Wendy Gramm - distinguished senior fellow and director of regulatory studies program, Mercatus Center at George Mason University; chairman, U.S. Commodity Futures Trading Commission (1988-1993); administrator, Information and Regulatory Affairs at the Office of Management and Budget (1985-1988); former executive director, Presidential Task Force on Regulatory Relief; former bureau of economics director, Federal Trade Commission; former research staff, Institute for Defense Analyses; former associate professor, Texas A&M University; member, Board of Visitors of the Law and Economics Center at George Mason University, National Advisory Board of the Republican Women’s Federal Forum; board member, Chicago Mercantile Exchange, Enron Corp., IBP, inc., Independent Women’s Forum, International Republican Institute, Invesco Funds and State Farm Insurance Companies; received numerous awards including the Financial Management Association’s Financial Executive of the Year; B.A., economics, Wellesley College; Ph.D., economics, Northwestern University; mother of two. Spouse - Phil. Fairfax, Virginia.

 Thomas Jefferson once said that the price of liberty is eternal vigilance. We are all vigilantes in this fight to stop excessive government regulation, and I want to thank you for all your hard work in this important area of public policy.

This time of year, in part because of the State of the Union address, we think about taxes a lot. But there's one tax you don't hear about very much. It's rarely even talked about, because it's a hidden tax, otherwise known as the cost of regulations. Take, for example, the case when government decides that it wants a program to protect the golden-cheeked warbler. They don't want to pay for the environment to protect this golden-cheeked warbler. And they certainly don't want to raise taxes to do it. Instead, they tell individuals, "You restrict the use of your property to provide appropriate habitat." So it is a tax, but it's an indirect, hidden tax. 

The problem is that this hidden tax is enormous. In 1997, a conservative estimate was that we spend $688 billion annually in hidden taxes - $688 billion just to cover the cost of federal regulations.

Americans for Tax Reform estimates that if you add in the cost of regulations imposed on us by federal, state and local governments, the total would add up to a trillion dollars. This is hidden and off budget, it's over and above what the federal, state and local governments already spend of our tax dollars.

If you consider that the federal budget was about 1.6 trillion dollars in 1997, you're talking about adding to that another 40 percent through the cost of regulations imposed on us. We pay indirectly through higher prices of goods and services and by restrictions on our property and activities.

Not only is this burden huge, maybe $2,800 or $3,000 for each man, woman and child per year, but it is growing. And it's growing unchecked.

What I want to discuss this morning is why it's growing unchecked and what we can do about it.

Regulations grow unchecked because first of all, as I mentioned, they're hidden. What a wonderful way for policy makers to say they're going to give you something. They make you do it, and they are not forced to do unpopular things, such as raise taxes or bust the budget.

Not only are these expenditures to implement regulations off budget, we don't even really know the size of this burden. This $688 billion that I say is a conservative estimate is just that, an estimate. No one really knows. There is no real measure. We don't calculate actual expenditures like the federal budget, where at least we know something about how much we spend. In the regulatory arena, it's only an educated guess.

When I was at the Office of Management and Budget working with others to control the growth of federal regulations, we tracked our progress by counting the number of pages in the Federal Register. That was our proxy for the size and cost of federal regulations. Of course, that's a rough proxy.

Murray Weidenbaum's Center for the Study of American Business in St. Louis, used the size of regulatory agencies as a measure, but that doesn't really measure the cost either. Again, it's a proxy -- it doesn't measure the real cost of regulations.

The good news is that we have better tools to measure the total cost of regulation, but we aren't there yet. How can you ever solve a problem if you can't even measure it? Today there is no definitive, credible metric, so the burden of regulations can grow unchecked in this hidden way.

Regulations also grow because of the bureaucracy's incentive structure. Not only is there a tendency to expand the size and reach of their agencies, but bureaucracies and policy makers also tend to be very risk-averse.

Consider the Food and Drug Administration officials. What they don't want is a drug or a pharmaceutical product with a bad side effect. In this day of instant communication, everybody will hear about it.

The problem is that FDA officials know that if they make a mistake and someone experiences a harmful side effect, there's going to be negative press and a lot of criticism. And they're going to have to answer for it.

But what about the people who are really hurt by not having that new drug? If they're dead because the new drug is caught up in the FDA process and they can't get it, they don't know about it. They don't complain.

Some members of the new Congress have been very good about trying to personalize issues with anecdotes about how people are hurt by not being able to access new drugs. It's not surprising, though, if you think of the risk to the bureaucrat. You can see why approvals take drug companies years and millions of dollars.

This is not unique to the FDA.  Throughout the bureaucracy, there is a tendency to be risk-averse.  I'm afraid it's exacerbated not only by the media attention but also by the public's tendency to look to government to fix every problem.  

In this regard, we are reaping the harvest of years of government intervention, not only in our economic lives, but in all aspects of our lives.  When something goes wrong, the public and some members of the mainstream media immediately turn to the policy makers and ask, "What are you going to do about it?  How can you let something like this happen?  What are you going to do to prevent it from ever happening again?"  Whether it's a side effect, someone getting injured or some other bad incident.  And this applies even to the financial markets.  

I came to the Commodity Futures Trading Commission (CFTC), right after the stock market crash of 1987.  We spent a lot of time testifying before Congress about what we were going to do to prevent the stock market from crashing again.  Luckily, I would usually testify last in the panel.  Chairman Alan Greenspan would be first and say, "Mr. Chairman, we cannot guarantee that the stock market won't fall."  And Alan Greenspan would say it with a straight face. 

One winter when I was at the CFTC, it was really cold.  The price of oil spiked, as you would expect, in much the same way electricity prices spiked last summer when we had a heat wave.  Consumer groups and some state attorneys general complained to the agency. They asked me to explain what were we going to do to prevent energy prices from going up in the winter.  Everybody had decided that energy prices had risen because of speculators in the oil market.  

Now, I'm from Texas.  Energy prices going up is not a bad thing for everyone.  So, others went to testify in my place with instructions to act like Alan Greenspan, and do it with a straight face."  They wrote pages of testimony, and testified with a very straight face in a very bureaucratic way.  Their testimony basically stated: In answer to your question: in the wintertime, energy prices tend to be influenced by the weather.  And the weather is not in our department.  Someone else has control of the weather. 

You think I'm kidding, but I actually got a letter when I left the Commodity Futures Trading Commission.  The note said, "Good riddance.  You have caused misery to millions of oil heat users.  Get a job at Wendy's. 

I did not realize I was so powerful. 

Many demands for regulation are fueled by the media, by the bureaucracies themselves, and by special interests who want regulations.  So, why are we surprised that regulations grow?  

This It seems that the bureaucracies hold themselves accountable only for the lack of regulation, and not for the regulatory burdens they impose.  In some cases regulations can even kill, as in the case of airbags.  

This Over 100 people have been killed because airbags open up with such force.  The government requires the airbag to protect the 170-pound unbelted male, with dire consequences for the smaller person.  

Regulations also grow because of what we call the political economy of government.  Nobel Laureate James Buchanan received the Nobel Prize for his work developing this field of economics.  Special interests who want a regulation, just as those who want a spending project, are going to be noisy.  It's worth their while to lobby for a regulation, and they will.  But those who ultimately pay are generally absent or ignored in this debate.  

Why are they ignored?  Often the costs of a regulation are dispersed over a large number of people.  It's not worthwhile for an individual to spend time learning about projects which would increase taxes or the cost of a product by 10 cents or even $10.  So, many regulations get added incrementally.  Furthermore, when you're dealing with a hidden tax like regulations, you may not know what the cost really is going to be because agencies won't necessarily tell you and don't necessarily know themselves.

Some regulations affect an entire industry.  And those from the industry know that the regulation may make them less competitive on the world market.  They know that their customers and their business will be hurt if the price of their product increases.  Those industry leaders might complain to the agency.  But some agencies then say, "That's just industry talking.  That's a special interest."  Many agencies will discount complaints about regulations coming from the affected industry.  So regulations grow.

 What are we going to do about this?  We're working to alleviate the problem with the Regulatory Studies Program at the Mercatus Center at George Mason University.  The program's objective is to advance knowledge of regulations and their impact on society.  We're going to take the knowledge academics have and apply it to the regulatory debate.  We want to analyze and measure this hidden tax, regulation.  

We want to be an independent voice for the public interest -- independent of special interests, and independent of agencies writing the regulations.  We want to speak for the public interest in the policy debate on regulations.  

It's also a two-way street.  Not only do we want to expose the agency and policy makers to the high quality, academic analysis, we also want to expose academics to real live regulations.  

We want to get academics involved in the regulatory process by writing comments and by doing analysis. This will help get them interested in regulatory issues and the cost and benefits of health, safety, environment and other social regulations.  We need to build a knowledge base to tame this regulatory beast just the way that academic, economic research of the ‘50s was the knowledge base by which we developed a bipartisan coalition in Congress to deregulate many industries from communications and transportation to energy.  This deregulatory effort was fueled by academic research.  

We need to have more academics doing studies like the Tengs and Graham study.  Their study showed that if you just reallocate current spending from low-risk government regulatory programs to higher risk programs, you could double the number of life years saved by federal government programs.   

George Mason University is a natural intellectual home for this Regulatory Studies Program.  It's great, not only because people like Jim Miller and James Buchanan are there, but it is near D.C. -- near the policy makers.  Also, George Mason has a great collection of free market scholars.  

Mercatus is the part of the university that takes ideas and puts them into action.  Bridging the academic and the practical worlds is what I find so challenging.  This includes helping academics do more policy-relevant research.

The cornerstone of this Regulatory Studies Program is the Public Interest Comments (PIC) program in which we provide independent analysis of specific agency regulations.   These comments are placed into the public record of the agencies' rule making.  These comments are independent of the agencies, independent of the special interests.  They take the perspective of the public interest, the taxpayer, the consumer -- voices that aren't heard much in the rule making process.  

For example, in March 1997 we commented on EPA's ozone and particulates air standards regulation.  We made many presentations, wrote op-eds for The Wall Street Journal, and testified in Congress; but we didn't change EPA's mind. (Post script B In May 1999, the Court of Appeals for the District of Columbia remanded EPA's rules to the agency, in an opinion that tracked our comments closely.  EPA has appealed this decision to the Supreme Court, and the Mercatus Center filed an amicus brief in that case.) 

But even if we don't affect the rule-making, we want to educate not only the policy makers, but also the public, about regulations and the flaws in agencies' analysis.  And, we do credit agencies when they do good analysis.  Our public interest comments become a basis not only for the public but also for others who might want to use the information, whether it's for litigation or for future congressional action.  

Congress recently has passed a number of regulatory reform bills but, frankly, they have not been implemented effectively.  Congress needs to have more analysis.  They need to have independent groups inform them if a regulation has unintended effects or if it doesn't comport with the law.  Having comments from an independent, university-based organization can be helpful to them.  

We've done a number of comments.  Take, for example, EPA's ozone and the particulates regulation.  This regulation was going to cost close to $100 billion.  EPA did not even know how that new standard could be attained with current technology.  Furthermore, the interesting thing about this regulation was that it would not even improve public health.  In fact, it would be harmful to public health.  

EPA's own science advisory board couldn't say that meeting EPA's new air standards would help public health, even without considering costs.  Furthermore, EPA neglected to consider the fact that ozone does screen harmful ultraviolet radiation. According to the Department of Energy's estimates, meeting EPA's standard would cause 25 to 50 people to die each year from melanoma.  In addition, there would be 130 to 260 new melanoma cases, thousands more non-melanoma skin cancers, and between 13,000 and 28,000 new cataracts per year.  These adverse health effects were not considered by EPA.  

We also commented on a proposal by the Army Corps of Engineers.  People paid little attention to this proposal, which had to do with the nationwide wetlands program under the Army Corps of Engineers.  If you own property that's a wetland or is in the 100-year flood plain, there are many things you can't do.  If you want to build anything, you have to go through the Army Corps of Engineers' permitting process.  Almost 90 percent of their permits are handled through an automatic permitting process.  The 10 percent that you hear about -- that people complain about the time it takes to get permits -- are the 10 percent that aren't handled by the automatic permitting processes.

The Corps of Engineers proposed to change that nationwide permitting process and take away the automatic aspect of it for a number of types of permits.  For example, if you were going to build a development using less than 10 acres in a non-tidal wetlands area, they used to allow an automatic permit.  They've taken that away.  Permits must now be reviewed on a case-by-case basis.  They've taken away all automatic permitting in the 100-year flood plain.   

It is unclear what the effect will be.  We don't know the effect on the Army Corps of Engineers' work program.  It could be that they're going to be inundated with so much work that they're going to have to ask for more money to build their staff.  

They are not expanding their definition of wetlands in this regulation.  They're just taking away the ability to do projects with automatic permitting.  We don't know what the impact will be, but we raised a lot of questions in the public interest.  What is the impact on your workload?  Seven percent of the nation's land in the 100-year flood plain, which sounds like a lot of land to me.  How many people are going to be affected?  These are questions the public and policy makers need to know about before an agency issues such regulations.

Some upcoming regulations that we are working on now look interesting.  EPA, of course, is planning to require further reductions in auto emissions.  We expect that regulation to be proposed this spring.  OSHA has a regulation that is going to affect all businesses, especially the small business community.  OSHA is going to require all employers to establish a formal safety program to ensure that their work places are in compliance with health and safety regulations.  Core elements of the new program will be worker training, hazard identification and control, and worker participation in the program's development.    

We're carefully watching another regulation that is stalled right now.  President Clinton announced last spring plans to expand Title IX of the education amendments.  Title IX of the education amendments forbids sex discrimination in education.  It's been applied very aggressively in the area of sports.  While Title IX has opened up a lot of opportunities for women in sports, especially at the college level, under the Clinton Administration it has been applied as a quota system.  Last spring, President Clinton said that new regulations were being written to extend the law's protection to every academic program in every school receiving any type of federal funding from the Department of Education.  An administration official then said, We are not stepping up enforcement of Title IX.  We are just beginning it.  

 A women's group said, We won in the sports area.  Now it's on to the classroom.

Think about requiring roughly the same proportion of women as men in engineering classes, in chemistry classes, the same proportion of men as women in arts and other programs that women dominate.

Now, lest you think that they wouldn't do something like that, let me tell you a little bit about some of the recent initiatives at the Department of Education.

Here are some examples of what has happened in the sports area.  More than 200 male college sports teams have been eliminated because of Title IX in sports because women don't sign up for sports in the same proportion as men do.

The result is the elimination of virtually all collegiate wrestling teams across the country, many male gymnastics teams, and increasing numbers of men's swimming teams.  UCLA has eliminated its swim team, Boston University has eliminated its football and baseball teams.  They really did silly things in the sports arena, but it's not limited to just the sports arena.

Fair Test is one of the non-profit groups that sue on these issues. I think the Department of Education agreed with them in this dispute and brought a case against the College Board about the PSATs.  PSATs determine National Merit Scholarships.  Although women are 55 percent of those who take those PSATs, only 40 percent of the National Merit finalists or National Merit scholars are girls.  The College Board settled without conceding that the tests were actually biased.  But they added 39 questions that girls tended to do better on.  You've heard about the dumbing down, how about feminization?  This is not unlike lowering standards in the military in order to make sure that women can pass certain physical tests.

In addition, forty school districts are being investigated because there was an under-representation of girls in the advanced math and science and gifted programs.

Let me tell you who gets education funds besides schools, colleges, and universities:  Museums, state and local governments, some private business, training programs conducted by the Department of Defense, the Bureau of Indian Affairs, law enforcement agencies such as the FBI, etc., etc.  Furthermore, the Department of Education doesn't have to litigate because private litigation groups can do the work for them. 

When we do our public interest comments on regulations, we have a report card with six criteria.  We ask simple questions like, Did they identify a need for a regulation?  Did they consider alternatives?  Was the cost/benefit analysis adequate? And of course, What is the impact on our freedoms?

We must use the power of our ideas or others will decide, not just who will run our businesses and whom we can hire and fire, but how we're going to live our lives; how we educate our children; how we use our property. 

It's hard enough to cut taxes even though you can measure the money.  It is tougher in the regulatory arena because the issues are harder, more heartfelt.  You're talking about health and safety.  You're talking about the environment.  You're talking about social issues.  Those issues are easy to demagogue.

I remember when I was at OMB reviewing all the regulations of government.  One of my colleagues said, Wendy, in your job, you have got all the yuck issues at OMB.  How do you stand it?

I replied, Look, these aren't the yuck issues.  They may be the hard issues, but they're the challenging ones.  They're the important ones just because you can't put a number on them, and because, in the political debate, they're so easy to demagogue.

My commitment to fighting for freedom in the great American system is a very strong one.  Now this is a good excuse to tell you where my commitment comes from, and it's not just because I'm an economist.

Many of you have heard the story of my grandparents.  But some here may not have heard this story, so I'll tell you.

My grandparents were born in Korea.  They came to Hawaii to work in the sugar cane fields.  They didn't have any money.  They didn't even speak the language.  They didn't come looking for some government program.  They came in the early 1900s looking only for freedom and opportunity.

My father was the first Asian-American in the history of Hawaii ever to become an officer of a sugar company.  When I was chairman of the Commodity Futures Trading Commission, Presidents Reagan and Bush liked to point out that I oversaw the futures trading of all American commodities, including the same cane sugar my grandparents once cut by hand.

That's the American dream.  That's what is at stake.  And what I'm looking for is to preserve that American dream, not just for our children and our grandchildren, but for all those who missed it the first time around.  Thank you very much.