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Industrial: Economic Competitiveness [1 of 2] [1991]
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comment , 4 /
I have no
Nancy M
should as
section in
"Environa
Originally to
EW,
in
Document Doched
Following Page
d suggest DAB take a
laok at up 52,53, -54. 53, +
There are several errors
and a shglet "tone" problem
which don't serve the report
will.
12/23
N.Mayround
"Document Control"
TYPE.
ACTION
DOCUMENT NUMBER: 9125175
ORIGINATOR: 02
STATUS I
DIRECTORATE STATUS
FROM.
BOSKIN, Michael J.: COUNCIL OF ECONOMIC ADVISERS
TO:
DR. D.A. BROMLEY
DATE OF
CORRESPONDENCE: 12/19/91
SUBJECT: HE REQUESTS COMMENTS ON THE PRELIMINARY STAFF DRAFT
OF CHAPTER FIVE OF THE 1992 ECONOMIC REPORT OF THE
PRESIDENT.
DIRECTORATE
STAFF
ASSIGNED: Dr. Wong
ASSIGNED:
ACTION
STAFF
REQUIRED: COMMENT TO DAB
ACTION:
SENDER'S DUE DATE: 12/23/91
OSTP DUE DATE:
12/23/91
STAFF DUE DATE
DATE COMPLETED:
DATE COMPLETED/DEPT:
COPIES TO: D. Allan Bromley
WHITE HOUSE TRACKING #:
CONTACT PERSON:
PHONE:
EXT:
REMARKS:
CLOSED
OSTP RECEIVED: 12/20/91
DEPT RECEIVED:
FILE: P-INDUSTRIAL-ECONOMIC COMPETITIVENESS
CENTRAL FILES:
THE WHITE HOUSE
WASHINGTON
December 23, 1991
MEMORANDUM FOR MICHAEL BOSKIN
FROM:
ALLAN BROMLEY
Auan
SUBJECT:
Chapter Five of the 1992 Economic Report
In general, an excellent piece of work as always. Herein the few minor comments.
1. Page 94, second and third sentence. While I agree entirely, many may feel
that this estimate is an extreme one.
2. Page 94, end of first paragraph. I would suggest that you include reference
here to the budget numbers for R&D on energy efficient technologies.
3. Page 53, line 3. Suggest that this be changed to read as follows:
"chlorofluorocarbons (CFCs) probably have no net effect on global surface
temperature and raised a number of new scientific questions regarding the
nature of chemical reactions in the atmosphere including several important
gases." CFCs are indeed still greenhouse gases. It is the chemical reactions
between them and ozone and nitrous oxide - among others - that is at issue.
4. Page 52, penultimate line. Suggest that this should read: "The question of
how much several of the gases contribute to the greenhouse effect also remains
uncertain; this is ------."
cc: Phil Brady
294320
Document No.
CLOSE HOLD
5175
WHITE HOUSE STAFFING MEMORANDUM
DATE: 12/19/91
ACTION/CONCURRENCE/COMMENT DUE BY: C.O.B. Monday 12/23/91
1992 ECONOMIC REPORT OF THE PRESIDENT, Chapter 5 --
SUBJECT:
COMPETITIVE FORCES AND REGULATION
ACTION FYI
ACTION FYI
VICE PRESIDENT
HORNER
SKINNER
MCCLURE
SCOWCROFT
PETERSMEYER
DARMAN
PORTER
BRADY
ROGICH
BROMLEY
SMITH
BROADMAN, Harry
CARD
.
DEMAREST
FITZWATER
GRAY
HOLIDAY
REMARKS:
Please provide any comments directly to Harry Broadman, Rm. 314,
by close of business on Monday, 12/23, with a copy to this office.
Thanks.
RESPONSE:
CLOSE HOLD
PHILLIP D. BRADY
Assistant to the President
and Staff Secretary
Ext. 2702
5175
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, D.C. 20500
THE CHAIRMAN
December 19, 1991
MEMORANDUM FOR DISTRIBUTION BELOW
FROM:
MICHAEL J. BOSKIN mm
SUBJECT:
1992 Economic Report of the President
Chapter 5 -- Competitive Forces and Regulation
Attached is a preliminary staff draft of Chapter 5 of the 1992 Economic
Report of the President. Please let us have your comments in memo form by
Monday, December 23. CEA welcomes comments and suggestions and finds them
extremely helpful in preparation of the Report.
Comments should be delivered to the attention of Harry Broadman, Room
314, Old Executive Office Building.
Please note that the draft is for official use only, should be held close, and
should not be copied.
Attachment
White House (Porter, Gardner, Hill)
OMB (Darman, Grady, Hale, Al-Samarrie)
NSC (Scowcroft)
OSTP (Bromley)
USTR (Hills, Moskow, Walters)
CEQ (Deland)
State (Baker, Zoellick, McAllister, Bohlen)
Treasury (Brady, Mulford, Glauber, Wethington, Jones, Hubbard)
Commerce (Mosbacher, Darby, Farren, Obuchowski)
Agriculture (Madigan, Crowder, Gardner)
Defense (Cheney, Wolfowitz, Lilley)
Education (Alexander, Sanders)
Energy (Watkins, Kent, Stuntz)
HHS (Sullivan, Gerry)
HUD (Kemp, Weicher, Humbert, Woodward)
Justice (Barr, Rill)
Labor (Martin, DeArment, Norwood)
Transportation (Murphy)
Federal Reserve (Greenspan, Prell, Truman, Kohn)
CIA (Gates)
CFTC (Gramm)
FDA (Kessler)
EPA (Morgenstern)
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CHAPTER 5
COMPETITIVE FORCES AND REGULATION
Government at all levels affects economic activity through
such mechanisms as taxes, law enforcement, and the construction
of roads and highways. Regulation, however, generally refers to
legislation or rules developed by government agencies that alter
the way private companies conduct their operations or that
mandate government provision of goods and services. "Economic"
regulation takes many different forms and includes regulating
prices and limiting the extent of competition in an industry,
such as by establishing a single local telephone company with
regulated rates. The government also attempts to protect safety,
health, and the environment through "social" regulation.
While the intentions of many regulations are laudable, they
can have unintended adverse impacts on the general public. For
example, oil price controls and allocation schemes, begun in 1971
and abandoned in 1981, exacerbated the effects of the two energy
crises by creating gasoline lines and spot shortages. During the
conflict in the Gulf, the short-lived price spike reflected the
potential scarcity of oil created by the war. The higher prices
encouraged consumers to reduce their gasoline use, avoiding the
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need for government allocations. Soon after the war began,
prices receded.
Why are regulations that have an adverse impact on the
general public instituted in the first place? One reason is that
proponents of increased government regulation fail to consider
the costs associated with new regulations, relative to the
benefits they are intended to achieve. This is particularly
common when regulations are imposed to reduce risk exposure,
without consideration of their costs. Similarly, regulation to
prevent monopoly pricing by public utilities, while intended to
benefit consumers, can be costly if it discourages innovation by
the utility. Appropriate regulation is based on a balancing of
costs and benefits, taking into account hidden costs such as
reductions in the incentives for firms to innovate.
Once in place, a regulation may be very difficult to
eliminate or to change. One reason is that regulation is a legal
institution, requiring legislation or the actions of a government
agency to make the change. Also, regulation may favor a special
interest at the expense of the welfare of the consumer. For
example, continued restrictions on price cutting and on the
number of airlines that can fly on international air routes
benefits carriers having rights to those routes because they are
protected from competition, but consumers in general suffer
because they are forced to pay the higher fares. Those that
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benefit from existing regulations, especially subsidized State-
owned airlines not normally subject to the disciplines of
competition, will resist the change to a more deregulated
environment. But deregulation is appropriate when there is
reason to believe that, left on its own, a market will be
competitive.
The Administration remains committed to the continued
process of deregulation in markets that are or can be competitive
and to advocating regulation only when there is a strong
presumption that the benefits to society exceed the costs.
Energy, for example, is an important input into production and is
also consumed directly. Increased reliance on the competitive
market has improved the ability of the economy to respond to
shocks in energy supply and demand. The Administration's
National Energy Strategy has proposed regulatory changes that
would allow markets to function even more effectively. Further
deregulation would encourage the entry of new, low-cost producers
by increasing competition in the generation of electric power.
Reforming the regulation of financial institutions, while
ensuring the integrity of the financial sector, is also a major
goal of this Administration. This subject was analyzed in the
1991 Report.
Where regulation remains necessary, the movement toward
"incentive regulation" that encourages firms to operate more
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efficiently has been a positive regulatory innovation. The
Federal Communications Commission (FCC) is now regulating AT&T's
residential long-distance telephone rates in a way that
encourages the company to minimize costs. The Environmental
Protection Agency (EPA) has pioneered the use of a regulatory
mechanism that allows the market to determine the most efficient
way to achieve air quality levels. The expected savings in
pollution abatement costs from this Administration initiative
will amount to billions of dollars over the next two decades.
Poorly designed regulations can impose burdens on firms and
their workers that in the long run will hurt economic growth.
When it is determined that the government should intervene
directly, approaches that use market forces, rather than direct
bureaucratic control of output and prices, allow markets to
retain their flexibility and assure that the economy's resources
will be put to their most productive uses.
COMPETITION AND THE ROLE OF GOVERNMENT
The competitive market system has three important features.
First, the discipline of competition encourages efficient
production. In a competitive market, a firm that did not produce
efficiently would have to charge a higher price to make a profit
and would lose customers to its competitors. Ultimately the firm
will be driven out of business.
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Second, a competitive market ensures that the economy's
productive resources are put to their best use. For example,
automobile manufacturers decide what kind of cars to build based
in part on the relative prices of different parts needed for the
car, and in part on what they think consumers will pay for
different kinds of cars. As economists have known since Adam
Smith, in a competitive market, consumers and producers will be
led, as if by an invisible hand to a price having the remarkable
features that the value of the last unit of output produced just
equals the value that society forgoes in producing it.
Third, competition accommodates changes in consumer demand.
If consumers demand more washing machines, for example, store
owners will quickly begin to run out of inventories. The price
will increase to reflect the increased demand for the existing
stock of washing machines. In turn, manufacturers will be
respond by producing more of them.
One of the roles of government is to establish institutions
that facilitate competition, and when markets are not performing
well to introduce regulation that accomplishes the goal of
restoring competition in the most cost-effective manner.
THE LEGAL SYSTEM
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The law determines the environment within which transactions
take place. All legal rules, including regulations, impose costs
and benefits on different participants in a transaction and
therefore alter their incentives. If an inventor knew that
another person could copy his idea and sell it to others, there
would be very little incentive to invent in the first place. The
legal system protects the inventor's rights by giving him
specified rights to exclude others from the use of the invention,
and therefore the right to require compensation for its use.
Besides defining and protecting a person's property rights, the
legal system provides a method for enforcing contracts and for
compensating people when they are harmed from an accident or an
injury.
Among its many benefits, the legal system provides a forum
for resolving disputes and establishes the ground rules upon
which market transactions take place. But there are also costs
to resolving conflicts within the legal system. A legal system
can constrain economic activity if disputes are resolved slowly
and the costs of litigation are high. Reform of the legal
system, like regulatory reform, involves setting rules that
achieve their aims in the most cost-effective way possible. In
the case of the law, the goal is to create rules and a system of
adjudication that provides a fair and efficient system for
settling disputes.
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Property Rights, Contracts and the Tort System
Ownership of a piece of land conveys on that person the
right either to exclude others from or give them access to the
property, generally to the benefits or use of a resource on that
property. The deed to a piece of land defines a property right,
and the law protects those rights by giving the owner redress to
the courts if someone tries to use the property without the
owner's permission. Property rights are not absolute, however.
Society balances the goals of private ownership against other
social goals. In the case of land, local communities have zoning
laws that restrict the types of buildings that can be constructed
in a particular neighborhood.
Examples of property rights include not only a deed to a
piece of land, but less tangible equivalents to a deed such as a
patent that allows an inventor to receive the profits from his
work, or a license from the Federal Communications Commission
that gives the owner sole rights to a part of the radio spectrum.
The licensee of a particular portion of the spectrum would have
little incentive to promote the use of the frequency if any other
person could begin broadcasting on the same frequency. By
defining what the license is, and providing a forum to enforce
that right, the legal system allows the frequency owner to
capture the returns from the investment.
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The rules of contract law enforce agreements among
individuals and establish what actions will take place when
contracts are breached. Even if a person could specify all
outcomes when writing a contract, legal enforcement is still
necessary to ensure that people will honor the agreement. If a
tire manufacturer has contracted to deliver tires to an auto
assembler, and he does not deliver, the assembler can go to the
courts to have the contract enforced. Without enforcement,
people would have to depend exclusively on the good will of
others to ensure that the agreement in a contract is carried out.
For the auto manufacturer, it is much easier to plan production
of new cars when it is clear that the contract for tire delivery
is enforceable.
The legal system also includes a system of tort law, whose
major goal is to provide victims of accidents and injury the
opportunity to be compensated for their losses. By awarding
damages to victims, the tort law creates an incentive for
individuals to behave responsibly. Because there is potential
for being sued to compensate a victim, people will respect
property rights and put more effort into accident prevention and
into reducing the potential loss from accidents.
Proposed Reforms for the Legal System
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The process of enforcing civil law has been criticized for
being costly, arbitrary, and unpredictable and for using
unscientific standards. Because of the way the rules for
resolving legal disputes are currently written, parties to a
legal case do not consider all of the costs of resolving a
lawsuit. For example, both sides of a legal dispute have almost
unlimited ability to take sworn depositions of witnesses, request
documents, and submit written questions to each other within the
pre-trial process called "discovery." Discovery is provided
without cost to the requestor, so there is virtually no incentive
to limit the amount of the request. The result is often
unnecessary requests for information, adding substantially to the
cost of litigation with little offsetting benefit.
The President's Council on Competitiveness has proposed a
comprehensive set of reforms to the civil justice system in its
"Agenda for Civil Justice Reform in America." Many of the
reforms are meant to accelerate the resolution of disputes and to
discourage waste in litigation. The Council on Competitiveness,
under the leadership of the Vice President, has proposed
establishing rules to set quantitative limits on the amount of
discovery provided cost-free to the requestor. The proposed
civil justice reforms also include encouraging alternative
methods of dispute resolution, placing caps on punitive damages,
and promoting judicious use of expert testimony (Box 5-1). In
Executive Order 12778 the President has directed all Federal
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agencies to implement several of these reforms, including changes
in discovery procedures and in the use of expert witnesses,
whenever it is feasible.
Box 5-1: Civil Justice Reform Proposals
In August 1991, the President's Council on Competitiveness
recommended 50 specific changes to the civil litigation system.
The major reforms include:
Loser Pays. The Council has proposed the use of the English rule
or "loser pays.' Under this proposal the person who loses a case
would pay the winner's attorney fees. The amount of the payment
would be capped at a level equal to the amount spent by the
loser. Knowing that the law establishes a penalty for losing, a
person might be discouraged from bringing a frivolous suit.
The use of the English Rule would be limited to cases involving
State law brought under the Federal courts' diversity
jurisdiction.
Punitive Damages. Punitive damages are often awarded over and
above actual damages. While some States have attempted to limit
punitive damages, the current approach has been criticized for
distributing awards in a random and capricious manner. The
Council proposes that limitations be placed on punitive damages.
Under one proposal, the amount of the punitive damages would not
exceed an amount equal to the plaintiff's actual damages.
Expert Evidence. Often, "expert" testimony is unsupported by
accepted professional practice or scientific knowledge. A
principal recommendation would require experts to base their
testimony on theories "widely accepted" by others in the field.
Voluntary Dispute Resolution. Most disputes are resolved through
litigation, either at trial or in an out-of-court settlement.
The Council on Competitiveness recommends greater access to
alternative mechanisms such as private mediation or arbitration
to resolve matters without resort to the legal system.
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WHY AND HOW GOVERNMENTS REGULATE
Regulation, it is commonly argued, is intended to correct
market imperfections. First, an industry may not be competitive
because it contains only one or a few producers. In this case,
the government uses antitrust enforcement or price regulation to
protect consumers. Second, the presence of "externalities," or
third-party effects, means that people do not account for the
effects of their actions on others. As an example, pollution
imposes costs on third parties. This is the argument made for
environmental regulation: a manufacturer dumping pollutants into
a river does not consider the effects on a fisherman who also
uses the river.
An externality can also benefit rather than harm third-
parties. Information is one important example. When a company
discloses information on a product's characteristics, it may be
difficult to exclude competitors from capturing the benefits of
that information as well. The effect of an external benefit is
that the incentives to disclose the information are diminished.
In principle, when the benefits of having the information
outweigh the costs of providing it, the government's role may be
to provide the information directly, or to require firms to
provide it, and then to let consumers make choices about which
goods or services to buy. Examples of government required
information include food and drug labeling, and energy efficiency
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labels for household appliances. In other cases, it may be
costly for consumers to assess the information they receive
relative to the benefits of having the information. Rather than
requiring disclosure, the government sets standards, as in
airplane or consumer product safety.
Either the absence of competition or the presence of
externalities represent imperfections in the private market
system. If government regulators were acting primarily to
correct these imperfections, one would expect that the primary
characteristic of regulation would be to simulate the features of
the market, such as by encouraging regulated businesses to
produce efficiently. In practice, however, the United States and
other nations have often relied on command-and-control mechanisms
that dictate a particular level of profits or technology, rather
than on mechanisms that encourage firms to reduce their costs or
to improve services.
For example, EPA's 1979 rules for new electric power plants
required costly limestone "scrubbers" to reduce sulfur emissions
at virtually all new coal-fired plants. A better alternative
would have been to set emissions targets and then allow firms to
meet the targets by the most cost-effective means. Other
examples of command-and-control regulation include restricting
price competition among ocean shippers, limiting the number of
firms that can provide cable television service, and using
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administrative hearings to determine who gets the rights to new
positions on the radio spectrum.
One reason that command and control regulations remain in
place is that the decision to introduce regulatory reform or to
deregulate an industry affects the distribution of wealth among
consumers and regulated companies. The outcome of the regulatory
process may be determined by the strength of interest groups
rather than by what regulation maximizes net benefits to society.
A regulated company that is producing inefficiently, for example,
knows that if competition is introduced the company will either
be forced to go out of business or to invest in a more efficient
production process. Such a company will resist regulatory
reform.
In the following sections the traditional forms of
regulation are briefly analyzed, accompanied by a discussion of
the interest group theory of regulation.
Antitrust
Sometimes an industry may not be competitive--either because
a producer has a monopoly over production or because it has only
a few large firms that can make decisions collusively. In these
situations, producers tend to reduce the amount of production
below what a competitive market would produce, causing prices and
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profits to rise at the expense of consumers. The desirable
characteristics of markets are attenuated when competition is
absent. In particular, the outcome is inefficient because some
consumers would be willing to pay more for the good than the
additional cost of its production. If competition were greater,
producers' profits would decline, but by less than the value of
increased output, and all consumers would enjoy lower prices.
Although not normally discussed as a form of regulation,
antitrust policy is one way to inhibit anticompetitive behavior.
The Federal Government enforces the antitrust laws through the
Antitrust Division of the Department of Justice (DOJ) and the
Federal Trade Commission (FTC). The primary focus of these
agencies is to challenge mergers that significantly reduce
competition and to prosecute businesses that collude to raise
prices.
The Regulation of Prices and Competition
Economic regulation generally refers to control of the
prices a business can charge and sometimes the number of
businesses that can provide a good or service. One goal of
price regulation is to place a check on companies that have a
monopoly in the market that they serve. Yet, competitive
industries have also seen their prices regulated. Price
regulation of natural gas sales was instituted in 1954, even
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though approximately 2,300 independent producers of natural gas
were operating as of 1947. Because prices were set too low in an
industry that was already competitive, shortages of gas developed
in the 1970s.
Another motivation for economic regulation is to protect
existing companies from new competition. Regulation of
interstate trucking by the Interstate Commerce Commission (ICC)
in 1935 was stimulated by railroads' concern that unregulated
trucking companies would be able to undercut the prices of
railroads in areas where railroads were not the efficient
carrier. The ICC restricted the ability of trucking companies to
offer discounts, and regulators were hostile to companies that
wanted to extend service into new geographic regions and to the
development of completely new firms. In fact, existing firms
were allowed to protest proposed service by a new carrier. The
Motor Carrier Act of 1980 changed all of that by limiting the
ICC's regulatory authority. By 1990 the total number of licensed
interstate carriers exceeded 40,000, compared with 17,000 in
1980. During fiscal 1987, truckers filed 1.2 million new rate
schedules, as opposed to 394,000 in 1979. Because trucking
services represent 75 percent of all expenditures on transporting
goods, reduced regulation contributes to economic growth by
reducing a major cost of production.
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Price regulation and limitations on competition have a much
stronger justification in industries that are "natural
monopolies." These are industries where it is less costly to
produce all of a product in a single firm than in several
different firms. Within a particular geographic area, firms such
as electric utilities, local telephone companies, and local
distributors of natural gas have been considered natural
monopolies.
If several electric utilities attempted to compete with each
other for the same customers, each company, realizing that cost
reductions come from having more customers, would begin to lower
prices to capture those customers. Eventually only one firm
would survive this battle. Exactly this type of competition
occurred in the late 19th century when several companies provided
electric service in New York City, with one company eventually
emerging to serve the whole city. The expenditure on the
overlapping electric lines was wasteful since competing firms
could not survive.
The usual policy response is to carve out a monopoly for an
electric utility over a fixed geographic area, and to then
regulate its prices. While constraining the pricing of a
monopolist and eliminating wasteful duplication, regulation of
this type can also have drawbacks. As discussed below, the way
prices are regulated can diminish the incentive for the regulated
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company to minimize its costs. Also, the protection of a
monopoly by the government may prevent new competitors from
implementing new technologies that are not natural monopolies.
The Environment, Health, and Safety
Since World War II, the government has assumed an ever-
increasing role in regulating the environment, health, and
safety. Spurred by increasing public concern over risks,
government agencies now regulate discharges of air pollutants,
set safety standards for cars, and oversee the food Americans
eat.
The goal of regulating the environment, health, and safety
is to correct the problem of externalities or third-party
effects. Externalities may take the form of something people
want less of--like air pollution--or something they want more
of--like information on safety. If one man's clothes are soiled
by his rural neighbor's furnace, he may be able to arrange
compensation from the neighbor. But if his clothes are soiled by
air pollution from a thousand furnaces and cars, then it will not
be practical to obtain compensation from, or even identify, all
those who caused the harm. In this case, one person can pollute
another's air without paying compensation, and the result will be
too much air pollution. Ronald Coase, the winner of the 1991
Nobel Prize in Economics, pointed out that the difficulties in
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correcting the externality through bargaining may necessitate
regulation to reduce pollution (Box 5-2).
Box 5-2: Ronald Coase, Property Rights, and Pollution
Prof. Ronald Coase recognized the inextricable link between
establishing property rights and correcting externalities. In
the case of pollution, Coase asserted that if property rights to
the air could be assigned, and there are no costs of bargaining
between individuals, no government intervention would be
necessary to deal with pollution. No matter who is originally
assigned the property right, a market will develop for that
right. Polluting firms and injured parties would then be able to
negotiate on their own, producing an efficient level of
pollution.
The negotiations necessary to achieve this solution will not
necessarily occur, however. As Coase emphasized, there are
"transaction costs" of engaging in bargaining. In the case of
air pollution, millions of people may be affected, making
negotiation impossible. When transaction costs are high, how the
legislature originally assigns property rights becomes very
important. If they are assigned to a polluter, for example, it
can be difficult for injured parties to seek redress through
negotiation. In that case regulation may become necessary.
Besides protecting the environment, the government protects
consumers by providing information or requiring that businesses
provide information. In 1990 the President signed the Nutrition
Labeling and Education Act, requiring the FDA to establish rules
that would make it easier for consumers to understand the
nutritional content of foods. Because the benefits of providing
information on nutrition are conferred on all individuals and the
food company is not compensated for those benefits, their
incentive to provide the information is diminished. To help
correct this problem, the FDA has proposed standardized measures
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of a "serving" for more than 100 different foods to make it
easier for consumers to compare products. The FDA has also
placed limits on the health claims that food manufacturers can
make. Although the information benefits consumers, it is
important to recognize that businesses will incur costs to
develop the new information and to alter the food labels. Also,
strict regulation of health claims could have the adverse impact
of suppressing dissemination of useful information. Furthermore,
the presence of an externality does not mean that no information
on nutrition will be provided. Even when firms cannot capture
all of the benefits, information may still be supplied by others
(e.g., through consumer magazines).
For certain risks, the government may go beyond requiring
that information be provided. Because it is costly for people to
assess the information associated with consumer products,
workplace safety, and similar risks relative to the benefits of
having the information, it is argued that the government should
regulate the risks directly.
Many actions have some external or third party effects that
could be used to justify government intervention. But government
action itself has third-party effects, and government
intervention to correct the "market failure" of an externality
carries with it the risk of unintended outcomes because of
government intervention or "government failure."
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Government failure may occur for at least three reasons.
First, it can be difficult to determine who is affected by an
externality and to what extent. This is particularly true where
the scientific consensus is still evolving. For example, the
scientific consensus on air pollutants and toxic substances has
changed often enough to impede sound regulatory decisions; the
scientific debates surrounding asbestos, dioxin, and global
climate change all attest to this.
Government failure may also occur when regulatory solutions
impose large unintended costs on innocent third parties. Thus,
long delays in the testing of new drugs harms those forced to use
the older, often less effective, substances. The Administration
has proposed using private organizations to complement the FDA's
function of testing the safety and effectiveness of new drugs.
The goal of privatizing some of the testing function is to reduce
the average time it takes to get a new drug to market from 9.75
years to 6 years.
Third, as explained in the next section, government failure
may occur when regulation becomes the mechanism that allows one
group of citizens to take advantage of another.
Interest Groups and Regulation
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Regulation creates winners and losers. Firms know this, and
spend considerable time and money trying to capture the benefits
of regulation. New regulations rarely affect all firms equally.
New firms may face higher costs than existing firms; large firms
may be able to finance costly changes demanded by new
regulations; some firms may be able to gain exemptions from the
existing rules.
An example is in the development of the pipeline that brings
Alaskan natural gas to the rest of the country. A waiver of
certain Federal regulations granted by Congress in 1981
facilitated construction of the pipeline. Companies involved in
the project lobbied heavily for this waiver, which reduced their
liability in the event the project failed. Their success in
obtaining passage of the waiver increased the value of these
firms considerably.
Through regulation or other policy, the government can
transfer income from one group to another. One way is by
creating or protecting a firm's position as a monopolist, or by
restricting a market to a small number of firms. Protected firms
enjoy higher profits than competitive firms; these higher profits
become the prize sought by others. Thus, as explained above,
truckers used the ICC to block entry of new competitors.
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But gaining a protected position from the government can
involve large expenditures. Firms hire lobbyists and lawyers,
and even alter their business plans in order to acquire a
protected position. Since all interest groups must make similar
expenditures, the regulatory process tends to favor those groups
or businesses who can capture the greatest benefits from a
protected position. Once achieved, a protected position must be
defended against competitors trying to dislodge the incumbent
firm.
Before deregulation in 1978, for example, the Civil
Aeronautics Board (CAB) granted effective monopolies to airlines
on many routes. The CAB held hearings in which the airlines
attempted to persuade the board members to award them the
exclusive franchises and to keep out competitors. Although the
post-deregulation domestic airline industry continues to use
lobbyists to gain a favorable hearing for its views, the industry
no longer has protected domestic monopolies to spend time and
money defending.
The U.S. Department of Agriculture's (USDA) agricultural
marketing orders are another illustration. These orders restrict
supply in markets for milk, lemons, oranges, and other crops (Box
5-3). For decades farmers have made investments with the belief
that the orders would protect their profitable position. They
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resist proposals that would eliminate these orders because doing
so would reduce the value of their investment.
Box 5-3: Agricultural Marketing Orders
Marketing orders regulate handlers (first buyers) of certain
fruits and vegetables and fluid milk. A Federal marketing order
for California-Arizona navel oranges has been in effect since
1933. Under the present order, the maximum quantity each handler
may ship to the domestic fresh market is set weekly. Harvested
oranges not sold in the domestic market are sold abroad or to the
domestic processing industry. By diverting oranges that would
typically be sold in fresh markets to these other markets, total
revenue to growers is increased.
Although land owners gain because of higher farm income, the
marketing order penalizes lower cost producers by restricting the
amount of fresh oranges that can be sold to the higher priced
domestic market. Consumers of fresh oranges lose as well because
of higher prices.
What are the costs and benefits of such regulation? A
recent USDA study suggests that eliminating the marketing order
would cost producers about $13 million annually, while saving
consumers about $30 million. On a per-capita basis, however,
each consumer would gain about $.12, while each grower would lose
about $3,150 from eliminating the order.
The problem of entrenched protected interests can be avoided
by arrangements that discourage expenditures solely to defend the
special position. Auctioning public property, for example, makes
the auction winners owners of the property and gives them an
incentive to make the best use of it. Currently, the FCC uses a
lengthy process of hearings or a purely random lottery system to
assign new licenses to the radio spectrum. Competitive bidding
for newly available portions of the radio spectrum ensures that
licenses will be allocated to those parties who value it most.
Bidding would also simplify the application process.
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Another solution would be to require supermajorities for
passing certain kinds of legislation, such as imposing tariffs,
quotas, or price supports. Supermajorities would reduce the
ability of narrow interests to impose costs on the larger public.
THE REGULATORY PROCESS
Regulation has become pervasive at the local, State, and
Federal levels. Local regulation typically focuses on issues of
interest to cities and towns. These include such measures as
setting zoning restrictions and building codes, regulating sewer
and water prices, and granting cable television franchises. In
some cases local municipalities own the local electric utility,
buying the needed power from generators of electricity. States
regulate similarly, usually through regulatory commissions, which
set retail rates for local telephone calls, electric power, and
natural gas. States also regulate in a broad range of other
areas, such as intrastate trucking, the insurance industry, and
the environment.
Federal regulation is concerned primarily with goods and
services that are sold in interstate commerce. Congress has
responded to economic and social problems by creating regulatory
agencies or by expanding the role of an existing Cabinet
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Department. In health and safety, for example, 9 separate
Federal agencies write regulations under the authority of 26
major statutes. In a process called a "rulemaking," agencies
propose rules to conform with the requirements of the
legislation. They are then published in the Federal Register, and
finalized only after a period for public comment.
Box 5-4: Writing the Rules: The Clean Air Act
Congress legislates regulation broadly but leaves to the
agencies the task of filling in the details. Each major
regulatory agency is charged with implementing certain laws. As
an illustration, the Clean Air Act Amendments of 1990 (CAAA)
contains 9 major titles running to 300 pages and requires EPA to
issue over 55 separate regulations in the first 2 years alone.
Consultation and public comment. On November 15, 1990, President
Bush signed the CAAA. In late 1990, EPA began work on the first
set of rules to be drafted, meeting formally and informally with
affected industries, environmental groups, and other outside
groups. In early 1991, EPA published in the Federal Register the
first of a series of notices of proposed rulemaking, soliciting
public comment. At several stages of the rule writing process,
EPA must solicit public comments to be considered as the
regulations are finalized.
Req-neq. Recently, some rules have been formulated through
negotiated regulations or "reg-negs," which aim to get around
some of the lengthy and cumbersome steps of the conventional
process. The 1991 draft rule on reformulated gasoline was drawn
up with a reg-neg.
Agency review. The Office of Management and Budget (OMB) and
other agencies have the opportunity, and in some cases the
statutory obligation, to review proposed rules, generally for 30
to 60 days.
Final rule. After a last round of public comments, and
concurrence from OMB, the EPA Administrator signs the final rule,
which is promulgated in the Federal Register.
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As shown in figure 5-1, researchers estimate that the
administrative costs of enforcing and writing regulations have
increased almost threefold since 1970. These costs, however, do
not include the additional costs imposed on the firms that are
regulated--costs that are ultimately borne by consumers. One
recent estimate puts the total cost of Federal regulation at
about $400 billion a year, or 7 percent of GNP.
To make regulations more cost effective and to create some
consistency in the way regulations are formulated in each agency,
a system of regulatory oversight has been established within the
Executive Office of the President. In 1981, President Reagan
issued Executive Order 12291, which authorizes the Office of
Information and Regulatory Affairs (OIRA) within the Office of
Management and Budget (OMB) to work with the various regulatory
agencies to develop more effective and less costly regulations.
The Executive Order directs all agencies proposing new
regulations, reviewing old ones, or developing legislation to
estimate costs and benefits and to demonstrate that the potential
benefits outweigh the potential costs to society. In 1990, OIRA
reviewed over 2,100 rules to ensure that the principles of
Executive Order 12291 were applied.
Federal vs. State Regulation
Administrative Costs of Federal Regulation
in Millions of 1982 Dollars
10,000
8,000
6,000
4,000
2,000
1970
1975
1980
1985
1990
1991*
1992*
Year
Social Regulation
Economic Regulation
*
Estimated
Figure 5-1
Source: Center for the Study of American Business, Washington University.
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One barrier to increasing the overall effectiveness of
regulation is the dual system of Federal and local regulation.
Often, local governments can respond more effectively to problems
that arise in their communities. Federal involvement in local
zoning laws, for example, would require knowledge of local
conditions that would be very costly to accumulate. Sometimes
overlapping jurisdictions can create problems. For example,
State regulations that impose food labeling laws distinct from
the Federal rules of the Food and Drug Administration (FDA) force
businesses to develop differently labeled products for these
States. The inevitable increase in production costs would lead
to higher food prices for all consumers. In cases where local
regulation interferes with economies of production, a uniform
system of Federal regulations would reduce the burdens on firms
and their workers and lower prices for consumers.
SUMMARY
O A system of competitive markets creates the discipline that
encourages firms to produce efficiently and directs
resources to their best use.
O
A well-functioning legal system should increase the level of
economic activity by protecting property rights, ensuring
that contracts are fulfilled, and protecting the victims of
injury.
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O
Although the presence of an externality may be clear,
measuring its size can be difficult. When it can be
measured, policies that incorporate market incentives are
superior to command and control solutions.
THE BENEFITS OF ECONOMIC DEREGULATION
The primary purpose of deregulation is to allow competition
to determine the prices that consumers are charged and the amount
of goods and services that are produced as well as to encourage
innovation and the development of new products. For example,
before deregulation, the CAB determined the number of airlines
that could serve each air route and the air fares they could
offer. Ostensibly, fares were regulated so that consumers would
benefit from prices that would prevail in a competitive market.
Since deregulation in 1978, fares have decreased on long-distance
routes and increased on short-distance routes, but taken together
average air fares have declined 20 percent. Forty percent of
high-density routes are now served by three or more carriers,
double the percentage before deregulation. Also, once freed from
regulation airlines developed "hub and spoke" systems, an
innovation that has given passengers a much greater range of
flight choices.
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New technologies mean that some industries are no longer
natural monopolies, but regulation can mask that fact by keeping
the new technologies out of the market place. Instead of
perpetuating the monopoly, deregulation would allow new firms to
enter. The market would then determine how the service should be
provided and at what price.
This is especially true in telecommunications where
technology is changing rapidly. For example, before the breakup
of AT&T most supporters of regulation considered long-distance
telephone service to be a natural monopoly. Now firms have set
up fiber optic and microwave networks that compete directly with
AT&T in long-distance service. The Administration proposed in
November 1991 to allow competition with INTELSAT, the
international consortium that provides international long-
distance telephone service by satellite. Under the new policy
new satellite companies would be allowed to compete with INTELSAT
by 1997.
Even when competition is not feasible, innovative regulatory
measures can still be taken. Reforming the way prices are
regulated would give regulated firms greater incentive to reduce
costs and to innovate. Currently, monopolies are usually
regulated using traditional cost-of-service regulation. The
regulator determines the cost of providing the service and then
prices are set to cover those costs, including a return on the
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capital that is invested in the regulated company. This method
is used to ensure that the company will not lose money, and that
it will not be able to charge prices above its costs.
The problem with cost-of-service regulation is that it does
not give the regulated firm the incentive to reduce its costs or
provide better service. An attempt to reduce costs will
eventually be followed by a reduction in allowed revenues,
leaving the firm no better off. If new services lead to
increases in profit, prices will eventually be reduced to bring
revenues in line with costs.
New regulatory approaches, commonly labeled "incentive
regulation," are being tried as alternatives to cost-of-service
regulation. In the transition from regulation to unregulated
competition in long-distance telephone service, some of AT&T's
rates are tied to an index that is adjusted for inflation minus a
correction for expected productivity improvements. If AT&T
reduces its costs or improves its products, it is allowed to keep
the profits. Many States have also instituted this incentive
rate regulation for local telephone companies. And in its
National Energy Strategy, the Administration has proposed
instituting incentive rate regulation for natural gas pipelines.
In this way regulators monitor monopoly profits while giving the
regulated company incentives to produce efficiently.
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Proposals for further deregulation are now being considered
to improve performance in the natural gas, electric power, and
cable television industries. Regulatory reform will bring more
competition to natural gas delivery and the generation of
electric power. The benefits of deregulating cable television
will be fully realized only when entry barriers to new
competitors, possibly using alternative technologies, are
removed. The goal of deregulation is to secure a more efficient
allocation of resources. That goal can be achieved by
eliminating price regulation and barriers to entry where markets
are competitive.
NATURAL GAS
Regulation in the natural gas industry is a primary example
of the problems that can arise when regulators set prices
incorrectly. Before 1978, the price paid for the natural gas
that is extracted from the ground, often called the "wellhead"
price, was regulated by the Federal Energy Regulatory Commission
(FERC). Unfortunately, the regulated prices were set too low,
reducing the incentive to extract more natural gas. Because
there was a greater demand for natural gas at the regulated price
than was being produced, Federal regulators were forced to ration
the use of gas. To alleviate this problem, the Natural Gas
Policy Act of 1978 began the process of decontrolling prices.
The Natural Gas Wellhead Decontrol Act of 1989 set a timetable
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for completing the deregulatory process. By January 1, 1993, all
regulatory control over wellhead prices will be eliminated.
The Current Status of Natural Gas Regulation
The process of transporting natural gas to a residence or a
commercial user remains regulated by FERC and the States,
however. Once natural gas is extracted from the ground, it is
transported by pipeline, often over long distances and across over State
lines, and then sold to local distribution companies, electric
utilities, and industrial users. FERC regulates the prices
charged for interstate transportation of natural gas and the
prices that pipelines charge for the gas they sell to local
distributors and others. Pipeline companies must provide
FERC with information on costs of production. FERC then sets
prices to cover those costs.
The local distribution segment of the industry, which
distributes the gas to residences and commercial users, remains a
regulated monopoly. Having multiple natural gas lines to every
home and business would be inefficient. One company delivering
the gas to all homes within a market is a less costly method of
distribution. Because distribution has natural monopoly
characteristics, the local distributors have monopolies over
their service areas, and the rates are regulated by States.
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Despite the fact that wellhead prices have been deregulated,
the utilization of natural gas has actually declined in the
electric generation and industrial sector over the last two
decades. Although natural gas is a relatively clean fuel with
abundant domestic supplies, total domestic consumption has
declined more than 10 percent since 1973 (see figure 5-2). One
This would
not explain
primary obstruction to increased use of natural gas is the
a decline
in consumption
process of granting permits for construction of new natural gas
pipelines. An interstate pipeline must apply to FERC for
permission to construct a pipeline. Often, an administrative
hearing is held in which outside parties, including competitors,
can object to the application. Several years may elapse before a
construction permit is granted, sometimes prompting consumers to
turn to alternative, more expensive fuels. Legislation based on
the Administration's National Energy Strategy would streamline
the process of reviewing applications for pipeline construction.
Additionally, local distribution companies, electric
utilities, and industrial users may be limited in their ability
to negotiate directly with natural gas producers. For example,
an industrial user's only source for gas may be from the pipeline
that serves its plant. With a monopoly over gas sales, the
pipeline can set a higher than competitive price for the gas,
prompting the user to consider alternative fuels. In fact,
before 1985, almost all of the gas transported by pipelines was
actually purchased by the pipeline and then resold to
United States Consumption of Natural Gas
in Billion Cubic Feet
23,000
22,000
21,000
20,000
19,000
18,000
17,000
16,000
15,000
1973
1975
1977
1979
1981
1983
1985
1987
1989
1974
1976
1978
1980
1982
1984
1986
1988
1990
Year
Source: Energy Information Administration, Monthly Energy Review, October 1991.
Figure 5-2
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distribution companies or industrial users. In 1982, only 3
percent of the natural gas transported by the pipelines was owned
by others. To protect buyers, some type of regulation was
necessary.
Open Access to Natural Gas Pipelines
Recent FERC initiatives have significantly changed the
position of pipelines in the sale of gas by creating incentives
for pipelines to transport gas that is owned by other companies.
This policy is commonly called "open access." Since pipelines
also sell gas, they have developed "gas affiliates" to market the
product. Open access pipelines are required to provide gas
transportation services to nonaffiliated natural gas sellers that
are comparable to those it provides for its own gas affiliates.
Because of this policy, nonaffiliates now account for 80 percent
of the interstate sales of natural gas. Pipelines now play a
dual role, marketing their own gas and transporting gas owned by
others.
The effect of the open access policy is that utilities and
industrial users can contract directly with a large number of
producers, and not just the pipeline, when purchasing gas.
Indeed, a competitive market has developed. Recognizing this
fact, FERC has proposed to relax regulation of pipeline gas
sales. Limited regulation of natural gas pipeline sales means
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that the competitive market will determine which transactions
take place and at what price.
Because local distributers and other gas consumers may still
be captive to a single pipeline, the rate the pipeline charges
for transporting the natural gas remains regulated. Critics of
natural gas deregulation note that when a pipeline sells its own
gas, it is actually selling a bundled commodity consisting of the
gas and the transportation service. Other gas sellers pay for
the transportation services separately, but the price they pay
may not be comparable to the rate the pipeline's own gas
affiliate is implicitly paying for the service. If there is no
other competing pipeline through which the natural gas can be
delivered to a particular customer, the non-pipeline seller will
be at a disadvantage relative to the pipeline's own gas
affiliate. Discrimination of this type could reduce the benefits
of competition.
One of the goals of the Administration's National Energy
Strategy is to eliminate the possibility of discrimination. As a
remedy, FERC has proposed that pipelines be required to separate
their business of selling gas from their business of transporting
gas for others. Gas would be sold unbundled from the various
transportation services, as on an "a la carte" menu, making it
the comparability of transportation rates much easier to monitor.
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Mandatory unbundling does have its costs, however. It is
important to recognize the tradeoff between solving the problem
of discrimination and forgoing the economies in the dual role of
pipelines as both merchants and transporters of gas. Mandating
unbundling would deny the benefit of these "economies of scope"
to purchasers desiring a bundled package of services. The loss
of productive efficiency needs to be considered before
comprehensive unbundling is mandated.
ELECTRIC POWER
Similar to the natural gas industry, the electric power
industry consists of three different segments: the generation of
power, the transmission of power from generators to local
utilities, and the distribution of electricity to homes and
businesses by the local utility company. Some electric power
companies participate in all three segments of the industry:
they produce their own power and then transmit it to their own
local utility. Other firms specialize in one particular segment,
such as generating electric power that is sold wholesale to
utilities or industrial users.
Currently, all three segments of the industry are subject to
State and Federal regulation to some extent. Competition in the
distribution of electricity, as with natural gas, is generally
not considered feasible because of its natural monopoly
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characteristics. Instead, local utilities are granted monopolies
over the markets they service, and States or local municipalities
regulate the rates they can charge customers. FERC regulates the
price of interstate purchases of wholesale power and the prices
charged for use of interstate transmission facilities. But
competition has emerged among firms that sell wholesale power.
Regulators now face the problem of determining when to step aside
and allow the market to determine the price at which that power
is sold.
Deregulating Electricity Generation
The ability to buy and sell electric power allows utilities
to make more efficient use of existing capacity. For example, by
buying power from other companies, a local utility can satisfy an
extraordinary demand for electricity, such as that which occurs
on an unusually hot day, without having to build the capacity
itself. When utilities purchase power, however, the Federal
Power Act of 1935 requires FERC to determine whether the prices
charged for the interstate sales are "just and reasonable." That
determination requires the regulated company to provide cost
information to FERC, and significant delays in determining the
rates can occur. Since the Federal Power Act was passed,
however, the need to regulate all sales has been questioned
because many alternative sources of electric power have
developed.
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One major step in developing competition in the sale of
electric power was the Public Utilities Regulatory Policies Act
of 1978 (PURPA). PURPA defined a set of "qualifying facilities,"
such as cogenerators of steam and electricity that were exempted
from FERC rate control and were relieved of other financial
requirements. PURPA has been successful in encouraging the
development of nontraditional sources of power. In the 1980s
qualifying facilities added 13,000 to 15,000 megawatts (MW) of
capacity to the national market, while utilities that produce
their own power ordered only 9,500 MW of new capacity. Other
power producers that are too large to qualify under PURPA have
also emerged. The availability of alternative power sources has
encouraged 13 States to make use of competitive bidding, rather
than regulation, when a utility needs generating capacity.
One barrier to the further development of a decentralized
market for electricity generation is the Public Utility Holding
Company Act of 1935 (PUHCA). The original intent of the Act was
to curb financial abuses by holding companies of electric
utilities. Its effect today, however, is to restrict the
development of independent generating sources. For example,
certain holding companies are barred from owning more than 10
percent of a power producer whose sole purpose is to sell power
in the wholesale market. Legislation based on the
Administration's National Energy Strategy would change the role
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of PUHCA by encouraging entry by new independent power producers
as well as the establishment of new sources of wholesale power
controlled by utilities.
Transmission Access
Unfortunately, the control of transmission services by firms
that also sell wholesale power has inhibited the ability of FERC
to rely fully on market prices for power sales. The primary
reason for this is that a utility may be captive to a single
provider of transmission who also sells power. The owner of the
transmission capacity could deny other power producers access to
the lines, allowing it to charge prices above competitive levels
for the power. The presence of a monopoly provider of
transmission forces FERC to keep a close watch over the prices
charged for wholesale power.
A seller of power who also controls transmission of power
does not always set rates above the competitive level, however.
A purchaser may have several alternative sources of supply. It
could generate power itself, it could purchase power produced by
others in its own service area, or it could purchase power
produced outside of its service area by firms that have access to
the necessary transmission. When the purchaser of power has a
number of alternative sources, a competitive market can develop.
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Prices that arise from those markets are a sufficient substitute
for regulated rates.
When there are no alternative sources of power, denial of
access to transmission would leave the utility captive to only
one supplier. In that case a requirement that the transmission
owner give a buyer access to alternative sellers, while being
compensated for the costs of using the transmission, would
increase competition in wholesale markets and ensure that power
can be purchased at competitive rates. Unfortunately, FERC has
very limited legal authority to require owners of transmission to
provide access. Legislation by Congress would give FERC the
authority to accept an application by a power supplier for access
when it would promote competition in the sale of power at
wholesale.
CABLE TELEVISION
Cable Television is now available to more than 90 percent
of all homes with television, and more than 60 percent of these
households subscribe to the service. Cable television normally
includes television stations that are broadcast over the air and
services, such as CNN and ESPN, that are delivered by satellite
to the cable operator. In most communities, consumers can only
obtain these services by subscribing to the local cable
television service. The operator charges subscribers a fee for
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delivering these services to their television. The problem now
facing policy makers is how to encourage competition that will
restrain the local cable system from setting high fees.
The Effects of Cable Deregulation
By virtue of their control over permits to string cable
along local roads, local communities established the right to
regulate cable television, and most of them decided that having
more than one cable system was inefficient. Multiple systems
would have meant duplicating all of the cable connected to each
household or business. Most cable television companies were thus
granted a monopoly franchise over the market they serve, with a
local authority regulating the rates that the cable franchises
could charge. In 1969 the Federal Communications Commission
(FCC) affirmed that local communities could regulate the rates of
"basic service," a package that usually includes both broadcast
channels and satellite-delivered programs.
In the early 1980s the need for continued regulation was
questioned because of the availability of alternatives to cable.
Possible alternatives included purchasing satellite dishes, using
VCRs, or simply opting to limit viewing to channels available via
broadcast antenna. The Cable Communications Policy Act of 1984
(Cable Act) stated that regulation was not necessary where there
was "effective" competition, which the FCC defined to mean that
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local residents could receive three or more broadcast channels.
The effect of this rule was to leave only 3.5 percent of all
cable franchises regulated by the end of 1989, down from 67
percent before deregulation.
Cable TV rates increased substantially between the end of
1986, when the Cable Act took effect, and the end of 1990. Over
that period, the average rate for the lowest-priced basic service
increased 32 percent in constant dollars. Cable operators
explain the increase by noting that most basic service now
includes more channels and a greater variety of programs. But
others blame deregulation, noting that the alternatives of
watching broadcast television or renting video tapes do not
provide enough competition to restrict the prices charged by
cable operators.
Introducing Competition for Cable
Responding to that criticism, the FCC changed its effective
competition standard in 1991. Now local communities have the
right to regulate rates, except in those areas that receive
competition from six or more broadcast channels. Although there
have been calls to increase the scope of rate regulation even
further, an alternative policy that introduces new competition
for cable operators would both encourage price competition and
provide alternative sources of television programming.
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- 43 -
The emergence of competition will depend on whether a second
cable provider finds it profitable to put up the necessary wires
and other equipment or to use a different technology in order to
compete with the incumbent cable operator. One possible
competitor that has already invested in much of the fixed
equipment is the local telephone company. Current FCC
regulations and the Cable Act, however, prevent competition from
the local telephone company.
Under one proposal, local telephone companies would become
an alternative way of transmitting television or other video
signals, with both the telephone company and companies not
affiliated with the telephone company being allowed to control
the programming or other video content that was being provided.
Critics of this plan worry that because telephone rates in some
States are still determined using cost-of-service regulation, the
telephone companies might transfer the costs of programming to
the regulated telephone sector, thereby making telephone
customers pay for the costs of some of the programming services
and putting unaffiliated companies at a disadvantage. This is
commonly called "cross-subsidizing." Telephone companies might
also use their control over the telephone lines to discriminate
against competing programmers simply by designing the network to
favor their own product.
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The problems of discrimination and cross-subsidization are a
legitimate concern. If local telephone companies are to be
permitted to control video content, adequate regulation is needed
to prevent costs from being shifted to telephone ratepayers and
to ensure access to the telephone lines. The FCC already has
adopted cost allocation rules that can be used to prevent cross-
subsidization. Rules that prevent discrimination need to be in
place before telephone companies can fully take part in providing
video content. While these safeguards are being developed,
competition for existing cable operators could be enhanced by
permitting local telephone companies to carry television and
other video services that are controlled by independent
companies. The FCC began to ask for comment on such a policy in
November 1991. The alternative policy would be to continue
banning the most likely competitor for incumbent cable operators.
Such a policy is untenable in the face of unregulated rates and
monopoly franchises.
SUMMARY
Implementation of the National Energy Strategy will enhance
competition in the generation of electric power and in the
delivery of natural gas.
Instead of reregulating to control cable rates, a policy
that removes the barriers to competition for existing cable
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- 45 -
operators would lower rates and provide alternative
services.
O
The economies of producing in both a regulated and
unregulated market should not automatically be sacrificed in
order to eliminate problems of discrimination and cross-
subsidization.
REFORMING REGULATION OF THE ENVIRONMENT, HEALTH, AND SAFETY
Environmental, health, and safety regulation attempts to
remedy externalities or third-party effects. During the past two
decades, the Federal Government has significantly widened the
scope of regulation in these areas, generally using command-and-
control regulation. And because legislation in these areas has
rarely required regulators to balance the costs and benefits of
their actions, costs to the economy have increased substantially.
Recent initiatives have attempted to improve on traditional
regulation by allowing more flexibility, and by balancing
benefits and costs. This section describes several areas where
regulatory reform offers significant benefits to the Nation.
IMPROVING THE ENVIRONMENT
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By requiring firms to account for the costs they impose on
others through pollution, the Clean Air Act, the Clean Water Act,
and the Resource Conservation and Recovery Act have to some
extent dampened the incentives for the excessive use of
environmental resources. These measures have contributed to
cleaner air and water in most regions of the country.
At the same time, their costs have been significant. Just
one new initiative, the Clean Air Amendments of 1990, when fully
implemented in 2006, will likely cost $25 billion per year or
more. EPA estimates that efforts to reduce pollution costs the
U.S. economy $115 billion in 1990, more than in any other major
industrialized country, both in absolute terms and as a
percentage of GNP. Between 1972 and 1990, pollution control
costs tripled (in constant dollars), rising from 0.9 percent to
2.1 percent of GNP; by 2000, EPA expects this total to rise to
2.6 percent. By some estimates, indirect costs (which arise, for
example, when a firm must use a higher-priced substitute product)
add significantly to this total.
Acid Rain
Significant uncertainties surround many environmental
issues. This can be seen in the scientific controversy that
emerged in the National Acid Precipitation Assessment Program
(NAPAP), a 10-year study authorized by Congress because of
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concern that acid rain might be harming the environment. When
the NAPAP study began in 1980, the consensus view held that acid
rain caused acid lakes; the study demonstrated, however, that
soil conditions had a far greater influence than acid rain on
acid lakes, and suggested that simple mitigation strategies were
far more cost effective than the technology-based command-and-
control regulation usually favored by Congress.
In the recent past, scientific consensus has shifted
abruptly on several other important issues as well. These
examples should remind us not to rush into expensive new
regulatory regimes on the basis of incomplete evidence. But once
a policy decision has been made to correct an externality
associated with the environment, then market-based incentive
programs usually can accomplish their objectives at a lower cost
than traditional command and control approaches.
The Clean Air Act Amendments of 1990 institute the first
large-scale emissions trading regime for a pollutant. This
program sets a national level of sulfur dioxide emitted annually
from coal-fired power plants. Firms must possess an emission
allowance for each unit of SO₂ they emit or face heavy fines. To
comply, firms are allowed to buy and sell allowances; the desired
level of emissions will be attained efficiently because firms
self-select, purchasing or selling allowances (which are
effectively inputs) to minimize costs. The same level of
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emissions could be achieved under command-and-control regulation,
but the cost of compliance, which falls ultimately on the
consumer through high energy prices, would be far greater.
Economic incentives decrease firms' compliance costs by
offering them the flexibility to make the best use of information
regarding their production process. In contrast, efficient
command-and-control regulation requires the regulating agency to
collect detailed, firm-specific information on pollution control
costs, substitution possibilities, and the value of capital stock
in place--an almost impossible task. With economic incentives,
regulators merely lay down ground rules and allow firms to
determine how to meet strict emissions targets; the government--
and the nation--gets the benefit of the firm's internal
information without having to discover it.
Box 5-5: Are Emission Allowances Licenses to Pollute?
Some have opposed the implementation of emission allowance
trading systems on the grounds that the allowances give their
holders a license to pollute. By these standards, however, any
environmental regulation that does not hold pollution to zero
also constitutes a license to pollute. The costs of pollution
abatement become prohibitive compared with benefits as emissions
are steadily reduced, making some tradeoffs inevitable.
Consequently, regimes should be implemented that protect the
environment to some desired level while minimizing the losses to
economic growth.
Under traditional emission control regulation, firms pay
nothing for emissions until they reach the statutory limit, then
pay often exorbitant fines for exceeding it. This deters firms
from polluting excessively, but because pollution is free up to
this limit, firms do not compensate for the environmental
resources that they consume. An allowance trading system
Document Originally
Attached to
Following Page
D.Pryer
LEA seems to
accept the notion
of a tax (carbon
tax?) to compensate
for externalities
inthe case fuel economy
- Surprise
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requires firms to consider the cost of each unit of pollutant in
their production decision.
Fuel Economy Standards
The transportation sector accounts for two-thirds of U.S.
petroleum consumption, with more than half going to gasoline for
cars, trucks, and buses. Gasoline consumption imposes at least
three kinds of externalities on society: pollution, vulnerability
to oil shocks, and road congestion. Reducing oil consumption to
correct the first two of these problems was the original
justification for Corporate Average Fuel Economy (CAFE) standards
in 1975. Proponents claimed the standards would improve air
quality, particularly in cities, by reducing ground-level ozone
and would reduce U.S. vulnerability to shocks in the oil market
by reducing the demand for imported oil.
CAFE standards require each manufacturer to meet the target
of 27.5 miles per gallon for both its domestic and imported
fleet. Recent proposals would increase CAFE standards by varying
amounts. Proponents argue that higher standards would reduce
both oil imports and consumption.
Government can correct the externalities associated with
gasoline consumption by several means, including fuel and vehicle
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taxes. The most direct solution would be for regulators to
determine the damage caused by gasoline consumption and then set
a tax on its use equal to the value of the harm. (State and
Federal gasoline taxes, which now average 26 cents per gallon,
already correct 26 cents worth of the externality in this way.)
Higher CAFE standards would be a poor substitute for this
approach, because they fail to address the externalities
directly. First, higher CAFE standards may reduce pollution,
because drivers would burn less gasoline per mile. However,
because higher mileage cars generally cost less to drive per
mile, motorists would drive more, offsetting some or all of the
gain from the higher standards. Second, although higher CAFE
standards would indeed reduce oil imports, they may not reduce
U.S. vulnerability to oil shocks, which depends not on the level
of imports, but rather on the flexibility of the economy and
economic responses to the shock.
Much of the CAFE debate has centered on engineering
feasibility, on what mileage targets could be achieved by the
automakers. But consumers, who are the ultimate decisionmakers,
do not base vehicle purchase decisions on engineering
feasibility. Size, options, and performance are also important.
Indeed, engineering feasibility does not itself establish value
to society; it does so only in conjunction with economic
feasibility. Manufacturers can produce cars with high CAFE
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ratings, but if consumers will not buy them, then they should not
be produced.
Proponents of higher CAFE standards generally overlook the
indirect effects of their proposals, which would tend to offset
many of the purported benefits. First, to comply with higher
CAFE standards, firms would probably produce fewer large cars and
more small cars. This would raise the price of large cars and
likely cause consumers to respond by holding onto their present
(older, less fuel-efficient) vehicles. Second, because small
cars are, all else being equal, less safe in an accident than
large cars, higher CAFE standards could significantly increase
deaths on the Nation's highways.
Higher CAFE standards pose other problems as well. The CAFE
requirement that manufacturers divide production into a
"domestic" and an "import" fleet ignores the realities of a
globalized auto industry and forces them to make less than
efficient input choices to meet the standard in each category.
Moreover, current proposals would penalize firms whose technology
gives them a comparative advantage in the production of larger
cars. They could be forced to abandon these competitive
technologies in order to comply. Finally, as with other forms of
regulation, CAFE standards could be coopted by political forces
and used by some firms to gain an advantage over others.
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Global Climate Change
Global climate change is another example of an environmental
externality. The presence of "greenhouse gases" such as carbon
dioxide, methane, and water vapor in the atmosphere helps to
maintain surface temperatures at historic levels; without them,
the temperature of the earth would be about 33°C lower. These
gases retain and reflect some of the heat given off by the earth
back to its surface, providing a sort of blanket to the planet.
Some production processes such as the burning of fossil fuels
result in the emission of greenhouse gases. These additions to
the earth's natural supply of such gases have raised concerns
over possible effects on global climate. Those who emit
greenhouse gases do not account in their production decision for
the climatic effects they cause. For this reason, there is an
externality present to the extent that there are ecological and
economic effects from global climate change and to the extent
that such effects are adverse.
As with many global environmental issues, much of the
research regarding the effects of greenhouse gases is in its
preliminary stage. Indeed, the Intergovernmental Panel on
Climate Change, under the aegis of the United Nations, estimated
that it may take a decade or more to be certain that man-induced
how much several & the gases
climate change has occurred. The question of which gases
contribute to the greenhouse effect also remains open; this is
uncertain
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illustrated by the conclusion of the Scientific Assessment of
Stratospheric Ozone, a recent study, which stated that
chlorofluorocarbons (CFCs) probably have no net effect on global surface
temperature and thus are probably not greenhouse gases reversing
the previously accepted conclusion.
and raised a mumber of new screntific
wrong
questions regarding the nature of chemical reactions in the atranghere several
Most scientists agree that some warming will occur invelving as a importants gases
result of fuel burning, deforestation, and other human
activities. At issue is timing and magnitude. The increase in
global average temperature resulting from a doubling of
atmospheric CO2 has been estimated at between 1.5°C and 4.5°C,
with the most recent estimates falling in the lower end of this
range. More recent scientific research generally discounts the
severe effects predicted in some preliminary work a few years
not
necessary
ago.
In choosing among alternative courses of action, the
scientific uncertainty surrounding climate change should be
considered along with estimated costs and benefits of action. A
prudent course includes taking these actions that would be
desirable on their own merits, while deferring costly steps that
should properly await resolution of key scientific uncertainties.
Rational policy requires balancing the costs of delay with the
benefits of information that will be available later.
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The potential effects of climate change are generally long
term, and the initial costs of proposed remedies may be high.
One proposal aims to stabilize global greenhouse gas emissions
als best use secured
this the
at 80 percent of 1985 totals by 2010. Studies put the eventual
to
cost of achieving this goal at 1 to 5 percent of world gross
extreme)
domestic product per year with most of the cost attributed to the
reduction in output needed to achieve the emission reduction. In
today's world economy, this would be $200 billion to $1 trillion
per year. Hasty attempts to remedy the externality imposed by
greenhouse gas emissions could have small benefits relative to
these very large costs. A better understanding of the science of
global climate change is needed before agreeing to policies with
potentially large costs. To help resolve the scientific
questions, the President's 1993 budget marks a total of $xxx
billion for research on global climate change, including $xxx
million for research in the economics of global change, making
this the largest national research effort in climate change.
mclude ref.
to budget for R+D
HEALTH AND SAFETY REGULATION
on energy efficient
technologies
Decisions to wear a seat belt, to take a job as a telephone
lineman, or to fly a small plane all involve balancing exposure
to risk against other objectives. In the United States,
government addresses risk indirectly, by providing the legal
framework for the market and the tort system; and directly, by an
extensive and growing program of safety regulation. For example,
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a 1967 National Highway Traffic Safety Administration (NHTSA)
rule sets safety standards for automobile steering columns, a
1979 EPA rule regulates chemicals used to treat drinking water, a
1985 Federal Aviation Administration (FAA) rule sets fire
protection standards for aircraft cabins, and a 1990 EPA decision
listed certain wood-preserving chemicals as hazardous wastes.
Proponents of a larger government role in health and safety
assert that in these areas, people are not able to make proper
decisions about risk bearing. Some also argue for intervention
on equity grounds. If a certain risk is exceptionally high or
prohibitively expensive for an individual to bear, society will
sometimes assume the burden through regulatory intervention or
public funding, as it does for neonatal intensive care, and burn
and trauma centers.
Congress has expanded budgets, staffs, and the regulatory
scope of the agencies regulating these areas, almost tripling
administrative costs of health, safety, and environment
regulation between 1970 and the present. The Federal Register,
which chronicles official actions of the regulatory agencies,
including those that regulate health and safety, and whose size
gives an idea of the regulatory burden on the economy, occupied
26 inches of shelf space for the year 1956, 36 inches for 1966,
and over 10 feet at its apogee in 1978; in more recent years it
has been somewhat thinner.
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Public perceptions have fueled this growth. The public
believes, according to surveys, that life is becoming more risky.
In fact, life is becoming safer, as demonstrated by the steady
increase in life expectancy, from 70.8 years in 1970 to 74.9
years in 1988; by the steady decrease in age-adjusted death rates
from most diseases; and by the steady decrease in accident rates
on highways and in the workplace.
Public concern over risk has sometimes given rise to
regulations requiring that all risk be eliminated. The Delaney
Clause of the Food and Drug Act prohibits the use in food of any
"substance shown to cause cancer in animals or humans."
Regulators have interpreted this to mean at any dose, however
unrealistic for humans, and with no regard with potential
benefits. In the Clean Air Act, Congress set a slightly looser
standard when it instructed EPA to fix primary air quality
standards that "protected the most sensitive group in the
population with an adequate margin of safety." Similarly,
Congress charged the Occupational Safety and Health
Administration (OSHA) with ensuring that "insofar as possible, no
employee will suffer diminished health, functional capacity, or
life expectancy as a result of his work."
Just as individuals must balance risks and benefits in
making their individual decisions, so must government regulators.
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Commercial air travel, for example, is relatively safe; at some
cost, though, it could be made still safer. Yet each extra
safety-related increase in ticket prices makes some travelers
decide to drive instead, which is about 20 times more dangerous
per mile traveled.
As figure 5-3 indicates, regulations issued during the 1980s
were, on average, far more costly per unit of safety achieved
than earlier ones had been. (The vertical axis is logarithmic;
each grid line represents 100 times more cost per unit of safety
than the one below it). EPA's rule regulating wood-preserving
chemicals, while not large in total costs, is estimated to avert
only one case of cancer every 2.9 million years, and cost $5
trillion dollars per death averted; this is 10 million times more
costly per unit of safety than a number of earlier rules.
Complying with the Superfund and other laws governing hazardous
wastes will cost between $400 billion and $1 trillion (in 1991
dollars) over the life of the program. In these examples and
elsewhere, regulation often targets expensive risks and passes
over those where greater reductions are possible at the same
cost.
Market failure justifies government intervention if the
government can improve on the market. Cost-benefit analysis can
be a useful tool for setting appropriate goals when regulating
risk. In regulating risk, as in regulating other areas,
Cost-Effectiveness of
Federal Health and Safety Regulations
Cost per Premature Death Averted
Millions of $1990
100,000,000
1,000,000
10,000
100
1
THE mm TITUM TTM THE Time
0.01
1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992
Year
Dots represent Federal regulations.
Figure 5-3
Source: U.S. National Report for UNCED.
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government policies should strive to maximize net benefits,
enacting only those regulations in which benefits to society
outweigh costs. To do otherwise diverts resources from more
important risks, and impedes economic growth.
SUMMARY
Market-based solutions are the most efficient means of
allocating a given level of pollution.
Increased CAFE standards are potentially costly, would
encourage consumers to maintain their older, less fuel
efficient automobiles, and could decrease automobile safety.
Careful evaluation of the economic effects of policies
addressing global climate change is necessary before their
institution.
In regulating health and safety risks, government policies
should maximize net benefits, promulgating only those
regulations whose benefits to society outweigh their costs.
CONCLUSION
The government plays a crucial role in facilitating
competition through the establishment of a legal system that
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governs contracts, protects property rights, and protects people
from harm. Proposed reforms to the legal system would reduce the
burdens on industry from litigation, while maintaining a fair
system for settling disputes. Regulation can also play a direct
role in improving the performance of the market system. Any
proposal to regulate the market, however, should be tempered by
an understanding that regulation can be as imperfect as the
market it is trying to improve.
The government must constantly reevaluate the need to
intervene in markets. For instance, the necessity of continuing
to regulate industries where prices and the structure of the
industry can be determined by competition should be reconsidered.
The National Energy Strategy would accelerate deregulation in the
markets for pipeline sales of natural gas and in the generation
and sales of electric power, benefiting consumers with lower
energy prices. Environmental protection is also an important
goal of this Administration, but measures should reflect the
opportunity costs of shifting resources away from other uses to
meet this challenge. Tradable allowances are an appropriate tool
for meeting strict pollution standards at minimum cost.
Similarly, resources expended to reduce one type of risk must be
balanced against the effectiveness of those resources in reducing
other risks.
followup?
"Document Control"
TYPE:
MEETING REQUEST
DOCUMENT NUMBER: 9125132
ORIGINATOR: 02
STATUS I
DIRECTORATE STATUS
FROM:
BEGGS, James M.: NASA ALUMNI LEAGUE
703-525-5656
TO:
DR. D.A. BROMLEY
Sue Reiser
DATE OF
CORRESPONDENCE: 12/11/91
SUBJECT: THEY REQUEST A MEETING WITH DR. BROMLEY REGARDING
THE IMPLEMENTATION OF THEIR RECOMMENDATIONS
REGARDING U.S. COMPETITIVENESS IN HIGH TECHNOLOGY
PRODUCTS AND SERVICES.
DIRECTORATE
STAFF
ASSIGNED:
INDUSTRIAL
ASSIGNED:
ACTION
STAFF
REQUIRED: AS APPROPRIATE
ACTION:
SENDER'S DUE DATE:
OSTP DUE DATE:
12/31/91
STAFF DUE DATE
DATE COMPLETED:
DATE COMPLETED/DEPT:
COPIES TO: D. Allan Bromley
WHITE HOUSE TRACKING #:
CONTACT PERSON:
PHONE:
EXT:
REMARKS:
3/5 man
I entered
Let's want for him to call
these ito tracking comments Met with Brggo 2/21/92
System
EW
Saeg
OSTP RECEIVED: 12/17/91
DEPT RECEIVED:
FILE: P-INDUSTRIAL-ECONOMIC COMPETITIVENESS
CENTRAL FILES:
Presidential ?
5132
RECEIVED
NASA
ALUMNI LEAGUE
(202)543-3587
FAX (202)546-4189
2/27/20
91 DEC 17 A9:50
922 Pennsylvania Avenue, SE
Washington, DC 20003
OSTP
MAIL ROOM
December 11, 1991
Dr. D. Allan Bromley
Assistant to President for
Science and Technology
Old Executive Office Bldg., #358
Washington, DC 20503
Dear Dr. Bromley:
You may recall that the NASA Alumni League held a Workshop
on Technology Applications and Competitiveness some time ago.
Reports on the results were published earlier this year. The
final report included four recommendations aimed at improving
U.S. competitiveness in the international marketing of high
technology products and services.
The enclosed paper carries these recommendations one step
further in providing suggestions for implementation. The League
desires your considered comments on these suggestions in terms
of whether they hit the mark or whether there are better alter-
natives.
We will be contacting your office in the next week or two
to set a date for a meeting with you to explore your ideas and
interest. If your time permits, written comments also would be
most welcome.
Sincerely,
Jim James M. Beggs,
Chairman
The NASA Alumni League is a private, nonprofit organization and is not affiliated with any agency of the United States Government.
PROGRAMS TO IMPROVE U.S. TECHNOLOGICAL COMPETITIVENESS
The long slide in U.S. competitiveness, both commercial and
technological, is widely recognized. The implications of the
problem for the national welfare are clear, but the nation has
not yet addressed itself to remedial action. In Europe and Japan,
such matters are made issues of mutual government and industry
concern and are addressed promptly through a variety of joint or
cooperative mechanisms. Europe and Japan justify such action as
in the interests of commercial competitiveness and market
position, especially where the costs and risks of developing and
applying important technologies exceed the capacities of
individual firms. It is by such means that our competitors have
moved ahead of us in important business sectors. It is abundantly
clear that the U.S. must quickly take similar steps, adapted to
the American scene, to sustain and, in some cases, regain
competitiveness in the national interest.
National actions are described in the brief papers attached. * and
specific approaches are presented as examples for accomplishing
four objectives considered critical and urgent to the improvement
of U.S. technological competitiveness:
1. To use the potential for commercial applications inherent
in federal R&D efforts
An example mechanism is described aimed at identifying and
encouraging possible commercial applications of on-going
federally funded R&D programs so as to contribute to the
international competitiveness of U.S. industry.
2. To provide mechanisms better government/industry interaction
in identifying and achieving priority technology goals
A detailed mechanism, based on successful precedent, plus an
illustrative program, is proposed to provide for joint
government/industry action to address national require-
ments for strategies and programs in critical commercial
technology sectors.
3. To support technology development to the point of readiness
for application in critical commercial sectors.
Recommendations are included for supporting the development
and validation of technology in areas critical for U.S.
competitiveness in order to assure that it is brought to the
point of readiness for application by the commercial sector.
4. To establish a focal point for federal technology activities
in support of U.S. international competitiveness
Options are described for providing a focus within the federal
government for coordination and direction of such agency/industry
programs as those above to enhance commercial competitiveness.
*This report is based on an independent study/workshop conducted
by the NASA Alumni League with preponderantly non-NASA
participants and without special reference to NASA.
- 7 -
(1) RECOMMENDATION TO UTILIZE THE POTENTIAL FOR COMMERCIAL
APPLICATION INHERENT IN FEDERAL R&D EFFORTS
Problem
The annual investment in federally sponsored R&D is very large--
currently approaching $80 billion per year. While government
funded programs are major contributors to our technological and
industrial base, there is no general recognition within the
federal government of a need to factor commercial potential into
the judgements as to which programs are to be supported or how
they are structured. In addition, there is inadequate expression
by U.S. industry regarding their projected technology needs and
the role government R&D could play in improving U.S. competitive
posture in the international arena.
Two dominant reasons exist for the lack of consideration for the
economic potential of government programs. First, the assumption
that private enterprise should be totally responsible for
pursuing and funding commercial endeavors and, second, an
environment wherein federal R&D agencies tend to be totally
focused on their own mission needs.
These inhibitions to commercial developments continue despite
the fact that the U.S. is falling behind its international
competitors in the application of high technology to commercial
products. Yet, it is well established that our future economic
strength depends upon our ability to exploit technological
innovations in the commercial arena.
A Solution
In programs sponsored by the federal government, greater
emphasis should be placed on R&D that have commercial potential.
These programs can be major contributors to the commercial
technology base of the nation without significant impact on
agency mission needs. This additional emphasis can be
accomplished by requiring that identification of potential
commercial applications and their implementation strategies be an
integral part of the process for government R&D programs. Such an
activity could be initiated either through the issuance of a
presidential directive or enactment of legislation.
An Implementation Example
Any federal agency, on issuance of a Request for Proposal (RFP)
involving significant R&D effort, would encourage the proposer to
identify and assess the potential commercial applications that
might be derived from the technologies or systems, incorporated
in the proposal. In addition, the proposer would be encouraged
to outline strategies for pursuit of the commercial opportunities
including any government assistance felt to be necessary.
-
The sponsoring agency would make a preliminary evaluation of the
commercial possibilities and assessment of government support
needs. Its recommendations would be forwarded both to the agency
office responsible for activities in the commercial arena and
also to an appropriate office in the Executive Branch for
coordination, possible integration with other proposals,
communication with commercial interests, and recommendations as
to government support requirements.
- 4 -
(2) RECOMMENDATION TO PROVIDE BETTER MECHANISMS FOR
GOVERNMENT/INDUSTRY INTERACTION IN IDENTIFYING AND ACHIEVING
PRIMARY TECHNOLOGY GOALS
Problem
A clear need exists in certain critical sectors for
government/industry interaction to identify priority technology
requirements and to define broad plans and programs to achieve
their commercial potential. Opportunities for competitive
advances are lost because short-range industry considerations may
not add up to long-term national interests, because development
and market risks exceed individual firms resources, or because of
limited communications, coordination and cooperation within
industry or between industry and government. Although some R&D
areas have mechanisms in place to carry out these functions, most
are inadequate or non-existent.
A Solution
The government should have its R&D agencies examine their current
program review and planning mechanisms, make the necessary
adjustments to strengthen commercial awareness, and highlight
government programs which could contribute to U.S. international
competitiveness. Improved interaction and more open
communications among industrial firms and between industry and
government must take place to assure that government and industry
R&D plans, programs, and future thrusts are focused on critical
technologies and the marketplace. Mechanisms similar to those
employed by NASA's predecessor, the National Advisory Committee
for Aeronautics (NACA), should be implemented to effect better
government-industry interaction for selected industrial sectors.
The NACA had a set of working committees that provided a very
effective means for industry, academia and other government
agencies to address priorities and strategies for aeronautical
R&D.
An Implementation Example (Computer Software)
Software Problem
Software is a central element in vital civil and military systems
and constitutes an infrastructure that undergirds all other high
industrial and defense technologies as well as an increasing
range of consumer goods technologies. Government agencies,
notably in the defense and space sectors, are major contractors
for and users of software products.
Substantial foreign government/industry cooperative efforts are
applied to this sector and foreign competence and competition is
growing. Thus, U.S. overseas software markets are increasingly
challenged and, of most concern, foreign firms are moving into
the lead in the areas critical to future commercial success such
as automation of software development (with its attendant
cost/time reductions and reliability improvement). U.S. industry
stands to lose ground steadily if it continues to face such
cooperative activities without the support of similar mechanisms
adapted to American conditions.
:
A Software Solution
As stated above, an American model exists for government and
industry cooperation to assure competitiveness in a critical
technology: this model was created by the National Advisory
Committee for Aeronautics to remedy a critical gap in U.S.
aviation technology. The National Advisory Committee for
Aeronautics brought government, industry and academia together in
the formulation and implementation of critical technological
programs with conspicuous success.
To provide a similar capability, the following steps would be
taken in the Software area:
1. Enact legislation authorizing the federal agencies which are
the principal users of software, especially the Department of
Defense and the National Aeronautics and Space Administration, to
work with private firms to establish and operate a Joint National
Program Committee for Software. Its purpose would be to
identify, develop and promulgate technology programs to enhance
the U.S. competitive posture in the area of software, in
conformance with the criteria described below.
2. The Office of Science and Technology (or other government
agency) would be authorized to designate the agencies which
should partici-pate with industry in the establishment and
operation of said Joint Software Committee and to coordinate the
government participation, including the allocation of the
government share of funding require-ments.
3. The Joint Software Committee would operate under the following
guidelines:
O industry membership should be voluntary,
industry and government participants should be broadly rep-
resentative,
academic participation as may be agreed should be invited,
it should be structured to undertake such advisory and
operational programs as the Joint Software Committee
agrees are required and appropriate to its objectives,
it should be chaired by an industry representative, with
industry representatives in the majority.
O it would conduct its business by consensus (but should not
require unanimity for action),
O it should utilize or enlist the support and cooperation of
relevant existing government and industry mechanisms/
facilities wherever possible and constructive.
-7-
4. The federal agencies concerned, subject to the coordination
prescribed above, would be authorized to provide for
contributions to the funding required for the operation of the
Joint Committee for Software, provided that the industry sector
matches or exceeds the government contribution and that the
contributions required from the participating government agencies
appear in agency budget submissions and accounting.
5. The Joint Committee would determine the content, management
arrangement and continuity of its program.
0
(3) RECOMMENDATION TO SUPPORT TECHNOLOGY DEVELOPMENT TO THE
POINT OF READINESS FOR APPLICATION IN CRITICAL COMMERCIAL SECTORS
Problem
Continued advancement of the technology base available to U.S.
industries is critical to maintaining a-competitive position in
the international marketing of products and services. Even more
important is the ability of our industrial firms to apply new
technology rapidly and confidently to create superior products at
competitive prices. This ability has been degrading relative to
other nations over several decades.
In areas of high technology, it is not sufficient for industry
just to be knowledgeable of technological innovations. This
results in a slow, methodical application of new technology,
often stimulated solely as a result of earlier use by foreign
competitors. This conservative approach is often taken by U.S.
industry because the financial risk is viewed as too great. If
the practicability of the application has not been demonstrated
in advance, the technology is not ready for application. Other
countries have found ways to speed this process, sometimes
through direct subsidies but also through use of indirect
incentives such as low cost financing.
A Solution
A number of remedial actions can be taken by the congress and the
executive branch. The following premises apply:
O Leadership of this activity to a large degree should rest with
industry,
O The federal government should play a catalytic role which, in
some cases, would include some funding support,
O The free market system, which has served the country well,
should not be affected in any material way.
On this basis, the following is recommended:
1. The federal government should recognize the need in selected
important areas, to help carry development of technology to the
point of readiness for application and consider ways in which to
foster the validation of the technology, e.g.:
O The use of revolving funds to provide resources for validation
effort. Benefiting companies would make repayments to the fund as
and if they recover investment through sales,
O Joint funding of industry-proposed technology readiness pro-
grams,
-9- -
O The licensing of the products of government R&D to industries
that are willing to fund continued development,
O The granting of a limited period of exclusive use to provide
incentive for industrial investment.
2. Where completely new products or services have been
demonstrated to be technically feasible and show economic
promise, agencies of the federal government should consider
committing to the purchase of such products or services as can be
useful in the execution of their respective missions.
An Implementation Example (Aeronautics)
An appropriation would establish an Aeronautical Technology
Validation Fund, under the guidance of an Aeronautical Technology
Validation Steering Committee, administered by NASA. Additional
appropriations, in following years, would be limited with the
intent that the fund becomes a self-supporting revolving fund.
The Steering Committee, consisting of appropriate executives such
as the NASA and FAA Administrators, the Secretary of Commerce,
the U.S. Trade Representative, the Secretary of Defense, and
number of industry representatives, would be chaired by the
Assistant to the President for Science & Technology.
The revolving fund would be exclusively to validate practical
commercial applicability of aeronautical technology critical to
U.S. competitiveness. The fund would be independent of and not
affect individual agency research and technology budgets.
The selected technologies would represent advances which have
been found feasible and clearly important to competitiveness, but
which still require validation under realistic conditions to
establish readiness for economical commercial applications. In
most but not all instances, industry would recommend and NASA
would provide support to the conduct of the program, upon
Steering Committee approval. Industry and academic assistance in
identifying critical technology needs could be obtained through
NASA's existing aeronautics advisory committee structure. For
competitive technology specifically related to areas such as air
traffic control and flight safety, the responsibility would be
shared between FAA and NASA.
Performing contractors or contractor teams would be selected
through the conducting agency's normal procurement processes,
with heavy emphasis on the degree of proposed cost sharing and
recoupment provisions would help maintain the fund. Other U.S.
companies would be given advanced access to results and details
under similar recoupment agreements.
The conducting agency would present for Steering Committee
approval the terms to be applied to a proposed validation
-10-
project. Given the goal of maintaining a self-supporting fund, a
general guideline would be to seek approximately 50% industry
cost sharing, complemented by appropriate recoupment based on
product sales over a time period. (Business and competitive
conditions may warrant different terms in specific instances.)
Allowances should be made for firms with limited cost sharing
capability but technology which otherwise meets the fund's
objectives.
-11- il
(4) RECOMMENDATION TO ESTABLISH A FOCAL POINT FOR FEDERAL
TECHNOLOGY ACTIVITIES IN SUPPORT OF U.S. INTERNATIONAL
COMPETITIVENESS
Problem
No means exists in the U.S. government to produce the concerted
effort needed for the planning and implementation of activities
aimed at establishing and/or maintaining leadership in critical
areas of commercially applicable technology. Most of the
industries which are competitive in the international arena and
provide the nation with economic trade advantages, e.g., air
transport, computers and agriculture, have been beneficiaries of
government sponsored technology, acquisition programs and other
support, and have close interactions with government departments
and agencies such as DoD, DoA, DoC and NASA. Yet, there is no
means for establishing national priorities in these and any
other economically critical areas. This problem is compounded by
the lack of a mechanism for setting relative priorities between
substantially unrelated activities.
Almost all the nations which are our strongest economic
competitors have effective means to accomplish coordination
between industrial firms and government agencies, as well as
means for establishing and allocating government support.
A Solution
This country does not need an industrial policy or a "Department
of Industry" but the federal government does need to recognize
the common sense and practicality of government cooperation with
industry in the national interest and the importance of
government's playing a catalytic and supportive rather than a
negative role in encouraging commercial applications and economic
competitiveness. Required actions are:
1. Government-industry cooperation in determining those measures
necessary to enhance technology application and competitiveness
in critical sectors.
2. Government designation of a focal point to coordinate and
stimulate the federal R&D establishment in the catalytic and
supportive activities recommended
The efforts recommended can be accomplished largely using the
institutional resources currently existing with the federal
government; however, a focal point for budget and programmatic
planning and coordination needs to be designated. This
organization would not replace functions already in existence,
e.g., program management capabilities and procurement. In this
context, an existing office within the Executive Branch could be
assigned these responsibilities, at least in an interim sense.
Then, based on that experience, other steps could be taken such
-12-
as the establishment of a new office or agency.
An Implementation Example
As an initial step in providing a focus on the commercial facets
of technology innovation and application within the federal
government, the Office of Science and Technology Policy (OSTP)
could be designated to define and develop the appropriate
functions and responsibilities. Some are indicated in the
previous recommendations such as:
1. An evaluation function in establishing priorities in
economically critical areas of technology,
2. An oversight, coordination and integration function pertaining
to federal agency and industry program efforts in the commercial
technology area,
3. A central point of contact with industry in support of U.S.
international competitiveness,
4. A fund source for agencies and industry in areas of cost
sharing, revolving funds and other catalytic allocation of
resources.
OSTP, or any other office designated to accomplish these tasks,
would not manage the conduct of programs which would be left in
the hands of federal agencies, industry or both as the case may
be. OSTP, however, would organize and conduct "pilot" activities
in connection with such functions as listed above in order to
determine how they should be carried out. Based on the OSTP
experience, other steps could be taken such as the augmentation
of an existing office or agency or the establishment of a new
one.
-15-
"Document Control"
TYPE:
MEETING REQUEST
DOCUMENT NUMBER: 9125132
ORIGINATOR: 02
STATUS I
DIRECTORATE STATUS
FROM:
BEGGS, James M.: NASA ALUMNI LEAGUE
TO:
DR. D.A. BROMLEY
DATE OF
CORRESPONDENCE: 12/11/91
SUBJECT: THEY REQUEST A MEETING WITH DR. BROMLEY REGARDING
THE IMPLEMENTATION OF THEIR RECOMMENDATIONS
REGARDING U.S. COMPETITIVENESS IN HIGH TECHNOLOGY
PRODUCTS AND SERVICES.
DIRECTORATE
STAFF
ASSIGNED: INDUSTRIAL
ASSIGNED:
ACTION
STAFF
REQUIRED: AS APPROPRIATE
ACTION:
SENDER'S DUE DATE:
OSTP DUE DATE:
12/31/91
STAFF DUE DATE
DATE COMPLETED:
DATE COMPLETED/DEPT:
COPIES TO: D. Allan Bromley
WHITE HOUSE TRACKING #:
CONTACT PERSON:
PHONE:
EXT:
REMARKS:
2/20/92 Drs Wong & Erb. mut w/Beggs. per.
DAB.
mn.
OSTP RECEIVED: 12/17/91
DEPT RECEIVED:
FILE: P-INDUSTRIAL-ECONOMIC COMPETITIVENESS
CENTRAL FILES:
5132
RECEIVED
NASA
ALUMNI LEAGUE
SIDEC17 A S : 50
922 Pennsylvania Avenue, SE
Washington, DC 20003
(202)543-3587
OSTP
FAX (202)546-4189
MAIL ROOM
December 11, 1991
Dr. D. Allan Bromley
Assistant to President for
Science and Technology
Old Executive Office Bldg., #358
Washington, DC 20503
Dear Dr. Bromley:
You may recall that the NASA Alumni League held a Workshop
on Technology Applications and Competitiveness some time ago.
Reports on the results were published earlier this year. The
final report included four recommendations aimed at improving
U.S. competitiveness in the international marketing of high
technology products and services.
The enclosed paper carries these recommendations one step
further in providing suggestions for implementation. The League
desires your considered comments on these suggestions in terms
of whether they hit the mark or whether there are better alter-
natives.
We will be contacting your office in the next week or two
to set a date for a meeting with you to explore your ideas and
interest. If your time permits, written comments also would be
most welcome.
Sincerely,
Jim James M. Beggs,
Chairman
The NASA Alumni League is a private, nonprofit organization and is not affiliated with any agency of the United States Government.
PROGRAMS TO IMPROVE U.S. TECHNOLOGICAL COMPETITIVENESS
The long slide in U.S. competitiveness, both commercial and
technological, is widely recognized. The implications of the
problem for the national welfare are clear, but the nation has
not yet addressed itself to remedial action. In Europe and Japan,
such matters are made issues of mutual government and industry
concern and are addressed promptly through a variety of joint or
cooperative mechanisms. Europe and Japan justify such action as
in the interests of commercial competitiveness and market
position, especially where the costs and risks of developing and
applying important technologies exceed the capacities of
individual firms. It is by such means that our competitors have
moved ahead of us in important business sectors. It is abundantly
clear that the U.S. must quickly take similar steps, adapted to
the American scene, to sustain and, in some cases, regain
competitiveness in the national interest.
National actions are described in the brief papers attached. * and
specific approaches are presented as examples for accomplishing
four objectives considered critical and urgent to the improvement
of U.S. technological competitiveness:
1. To use the potential for commercial applications inherent
in federal R&D efforts
An example mechanism is described aimed at identifying and
encouraging possible commercial applications of on-going
federally funded R&D programs so as to contribute to the
international competitiveness of U.S. industry.
2. To provide mechanisms better government/industry interaction
in identifying and achieving priority technology goals
A detailed mechanism, based on successful precedent, plus an
illustrative program, is proposed to provide for joint
government/industry action to address national require-
ments for strategies and programs in critical commercial
technology sectors.
3. To support technology development to the point of readiness
for application in critical commercial sectors.
Recommendations are included for supporting the development
and validation of technology in areas critical for U.S.
competitiveness in order to assure that it is brought to the
point of readiness for application by the commercial sector.
4. To establish a focal point for federal technology activities
in support of U.S. international competitiveness
Options are described for providing a focus within the federal
government for coordination and direction of such agency/industry
programs as those above to enhance commercial competitiveness.
*This report is based on an independent study/workshop conducted
by the NASA Alumni League with preponderantly non-NASA
participants and without special reference to NASA.
- 7 -
(1) RECOMMENDATION TO UTILIZE THE POTENTIAL FOR COMMERCIAL
APPLICATION INHERENT IN FEDERAL R&D EFFORTS
Problem
The annual investment in federally sponsored R&D is very large--
currently approaching $80 billion per year. While government
funded programs are major contributors to our technological and
industrial base, there is no general recognition within the
federal government of a need to factor commercial potential into
the judgements as to which programs are to be supported or how
they are structured. In addition, there is inadequate expression
by U.S. industry regarding their projected technology needs and
the role government R&D could play in improving U.S. competitive
posture in the international arena.
Two dominant reasons exist for the lack of consideration for the
economic potential of government programs. First, the assumption
that private enterprise should be totally responsible for
pursuing and funding commercial endeavors and, second, an
environment wherein federal R&D agencies tend to be totally
focused on their own mission needs.
These inhibitions to commercial developments continue despite
the fact that the U.S. is falling behind its international
competitors in the application of high technology to commercial
products. Yet, it is well established that our future economic
strength depends upon our ability to exploit technological
innovations in the commercial arena.
A Solution
In programs sponsored by the federal government, greater
emphasis should be placed on R&D that have commercial potential.
These programs can be major contributors to the commercial
technology base of the nation without significant impact on
agency mission needs. This additional emphasis can be
accomplished by requiring that identification of potential
commercial applications and their implementation strategies be an
integral part of the process for government R&D programs. Such an
activity could be initiated either through the issuance of a
presidential directive or enactment of legislation.
An Implementation Example
Any federal agency, on issuance of a Request for Proposal (RFP)
involving significant R&D effort, would encourage the proposer to
identify and assess the potential commercial applications that
might be derived from the technologies or systems, incorporated
in the proposal. In addition, the proposer would be encouraged
to outline strategies for pursuit of the commercial opportunities
including any government assistance felt to be necessary.
-
The sponsoring agency would make a preliminary evaluation of the
commercial possibilities and assessment of government support
needs. Its recommendations would be forwarded both to the agency
office responsible for activities in the commercial arena and
also to an appropriate office in the Executive Branch for
coordination, possible integration with other proposals,
communication with commercial interests, and recommendations as
to government support requirements.
- 4 -
(2) RECOMMENDATION TO PROVIDE BETTER MECHANISMS FOR
GOVERNMENT/INDUSTRY INTERACTION IN IDENTIFYING AND ACHIEVING
PRIMARY TECHNOLOGY GOALS
Problem
A clear need exists in certain critical sectors for
government/industry interaction to identify priority technology
requirements and to define broad plans and programs to achieve
their commercial potential. Opportunities for competitive
advances are lost because short-range industry considerations may
not add up to long-term national interests, because development
and market risks exceed individual firms resources, or because of
limited communications, coordination and cooperation within
industry or between industry and government. Although some R&D
areas have mechanisms in place to carry out these functions, most
are inadequate or non-existent.
A Solution
The government should have its R&D agencies examine their current
program review and planning mechanisms, make the necessary
adjustments to strengthen commercial awareness, and highlight
government programs which could contribute to U.S. international
competitiveness. Improved interaction and more open
communications among industrial firms and between industry and
government must take place to assure that government and industry
R&D plans, programs, and future thrusts are focused on critical
technologies and the marketplace. Mechanisms similar to those
employed by NASA's predecessor, the National Advisory Committee
for Aeronautics (NACA), should be implemented to effect better
government-industry interaction for selected industrial sectors.
The NACA had a set of working committees that provided a very
effective means for industry, academia and other government
agencies to address priorities and strategies for aeronautical
R&D.
An Implementation Example (Computer Software)
Software Problem
Software is a central element in vital civil and military systems
and constitutes an infrastructure that undergirds all other high
industrial and defense technologies as well as an increasing
range of consumer goods technologies. Government agencies,
notably in the defense and space sectors, are major contractors
for and users of software products.
Substantial foreign government/industry cooperative efforts are
applied to this sector and foreign competence and competition is
growing. Thus, U.S. overseas software markets are increasingly
challenged and, of most concern, foreign firms are moving into
the lead in the areas critical to future commercial success such
as automation of software development (with its attendant
5
cost/time reductions and reliability improvement). U.S. industry
stands to lose ground steadily if it continues to face such
cooperative activities without the support of similar mechanisms
adapted to American conditions.
- / -
A Software Solution
As stated above, an American model exists for government and
industry cooperation to assure competitiveness in a critical
technology: this model was created by the National Advisory
Committee for Aeronautics to remedy a critical gap in U.S.
aviation technology. The National Advisory Committee for
Aeronautics brought government, industry and academia together in
the formulation and implementation of critical technological
programs with conspicuous success.
To provide a similar capability, the following steps would be
taken in the Software area:
1. Enact legislation authorizing the federal agencies which are
the principal users of software, especially the Department of
Defense and the National Aeronautics and Space Administration, to
work with private firms to establish and operate a Joint National
Program Committee for Software. Its purpose would be to
identify, develop and promulgate technology programs to enhance
the U.S. competitive posture in the area of software, in
conformance with the criteria described below.
2. The Office of Science and Technology (or other government
agency) would be authorized to designate the agencies which
should partici-pate with industry in the establishment and
operation of said Joint Software Committee and to coordinate the
government participation, including the allocation of the
government share of funding require-ments.
3. The Joint Software Committee would operate under the following
guidelines:
O industry membership should be voluntary,
O industry and government participants should be broadly rep-
resentative,
academic participation as may be agreed should be invited,
it should be structured to undertake such advisory and
operational programs as the Joint Software Committee
agrees are required and appropriate to its objectives,
it should be chaired by an industry representative, with
industry representatives in the majority.
O it would conduct its business by consensus (but should not
require unanimity for action),
O it should utilize or enlist the support and cooperation of
relevant existing government and industry mechanisms/
facilities wherever possible and constructive.
7-
4. The federal agencies concerned, subject to the coordination
prescribed above, would be authorized to provide for
contributions to the funding required for the operation of the
Joint Committee for Software, provided that the industry sector
matches or exceeds the government contribution and that the
contributions required from the participating government agencies
appear in agency budget submissions and accounting.
5. The Joint Committee would determine the content, management
arrangement and continuity of its program.
(3) RECOMMENDATION TO SUPPORT TECHNOLOGY DEVELOPMENT TO THE
POINT OF READINESS FOR APPLICATION IN CRITICAL COMMERCIAL SECTORS
Problem
Continued advancement of the technology base available to U.S.
industries is critical to maintaining a*competitive position in
the international marketing of products and services. Even more
important is the ability of our industrial firms to apply new
technology rapidly and confidently to create superior products at
competitive prices. This ability has been degrading relative to
other nations over several decades.
In areas of high technology, it is not sufficient for industry
just to be knowledgeable of technological innovations. This
results in a slow, methodical application of new technology,
often stimulated solely as a result of earlier use by foreign
competitors. This conservative approach is often taken by U.S.
industry because the financial risk is viewed as too great. If
the practicability of the application has not been demonstrated
in advance, the technology is not ready for application. Other
countries have found ways to speed this process, sometimes
through direct subsidies but also through use of indirect
incentives such as low cost financing.
A Solution
A number of remedial actions can be taken by the congress and the
executive branch. The following premises apply:
O Leadership of this activity to a large degree should rest with
industry,
O The federal government should play a catalytic role which, in
some cases, would include some funding support,
O The free market system, which has served the country well,
should not be affected in any material way.
On this basis, the following is recommended:
1. The federal government should recognize the need in selected
important areas, to help carry development of technology to the
point of readiness for application and consider ways in which to
foster the validation of the technology, e.g.:
O The use of revolving funds to provide resources for validation
effort. Benefiting companies would make repayments to the fund as
and if they recover investment through sales,
O Joint funding of industry-proposed technology readiness pro-
grams,
-9- -
O The licensing of the products of government R&D to industries
that are willing to fund continued development,
O The granting of a limited period of exclusive use to provide
incentive for industrial investment.
2. Where completely new products or services have been
demonstrated to be technically feasible and show economic
promise, agencies of the federal government should consider
committing to the purchase of such products or services as can be
useful in the execution of their respective missions.
An Implementation Example (Aeronautics)
An appropriation would establish an Aeronautical Technology
Validation Fund, under the guidance of an Aeronautical Technology
Validation Steering Committee, administered by NASA. Additional
appropriations, in following years, would be limited with the
intent that the fund becomes a self-supporting revolving fund.
The Steering Committee, consisting of appropriate executives such
as the NASA and FAA Administrators, the Secretary of Commerce,
the U.S. Trade Representative, the Secretary of Defense, and
number of industry representatives, would be chaired by the
Assistant to the President for Science & Technology.
The revolving fund would be exclusively to validate practical
commercial applicability of aeronautical technology critical to
U.S. competitiveness. The fund would be independent of and not
affect individual agency research and technology budgets.
The selected technologies would represent advances which have
been found feasible and clearly important to competitiveness, but
which still require validation under realistic conditions to
establish readiness for economical commercial applications. In
most but not all instances, industry would recommend and NASA
would provide support to the conduct of the program, upon
Steering Committee approval. Industry and academic assistance in
identifying critical technology needs could be obtained through
NASA's existing aeronautics advisory committee structure. For
competitive technology specifically related to areas such as air
traffic control and flight safety, the responsibility would be
shared between FAA and NASA.
Performing contractors or contractor teams would be selected
through the conducting agency's normal procurement processes,
with heavy emphasis on the degree of proposed cost sharing and
recoupment provisions would help maintain the fund. Other U.S.
companies would be given advanced access to results and details
under similar recoupment agreements.
The conducting agency would present for Steering Committee
approval the terms to be applied to a proposed validation
-10-
project. Given the goal of maintaining a self-supporting fund, a
general guideline would be to seek approximately 50% industry
cost sharing, complemented by appropriate recoupment based on
product sales over a time period. (Business and competitive
conditions may warrant different terms in specific instances. )
Allowances should be made for firms with limited cost sharing
capability but technology which otherwise meets the fund's
objectives.
-11-
(4) RECOMMENDATION TO ESTABLISH A FOCAL POINT FOR FEDERAL
TECHNOLOGY ACTIVITIES IN SUPPORT OF U.S. INTERNATIONAL
COMPETITIVENESS
Problem
No means exists in the U.S. government to produce the concerted
effort needed for the planning and implementation of activities
aimed at establishing and/or maintaining leadership in critical
areas of commercially applicable technology. Most of the
industries which are competitive in the international arena and
provide the nation with economic trade advantages, e.g., air
transport, computers and agriculture, have been beneficiaries of
government sponsored technology, acquisition programs and other
support, and have close interactions with government departments
and agencies such as DoD, DoA, DoC and NASA. Yet, there is no
means for establishing national priorities in these and any
other economically critical areas. This problem is compounded by
the lack of a mechanism for setting relative priorities between
substantially unrelated activities.
Almost all the nations which are our strongest economic
competitors have effective means to accomplish coordination
between industrial firms and government agencies, as well as
means for establishing and allocating government support.
A Solution
This country does not need an industrial policy or a "Department
of Industry" but the federal government does need to recognize
the common sense and practicality of government cooperation with
industry in the national interest and the importance of
government's playing a catalytic and supportive rather than a
negative role in encouraging commercial applications and economic
competitiveness. Required actions are:
1. Government-industry cooperation in determining those measures
necessary to enhance technology application and competitiveness
in critical sectors.
2. Government designation of a focal point to coordinate and
stimulate the federal R&D establishment in the catalytic and
supportive activities recommended
The efforts recommended can be accomplished largely using the
institutional resources currently existing with the federal
government; however, a focal point for budget and programmatic
planning and coordination needs to be designated. This
organization would not replace functions already in existence,
e.g., program management capabilities and procurement. In this
context, an existing office within the Executive Branch could be
assigned these responsibilities, at least in an interim sense.
Then, based on that experience, other steps could be taken such
-12-
as the establishment of a new office or agency.
An Implementation Example
As an initial step in providing a focus on the commercial facets
of technology innovation and application within the federal
government, the Office of Science and Technology Policy (OSTP)
could be designated to define and develop the appropriate
functions and responsibilities. Some are indicated in the
previous recommendations such as:
1. An evaluation function in establishing priorities in
economically critical areas of technology,
2. An oversight, coordination and integration function pertaining
to federal agency and industry program efforts in the commercial
technology area,
3. A central point of contact with industry in support of U.S.
international competitiveness,
4. A fund source for agencies and industry in areas of cost
sharing, revolving funds and other catalytic allocation of
resources.
OSTP, or any other office designated to accomplish these tasks,
would not manage the conduct of programs which would be left in
the hands of federal agencies, industry or both as the case may
be. OSTP, however, would organize and conduct "pilot" activities
in connection with such functions as listed above in order to
determine how they should be carried out. Based on the OSTP
experience, other steps could be taken such as the augmentation
of an existing office or agency or the establishment of a new
one.
-15-
"Document Control"
TYPE:
INFORMATION
DOCUMENT NUMBER: 9124821
ORIGINATOR: 02
STATUS C
DIRECTORATE STATUS
FROM:
FISHER, George: COUNCIL ON COMPETITIVENESS
TO:
DR. D.A. BROMLEY
DATE OF
CORRESPONDENCE: 11/15/91
SUBJECT: RE: A RECENT POLL THE COUNCIL COMMISSIONED TO GAUGE
THE EXTENT OF PUBLIC UNDERSTANDING AND AWARENESS OF
U.S. COMPETITIVENESS.
DIRECTORATE
STAFF
ASSIGNED:
ASSIGNED:
ACTION
STAFF
REQUIRED:
ACTION:
SENDER'S DUE DATE:
OSTP DUE DATE:
STAFF DUE DATE
DATE COMPLETED:
DATE COMPLETED/DEPT:
COPIES TO: D. Allan Bromley
INDUSTRIAL
WHITE HOUSE TRACKING #:
CONTACT PERSON:
PHONE:
EXT:
REMARKS:
OSTP RECEIVED: 11/18/91
DEPT RECEIVED:
FILE: P-INDUSTRIAL-ECONOMIC COMPETITIVENESS
CENTRAL FILES:
CHAIRMAN
4821
George M. C. Fisher
Motorola, Inc.
VICE CHAIRMEN
Council on Competitiveness
Thomas E. Everhart
California Institute of Technology
Howard D. Samuel
Industrial Union Department, AFL-CIO
Henry B. Schacht
RECEIVED
Cummins Engine Company, Inc.
EXECUTIVE COMMITTEE
John F. Akers
International Business Machines Corporation
November 15
Paul Allaire
Xerox Corporation
91 NOV 18 A9 1991 29
John L. Clendenin
BellSouth Corporation
D. Allan Bromley
Joseph Duffey
Assistant to the President
American University
David P. Gardner
for Science and Technology
STP
University of California
Earl Graves
Office of Science and Technol Policy
Black Enterprise Magazine
Old Executive Office Building
Paul Gray
Massachusetts Institute of Technology
Room 358
Jerry Jasinowski
National Association of Manufacturers
Washington, DC 20506
Peter Likins
Lehigh University
Thomas J. Murrin
Dear Allan:
Duquesne University
Michael Porter
School of Business Administration,
The private-sector Council on
Harvard University
Carl E. Reichardt
Competitiveness has undertaken a major effort
Wells Fargo & Co.
aimed at reshaping the national debate on
lan Ross
AT&T Bell Laboratories
competitiveness and competitiveness-related
Roland W. Schmitt
Rensselaer Polytechnic Institute
issues. We recently commissioned a national,
Albert Shanker
bipartisan poll of over 1,000 American voters to
American Federation of Teachers, AFL-CIO
Jack Sheinkman
gauge the extent of public understanding and
Amalgamated Clothing and Textile
Workers Union, AFL-CIO, CLC
awareness of U.S. competitiveness.
Ray Stata
Analog Devices, Inc.
Arnold Weber
The poll, conducted by two of America's
Northwestern University
leading political pollsters (one Republican, one
Lynn R. Williams
United Steel Workers of America, AFL-CIO, CLC
Democratic), was followed by a series of focus
Steve P. Yokich
United Auto Workers
groups held across the country. The poll
John A. Young
results, along with a Council report entitled
Hewlett-Packard Company
PRESIDENT
Looking for Leadership: The Public,
Kent H. Hughes
Competitiveness and Campaign '92, will be
EXECUTIVE VICE PRESIDENT
Daniel F. Burton, Jr.
released officially at a press conference on
DISTINGUISHED FELLOW
Monday, November 18.
Erich Bloch
SENIOR ADVISOR
B. R. Inman
The results of the poll indicate a deep-
NATIONAL AFFILIATES
seated concern about the present condition of the
American Assembly of Collegiate Schools
of Business
U.S. economy and prospects for the future. Most
American Association for the Advancement
of Science
Americans feel a squeeze on their pockets and
American Business Conference
their standard of living, and believe their
American Council for Capital Formation
American Council on Education
children will have a harder time starting out in
American Electronics Association
life.
American Enterprise Institute
American Management Association
American Productivity and Quality Center
To put the country back on track in terms of
American Society for Training and Development
Association of American Universities
economic, industrial and technological
Business Higher Education Forum
competitiveness, most voters feel that the
Center for Strategic and International Studies
Collective Bargaining Forum
federal government must take a more direct,
Committee for Economic Development
activist role in working with business.
Council on Research and Technology
Health Industry Manufacturers Association
IC² Institute
Our challenge, and, I believe, a challenge
Industrial Research Institute, Inc.
Labor-Industry Coalition for International Trade
for the Administration and '92 candidates as
National Alliance of Business
well, is to educate voters on the links that
National Association of Manufacturers
National Association of State Universities
exist between technology, training,
& Land-Grant Colleges
National Association of Wholesaler-Distributors
infrastructure, and savings and investment on the
National Center for Manufacturing Sciences
The Aspen Institute
The Association for Manufacturing Technology
The Brookings Institution
The Conference Board
The Institute of Electrical and Electronics
900 17TH Street, NW
Suite 1050
Washington, DC 20006
Engineers U.S. Activities
(202) 785-3990
FAX (202) 785-3998
November 15, 1991
Page Two
one hand, and long-term prosperity and a rising standard of
living on the other. The Council has repeatedly stressed the
importance of and need for pragmatic partnerships between
government and industry, most notably in key critical
technologies, as outlined in our March 1991 report, Gaining New
Ground: Technology Priorities for America's Future.
Clearly, the economic competitiveness of the United States
will be one of if not the major issue of the '92 elections.
Enclosed is a copy of the poll results, the Council's report, and
a Republican strategy memo for the '92 campaign cycle drafted by
Linda DiVall, one of the Council's pollsters and President of
American Viewpoint. I think you will find this both interesting
and useful as you help shape the Administration's agenda for
1992.
Please do not hesitate to call me or any of the Council
staff if you have any questions about the poll or if we can be of
assistance.
Sincerely,
George George Fisher
Enclosures
COUNCIL ON COMPETITIVENESS
"Document Control"
TYPE:
INFORMATION
DOCUMENT NUMBER: 9124633
ORIGINATOR: 02
STATUS C
DIRECTORATE STATUS
FROM:
HUBBARD, ALLAN B.: COUNCIL ON COMPETITIVENESS
TO:
DR. D.A. BROMLEY
DATE OF
CORRESPONDENCE: 10/30/91
SUBJECT: HE IS FORWARDING A COPY OF A LETTER HE HAD WRITTEN
TO THE SENATE GOVERNMENT OPERATIONS COMMITTEE.
DIRECTORATE
STAFF
ASSIGNED:
ASSIGNED:
ACTION
STAFF
REQUIRED:
ACTION:
SENDER'S DUE DATE:
OSTP DUE DATE:
STAFF DUE DATE
DATE COMPLETED:
DATE COMPLETED/DEPT:
COPIES TO: D. Allan Bromley
INDUSTRIAL
Carl Bretscher
WHITE HOUSE TRACKING #:
CONTACT PERSON:
PHONE:
EXT:
REMARKS:
OSTP RECEIVED: 11/04/91
DEPT RECEIVED:
FILE: INDUSTRIAL-ECONOMIC COMPETITIVENESS
CENTRAL FILES:
46
RECEIVED
01 NOV 4 A10:56
OFFICE OF THE VICE PRESIDENT
WASHINGTON
October 30, 1991
DIRECTOR
MEMORANDUM FOR DIRECTOR BROMLEY
OFFICE OF SCIENCE AND TECHNOLOGY POLICY
FROM:
ALLAN B. HUBBARD
EXECUTIVE DIRECTOR
Bn
COUNCIL ON COMPETITIVENESS
SUBJECT:
LETTER TO THE SENATE GOVERNMENT OPERATIONS
COMMITTEE
The Vice President asked that I forward a copy of the enclosed
response to a letter from Senators Glenn, Levin and Kohl of the
Senate Committee on Government Operations. He thought you might
be interested in light of the recent letters from the Senators to
several Cabinet members inquiring as to their agency's
relationship with the Council on Competitiveness.
OFFICE OF THE VICE PRESIDENT
WASHINGTON
October 22, 1991
Senator John Glenn
Chairman, Committee on Government Operations
United States Senate
Washington, D.C. 20510
Dear Chairman Glenn:
The Vice President has asked me to respond to your letters
requesting additional information about the Council on
Competitiveness. As you know, the Vice President has met with
you and Senator Levin to discuss the Council and its mission.
Additionally, our staff has met with committee staff to discuss
the Council's operations.
Let me make two basic points about the Council and its
mission:
First, in implementing one of the Council's primary
assignments from President Bush--to reduce the regulatory burden
on our economy--the Vice President seeks to promote the general
interest of all Americans. We are committed to reducing and--
wherever possible--eliminating excessive, burdensome and
unnecessary regulations that:
Threaten the loss of American jobs,
Raise the cost of products to American consumers,
O
Impose needless government paperwork on America's small
business women and men, and
O
Impose unnecessary federal mandates on our cities, counties
and towns.
Second, I understand that there is some concern that the
Council is a "secret, backdoor channel" for deciding regulatory
issues. Let me assure you that this is definitely not the case.
Citizens from around the country are invited to bring regulatory
problems to the Council's attention. Whenever there is a policy
issue, our staff welcomes representatives of all sides of the
debate to come in and present their arguments. In so doing, we
always encourage them to present their arguments to the
regulatory agency responsible for issuing the regulation.
The agency is responsible for compiling a record available
to the public of the pertinent factual information on which the
agency relies to support its rulemaking decisions. The Council
on Competitiveness uses this record, together with the analyses
of the regulation prepared by professionals at the regulatory
agency, OMB, and other government agencies, in its deliberations
regarding policy issues. As the attached Fact Sheets and Press
Releases demonstrate, the Council publicly announces its
regulatory initiatives.
We look forward to working with you to reduce the regulatory
burden on all Americans. Attached is a copy of my April 25th
response to your first letter that includes the basic information
about the Council. In addition, the following information
addresses the specific questions you raised in your first letter.
1. What specific role does the Council play in reviewing agency
regulatory activities? Through what specific legal
authority and through which executive orders or directives
does the Council perform those functions?
Executive Order Nos. 12291 and 12498 set forth the specific
procedures for the regulatory review process. On June 15, 1990,
President Bush directed the Council on Competitiveness to
exercise the same authority over regulatory issues as did the
Presidential Task Force on Regulatory Relief under Executive
Order 12291. The President also designated the Council on
Competitiveness, chaired by Vice President Quayle, as the
appropriate council to review issues raised in conjunction with
the regulatory program under Executive Order 12498.
2. What is the relationship of the Council to OMB's Office of
Information and Regulatory Affairs (OIRA) and to the Office
of the OMB Deputy Director for Management (established by
the Chief Financial Officers Act of 1990)?
Executive Orders 12291 and 12498 vest responsibility for
their implementation in the Director of the Office of Management
and Budget, subject now to the review of the Council on
Competitiveness. The Office of Information and Regulatory
Affairs (OIRA) reviews regulations under these Executive Orders.
OIRA staff keeps the Council staff informed about the regulatory
review process and the status of particular issues under review.
The Chief Financial Officers Act of 1990 provides that OMB's
Deputy Director for Management is to, inter alia, "perform all
functions of the Director, including
all functions delegated by the President to the Director.
[relating to] regulatory affairs." (Sec. 503 (b) (2))
2
3. Please describe the council's regulatory review activities.
How are regulatory activities referred to or selected by the
Council for review? What procedures are followed and what
standards are used to review those regulatory activities?
How are Council decisions or comments communicated to
agencies?
The Council's regulatory review activities involve working
closely with the OMB in carrying out OMB's regulatory review
under E.O. 12291 and its development of the Regulatory Program
under E.O. 12498. The Council determines which items it will
review based on the views of its members and staff; normally the
items it takes up are those that present difficult issues under
E.O. 12291 that require Cabinet-level attention, particularly
issues where there is a policy disagreement among agencies.
The process for reviewing regulations is spelled out in
Executive Order Nos. 12291 and 12498 which provide inter alia:
"the Director [of OMB], subject to the direction of the Task
Force, shall have authority, to prescribe criteria for
making [determinations whether a rule an agency intends to
propose or to issue is a major rule]." (E.O. 12291 Section
3 (b))
"The Director [of OMB], subject to the direction of the
Task Force, which shall resolve any issues raised under
this Order or ensure that they are presented to the
President, is authorized to review any preliminary or
final Regulatory Impact Analysis, notice of proposed
rulemaking, or final rule based on the requirements of
this Order." (E.O. 12291 Section 3 (e) (1))
"Regulation" or 'rule' means an agency statement of general
applicability and future effect designed to implement,
interpret, or prescribe law or policy or describing the
procedure or practice of an agency [with
certain
exceptions for formal rulemaking, national security, agency
organization, management or personnel]" (E.O. 12291
Section 1 (a))
"The Director [of OMB], subject to the direction of the
Task Force, may designate currently effective rules for
review in accordance with this Order, and establish
schedules for reviews and Analyses under this Order."
(E.O. 12291 Section (3) (i))
"The Director, subject to the direction of the Task Force,
may, to the extent permitted by law: (1) Require agencies
to provide additional information in an agenda [published
every 6 months of proposed regulations that the agency has
3
issued or expects to issue, and currently effective rules
that are under agency review] ; and (2) Require publication
of the agenda in any form." (E.O. 12291 Section 5 (b))
"To the extent permitted by law.
the Director shall
have authority, subject to the direction of the Task
Force, to:
(1) Designate any proposed or existing rule as a major rule
in accordance with Section 1 (b) of this Order;
(2) Prepare and promulgate uniform standards for the
identification of major rules and the development of
Regulatory Impact Analyses;
(3) Require an agency to obtain and evaluate, in connection
with a regulation, any additional relevant data from
any appropriate source;
(4) Waive the requirements of Sections 3,4, or 7 of this
Order with respect to any proposed or existing major
rule;
(5) Identify duplicative, overlapping and conflicting
rules, existing or proposed, and existing or proposed
rules that are inconsistent with the policies
underlying statutes governing agencies other than the
issuing agency or with the purposes of this Order, and,
in each such case, require appropriate interagency
consultation to minimize or eliminate such duplication
overlap, or conflict;
(6) Develop procedures for estimating the annual benefits
and costs of agency regulations, on both an aggregate
and economic or industrial sector basis, for purposes
of compiling a regulatory budget;
(7) In consultation with interested agencies, prepare for
consideration by the President recommendations for
changes in the agencies' statutes; and
(8) Monitor agency compliance with the requirements of this
Order and advise the President with respect to such
compliance." (E.O. 12291, Section 6 (a))
"The Director, subject to the direction of the Task Force,
is authorized to establish procedures for the performance of
all functions vested in the Director by this Order."
(E.O. 12291 Section 6 (b))
"In the event of disagreement over the content of the
agency's draft regulatory program, the agency head or the
4
Director may raise issues for further review by the
President or by such appropriate Cabinet Council or other
forum as the President may designate." E.O. 12498
Section 3 (a)
The standards used to review a regulation are also spelled
out in E.O. 12291:
"In promulgating new regulations, reviewing existing
regulations, and developing legislative proposals concerning
regulation, all agencies, to the extent permitted by law,
shall adhere to the following requirements:
(a) Administrative decisions shall be based on
adequate information concerning the need for and
consequences of proposed government action;
(b) Regulatory action shall not be undertaken unless
the potential benefits to society for the regulation
outweigh the potential costs to society;
(c) Regulatory objectives shall be chosen to maximize
the net benefits to society;
(d) Among alternative approaches to any given
regulatory objective, the alternative involving the
least net cost to society shall be chosen; and
(e) Agencies shall set regulatory priorities with the
aim of maximizing the aggregate net benefits to
society, taking into account the condition of the
particular industries affected by regulations, the
condition of the national economy, and other regulatory
actions contemplated for the future." (Section 2)
It is important to keep in mind the key distinction between
the role of the Council in coordinating with OMB to implement the
review of regulations pursuant to the Executive Order and the
role of an agency in issuing regulations. The Council serves as
a deliberative forum where senior agency officials can gather to
discuss and resolve policy issues that affect major regulatory
proposals often involving several agencies.
The Council does not have the authority to issue
regulations. This authority is vested in the regulatory agencies
of jurisdiction, which often have a great deal of discretion,
consistent with fully implementing the law, in developing
particular regulations. Agencies exercise their regulatory
authority using the record-keeping and rulemaking processes
clearly outlined in the Administrative Procedure Act. These are
widely known and include public participation. The President has
directed that, when Executive agencies exercise their regulatory
5
authority and discretion, they adhere, to the extent permitted by
law, to the principles set forth in E.O. 12291. The Council
provides a forum for discussion and resolution of policy issues
that arise in this process, and its views are communicated to
agencies through the forum and discussions and through OIRA.
4.
In what manner and under what circumstances does the Council
solicit or receive comments on agency regulatory activities
from persons outside the Council? What records are kept of
such communications and what is done with the comments?
The distinction between agencies' formal regulatory
authority and the Council's policy coordination function is also
relevant to the Council's communications with the public. To
illustrate the point, it is useful to compare the two functions
to a congressional committee's activities. The outcome of the
committee's deliberations is a vote or other committee action,
usually accompanied by a committee report. The outcome of
deliberations in the Executive Branch regarding regulatory issues
is ultimately the regulatory action taken by the agency. In the
same way that the committee vote and accompanying report are
matters of public record, the agency action is recorded in the
Federal Register and there is a substantial public record
maintained pursuant to Administrative Procedure Act requirements.
Similarly, just as members of your Committee and its staff
interact informally with government agencies, private sector
organizations, interest groups and individuals on legislative and
oversight matters before the Committee, members of the Council
and its staff interact with such groups and individuals as they
gather information on major regulatory proposals. The Vice
President, in meeting with people around the country, routinely
invites them to send him information about regulatory and
competitiveness issues. The Council staff has a policy of
meeting with any group that requests an appointment to discuss a
regulatory issue, including representatives of workers,
consumers, businesses and citizens. This information gathering
is necessary to the Executive Branch's deliberative process.
Since the Council on Competitiveness is a Cabinet-level
body, there are no formal procedures for how its members receive
information from sources outside the Council. This practice is
consistent with the Administrative Procedure Act, which does not,
and should not, limit the ability of senior Executive Branch
officials to seek information needed to deliberate on and resolve
policy questions that necessarily arise when major regulatory
issues are under consideration.
6
5. For each regulatory activity reviewed or otherwise discussed
(including those currently under review) by the Council,
please identify:
-
The proposal;
-
The dates and length of review;
-
The action taken by the Council (whether informal
discussion or formal decision); and
-
Any record that exists of the Council's deliberations.
There were Council meetings held on June 28, 1990; September
27, 1990; December 19, 1990; February 11, 1991; May 6, 1991; May
.14, 1991; June 27, 1991; July 22, 1991; and July 29, 1991. At
these meetings, the Council discussed various regulatory issues,
including: the general problem of the burden of unnecessary
regulation on the American economy, protection of
constitutionally ensured private property rights which are
threatened by excessive government regulation, analysis of
regulatory burdens on the transfer of research from government
laboratories to the market place, the principles to be used by
the agencies in developing biotechnology regulations, the
recycling requirement in the Municipal Waste Combustors Rule,
regulations implementing the statutory exemption for secured
parties from Superfund cleanup liability, review of the wetlands
delineation manual, review of the federal ban on homeworkers in
the women's apparel industry, reform of regulations governing
pension plans, and response to public concern over Clinical
Laboratory Inspection Act (CLIA) rules.
In my previous letter, I attached all of the publicly
available documentation of these meetings. To bring you up to
date, attached are the fact sheets covering the meetings since my
April 25 letter. While these meetings addressed other regulatory
issues as part of the deliberative process of the Executive
Office of the President and the Cabinet, the Council did not set
out Administration policies in these areas. Needless to say,
Council staff also discuss regulatory matters on an ongoing
basis.
Any decisions about a particular regulation are made by the
agency head responsible for issuing the regulation, and, in so
doing, implementing the policies of the President. His or her
decisions would be reflected in the public record as required by
the Administrative Procedure Act.
6. To what extent was your March 22, 1991, Memorandum for Heads
of Executive Departments and Agencies based on problems the
Council has experienced in its review of regulatory
activities? If so, what were those problems and how were
they addressed by the Memorandum? Also, please explain how
the Memorandum's delineation of the scope of OMB regulatory
7
review is consistent with the Administrative Procedure Act's
definition of "rule" and "rule making."
The purpose of the Vice President's March 22, 1991,
memorandum to the heads of the executive departments and agencies
was to enlist their help to make sure that the regulatory review
process operates to minimize the burden on the economy of all
Federal regulations. He noted in the memorandum that several
agencies had raised questions about the scope of Executive Order
12291 and which agency actions must be submitted to OMB for
review. The Vice President also noted questions had been raised
with regard to the scope of Regulatory Impact Analyses when an
agency is implementing a statute.
1. In the memorandum, the Vice President indicated that the
Administration has consistently interpreted the Executive
Order to include all agency policy guidance that affects the
public. Such policy guidance includes not only regulations
that are published for notice and comment, but also strategy
statements, guidelines, policy manuals, grant and loan
procedures, Advance Notices of Proposed Rule Making in
limited instances, press releases and other documents that
themselves announce or implement new regulatory policy that
affects the public. The Vice President reminded the
agencies that the Executive Order makes certain exceptions
for adjudications or agency actions that are involved in
military or foreign affairs, and internal agency
organization.
E.O. 12291 applies, with certain exceptions, to any "agency
statement of general applicability and future effect
designed to implement, interpret, or prescribe law or policy
or describing the procedure or practice requirements of an
agency" (emphasis added.) Therefore, OIRA reviews various
types of documents in order to implement the policies
contained in Executive Order No. 12291.
2. The Vice President's memorandum drew attention to the
Executive Order's requirement that a Regulatory Impact
Analysis be done for all major rules. The memorandum stated
the analysis should review the costs and benefits of the
proposed rule or action and a variety of regulatory and non-
regulatory alternatives, including innovative approaches
such as market-based incentives, information disclosure, and
a "no regulation" alternative (for programs largely
regulatory in nature) or a "zero-based" option (for
budgetary programs implemented through regulation).
3. The memorandum also addressed the scope of the Regulatory
Impact Analysis when the agency is implementing a statute.
It stated the Analysis should fully address the costs and
benefits of actions mandated by legislation as well as
8
actions that are a matter of agency discretion. The Vice
President asked the agencies to make sure that all
appropriate agency actions are included in the regulatory
review process, and that any Regulatory Impact Analysis
fully assesses the economic impact of regulations in
accordance with OIRA guidance.
7.
Please describe the functions, responsibilities, and
authority of the Council's Working Groups.
The Vice President has established six working groups to
assist the Council in implementing its mission to review
regulatory issues, and such other issues as may be referred by
the President, bearing on competitiveness. These include:
Working Group on Biotechnology
Working Group on Civil Litigation Reform
Working Group on Deregulation
Working Group on the Drug Approval Process
Working Group on Product Liability Reform
Working Group on Commercialization of Government Research
The Vice President has asked these working groups to make
recommendations to the Council regarding particular policy and
regulatory issues that arise in their respective areas.
In closing, I would like to thank you again for your
interest in the Council's work. Additionally, I want to
emphasize that, while I am sure you understand that I cannot
provide certain information that is part of the deliberative and
decision making process of the Administration, I would be happy
to meet with you personally to discuss in more detail the role
the Council plays in the regulatory review process.
Allan Brl B. Hubbard
Sincerely,
Executive Director
Council on Competitiveness
CC: Senator William Roth
9
OFFICE OF THE VICE PRESIDENT
WASHINGTON
October 22, 1991
Senator Carl Levin
United States Senate
Washington, D.C. 20510
Dear Senator Levin:
The Vice President has asked me to respond to your letters
requesting additional information about the Council on
Competitiveness. As you know, the Vice President has met with
you and Senator Glenn to discuss the Council and its mission.
Additionally, our staff has met with committee staff to discuss
the Council's operations.
Let me make two basic points about the Council and its
mission:
First, in implementing one of the Council's primary
assignments from President Bush--to reduce the regulatory burden
on our economy--the Vice President seeks to promote the general
interest of all Americans. We are committed to reducing and--
wherever possible--eliminating excessive, burdensome and
unnecessary regulations that:
Threaten the loss of American jobs,
Raise the cost of products to American consumers,
Impose needless government paperwork on America's small
business women and men, and
Impose unnecessary federal mandates on our cities, counties
and towns.
Second, I understand that there is some concern that the
Council is a "secret, backdoor channel" for deciding regulatory
issues. Let me assure you that this is definitely not the case.
Citizens from around the country are invited to bring regulatory
problems to the Council's attention. Whenever there is a policy
issue, our staff welcomes representatives of all sides of the
debate to come in and present their arguments. In so doing, we
always encourage them to present their arguments to the
regulatory agency responsible for issuing the regulation.
The agency is responsible for compiling a record available
to the public of the pertinent factual information on which the
agency relies to support its rulemaking decisions. The Council
on Competitiveness uses this record, together with the analyses
of the regulation prepared by professionals at the regulatory
agency, OMB, and other government agencies, in its deliberations
regarding policy issues. As the attached Fact Sheets and Press
Releases demonstrate, the Council publicly announces its
regulatory initiatives.
We look forward to working with you to reduce the regulatory
burden on all Americans. Attached is a copy of my April 25th
response to your first letter that includes the basic information
about the Council. In addition, the following information
addresses the specific questions you raised in your first letter.
1. What specific role does the Council play in reviewing agency
regulatory activities? Through what specific legal
authority and through which executive orders or directives
does the Council perform those functions?
Executive Order Nos. 12291 and 12498 set forth the specific
procedures for the regulatory review process. On June 15, 1990,
President Bush directed the Council on Competitiveness to
exercise the same authority over regulatory issues as did the
Presidential Task Force on Regulatory Relief under Executive
Order 12291. The President also designated the Council on
Competitiveness, chaired by Vice President Quayle, as the
appropriate council to review issues raised in conjunction with
the regulatory program under Executive Order 12498.
2. What is the relationship of the Council to OMB's Office of
Information and Regulatory Affairs (OIRA) and to the Office
of the OMB Deputy Director for Management (established by
the Chief Financial Officers Act of 1990) ?
Executive Orders 12291 and 12498 vest responsibility for
their implementation in the Director of the Office of Management
and Budget, subject now to the review of the Council on
Competitiveness. The Office of Information and Regulatory
Affairs (OIRA) reviews regulations under these Executive Orders.
OIRA staff keeps the Council staff informed about the regulatory
review process and the status of particular issues under review.
The Chief Financial Officers Act of 1990 provides that OMB's
Deputy Director for Management is to, inter alia, "perform all
functions of the Director, including
all functions delegated by the President to the Director
[relating to] regulatory affairs." (Sec. 503 (b) (2))
3.
Please describe the council's regulatory review activities.
How are regulatory activities referred to or selected by the
2
Council for review? What procedures are followed and what
standards are used to review those regulatory activities?
How are Council decisions or comments communicated to
agencies?
The Council's regulatory review activities involve working
closely with the OMB in carrying out OMB's regulatory review
under E.O. 12291 and its development of the Regulatory Program
under E.O. 12498. The Council determines which items it will
review based on the views of its members and staff; normally the
items it takes up are those that present difficult issues under
E.O. 12291 that require Cabinet-level attention, particularly
issues where there is a policy disagreement among agencies.
The process for reviewing regulations is spelled out in
Executive Order Nos. 12291 and 12498 which provide inter alia:
"the Director [of OMB], subject to the direction of the Task
Force, shall have authority,
to prescribe criteria for
making [determinations whether a rule an agency intends to
propose or to issue is a major rule]." (E.O. 12291 Section
3 (b))
"The Director [of OMB], subject to the direction of the
Task Force, which shall resolve any issues raised under
this Order or ensure that they are presented to the
President, is authorized to review any preliminary or
final Regulatory Impact Analysis, notice of proposed
rulemaking, or final rule based on the requirements of
this Order." (E.O. 12291 Section 3 (e) (1))
"Regulation" or 'rule' means an agency statement of general
applicability and future effect designed to implement,
interpret, or prescribe law or policy or describing the
procedure or practice of an agency [with
certain
exceptions for formal rulemaking, national security, agency
organization, management or personnel]" (E.O. 12291
Section 1(a))
"The Director [of OMB], subject to the direction of the
Task Force, may designate currently effective rules for
review in accordance with this Order, and establish
schedules for reviews and Analyses under this Order."
(E.O. 12291 Section (3) (i))
"The Director, subject to the direction of the Task Force,
may, to the extent permitted by law: (1) Require agencies
to provide additional information in an agenda [published
every 6 months of proposed regulations that the agency has
issued or expects to issue, and currently effective rules
that are under agency review]; and (2) Require publication
of the agenda in any form." (E.O. 12291 Section 5(b))
3
"To the extent permitted by law.
the Director shall
have authority, subject to the direction of the Task
Force, to:
(1) Designate any proposed or existing rule as a major rule
in accordance with Section 1 (b) of this Order;
(2) Prepare and promulgate uniform standards for the
identification of major rules and the development of
Regulatory Impact Analyses;
(3) Require an agency to obtain and evaluate, in connection
with a regulation, any additional relevant Cata from
any appropriate source;
(4) Waive the requirements of Sections 3,4, or 7 of this
Order with respect to any proposed or existing major
rule;
(5) Identify duplicative, overlapping and conflicting
rules, existing or proposed, and existing or proposed
rules that are inconsistent with the policies
underlying statutes governing agencies other than the
issuing agency or with the purposes of this Order, and,
in each such case, require appropriate interagency
consultation to minimize or eliminate such duplication
overlap, or conflict;
(6) Develop procedures for estimating the annual benefits
and costs of agency regulations, on both an aggregate
and economic or industrial sector basis, for purposes
of compiling a regulatory budget;
(7) In consultation with interested agencies, prepare for
consideration by the President recommendations for
changes in the agencies' statutes; and
(8) Monitor agency compliance with the requirements of this
Order and advise the President with respect to such
compliance." (E.O. 12291, Section 6 (a))
"The Director, subject to the direction of the Task Force,
is authorized to establish procedures for the performance of
all functions vested in the Director by this Order."
(E.O. 12291 Section 6 (b))
"In the event of disagreement over the content of the
agency's draft regulatory program, the agency head or the
Director may raise issues for further review by the
President or by such appropriate Cabinet Council or other
forum as the President may designate." E.O. 12498
4
Section 3 (a)
The standards used to review a regulation are also spelled
out in E.O. 12291:
"In promulgating new regulations, reviewing existing
regulations, and developing legislative proposals concerning
regulation, all agencies, to the extent permitted by law,
shall adhere to the following requirements:
(a) Administrative decisions shall be based on
adequate information concerning the need for and
consequences of proposed government action;
(b) Regulatory action shall not be undertaken unless
the potential benefits to society for the regulation
outweigh the potential costs to society;
(c) Regulatory objectives shall be chosen to maximize
the net benefits to society;
(d) Among alternative approaches to any given
regulatory objective, the alternative involving the
least net cost to society shall be chosen; and
(e) Agencies shall set regulatory priorities with the
aim of maximizing the aggregate net benefits to
society, taking into account the condition of the
particular industries affected by regulations, the
condition of the national economy, and other regulatory
actions contemplated for the future." (Section 2)
It is important to keep in mind the key distinction between
the role of the Council in coordinating with OMB to implement the
review of regulations pursuant to the Executive Order and the
role of an agency in issuing regulations. The Council serves as
a deliberative forum where senior agency officials can gather to
discuss and resolve policy issues that affect major regulatory
proposals often involving several agencies.
The Council does not have the authority to issue
regulations. This authority is vested in the regulatory agencies
of jurisdiction, which often have a great deal of discretion,
consistent with fully implementing the law, in developing
particular regulations. Agencies exercise their regulatory
authority using the record-keeping and rulemaking processes
clearly outlined in the Administrative Procedure Act. These are
widely known and include public participation. The President has
directed that, when Executive agencies exercise their regulatory
authority and discretion, they adhere, to the extent permitted by
law, to the principles set forth in E.O. 12291. The Council
provides a forum for discussion and resolution of policy issues
5
that arise in this process, and its views are communicated to
agencies through the forum and discussions and through OIRA.
4. In what manner and under what circumstances does the Council
solicit or receive comments on agency regulatory activities
from persons outside the Council? What records are kept of
such communications and what is done with the comments?
The distinction between agencies' formal regulatory
authority and the Council's policy coordination function is also
relevant to the Council's communications with the public. To
illustrate the point, it is useful to compare the two functions
to a congressional committee's activities. The outcome of the
committee's deliberations is a vote or other committee action,
usually accompanied by a committee report. The outcome of
deliberations in the Executive Branch regarding regulatory issues
is ultimately the regulatory action taken by the agency. In the
same way that the committee vote and accompanying report are
matters of public record, the agency action is recorded in the
Federal Register and there is a substantial public record
maintained pursuant to Administrative Procedure Act requirements.
Similarly, just as members of your Committee and its staff
interact informally with government agencies, private sector
organizations, interest groups and individuals on legislative and
oversight matters before the Committee, members of the Council
and its staff interact with such groups and individuals as they
gather information on major regulatory proposals. The Vice
President, in meeting with people around the country, routinely
invites them to send him information about regulatory and
competitiveness issues. The Council staff has a policy of
meeting with any group that requests an appointment to discuss a
regulatory issue, including representatives of workers,
consumers, businesses and citizens. This information gathering
is necessary to the Executive Branch's deliberative process.
Since the Council on Competitiveness is a Cabinet-level
body, there are no formal procedures for how its members receive
information from sources outside the Council. This practice is
consistent with the Administrative Procedure Act, which does not,
and should not, limit the ability of senior Executive Branch
officials to seek information needed to deliberate on and resolve
policy questions that necessarily arise when major regulatory
issues are under consideration.
5. For each regulatory activity reviewed or otherwise discussed
(including those currently under review) by the Council,
please identify:
-
The proposal;
6
-
The dates and length of review;
-
The action taken by the Council (whether informal
discussion or formal decision) ; and
-
Any record that exists of the Council's deliberations.
There were Council meetings held on June 28, 1990; September
27, 1990; December 19, 1990; February 11, 1991; May 6, 1991; May
14, 1991; June 27, 1991; July 22, 1991; and July 29, 1991. At
these meetings, the Council discussed various regulatory issues,
including: the general problem of the burden of unnecessary
regulation on the American economy, protection of
constitutionally ensured private property rights which are
threatened by excessive government regulation, analysis of
regulatory burdens on the transfer of research from government
laboratories to the market place, the principles to be used by
the agencies in developing biotechnology regulations, the
recycling requirement in the Municipal Waste Combustors Rule,
regulations implementing the statutory exemption for secured
parties from Superfund cleanup liability, review of the wetlands
delineation manual, review of the federal ban on homeworkers in
the women's apparel industry, reform of regulations governing
pension plans, and response to public concern over Clinical
Laboratory Inspection Act (CLIA) rules.
In my previous letter, I attached all of the publicly
available documentation of these meetings. To bring you up to
date, attached are the fact sheets covering the meetings since my
April 25 letter. While these meetings addressed other regulatory
issues as part of the deliberative process of the Executive
Office of the President and the Cabinet, the Council did not set
out Administration policies in these areas. Needless to say,
Council staff also discuss regulatory matters on an ongoing
basis.
Any decisions about a particular regulation are made by the
agency head responsible for issuing the regulation, and, in so
doing, implementing the policies of the President. His or her
decisions would be reflected in the public record as required by
the Administrative Procedure Act.
6. To what extent was your March 22, 1991, Memorandum for Heads
of Executive Departments and Agencies based on problems the
Council has experienced in its review of regulatory
activities? If so, what were those problems and how were
they addressed by the Memorandum? Also, please explain how
the Memorandum's delineation of the scope of OMB regulatory
review is consistent with the Administrative Procedure Act's
definition of "rule" and "rule making."
The purpose of the Vice President's March 22, 1991,
memorandum to the heads of the executive departments and agencies
7
was to enlist their help to make sure that the regulatory review
process operates to minimize the burden on the economy of all
Federal regulations. He noted in the memorandum that several
agencies had raised questions about the scope of Executive Order
12291 and which agency actions must be submitted to OMB for
review. The Vice President also noted questions had been raised
with regard to the scope of Regulatory Impact Analyses when an
agency is implementing a statute.
1.
In the memorandum, the Vice President indicated that the
Administration has consistently interpreted the Executive
Order to include all agency policy guidance that affects the
public. Such policy guidance includes not only regulations
that are published for notice and comment, but also strategy
statements, guidelines, policy manuals, grant and loan
procedures, Advance Notices of Proposed Rule Making in
limited instances, press releases and other documents that
themselves announce or implement new regulatory policy that
affects the public. The Vice President reminded the
agencies that the Executive Order makes certain exceptions
for adjudications or agency actions that are involved in
military or foreign affairs, and internal agency
organization.
E.O. 12291 applies, with certain exceptions, to any "agency
statement of general applicability and future effect
designed to implement, interpret, or prescribe law or policy
or describing the procedure or practice requirements of an
agency" (emphasis added.) Therefore, OIRA reviews various
types of documents in order to implement the policies
contained in Executive Order No. 12291.
2.
The Vice President's memorandum drew attention to the
Executive Order's requirement that a Regulatory Impact
Analysis be done for all major rules. The memorandum stated
the analysis should review the costs and benefits of the
proposed rule or action and a variety of regulatory and non-
regulatory alternatives, including innovative approaches
such as market-based incentives, information disclosure, and
a "no regulation" alternative (for programs largely
regulatory in nature) or a "zero-based" option (for
budgetary programs implemented through regulation).
3.
The memorandum also addressed the scope of the Regulatory
Impact Analysis when the agency is implementing a statute.
It stated the Analysis should fully address the costs and
benefits of actions mandated by legislation as well as
actions that are a matter of agency discretion. The Vice
President asked the agencies to make sure that all
appropriate agency actions are included in the regulatory
review process, and that any Regulatory Impact Analysis
fully assesses the economic impact of regulations in
8
accordance with OIRA guidance.
7. Please describe the functions, responsibilities, and
authority of the Council's Working Groups.
The Vice President has established six working groups to
assist the Council in implementing its mission to review
regulatory issues, and such other issues as may be referred by
the President, bearing on competitiveness. These include:
Working Group on Biotechnology
Working Group on Civil Litigation Reform
Working Group on Deregulation
Working Group on the Drug Approval Process
Working Group on Product Liability Reform
Working Group on Commercialization of Government Research
The Vice President has asked these working groups to make
recommendations to the Council regarding particular policy and
regulatory issues that arise in their respective areas.
In closing, I would like to thank you again for your
interest in the Council's work. Additionally, I want to
emphasize that, while I am sure you understand that I cannot
provide certain information that is part of the deliberative and
decision making process of the Administration, I would be happy
to meet with you personally to discuss in more detail. the role
the Council plays in the regulatory review process.
Allan Sincerely, All B. Hubbard w/
Executive Director
Council on Competitiveness
CC: Senator William Roth
9
OFFICE OF THE VICE PRESIDENT
WASHINGTON
October 22, 1991
Senator Herbert Kohl
United States Senate
Washington, D.C. 20510
Dear Senator Kohl:
The Vice President has asked me to respond to your letters
requesting additional information about the Council on
Competitiveness. As you know, the Vice President has met with
Senators Glenn and Levin to discuss the Council and its mission.
Additionally, our staff has met with committee staff to discuss
the Council's operations.
Let me make two basic points about the Council and its
mission:
First, in implementing one of the Council's primary
assignments from President Bush--to reduce the regulatory burden
on our economy--the Vice President seeks to promote the general
interest of all Americans. We are committed to reducing and--
wherever possible--eliminating excessive, burdensome and
unnecessary regulations that:
Threaten the loss of American jobs,
Raise the cost of products to American consumers,
Impose needless government paperwork on America's small
business women and men, and
O
Impose unnecessary federal mandates on our cities, counties
and towns.
Second, I understand that there is some concern that the
Council is a "secret, backdoor channel" for deciding regulatory
issues. Let me assure you that this is definitely not the case.
Citizens from around the country are invited to bring regulatory
problems to the Council's attention. Whenever there is a policy
issue, our staff welcomes representatives of all sides of the
debate to come in and present their arguments. In so doing, we
always encourage them to present their arguments to the
regulatory agency responsible for issuing the regulation. The
agency is responsible for compiling a record available to the
public of the pertinent factual information on which the agency
relies to support its rulemaking decision. The Council on
Competitiveness uses this record, together with the analyses of
the regulation prepared by professionals at the regulatory
agency, OMB, and other government agencies, in its deliberations
regarding policy issues. As the attached Fact Sheets and Press
Releases demonstrate, the Council publicly announces its
regulatory initiatives.
We look forward to working with you to reduce the regulatory
burden on all Americans. Attached is a copy of my April 25th
response to your first letter that includes the basic information
about the Council. In addition, the following information
addresses the specific questions you raised in your first letter.
1. What specific role does the Council play in reviewing agency
regulatory activities? Through what specific legal
authority and through which executive orders or directives
does the Council perform those functions?
Executive Order Nos. 12291 and 12498 set forth the specific
procedures for the regulatory review process. On June 15, 1990,
President Bush directed the Council on Competitiveness to
exercise the same authority over regulatory issues as did the
Presidential Task Force on Regulatory Relief under Executive
Order 12291. The President also designated the Council on
Competitiveness, chaired by Vice President Quayle, as the
appropriate council to review issues raised in conjunction with
the regulatory program under Executive Order 12498.
2. What is the relationship of the Council to OMB's Office of
Information and Regulatory Affairs (OIRA) and to the Office
of the OMB Deputy Director for Management (established by
the Chief Financial Officers Act of 1990)?
Executive Orders 12291 and 12498 vest responsibility for
their implementation in the Director of the Office of Management
and Budget, subject now to the review of the Council on
Competitiveness. The Office of Information and Regulatory
Affairs (OIRA) reviews regulations under these Executive Orders.
OIRA staff keeps the Council staff informed about the regulatory
review process and the status of particular issues under review.
The Chief Financial Officers Act of 1990 provides that OMB's
Deputy Director for Management is to, inter alia, "perform all
functions of the Director, including
all functions delegated by the President to the Director.
[relating to] regulatory affairs." (Sec. 503 (b) (2))
3. Please describe the council's regulatory review activities.
How are regulatory activities referred to or selected by the
2
Council for review? What procedures are followed and what
standards are used to review those regulatory activities?
How are Council decisions or comments communicated to
agencies?
The Council's regulatory review activities involve working
closely with the OMB in carrying out OMB's regulatory review
under E.O. 12291 and its development of the Regulatory Program
under E.O. 12498. The Council determines which items it will
review based on the views of its members and staff; normally the
items it takes up are those that present difficult issues under
E.O. 12291 that require Cabinet-level attention, particularly
issues where there - policy disagreement among agencies.
The process for reviewing regulations is spelled out in
Executive Order Nos. 12291 and 12498 which provide inter alia:
"the Director [of OMB], subject to the direction of the Task
Force, shall have authority,
to prescribe criteria for
making [determinations whether a rule an agency intends to
propose or to issue is a major rule]." (E.O. 12291 Section
3 (b))
"The Director [of OMB], subject to the direction of the
Task Force, which shall resolve any issues raised under
this Order or ensure that they are presented to the
President, is authorized to review any preliminary or
final Regulatory Impact Analysis, notice of proposed
rulemaking, or final rule based on the requirements of
this Order." (E.O. 12291 Section 3 (e) (1))
"Regulation" or 'rule' means an agency statement of general
applicability and future effect designed to implement,
interpret, or prescribe law or policy or describing the
procedure or practice of an agency [with certain
exceptions for formal rulemaking, national security, agency
organization, management or personnel]" (E.O. 12291
Section 1 (a))
"The Director [of OMB], subject to the direction of the
Task Force, may designate currently effective rules for
review in accordance with this Order, and establish
schedules for reviews and Analyses under this Order."
(E.O. 12291 Section (3) (i))
"The Director, subject to the direction of the Task Force,
may, to the extent permitted by law: (1) Require agencies
to provide additional information in an agenda [published
every 6 months of proposed regulations that the agency has
issued or expects to issue, and currently effective rules
that are under agency review]; and (2) Require publication
of the agenda in any form." (E.O. 12291 Section 5(b))
3
"To the extent permitted by law.
the Director shall
have authority, subject to the direction of the Task
Force, to:
(1) Designate any proposed or existing rule as a major rule
in accordance with Section 1 (b) of this Order;
(2) Prepare and promulgate uniform standards for the
identification of major rules and the development of
Regulatory Impact Analyses;
(3) Require an agency 20 optain and evaluate, in connection
with a regulation, any additional relevant data from
any appropriate source;
(4) Waive the requirements of Sections 3,4, or 7 of this
Order with respect to any proposed or existing major
rule;
(5) Identify duplicative, overlapping and conflicting
rules, existing or proposed, and existing or proposed
rules that are inconsistent with the policies
underlying statutes governing agencies other than the
issuing agency or with the purposes of this Order, and,
in each such case, require appropriate interagency
consultation to minimize or eliminate such duplication
overlap, or conflict;
(6) Develop procedures for estimating the annual benefits
and costs of agency regulations, on both an aggregate
and economic or industrial sector basis, for purposes
of compiling a regulatory budget;
(7) In consultation with interested agencies, prepare for
consideration by the President recommendations for
changes in the agencies' statutes; and
(8) Monitor agency compliance with the requirements of this
Order and advise the President with respect to such
compliance." (E.O. 12291, Section 6 (a))
"The Director, subject to the direction of the Task Force,
is authorized to establish procedures for the performance of
all functions vested in the Director by this Order."
(E.O. 12291 Section 6 (b))
"In the event of disagreement over the content of the
agency's draft regulatory program, the agency head or the
Director may raise issues for further review by the
President or by such appropriate Cabinet Council or other
forum as the President may designate." E.O. 12498
4
Section 3 (a)
The standards used to review a regulation are also spelled
out in E.O. 12291:
"In promulgating new regulations, reviewing existing
regulations, and developing legislative proposals concerning
regulation, all agencies, to the extent permitted by law,
shall adhere to the following requirements:
(a) Administrative decisions shall be based on
adequate information concerning the need for and
consequences of proposed government action;
(b) Regulatory action shall not be undertaken unless
the potential benefits to society for the regulation
outweigh the potential costs to society;
(c) Regulatory objectives shall be chosen to maximize
the net benefits to society;
(d) Among alternative approaches to any given
regulatory objective, the alternative involving the
least net cost to society shall be chosen; and
(e) Agencies shall set regulatory priorities with the
aim of maximizing the aggregate net benefits to
society, taking into account the condition of the
particular industries affected by regulations, the
condition of the national economy, and other regulatory
actions contemplated for the future.' (Section 2)
It is important to keep in mind the key distinction between
the role of the Council in coordinating with OMB to implement the
review of regulations pursuant to the Executive Order and the
role of an agency in issuing regulations. The Council serves as
a deliberative forum where senior agency officials can gather to
discuss and resolve policy issues that affect major regulatory
proposals often involving several agencies.
The Council does not have the authority to issue
regulations. This authority is vested in the regulatory agencies
of jurisdiction, which often have a great deal of discretion,
consistent with fully implementing the law, in developing
particular regulations. Agencies exercise their regulatory
authority using the record-keeping and rulemaking processes
clearly outlined in the Administrative Procedure Act. These are
widely known and include public participation. The President has
directed that, when Executive agencies exercise their regulatory
authority and discretion, they adhere, to the extent permitted by
law, to the principles set forth in E.O. 12291. The Council
provides a forum for discussion and resolution of policy issues
5
that arise in this process, and its views are communicated to
agencies through the forum and discussions and through OIRA.
4.
In what manner and under what circumstances does the Council
solicit or receive comments on agency regulatory activities
from persons outside the Council? What records are kept of
such communications and what is done with the comments?
The distinction between agencies' formal regulatory
authority and the Council's policy coordination function is also
relevant to the Council's communications with the public. To
illustrate the point, it is useful to compare the two functions
to a congressional committee's activities. The outcome of the
committee's deliberations is a vote or other committee action,
usually accompanied by a committee report. The outcome of
deliberations in the Executive Branch regarding regulatory issues
is ultimately the regulatory action taken by the agency. In the
same way that the committee vote and accompanying report are
matters of public record, the agency action is recorded in the
Federal Register and there is a substantial public record
maintained pursuant to Administrative Procedure Act requirements.
Similarly, just as members of your Committee and its staff
interact informally with government agencies, private sector
organizations, interest groups and individuals on legislative and
oversight matters before the Committee, members of the Council
and its staff interact with such groups and individuals as they
gather information on major regulatory proposals. The Vice
President, in meeting with people around the country, routinely
invites them to send him information about regulatory and
competitiveness issues. The Council staff has a policy of
meeting with any group that requests an appointment to discuss a
regulatory issue, including representatives of workers,
consumers, businesses and citizens. This information gathering
is necessary to the Executive Branch's deliberative process.
Since the Council on Competitiveness is a Cabinet-level
body, there are no formal procedures for how its members receive
information from sources outside the Council. This practice is
consistent with the Administrative Procedure Act, which does not,
and should not, limit the ability of senior Executive Branch
officials to seek information needed to deliberate on and resolve
policy questions that necessarily arise when major regulatory
issues are under consideration.
5.
For each regulatory activity reviewed or otherwise discussed
(including those currently under review) by the Council,
please identify:
-
The proposal;
6
-
The dates and length of review;
-
The action taken by the Council (whether informal
discussion or formal decision); and
-
Any record that exists of the Council's deliberations.
There were Council meetings held on June 28, 1990; September
27, 1990; December 19, 1990; February 11, 1991; May 6, 1991; May
14, 1991; June 27, 1991; July 22, 1991; and July 29, 1991. At
these meetings, the Council discussed various regulatory issues,
including: the general problem of the burden of unnecessary
regulation on the American economy, protection of
constitutionally ensured private property rights which are
threatened by excessive government regulation, analysis or
regulatory burdens on the transfer of research from government
laboratories to the market place, the principles to be used by
the agencies in developing biotechnology regulations, the
recycling requirement in the Municipal Waste Combustors Rule,
regulations implementing the statutory exemption for secured
parties from Superfund cleanup liability, review of the wetlands
delineation manual, review of the federal ban on homeworkers in
the women's apparel industry, reform of regulations governing
pension plans, and response to public concern over Clinical
Laboratory Inspection Act (CLIA) rules.
In my previous letter, I attached all of the publicly
available documentation of these meetings. To bring you up to
date, attached are the fact sheets covering the meetings since my
April 25 letter. While these meetings addressed other regulatory
issues as part of the deliberative process of the Executive
Office of the President and the Cabinet, the Council did not set
out Administration policies in these areas. Needless to say,
basis. Council staff also discuss regulatory matters on an ongoing
Any decisions about a particular regulation are made by the
agency head responsible for issuing the regulation, and, in so
doing, implementing the policies of the President. His or her
decisions would be reflected in the public record as required by
the Administrative Procedure Act.
6. To what extent was your March 22, 1991, Memorandum for Heads
of Executive Departments and Agencies based on problems the
Council has experienced in its review of regulatory
activities? If so, what were those problems and how were
they addressed by the Memorandum? Also, please explain how
the Memorandum's delineation of the scope of OMB regulatory
review is consistent with the Administrative Procedure Act's
definition of "rule" and "rule making."
The purpose of the Vice President's March 22, 1991,
memorandum to the heads of the executive departments and agencies
7
was to enlist their help to make sure that the regulatory review
process operates to minimize the burden on the economy of all
Federal regulations. He noted in the memorandum that several
agencies had raised questions about the scope of Executive Order
12291 and which agency actions must be submitted to OMB for
review. The Vice President also noted questions had been raised
with regard to the scope of Regulatory Impact Analyses when an
agency is implementing a statute.
1.
In the memorandum, the Vice President indicated that the
Administration has consistently interpreted the Executive
Order to include all agency policy guidance that affects the
public. Such policy guidance includes not only regulations
that are published for notice and comment, but also strategy
statements, guidelines, policy manuals, grant and loan
procedures, Advance Notices of Proposed Rule Making in
limited instances, press releases and other documents that
themselves announce or implement new regulatory policy that
affects the public. The Vice President reminded the
agencies that the Executive Order makes certain exceptions
for adjudications or agency actions that are involved in
military or foreign affairs, and internal agency
organization.
E.O. 12291 applies, with certain exceptions, to any "agency
statement of general applicability and future effect
designed to implement, interpret, or prescribe law or policy
or describing the procedure or practice requirements of an
agency" (emphasis added.) Therefore, OIRA reviews various
types of documents in order to implement the policies
contained in Executive Order No. 12291.
2.
The Vice President's memorandum drew attention to the
Executive Order's requirement that a Regulatory Impact
Analysis be done for all major rules. The memorandum stated
the analysis should review the costs and benefits of the
proposed rule or action and a variety of regulatory and non-
regulatory alternatives, including innovative approaches
such as market-based incentives, information disclosure, and
a "no regulation" alternative (for programs largely
regulatory in nature) or a "zero-based" option (for
budgetary programs implemented through regulation).
3.
The memorandum also addressed the scope of the Regulatory
Impact Analysis when the agency is implementing a statute.
It stated the Analysis should fully address the costs and
benefits of actions mandated by legislation as well as
actions that are a matter of agency discretion. The Vice
President asked the agencies to make sure that all
appropriate agency actions are included in the regulatory
review process, and that any Regulatory Impact Analysis
fully assesses the economic impact of regulations in
8
accordance with OIRA guidance.
7.
Please describe the functions, responsibilities, and
authority of the Council's Working Groups.
The Vice President has established six working groups to
assist the Council in implementing its mission to review
regulatory issues, and such other issues as may be referred by
the President, bearing on competitiveness. These include:
Working Group on Biotechnology
Working Group on Civil Litigation Reform
Working Group on Deregulation
Working Group on the Drug Approval Process
Working Group on Product Liability Reform
Working Group on Commercialization of Government Research
The Vice President has asked these working groups to make
recommendations to the Council regarding particular policy and
regulatory issues that arise in their respective areas.
In closing, I would like to thank you again for your
interest in the Council's work. Additionally, I want to
emphasize that, while I am sure you understand that I cannot
provide certain information that is part of the deliberative and
decision making process of the Administration, I would be happy
to meet with you personally to discuss in more detail the role
the Council plays in the regulatory review process.
Sincerely,
Allan Allu B. Hubbard
Executive Director
Council on Competitiveness
CC: Senator William Roth
9
Hubbard
THE WHITE HOUSE
nov. 4 'al
Dear Man
if letten to the Senate
many thanks fn Threapy I your
Government Quateons
state want A purparr and
Hu an admirably clear
can gratulate you oa it
OSTPand & sland ready
to tulp in anyway we can
both
Surcady
Allan
"Document Control"
TYPE:
ACTION
DOCUMENT NUMBER: 9124278
ORIGINATOR: 02
STATUS I
DIRECTORATE STATUS
FROM:
RASH, Kris D.
TO:
DR. D.A. BROMLEY
DATE OF
CORRESPONDENCE: 09/25/91
SUBJECT: CONCERN AND QUESTIONS REGARDING THE ECONOMIC FUTURE
OF THE U.S. AND A REQUEST FOR ANY AVAILABLE
INFORMATION ON THE SUBJECT.
DIRECTORATE
STAFF
ASSIGNED: INDUSTRIAL
ASSIGNED:
ACTION
STAFF
REQUIRED: DIRECT REPLY
ACTION:
SENDER'S DUE DATE:
OSTP DUE DATE:
10/16/91
STAFF DUE DATE
DATE COMPLETED:
DATE COMPLETED/DEPT:
COPIES TO:
WHITE HOUSE TRACKING #:
CONTACT PERSON:
PHONE:
EXT:
REMARKS:
DEPT RECEIVED: CLOSED
OSTP RECEIVED: 10/02/91
FILE: P-INDUSTRIAL-ECON COMP
4278
RECEIVED
9/25/91
White House Science
White Houseyroct 2 Adrison
Washington D.C.
20500
'OFFICE-OF THE
DIRECTOR
I am concerned about the economic future of the
United States, and I have some questions regarding
research and development. Many educated people have
expressed many conflicting ideas and opinions on this
subject. Most of these opinions seem to be frosted with
ulterior motives and personal interests. For instance:
private research institutions want government funding-
claiming this as the way to remain competitive; and
governmental research institutions want private funding-
claiming this as the solution.
Of course, being a concerned citizen, I wish for the
best possible outcome in decisions such as government
grants, and subsidies. Understanding that the private
sector stands only to gain from such a subsidy, it stands
to reason that they would want funding-technology-profit-
money in the pocket. Realizing that the U.S. Government
has obligations such as the national debt, it would seem
foolish to leave such things un-resolved.
Leaving the motives for seeking governmental funding
aside-whether they are for the good of the country or for
personal interest and profit-in your understanding, is
governmental funding for private research a solution to
potentially falling behind in the technology race, or
will it just waste tax dollars? Please explain your
answer. Any pamphlets you might have that would
enlighten me further would be appreciated. Thank you for
your time.
Kris D Rash
Kris D. Rash
460 S., 2nd W. #43
Rexburg, ID 83440
18/38/8
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EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF SCIENCE AND TECHNOLOGY POLICY
WASHINGTON, D.C. 20506
October 28, 1991
Dear Ms. Rash:
Thank you for your thoughtful letter concerning federal funding of research and its
effect on the economic future of the United States.
You ask: "...is government funding for private research a solution to potentially falling
behind in the technology race, or will it just waste tax dollars?" The second part is easy
to answer. Based on past experiences, government funding for private research will not
be a waste of tax dollars. Research-technology-industry form the food chain for
economic growth. Nearly all the high-growth industries and the industries that
contribute to a favorable balance of trade have been the result of research, much of it
government supported and most of it done at private laboratories, industrial or
academic. These industries include electronics, computers, telecommunications,
biotechnology and pharmaceutical, to name only a few.
The first part of your question is more complex but no less clear. Thanks to the vigor of
basic research in the U.S., much of which government supported, we are not falling
behind in the creation of technologies, but we may not be as effective in using technology
to generate industrial growth. How to use the technologies that we create more
effectively should be a major focus for the nation. Reducing government support for
research will not help in this regard. It can only hurt.
All in all, government support for research has been an outstanding investment in every
way, and will continue to be. Informed citizens like you are critical in building the base
of support that an effective and wise public policy requires. I am grateful to you for
your interest and concern, and I am enclosing a statement on U.S. Technology Policy
which this office issued last year.
Sincerely yours,
Eugene Wong
Associate Director
J
for Industrial Technology
Ms. Kris D. Rash
460 South 2nd West, #43
Rexburg, Idaho 83440