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September 29, 1978


Charlie Schultze£^5


Warren-Speth Memo on "Inflation and
Environmental and Health Regulations"

Charles-Warren and Gus Speth's memo to you of September
18 was’not--sent to CEA for comment prior to its submission to
y o u . T h e memo;reflects the views of the CEQ members with
-respect to the-Administration's regulatory reform efforts;.'
However, it--contains factual statements about the impact-oif '
regulation-'-and the political consequences of our regulatory
reform efforts that are, in my view, misleading. In light '
of your comment, "I agree," on the memo, I felt it important
to bring to your attention my concerns with this memo.
-The Economic Impact of Regulations
The CEQ memo cites the results of a study, by Chase
Econometrics, Inc., of the impact of environmental regulations
on inflation. -The study estimated that environmental regulations
will increase -the average annual rate of inflation by .35 percent
for the period 1970 to 1983. On the basis of this evidence,
CEQ concluded- that environmental regulations "do not contribute
substantially to inflation." I have three comments.
First, an impact even of the magnitude cited in the CEQ
memo is not insubstantial in my view. However, the study
to which CEQ refers actually found a greater impact from
environmental regulations in the latter part of the period.
Chase estimated that between 1976 and 1983 environmental
regulations would raise the average annual inflation rate
by .44 percentage point.

-2Second, the Chase study assumed a recession in 1978
during which unemployment reached 10 percent.
Such an
outcome is unlikely, in my view. Without a recession of
the magnitude assumed, the cost increases due to regulation
would have been more fully reflected in higher prices. In
the absence of a recession, the Chase study showed that
environmental regulations would raise the average annual
inflation rate,by .53 percentage point from 1976 to 1983.
Third., the CEQ memo and the Chase study refer only to
the economic effects of environmental regulations. The
economic, impact of other forms of Federal regulations,
including regulations issued by OSHA, HEW, FDA, USDA, and
other agencies also is substantial. Although studies of
the economic impact of regulations are far from perfect,
they do indicate that the total costs of regulation are very
large. For- example:
— . The -economic costs of regulations are directly
reflected in reduced labor productivity. The rate
of growth of productivity has virtually collapsed from about 3 percent annually in the 1950s and__
_196.0s to about 1-1/2 percent in this decade. It
would be a gross exaggeration to state that
regulation has been the sole cause of this slowdown,
but academic studies conclude that regulation is a
major factor. Edward Denison of Brookings has
estimated that anti-pollution and workplace health
and safety regulations alone reduced the rate of
productivity increase by about 0 .4 percentage
point in 1975 and that the impact of these regulations
on productivity has been growing steadily throughout
the 1970s. The Chase study of the 1976 and 1983
period found that the level of productivity in
1983 would be 2.2 percent below the level in the
absence of environmental regulations. The decline
in productivity growth contributes significantly to
economic problems such as inflation and the slow
growth of real incomes, the weakness of the dollar,
and perhaps to the general malaise among consumers.

The impact of regulations on individual industries
can be dramatic. Mine safety regulations, for
example, are cited as the primary cause of a

-3decline in labor productivity since 1969 of 40
percent in underground coal mining and 28 percent
in surface mining. Similarly, EPA estimates that
its own regulations have raised costs by 1 2 percent
in the copper industry, which today faces considerable
import competition. Chase Econometrics also estimates
that automobile prices between now and 1985 will
rise $750 per car due to new safety, emission7
and fuel-economy standards, and that prices will
rise a further 1 percentage point per year to
accommodate the cost of new light-weight metals..
Current regulatory procedures often leave firms
highly uncertain about the future requirements.
Moreover., many licensing requirements substantially
lengthen-planning and construction periods and
_reguire firms to plan beyond the period for which
-reasonable forecasts of capacity needs can be _madei Thus, new investments are discouraged,r;
eandiour productivity problems made worse.
: i. I recognizer.that the nation gets very important benefits
-from environmental and other regulations that are not counted
in the standard measures of GNP and productivity. But so--also do Federal health, welfare, and other budget programs.
provide benefits that are not fully measured in the GN£^— — --Yet no one.would suggest:
: o ~ t h a t the :s±ze -and timing of those programs should ;_
be immune from" review by the Executive Office
' "
_ of the President;
-.or that we should not make every effort to
secure the benefits at the least possible cost
to the nation.
do.not conceive of regulatory reform as a device
to-halt.progress-toward environmental, health and safety
objectives. But I do believe that major proposals of
the regulatory agencies, even in these sensitive areas,
should be subject to analysis and review.

-4Political Aspects of Regulatory Reform
The CEQ memo raises the prospect of enormous political
cost to the Administration from active pursuit of your
regulatory reform objectives. In particular, it cites
criticism that the Regulatory Analysis Program is "undermining
your support with many of those who have been your strongest
supporters," i.e., those in the environment movement.
There is no question that efforts to reform the regulatory
process will entail heated political debate. Environmental
and-labor.groups are dedicated to the objectives of the
Government^ regulatory program and view with suspicion
;any.effort to introduce into the process concerns that,
compete with.their own. Similarly, as we have seen with
the.airline deregulation bill, regulated industries also
-resist, strongly efforts to limit the Federal role in
price* or.-rater setting and market entry.
Your Administration has been forthright in pointing" out
the. glaring need to face up to the costs and inefficiencies
.of-our regulatory program. Often, the costs of- particular
-regulation^: excessive. The failings of the regulatory
process haye aroused anger and deep concern in the private
-^sector.-.- Corporations are sponsoring major publicity
campaigns to point up the economic burden of regulation.
Although still -in its infancy, the Regulatory Analysis
Program is certainly one of our most popular programs with
the business community as a result of this growing concern
with, .regulation.
Twice this year, the Senate has acted against OSHA
regulations _ ..first when it voted to exempt small businesses
-from OSJHA rules,: and last Monday when it voted to delay the
-effective date of the cotton dust rule.
If erosion of
environmental and health and safety objectives by such
ad hoc and ill-advised Congressional actions is to be
avoided, and if. the legitimate concerns of the nation
with regard to.regulation are to be met, we must move
forward with regulatory reform efforts.
Therefore, I disagree strongly — on economic and
on political grounds — with CEQ's recommendation that
"Administration regulatory review efforts should focus more
on ferreting out old regulations that are anti-competitive
or no longer serve a useful purpose, and much less on
new regulatory proposals in the health and environmental
areas." Today, I also sent you separately a report
of the interagency group that conducted the six-month
review of the Regulatory Analysis Program.
It outlines

-5several improvements in the program, and recommends that
you extend the program's life. I recommend that you
endorse this program and give it your full backing in the
months ahead. Regulatory reform is a vital ingredient in
our anti-inflation effort, a popular program with the
American people, and essential in the long run to achieving
our environmental-and health and safety objectives without
incurring unacceptable costs.
CEA7 DPS_, OMB and other agencies are exploring ways
to further enhance the regulatory reform effort. We also
are:working to build better bridges to the environmentalist
and labor communities in order to reduce their opposition
to these programs, if not gain their support. Your
continued strong support for these efforts, both publicly
and in the process of Administration decision making, is
ofrcritical importance to its success.

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102