upon a number of methodological challenges that are difficult, if not impossible, to overcome. The biggest challenge may be finding a valid proxy measure for regulation: proxy measures of the total amount of regulation in a country are inherently imprecise and cannot be reliably used to estimate macroeconomic outcomes. Because of this difficulty in identifying a suitable proxy measure of regulation, even if the total cost of regulation is substantial, it cannot be estimated with any precision. The top-down method is intended to measure only costs; measuring costs without also considering benefits does not provide the complete context for evaluating the appropriateness of a country’s amount of regulation.

For these and other reasons, both approaches to estimating the total cost of regulation have inherent—and potentially insurmountable—flaws….(More)”