US Spending on Regulation Rises Faster Than Inflation

THE most casual observer can spot the upturn in federal regulation of private economic activity. Congress is acting on a comprehensive revision and expansion of the Clean Air Act. Simultaneously, the national legislature is considering proposed laws to reverse Supreme Court rulings on affirmative action (and much more), to extend requirements imposed on employers for providing access to the handicapped, and to mandate employee leave for personal and family illness. Two colleagues at the Center for the Study of American business, Kenneth Chilton and Melinda Warren, recently completed a detailed compilation of the budgets and staffing of federal regulatory agencies as proposed in President Bush's budget for the fiscal year 1991.

The two researchers estimate that spending by federal regulators will reach a record high of $12.2 billion in fiscal 1991. That represents an 8.7 percent rise in nominal terms (up 4.4 percent after inflation).

Last year's budget, as submitted by outgoing President Ronald Reagan, called for only a 2 percent nominal increase in regulatory spending (a reduction of 1 percent in real terms). But after Congress and the Bush administration finished with this budget, the increase beat the inflation rate by 2.5 percent.

Mr. Bush also appears more inclined to allow the federal agencies to increase their head counts than was his predecessor. Regulatory staffing, according to his new fiscal plan, will rise by 4,300 between 1990 and 1991, a 4 percent expansion. This increase equals the total growth in the federal regulatory work force from 1985 to 1989.

The budgetary and personnel data also portray significant changes in the relative importance of the different regulatory endeavors. Twenty years after Earth Day, the Environmental Protection Agency is king of the regulatory hill. This one agency accounts for nearly one-third of the aggregate budgets of all federal regulatory activities. In 1970, the fledgling EPA received less than 15 percent of the total.

During those two decades, EPA staff has grown dramatically - from 3,900 in 1970 to 15,300 in 1990. The new Bush budget allows for an added 900 environmental regulators providing EPA with 14 percent of the total federal regulatory head count. Bush's pledge to be the environment president certainly is being carried out in terms of his budgetary proposals.

Ms. Warren and Mr. Chilton also conclude in their study that regulatory growth often follows dramatic news events - rather than changes in scientific knowledge. Thus, the Coast Guard budget benefits from oil spills. Food and Drug Administration spending rises in response to pressure for new drugs to fight AIDS and in response to the scandals involving generic drugs.

By the same token, financial regulators are added as a result of bankruptcies and bailouts of savings and loan associations. Similarly, Federal Aviation Administration outlays climb in tandem with public worries about aging airline equipment and personnel readiness. The Securities and Exchange Commission grows following ``insider trading'' abuses and other Wall Street scandals.

All the statistics merely confirm a more basic trend that seems likely to differentiate at least the early 1990s from the 1980s: increasing reliance on government to deal with what citizens perceive to be shortcomings in society.

However, we are not likely to see a simple rerun of the 1970s, when ``command and control'' regulation was voted to deal with virtually every shortcoming in the private sector. Economic incentives are no longer viewed as an obscene concept. The pending revisions of the Clean Air Act, for example, provide for creating tradable emissions permits for sulfur dioxide - a cost-minimizing approach long advocated by economists.

On the other hand, the task of providing economic education to policymakers is far from complete. The tradable permits provisions have become far more complex and far less economically sound as the clean air bills have progressed through the congressional committee review process.

An interesting juxtaposition has occurred in many instances with reference to the attitudes of different interest groups toward more innovative approaches to federal regulation. Many companies that originally opposed governmental intervention with great vehemence have grown accustomed to living in a more closely controlled policy environment. Often, knowledge of bureaucratic procedures is viewed as an advantage over potential new competitors. In contrast, the more enlightened environmental organizations, despairing of the shortcomings of the traditional regulatory process, are at times more willing to consider new departures such as pollution taxes.

In any event, reducing the extent of federal regulation does not seem to have as much attraction for policymakers in the early 1990s as it did in the early 1980s.

The best that we can hope for is that the actions that government takes might rely more fully on economic incentives and thus pursue the nation's regulatory objectives in a more cost-effective manner than has been typical in the past.