Regulations are intended to advance public wellbeing, whether it be in security or other areas. During the rulemaking process, however, federal agencies often make missteps in factoring the potential costs imposed because of their regulatory actions. This is where public participation in the regulatory process is essential.
In an earlier piece, we looked at some common issues with benefits in DHS rulemaking—issues that if corrected could help companies save money by either slowing down rules, stopping rules, or resulting in better rules. In this post, we focus on some of the cost issues of economic analyses and what to look for in these analyses. When it comes to costs, many commenters can correlate what they do in their company versus what the agency analysis says they do. Commenters who are experts in their field can easily tell whether the agency has it right.
Here are some areas in the rulemaking process that often challenge regulators to develop objective cost-benefit analyses. Understanding these common pitfalls can help you develop public comments that improve a proposed rule.
Problems with Factor Costs
Labor and fuel costs can be considered factor costs in economic analyses, and federal departments, such as DHS, sometimes do not consider the implications of their rulemaking on these factors. A major economic cost associated with many DHS rules is labor. DHS rules may require added security at airports, seaports, train stations and other public venues, like stadiums. These security workers, especially in an economy nearing full employment, may command higher wages, but higher wages may not be included in government analyses. One lesson for the public commenter is to make sure that these added costs are being counted.
Another economic cost to many rules is energy price increases or decreases caused by shifting from more costly to less costly forms of energy, or visa versa. This is common in Environmental Protection Agency (EPA) rules. Less costly forms of energy, such as coal and natural gas, to more expensive sources, such as wind and solar power, are sometimes not accounted for in the cost-benefit analysis. Higher energy costs translate into a smaller American economy with lower economic growth and fewer American jobs.
Measuring Costs/Benefits by the Same Baselines
A baseline is a specific point in time or a given level of compliance from which costs or benefits are measured. A baseline could refer to a current compliance with the existing rule or current practice if no rule exists; it could also mean full compliance with the existing rule. Benefits mean the same thing, and the number of incidents that a proposed rule is trying to prevent might be measured from an artificially high vantage point. When looking at DHS rules, it is possible that costs are measured from a baseline assuming that all firms are complying and benefits are measured from a baseline of current compliance. The results suggest that costs could be estimated on the low side and benefits could be estimated on the high side.
Let’s say that over the past 10 years, 10/100,000 people were able to bring an illegal device into a stadium. Over the past 5 years, it was 20/100,000 and in the past 2 years, it was 2/100,000. In addition, we know that new equipment was installed to prevent people from bringing these illegal devices into the stadium. What is the correct baseline?
Some people might say that you need to use a history of incidents and so you should use 10 years. Others might say that 5 years is appropriate because the rate worsened. Others might say that it should be 2 years because new preventive measures were added that brought the rate down.
The benefits would be the change in the rate before and after the rule goes into effect. Let’s assume that the rule would prevent 90% of all incidents. If you use 10 years, the rule would prevent 9 out of every 100,000. If you used 5 years, the rule would prevent 18 out of every 100,000. If you used 2 years, the rule would prevent 1.8 per 100,000. The costs should be measured from the same baseline as the benefits to provide an appropriate comparison. Being sensitive to alternative scenarios is also appropriate.
To provide another illustration of how this could be a problem, the Washington Times reported in April that illegal immigration has decreased nearly 60% since the start of the Trump presidency. If a proposed rule is being developed to prevent illegal immigration, then it is important to use the appropriate baseline, which might be: 1) the annual number of illegal immigrants crossing the border before the inauguration of President Trump; 2) the annual number of illegal immigrants crossing the border after the inauguration; or 3) some other appropriate baseline. The important part to remember is that when measuring costs and benefits, both need to be measured from the same point in time. The economist conducting analyses might also weigh a variety of scenarios to give policymakers knowledge of the possible ramifications from an alternative policy.
The public commenter in crafting their input should carefully evaluate how DHS or any other agency has calculated the costs. Assuming that costs are based on full compliance with the existing rule, then benefits should be considered from the same baseline. Failure to not evaluate this properly means that agencies have included preventable incidents in the benefits analysis that should not be there to start with. It also means that the agencies have more than likely underestimated costs.
Added Risk of From Private Sector Borrowing
Regulations often require companies to purchase equipment, provide additional labor, or do something different than current practice. Hiring an additional security guard, for example, could increase company costs, which in turn could increase the cost of the business’ product or service. And when companies charge more for a good or service, consumers may choose to shop elsewhere. When companies cannot easily raise prices, they may have to finance the added compliance costs themselves, or obtain the capital through another means. Many times, the added cost is not factored into the cost analysis, and the added risk (to the company) has not been accounted for.
The commenter should question whether an agency like DHS has evaluated, for example, changes in the current or quick ratio. The current ratio measures a company’s ability to pay short-term and long-term obligations. To gauge liquidity, the current ratio considers the current total assets of a company (both liquid and illiquid) relative to that company’s current total liabilities. The quick ratio measures a company’s short-term financial liabilities. Anytime a company has to borrow money, its liabilities will increase, which is not good for the company’s survivability. This can be most damaging to a smaller company that may not have the ability to easily borrow money when needed to comply with a DHS regulation. The end result is that the added compliance costs may affect the company’s ability to succeed. These concerns should be considered during the rulemaking process, and it is the public commenter who is in the best position to help DHS understand the private sector’s regulatory costs.
Agencies Neglect Effects on Small Business
The Regulatory Flexibility Act (RFA), administered by the Small Business Administration, is the key tool allowing small businesses to participate in regulatory decisions that affect them. Under this act, agencies must consider alternatives when a proposed regulation will have a significant economic impact and let small businesses participate in shaping a rule, providing real-world perspective on how small businesses operate in different industries and regions.
Under the RFA, when DHS or any other agency proposes a rule that would have a “significant economic impact on a substantial number of small entities,” the rule must be
accompanied by an impact analysis, known as an initial regulatory flexibility analysis (IRFA), when it is published for public comment. DHS must also publish a final regulatory flexibility analysis (FRFA) with the final rule. Alternatively, if a federal agency determines that a proposed rule would not impact small entities, the head of that agency may “certify” the rule and bypass the IRFA and FRFA requirements.
The commenter should understand that the RFA is the only regulatory reform that is statutorily required (i.e., passed by Congress) and should take most advantage of this over other regulatory reforms that have no statutory basis. Commenters to DHS rules should understand that most regulatory reforms are Executive Orders that expire at the end of a president’s term. The RFA, because of its statutory basis, will exist until Congress changes it. In short, the private sector can challenge these analyses more easily in court if they have not been developed or are developed in an unsatisfactory way.
Agencies Omit Costs of Industry Offshoring
Some DHS rulemakings might make an industry less competitive. With additional security costs, for example, manufacturing might shift offshore to countries with lower labor costs. If companies do not leave the United States, they may try to maintain their competitiveness through the use of increased automation, in turn impacting jobs. This should be included in cost/benefit analyses as it affects the businesses ability to compete.
Cost-benefit analyses performed by government agencies are especially important to the private sector. If a private company errs in its cost-benefit calculations, it may make an investment that turns out to be unprofitable and go out of business. But if a government agency makes mistakes in its cost-benefit analysis, the entire country pays. Decision makers need objective cost-benefit analysis, and your information and input can help make proposed rules ultimately better.