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STIMULATING SMARTER REGULATION: OMB'S ROLE

John D. Graham, Ph.D.
Administrator
Office of Information and Regulatory Affairs
Office of Management and Budget
Executive Office of the President of the United States

Remarks Prepared for the Organization Resources Counselors, Inc. (ORC)
Occupational Safety and Health Group, Arlington, VA

May 8, 2002

My topic today, smarter regulation, has been near and dear to my heart for twenty years -- as a graduate student interested in airbags and auto safety, as a post-doctoral fellow interested in regulation of toxic air pollution, as a junior faculty member interested in control of the AIDS epidemic and as a senior faculty member interested in what Europeans call the precautionary principle. Indeed, I would be embarrassed to admit how many words I wrote, how many speeches I gave, and how many numbers I computed that were relevant to the topic of regulatory reform.

Yet now I have both a tremendous opportunity and a very different challenge: how to stimulate smarter regulation from inside the executive branch of the federal government. I would like to describe some of the actions we are taking, some obstacles we face, and some practical ways that people in the university community can help us make a constructive difference.

I should start by defining a key phrase. The Bush Administration sees "smarter regulation" not simply as a slogan but as something very practical: adopting new regulations whose benefits to the public justify their costs, modifying existing regulations to improve effectiveness and/or reduce cost, and rescinding regulations that are outmoded or that should never have been adopted in the first place. Smart regulatory policy is not uniformly pro-regulation or anti-regulation; the science and economics may point in very different directions depending upon the case.

The Office I run at OMB has about 50 career public servants with expertise in policy analysis, law, economics, statistics and information technology. We have recently hired additional expertise in public health science, toxicology, engineering and health economics. These new hires reflect the increasing importance of health, safety and environmental issues in federal regulatory policy. Obviously, we are vastly outnumbered by the thousands of specialists in numerous agencies throughout the Federal government.

These Federal agencies issue 4,500 new rulemaking notices each year and, thank goodness!, only about 600 of these notices are judged significant enough to merit OMB review. Of those 600, only 50 to 100 each year are considered costly enough to justify a formal analysis of benefits and costs by the agency. We do not typically perform original analysis but rather focus our limited resources on review of these most important rulemakings.

The Bush Administration is not allergic to regulation; indeed, we consider it an essential tool of government policy in conjunction with spending and taxation. Already, due to the events of September 11th, we have cleared 41 significant new federal regulations covering concerns such as airline safety, border control and disaster assistance.

While OMB oversees dozens of federal regulators, the busiest regulators by far are the Department of Health and Human Services, the Department of Transportation and the Environmental Protection Agency. In considering whether the benefits of rules justify their costs, we expect agencies to consider non-quantifiable factors, such as fairness, quality of life and privacy, as well as benefit and cost items that can be quantified and expressed in monetary units.

In my first year at OMB, my boss, OMB Director Mitch Daniels and I have pursued initiatives in four areas: openness, promptness, early involvement, and information quality. Let me say a few words on each topic.

First, we have deployed the OMB web site to diminish the culture of secrecy and mystery that has surrounded my Office since it was launched early in the Reagan Administration. By consulting our web site, you can learn which rules are formally under review at OMB, which rules have recently been cleared, and which rules have been returned to agencies for reconsideration. You can even learn about which interest groups have recently lobbied us, the date of the meeting, the names of the participants, and the specific topic of the meeting.

Our openness does not necessarily make us popular. For example, in the last 10 months we have returned roughly 20 significant rules to agencies for reconsideration - more than the total number of returns in the entire Clinton Administration - and each of the these return letters is a public document posted on our web site. In six of those cases, we subsequently cleared improved rules that the agency revised and submitted to us for reconsideration. Given our demonstrated willingness to critique poorly analyzed rules, and to do so publicly, we believe we are beginning to see an improvement in the quality of regulatory packages submitted to OMB.

Second, one of the historical frustrations of agencies is that OMB review takes too long. Although there has historically been a 90-day limit for OMB review, agencies have sometimes been forced to wait 6 months, a year, or even longer to get an answer from OMB. We have changed that practice. I have instructed my staff that no rule will stay longer than 90 days at OMB without my personal authorization. Result: The number of rules held at OMB for longer than 90 days has plummeted to near zero for the last several months compared to the 15 to 25 delays occurring at any time under previous Administrations. We believe that since agency staff often toil for years in development of a regulatory proposal, they and the public deserve a rigorous yet prompt review from OMB.

Third, early OMB involvement is underway to increase the impact of OMB's analytical perspective. We have devised the "prompt letter" to agencies as a new way to suggest promising regulatory priorities. Our first set of prompts have suggested lifesaving opportunities at FDA, NHTSA, OSHA and EPA. For example, we have worked to persuade FDA that priority should be given to completing a promising rulemaking started in the previous Administration, a consumer labeling rule that would require food companies to report the trans-fatty acid content of foods. Trans-fats are now recognized as a significant contributor to coronary heart disease. OSHA has responded to one of our prompt letters by notifying each employer in the country of the lifesaving effects and cost-effectiveness of automatic defibrillators, a lifesaving technology designed to save lives during sudden cardiac arrest. And we are encouraging NHTSA to apply off-set crash tests to new cars and light trucks in order to provide superior crash protection to motorists.

More generally, we are stimulating a stronger role for science in priority setting by encouraging early external peer review of technical documents such as human health risk assessments. We have said to agencies: If you engage in serious independent peer review of your technical work, you can expect a more deferential review from OMB. My analysts are also offering some informal yet early comments to agencies about how to structure a good regulatory analysis. Think of this revolutionary change: decisions are sometimes being made after -- rather than before -- a regulatory analysis is completed!

In contrast, OMB's historical "end-of-the pipeline" approach to regulatory review is not a prescription for large impact. By the time a rule is formally submitted to OMB, agency career staff and senior management are already invested in the initiative, which means that any changes we suggest are destined to make waves, bruise egos and stimulate resistance. Although we must occasionally use our ultimate weapon to be effective - I mean the dreaded return letter - we have found that an increasing number of agencies are becoming more receptive to early discussions with OMB, at least on highly significant rulemakings.

We have also devoted significant resources to analysis of new regulatory legislation, since the laws passed by Congress often dictate decision criteria to be used by agencies and OMB. We are pleased, for example, that the Congress - in the context of the energy bill - may decide that new fuel economy standards for new cars and light trucks should be initiated through administrative action rather than arbitrary legislative prescription. President Bush has also announced his Clear Skies Initiative aimed at reducing by 70% the amount of pollution from coal-fired powerplants. We believe that a market-based cap-and-trade system can achieve pollution reductions more quickly and inexpensively than the litigation-prone system that EPA now administers.

Finally, and perhaps most importantly, we are taking steps to enhance the quality of information and analysis that agencies use and disseminate to the public. We recently issued government-wide guidelines that require agencies to establish minimum quality standards for information that they disseminate to the public, whether through their web sites or through rulemaking notices. A key feature of the OMB guidelines is the requirement that formal analytical results produced by agencies be reproducible, which means that there must be sufficient transparency about inputs, models and assumptions that a qualified third party could reproduce the agency's numbers. The enforcement mechanism in the new guidelines was specified by Congress in statute: any affected member of the public is permitted to challenge agency information and request a specific technical correction by the agency.

The new information-quality law will take effect October 1st of this year. OMB will oversee agency responses to information-quality complaints. The new OMB guidelines will create some headaches at the agencies but we believe the guidelines will ultimately enhance the competence, accountability and credibility of federal regulation. Third parties - including business, academia and public interest groups - also need to be aware that the new information-quality guidelines may set new standards for information that they submit to the government, assuming that an agency is asked to cite that information in support of agency policies.

In the economic arena, we have recently initiated a project with the Council of Economic Advisors to update our guidelines on proper cost-benefit analysis. Last updated in 1996, these guidelines govern our reviews of agency rulemakings. We have asked the public to nominate analytic issues that are ripe for reconsideration or refinement. We have already been urged to reconsider several analytic practices of strong interest to environmental regulators: the proper discount rate for computing the present values of cost and benefit streams and the analytic methods used to value health benefits in both health and monetary units.

I am particularly interested in fostering more government-wide consistency in specific analytic practices in health policy. Although I have never been a big fan of the idea that dollar values should be assigned to lives saved by regulations, we do need more analytic rigor in how we quantify the lifesaving effects of rules and how we compare the severity of different nonfatal health conditions ranging from a mild case of chest pain to a severe yet nonfatal heart attack. I have recently recommended that a think tank such as Resources for the Future convene a conference to assess the state of the art in valuation of health and safety outcomes.

Let me conclude with some specific steps that faculty and students at universities can take to assist my Office in improving the quality of federal regulation. I am aware that academics are not regular readers of the FEDERAL REGISTER and are not used to participating in the administrative process. However, between now and the end of May, OMB has provided everyone an excellent opportunity to suggest innovations in both analysis and regulation. Our draft Report to Congress on the Costs and Benefits of Regulation - available on our web site - suggests numerous areas for public comment, including: (1) regulatory programs that need to be extended, modified or rescinded, (2) issues of regulatory analysis that need to be refined in OMB's formal guidance documents to agencies, and (3) ideas for new regulatory priorities that we can suggest to agencies in the form of prompt letters. We know that many interest groups based in Washington, DC will participate in this public comment process but we are also hopeful that the academic community will choose to offer suggestions.

In summary, the Bush Administration supports federal regulations that are based on sound science and economics. We are taking modest yet important steps to improve the quality of federal regulation. Our primary role at OMB is to undertake rigorous yet prompt regulatory reviews -- reviews that can be scrutinized by the public. We have also practiced "early involvement" as a technique to enhance the impact of OMB's analytical perspective on legislative and administrative initiatives. We have set in motion a longer-term process of improvement in the quality of information and analysis used and disseminated by federal agencies. It is too early to assess the ultimate impact of these process endeavors but my academic instincts tell me that it may produce far greater public benefit than many pundits appreciate.

Thank you for the opportunity to offer these remarks and I look forward to questions, comments and discussion.