Or Pooping in the OCPA’s Backyard
ID’d by John Zachritz Saguaro National Park, Tucson, AZ
The impending confirmation hearing on the appointment of Oklahoma Attorney General Scott Pruitt to head the nation’s Environmental Protection Agency reminds me that I promised in my 12/3/2016 post O Regulation! My Regulation! to say more about the SBA study underlying OCPA President Small’s unqualified statement that federal regulations cost US businesses $1.75 trillion annually. This from my post referring to his post on www.ocpathink.org:
It didn’t take long to find a post on October 14, 2016, “Free Market Friday: A Simple Truth” by Jonathan Small, President of the OCPA. He relays “According to a study by the Small Business Administration, federal regulations drain from $1.75 trillion to $2.02 trillion from our economy each year.”
His statement is supported by the SBA study by Nicole V. Crain and W. Mark Crain commissioned by the Small Business Administration, Office of Advocacy, titled “The Impact of Regulatory Costs on Small Firms” dated September, 2010. The report does estimate the annual cost of federal regulations at more than $1.75 trillion and that the burden is 36 percent greater on small businesses than on large firms (500 or more employees). Their estimate of the total cost is broken into four categories: economic (a catch-all of anti-trust, foreign trade, financial, etc., regulations); environmental (like clean air and clean water); tax compliance (like collection and payment of employment and income taxes); and occupational safety and health and homeland security (like mine safety inspections and airport security). The largest category, according to their report, is economic so I focused first on it.
Defining and measuring the “costs” of complying with regulations is a challenging exercise that may on the surface appear easy to do. One experience I had with this was when my employer school district acquired a site for the construction of a new elementary school from the city that had previously been used for the disposal of sludge, i.e. the sewage from housing additions that subsequently were placed on city sewer service. When it became known that the site may also have been used for the disposal of street sweepings, including manufacturing areas that used heavy metals, the school district was required to incur the expense of having further environmental impact analysis performed. My best memory is that the analysis led to the inclusion of some mitigation work, i.e. removal of sludge and covering with new dirt, as part of the site preparation prior to construction of the new school. Those additional expenditures would be included in the costs of complying with federal regulations and increased the cost of the project. Although we were inconvenienced by the process we recognized that it was needed to assure that a site to be used by children would not cause them to be exposed to heavy metals (think Flint, Michigan today).
While the authors of the SBA study were able to use similar costs aggregated by federal agencies for the last three categories of regulations they found no satisfactory source for the category of economic regulations, again the largest component of the stated $1.75 trillion total. Instead they kind of backed into it by using what is called regression analysis to produce a model of different countries’ economic output per capita and using the World Bank’s Regulatory Quality Index as an independent variable. If I followed their logic, and not certain I did, after obtaining a model that accurately predicted economic output per capita for 25 countries, including the United States, with the Regulatory Quality Index explaining 9.4% of each country’s economic output (higher quality means more output) they did a simple proration to conclude that if the United States had a perfect (according to the World Bank) regulatory environment its output would be 8.7% greater—according to their model—and that amounts to $1.24 trillion out of our $14+ trillion economy (2008 dollars).
This sounds really horrible, at least that would be the headline message Mr. Small and the other limited-thinkers at the OCPA would have you take away. But here’s a couple of thoughts. First we should learn more about the Regulatory Quality Index before depending on it as a basis for driving our discussion about the merits of federal regulations. Here’s as far as I got, namely to find this from the World Bank, an “Ease of Doing Business” ranking of 190 countries based on their business friendly regulatory environment, showing the United States ranked number 8 out of 190 (http://www.doingbusiness.org/Rankings). That certainly generates a very different headline and starting point for discussion than Mr. Small’s lament about $1.75 trillion.
Second we would need to learn more about the limitations of the methodology used by the report’s authors. At one point in my life, a senior economics student with a minor in mathematics and statistics, I could have taken a crude stab at critiquing the report. Now doing that would be way out of my league (and far, far beyond any of the “fellows” at the OCPA). But thinking about it brought back memories of my part time job as a research assistant for two of my economics professors. They were working with housing quality data from the U. S. Census and attempting to build a regression analysis model with that data (I wish my memory was more specific about their work). My role was to transfer the data from the Census, and I think other sources, to computer punch cards (we’re talking 1968-1969 here), and then collate those data cards with the punch cards that specified the mathematical calculations for the regression analysis for submission to the university’s mainframe computer for processing. Usually I would submit a stack of cards in the evening, after making changes/additions as directed by the professors, and then pick up the results the next morning for them to review.
One memory from that experience was a little amusement that the professors’ underlying theories for the model they were seeking to construct would change as they sought the magic combination of independent variables that would yield a statistically significant result, and in turn the basis of a publishable paper which, in the increasingly mathematical world of economics, was what was expected. That experience makes me wonder about the selection of independent variables (i.e. “fixed broadband subscribers per 100 people”) by the Crains (authors of the report) and their choice of 25 countries (why not 190?); but I’m way out of my league here and will leave that to their peer reviewers.
Another memory was my amazement at how rapidly our nation’s housing quality had improved during the three decades of data available to us. This excerpt from a recent article captures the underlying change:
The first Census of housing in 1940 labeled 45.4 percent of owner-occupied units as substandard, which was defined as housing which lacked complete plumbing facilities or was dilapidated. This share dropped sharply over the next several decades, falling all the way to 6.1 percent in 1970 according to Clemmer and Simonson’s analysis in a 1983 article in the AREUEA Journal. (http://housingperspectives.blogspot.com/2013/02/the-return-of-substandard-housing.html)
Most of the “substandard” housing was classified as such because it lacked complete indoor plumbing. I remember being a little befuddled by that because I knew my father had grown up in a perfectly fine small-town house in Oklahoma with an outhouse in lieu of an indoor bathroom. To me then that was just different—not substandard like one that was “dilapidated”. In fact, of our children’s four grandparents–two still alive as were all four to see in this new millennium–three grew up with outhouses and thus in housing that was likely part of that 45.4 percent in 1940. To me today I quite agree that my father and my in-laws grew up in substandard housing, but no worse for the wear I’d also say, just lots of fun stories to hear about reading the Sears catalog cover to cover, tipping over outhouses on Halloween, and how every boy signed up for a school sport when the new school building included hot showers.
Today I suspect there are few locations in the United States where one could construct a new house without complete indoor plumbing facilities. The first requirements one would face, if one preferred to have an outhouse, would be local zoning and building code regulations. If such were not in place where OCPA President Small resides, and I purchased a lot next to his and constructed a house with no indoor plumbing to remove my wastewater, i.e. put an outhouse in the back yard next to his back yard, I suspect he would quickly become a fan of government regulation. He could regale the local authorities with all kinds of arguments about health, water quality, odor, etc. as reasons why my freedom to choose how I eliminate my wastes and wastewater, imposes costs upon him, his family and our neighbors. By impinging on my economic freedom, i.e. by passing laws that regulate disposal of my poop, Mr. Small and our neighbors would reap significant benefits. But now my new house will cost tens of thousands more dollars because I’m required to send my poop and wastewater into a proper disposal system. Translated if we look at this scenario and only ask is it right for government to impose tens of thousands of dollars of regulatory costs on me, without considering the benefits bestowed on my neighbors, then we are not seeing the full picture.
That is why President Small of the OCPA is a limited-thinker—he only wants you to think of regulations as “draining” production from the economy—without giving any consideration to the benefits received from those regulations. Fortunately, the authors of the report, the Crains, are not so limited or cynical. Here is what they say in their report:
Government regulations pervade modern life in America and other nations with few exceptions. Regulations are needed to provide the rules and structure for societies to properly function. This research, while mindful of this fact, does not consider the benefits of federal regulations, but looks at the overall costs imposed by them. Little stock is taken of the cumulative effects.
By “cumulative effects” they mean comparing the benefits to the costs. And this also from their report:
This report does not address the benefits of regulation, an important challenge that would be a logical next step toward achieving a rational regulatory system. The annual accounting statements compiled by OMB move toward such a system by presenting partial estimates of benefits as well as costs. This report, thus, should be seen as a building block toward a broader understanding of the costs of regulation, much of which creates important and substantial benefits. Like data on federal budgetary outcomes, the regulatory cost estimates inform the discussion about the balance between public and private sector control over resources.
When the Arkansas poultry industry was shown to be using the Illinois River as its outhouse next to Oklahoma’s backyard (my attempt at a metaphor for the deterioration of water quality in the Illinois River which when I floated it in the 70’s was clear to the river bottom) former Attorney General Drew Edmondson took action to stop the obvious harm. Unfortunately, his successor has not shown the same concern. However hope springs eternal (too bad clean water doesn’t) so perhaps we can rely on Scott Pruitt as head of the EPA to assure that the benefits, not just the costs, of environmental regulations are considered before moving to eliminate or weaken them. I won’t hold my breath–but perhaps I should, or at least acquire a face mask like many in China’s cities now do.
I conclude by sharing with you a couple of excerpts from the book Progressive Oklahoma, written by my now deceased former colleague at Tulsa Junior College, and as fine a softball second baseman as I was left fielder, Danney Goble. I used to read these passages to my students at TJC when discussing the economics of government regulations. Excerpts from Progressive Oklahoma by Dr. Danney Goble
Lunch is on me for the first to identify the location of the photo above, which is not of me pooping but rather avoiding a prickly seat while thinking in one of America’s fine national back yards.