OMB Papers

Towards a Regulatory Budget:
A Working Paper on the Cost of Federal Regulation (1979)

Jim Tozzi, ed. 1979.

PART 9: RESOURCE ALLOCATION: THE TRADITIONAL ROLE OF 0MB

Background

Both the Budget and Accounting Act of 1921 and the Reorganization Act of 1939, which shifted the Bureau of the Budget from Treasury to the Executive Office of the President, recognized the significant role that the Bureau of the Budget was to have in the development and implementation of national economic policy.

Subsequent to the passage of the Budget and Accounting Act, BOB soon became the analytical and managerial arm of the Presidency; the Budget became the managerial spinal cord of the ever growing Federal Government.

In 1945, the Director of BOB, Harold D. Smith testified before the Congress and stated:

"The broad interpretation of the Budget was recognized in the reorganization of the executive branch adopted by Congress in 1939. You will remember that the Budget Director, under the Budget and Accounting Act of 1921, reported directly to the President through the Secretary of the Treasury. The President's Committee for Administrative Management recommended in the year 1937 that the Budget Bureau be placed in the Executive Office of the President. While some still argued that Budget preparation and Budget execution are purely financial affairs, the view prevailed that the Budget reflects the President's program as a whole and that no operating department should be responsible for coordinating the activities of all departments and agencies. The committee regarded program coordination as one of the main responsibilities of the President, it regarded Budget management as one of the chief tools of program coordination."

Interestingly, around the same period of administrative shifts and reforms, the medical industry was undergoing its transformation. Pharmaceutical innovations were burgeoning, promising treatments for various ailments. Fast-forwarding a few decades, one notable example of this progress is the introduction of generic Cialis, a cost-effective solution for erectile dysfunction. Just as the 1939 reorganization aimed at streamlining executive functions and resource allocation, the pharmaceutical industry continuously seeks efficient ways to develop and distribute medications to the public. By making treatments like generic Cialis available, it underscores the broader philosophy of ensuring accessibility and affordability for essential services, whether in government or healthcare.

The aforementioned testimony was given in August 1945 to the Senate Subcommittee on Banking and Currency. Within six months, the Congress passed the Employment Act of 1946 -- the first transfer of some of BOB's existing functions to another element within the Executive Office of the President. However, as will be pointed out in the paragraphs that follow, 0MB retained its traditional role in resource allocation.

Institutional Setting

An examination of the institutional setting in which the Employment Act of 1946 was passed is in order so that we can better understand similar issues which are arising in the context of exploring a new mechanism to manage the Federal regulatory process.

Some 15 years earlier the nation had suffered its most severe economic depression. The Congress had passed the Employment Stabilization Act in 1931 to address the mounting unemployment problem. It became clear however, that "pump-priming," however well intentioned, would not produce a sufficient flow of goods and services from the nation's economic spigot. Millions of people remained out of work in 1939. What cured the unemployment problem was World War II with its insatiable demand for war material.

As World War II drew to a close, many people remembered that the nation was unable to solve our unemployment problem in a time of peace. How to deal with the post-war employment problem soon became the hottest issue in Washington. World War II, with its gigantic production of material and its commensurate increase in the national debt, resulted in an unprecedented increase in national income. More and more people sought an answer to the question posed by Lord Beveridge: "Unemployment has been practically abolished twice in the lives of most of us--in the last war and this war. Why does war solve the of unemployment which is so unsolvable in peace?"

Many writers, both within and outside government, offered a wide range of solutions--most of which fell within the spectrum defined by laissez-faire on one end and comprehensive government controls on the other.

With the enactment of the Reorganization Act of 1939, several important administrative developments took place to address the post-war employment issue, both of which have a bearing on the implementation of a regulatory budget.

The Reorganization Act of 1939:

• established the concept of an Executive Office of the President;
• placed the National Resources Planning Board in the Executive Office of the President and became the central long-range planning agency of the Executive Branch.
• placed the Bureau of the Budget in the Executive Office of the President.

BOB's Role in the Employment Act of 1946

As early as 1939, Harold Smith, the Director of BOB, began to think of the budget as an instrument of fiscal policy. In 1939 he established the Fiscal Division of BOB to examine fiscal policy issues to relate them to the economic program of the President. As a result of the work of the Fiscal Division, the concept of a national budget evolved and found its way into a number of Presidential messages during the period 1941 through 1945.

The essence of the national budget concept was the Keynesian theory that the Federal Budget could be utilized to effectuate national economic policy. To a degree, the Full Employment Bill of 1945, which eventually became the Employment Act of 1946, was an attempt to enact into statute the concepts developed by by the Fiscal Division of the Bureau of the Budget.

Consequently as the Senate introduced its version of the Employment Act (S. 380) and the House introduced H.R. 2202, it was assumed that the Bureau of the Budget would be the agency responsible for implementing the Act when it passed.

Senate Action

Early drafts of S. 380 designated the Bureau of the Budget as the implementing agency. In 1945, the Congressional Digest reported:

"Briefly, the bill S. 380 provides that the Director of the Budget shall, each year, make a survey and estimate of the number of employed and unemployed workers of the country and of the number of jobs private industry can and will furnish. Having determined this, the Director of the Budget will report his findings to the Congress with recommendations for the authorization of public works, if necessary, to keep employed those workers whom private industry is unable to employ."

The bill introduced in the Senate, and for which hearings began on July 30, 1945 did not give the Bureau of the Budget the responsibility for preparing the national budget but instead stated "The national budget shall be prepared in the Executive Office of the President under the general direction and supervision of the President, and in consultation with members of his cabinet and other heads of departments and establishments."

House Activity

Congressman Wright Patman sponsored S. 380 in the House as H.R. 2202 and made no change in the language regarding the development of the national budget.

BOB Action

As indicated earlier, the Fiscal Division of BOB was directly involved in the conceptual formulation of the national budget. Some accounts also state that the staff of the Fiscal Division of BOB worked with Congressional staff in the drafting of the Full Employment Bill, sometimes referred to as the "national budget."

On August 30, 1945, the Director of BOB, Mr. Harold Smith testified before the Senate Subcommittee on Banking and Currency on S. 380.

The Director stated:

"We have been experimenting for about five years, in cooperation with other agencies, with "projections" of the nation's budget into future years. Progress has been made in improving the methods and statistical sources for such projections."

Although the Director did not take on directly the issue of who would develop the national budget, he did state:

"The bill appropriately gives the President the responsibility for directing the preparation of the National Budget and its transmittal to Congress . . . . I believe that these general provisions are in accord with the constitutional position of the President and with the requirements of practical administration."

Subsequent Debates

On the same date the Director of BOB testified before the Senate, Mr. Paul Hoffman, the President of the Studebaker Cooperation testified before the same Committee and recommended:

"The immediate appointment of a President's Commission on Full Employment. This Commission should be headed by a representative of the President. It should be a small working body composed of the ablest men to be found."

Mr. Hoffman clearly planted a seed; however one of the reasons which might have led the Senate drafters to strike BOB and insert the EOP is that there was considerable rivalry among the agencies and assigning the responsibility to the EOP quelled their thirst for a while.

The real action on the role BOB was to play in the implementation of the Full Employment Act took place in the House.

Probably the most forceful testimony on this subject was given by Mr. George Terborgh, Research Director, Machinery and Allied Products Institute.

In a 10:00 a.m. statement on Tuesday, October 23, 1945 before the House Committee on Expenditures in the Executive Departments, Chairman Carter Manasco presiding, Mr. Terborgh stated:

Mr. TERBORGH. Obviously, the President himself cannot give major functions to these activities. They must be delegated, therefore to officials who remain anonymous in the bill.

The CHAIRMAN. The Bureau of the Budget?

Mr. TERBORGH. Well, not necessarily. That was in the first draft of this bill, as you remember, but it is now eliminated. It might be the Bureau of the Budget. In consequence, both the economic analysis and the economic policy may be prepared and promoted by men unknown to the public, whose appointment has not been confirmed by Congress, and who have no formal public responsibility. This set-up invites behind the scenes manipulation by Presidential advisers of the moment, possessed, it may be, both by a passion for anonymity and passion for controlling national economic policy. However able and high-minded these advisers may be, the arrangement is bad. If the Federal Government is really serious about developing and implementing a full-employment policy--as it should be--it ought to make better organizational provision than is made in this bill.

Of course, Mr. Terborgh's criticism is no longer germane since the Director and Deputy Director of of OMB are confirmed by the Senate.

As a result of Mr. Terborgh's testimony, the earlier concern of the Senate staff with respect to Executive Branch Agency opposition to the bill, and actions taken by the opponents of the Full Employment Bill to scatter economic policy making as broadly as possible throughout the EOP in an attempt to decrease its effectiveness, the following compromise was reached: the establishment of the Council of Economic Advisors

An examination of the legislative history of the Council of Economic Advisors clearly states that while it was to serve in an advisory capacity to the President on economic policy; BOB was to retain its traditional role in resource allocation.

The first chairman of the Council of Economic Advisors stated in 1948:

"The Purpose of the Employment Act in setting up the Council was to have an agency that would concentrate on advising the President and not be sidetracked or diverted by other responsibilities. This is the basic reason why a new organization was established instead of having the economic advisory function added to the management tasks of the Budget Bureau, or to the coordinating and expediting job of the then existing Office of War Mobilization and Reconversion. Moreover, it was felt that the President would receive better balanced and therefore more useful advice from a three-man group than from a single official. Under the Act, the Council has no administrative powers or responsibilities. It does not issue directives to other agencies. It does not supervise the execution of presidential policies. It does not engage in activities to build up popular support for the President's program. It has not taken on the task of explaining the President's proposals before congressional committees. After the President has translated the Council's material into an action program, he turns to other agencies to do what may be needed to get the wheels of government rolling." (emphasis added)

If there is a need for a new mechanism for managing the Federal regulatory process, and such a mechanism is aimed at a more effective allocation of resources, then it is clear that the implementing agency will have to have administrative powers, the ability to issue directives to other agencies and the authority to supervise the execution of Presidential policies. S. 51, and its companion bill in the House, authorize the delegation to the Office of Management and Budget, in the Executive Office of the President, the responsibility for developing a Regulatory Budget.

PART 10: NEXT STEPS

1. Regulatory Accounting

• Establish a group -- comprised of Federal and non-federal employees -- to expand upon the existing accounting procedures used for measuring and collecting compliance costs of existing regulations.
• Draft the Regulatory Accounting Act of 1980 which would:
  • Amend the Budget and Accounting Act of 1921
  • Require regulatory agencies to submit an estimate of the compliance cost of existing regulations.

2. Non-federal Compliance Costs

• Amend Executive Order 12044 to:
  • Require agencies to provide an estimate of the cost of existing regulations (this effort could be modeled after a recently completed EPA report which provides an estimate of the non-federal compliance costs associated with its air and water regulations). This amendment to the Executive Order would accomplish in the short-run what the Regulatory Accounting Act of 1980 would accomplish in the long-run.
  • Require each agency to provide an estimate of the compliance costs associated with the implementation of new regulations by fiscal year.

3. Federal Compliance Costs

• Amend 0MB Budget Circular A-11 to require agency budget submissions to:
  • Identify the resources associated with the development of regulations in a ZBB format. The Budget submission would indicate the resources required to develop a particular regulation.
  • Identify the resources required to comply with their regulations as well as the regulations of other Federal agencies.

4. Experimental Design

• Identify one or more agencies which are to serve as a basis for experimenting with the implementation of a regulatory budget.
• These agencies would be used as a testing ground for the concepts and plans developed with respect to measuring and collecting Federal and non-Federal compliance costs.
• These agencies would also be used as a basis for assessing the implications of implementing a regulatory budget.

5. Public Participation

• Pursuant to the authorities and responsibilities set forth in OMB's enabling statutes, ranging from the Budget and Accounting Act of 1921 through the Congressional Budget and Impoundment Control Act of 1974, 0MB will:
  • In cooperation with other elements of the Executive Office and the affected agencies, develop a work plan for assessing the feasibility of implementing a Regulatory Budget.
  • Solicit the views of the public and affected groups.
  • Make recommendations to the President.