Reuters and CNBC uncritically promoted a new report claiming that government regulations cost the economy over $2 trillion each year, ignoring any benefits of regulation. But the study uses the same flawed methodology as an earlier report by the same authors that was so widely panned that even the organization that commissioned it distanced itself from it.
Industry Report Claims Federal Regulations Cost Economy $2 Trillion Each Year
NAM Report Claims Regulations Cost Over $2 Trillion In Lost Economic Growth. The National Association of Manufacturers (NAM), a trade group that lobbies for major corporations including the American Petroleum Institute and ExxonMobil, released a report on September 10 titled “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business.” The report, carried out by economists W. Mark Crain and Nicole V. Crain, claims that federal regulations altogether cost the U.S. economy over $2 trillion each year, concluding that regulations place “significant burdens on manufacturers.” From the executive summary:
The NAM commissioned this analysis by economists Nicole V. Crain and W. Mark Crain, who estimated total federal regulatory costs reaching $2.028 trillion in 2012 (in 2014 dollars). The conclusions identify significant burdens for manufacturers in the United States, particularly small manufacturers with fewer than 50 employees, who pay an estimated $34,671 per employee per year to comply with federal regulations. [The Hill, 5/1/08; National Association of Manufacturers, 9/10/14]
Report Largely Mimics Earlier, Widely Panned Study
New Report Uses Similar Methodology To A Discredited 2010 Report By The Same Authors, The Crains. A 2010 report carried out by the same authors -- W. Mark Crain and Nicole V. Crain -- claimed to find that federal regulations cost the U.S. economy approximately $1.75 trillion per year. The study, was “deeply flawed,” according to the Economic Policy Institute (EPI), an economic policy think tank. An EPI economist explained in a post on EPI's site that the current study uses methodology that is “largely the same” but that “if anything, the current analysis is less robust and convincing than the previous one” :
An earlier C&C study used a similar methodology as yesterday's release -- that study was shown to be deeply flawed by an EPI analysis. Yet, the methodology of the current study is largely the same. In fact, if anything, the current analysis is less robust and convincing than the previous one. [Economic Policy Institute, 9/11/14; Wall Street Journal, 9/27/10]
Non-Partisan Congressional Research Service: Crains' Previous Report Ignored Economic Benefits Of Regulations And Used “Inherently Flawed” Methodology. The non-partisan Congressional Research Service noted that the Office of Management and Budget (OMB) said the study took an “inherently flawed” approach, and that even the authors said that their report “was not meant to be a decision-making tool” because they “make no attempt to estimate the benefits” of regulations:
Crain and Crain's estimates for environmental, occupational safety and health, and homeland security regulations were developed by mixing together academic studies (some of which were more than 30 years old) with agencies' estimates of regulatory costs that were developed before the rules were issued (some of which are now 20 years old). OMB has said that adding together diverse sets of individual studies to develop a summary measure of regulatory costs is an “inherently flawed” approach. The agency estimates that Crain and Crain used were drawn from OMB reports to Congress on the estimated costs and benefits of regulations, which were typically presented as low-to-high ranges. However, Crain and Crain used only the highest cost estimates from these reports, stating that they did so because the OMB estimates did not cover all regulations, and because they believe “government agencies tend to be conservative in estimating regulatory costs.” OMB has said that there is little documentation to support this view, and empirical studies of agencies' regulatory cost estimates have not resolved the issue.
However, Crain and Crain told CRS that their report was “not meant to be a decision-making tool for lawmakers or federal regulatory agencies to use in choosing the 'right' level of regulation. In no place in any of the reports do we imply that our reports should be used for this purpose. (How could we recommend this use when we make no attempt to estimate the benefits?)” [Congressional Research Service, 4/6/11]
- As the authors noted, analyzing the benefits alongside the costs of regulations is important to determining whether a given regulation is useful. A retrospective report by the Environmental Protection Agency, for example, found that regulations implemented under the Clean Air Act Amendments of 1990 have resulted in billions more in economic benefits, such as reductions in premature deaths and emergency room visits, than in costs.
[Environmental Protection Agency, April 2011]
CPR: Previous Report Used “Flimsy” And “Crude” Data. The Center for Progressive Reform (CPR) -- in an analysis cited by the Congressional Research Service -- criticized the study's lack of transparency and condemned the Crains for using “crude” data:
The report's estimate of “economic regulatory” costs--financial regulations, for example--which account for 70 percent of the total regulatory costs, is not based on actual cost estimates. Instead, this estimate is based on the results of public opinion polling concerning the business climate of countries that has been collected in a World Bank report. The authors of the World Bank report warn that its results should not be used for exactly the type of extrapolations made by Crain and Crain, because their underlying data are too crude. Crain and Crain nevertheless enter the World Bank data into a formula, which they appear to have created out of whole cloth, that purports to describe a relationship between a country's regulatory stringency and its Gross Domestic Product (GDP). OMB has repeatedly warned against trying to reduce the complex relationship between these two concepts to such simplistic terms, yet this is precisely what Crain and Crain do. [Center for Progressive Reform, February 2011]
SBA, Which Commissioned Earlier Study, Later Distanced Itself From It. After the 2010 report's fallout, the Small Business Administration posted an update on their website, writing that the findings of the study it commissioned “have been taken out of context and certain theoretical estimates of costs have been presented publicly as verifiable facts” and that the $1.75 trillion figure “was not intended to be considered a precise finding.” [Small Business Administration, accessed 9/11/14]
Experts Already Calling New Report “Flawed”
EPI Economist: Report Is “Too Flawed To Form Any Basis For Policymaking.” Josh Bivens, research and policy director at EPI, responded to the NAM study in a blog post on EPI's website. Bivens dissected the new report's methodology bit by bit, concluding that the report is “far too flawed to form any basis for policymaking” :
The latest effort to scaremonger about a rising regulatory burden on U.S. business was released yesterday by the National Association of Manufacturers (NAM). The report, by W. Mark Crain and Nicole V. Crain (C&C, henceforth) purports to (among other things) estimate the total cost of U.S. regulations. The claimed price tag is enormous--$2.1 trillion. The bulk of these costs (75 percent) are estimated using a cross-country regression analysis. This cross-country analysis, however, is completely unconvincing and should be ignored.
All in all, the C&C report's eye-catching number on the cost of regulations is, like their last report on this topic, far too flawed to form any basis for policymaking. [Economic Policy Institute, 9/11/14]
CEPR's Dean Baker: This Is “Not A Very Serious Study.” Economist Dean Baker, co-director of the Center for Economic and Policy Research, stated in an email to Media Matters:
[I]n their methodology if we eliminate safety regulations that may cost industry $10 billion to comply with we would be saving them $10 billion even if it meant that the companies had to pay $10 billion in additional damages to workers whom they had harmed on the job. In other words, this is not a very serious study. [Email to Media Matters, 9/11/14]
EPI Vice President: Study Is “Bogus” And “Even Worse Than Its Predecessor.” Ross Eisenbrey, Vice President of EPI, berated the report as “dressed-up junk economics” and advised journalists to ignore its findings:
The National Association of Manufacturers (NAM) is a cynical organization. It knows that few journalists will read a lengthy paper on the cost of regulation and realize that it is dressed-up junk economics, so it has published a re-run of the truly meretricious report that Mark Crain and Nicole Crain issued four years ago. The new report is even worse than its predecessor, in the sense that the authors have chosen not to respond to any of the criticism of their earlier work--even though it has been shown to be based on bad research, unreviewable and probably biased data, and faulty assumptions about the relationship between regulation and GDP.
The Crains' estimates are bogus and should be ignored or treated with derision. [Economic Policy Institute, 9/10/14]
Yet Top Business Media Outlets Touted Report, Ignored Criticisms And Flaws
Reuters Uncritically Repeated NAM's Flawed Anti-Regulation Claims. Reuters reported the study's findings uncritically in an article headlined “U.S. manufacturers cry foul over cost of federal regulations.” The article stated that the study is part of a “long-running battle over the burden of federal regulations” such as NAM's campaign against the Environmental Protection Agency's forthcoming ozone standards to reduce smog pollution:
U.S. manufacturers cried foul on Wednesday over the “burden” of complying with federal regulations, which they say cost them more than $2 trillion in 2012 that could have been reinvested in their businesses.
The report is the latest salvo in a long-running battle over the burden of federal regulations as business groups attempt to persuade Congress and regulators to loosen the rules.
NAM President and Chief Executive Jay Timmons said major new rules, such as a recent ozone standard from the Environmental Protection Agency, would make the overall burden even heavier. He said the new EPA rule would be the most expensive in U.S. history.
Reuters did not mention the controversy surrounding Crains' earlier, similar study, and quoted only top executives from NAM -- no critics. [Reuters, 9/10/14]
CNBC Gave Softball Interview To NAM CEO About The Report. The September 10 edition of CNBC's Street Signs featured an interview with Jay Timmons, CEO of NAM, to tout the new report. During the segment, Timmons berated environmental regulations as “the most onerous for manufacturers,” particularly regulations on ozone and greenhouse gases, which are not included in the Crains' study. Co-host Amanda Drury added: “Could get worse then” :
DRURY: Which regulations are the most onerous for manufacturers? Obviously there's like accounting compliance, there's environmental regulations, there's health regulations, there's tax regulations, all kinds of regulations. What are the most onerous?
TIMMONS: Yeah well, I think you just made the list. Certainly the most onerous for manufacturers, manufacturers are hit hardest by environmental regulations.
TIMMONS: The critics are just plain wrong. The fact is you've got to look at your regulatory system and make sure it's balanced, it's fair, and that there's a good balance between benefits and cost. And when you constantly have these costs being put on manufacturers and then saying, “Hey, we want you to grow, we want you to create jobs,” those two things just simply don't add up. And the other thing that I think is important to note in this study is that we're only looking at regulations from 2012 backwards. All the regulations that are coming out of this administration on ozone standards and greenhouse gases and others are not even included in this study. And those could be the most expensive ever.
DRURY: Could get worse then.