A Misleading Report Obscures Sequestration's Impact on Regulators' Budgets

by Nick Schwellenbach, 8/22/2013

Last month, university-based researchers Susan Dudley and Melinda Warren released a highly misleading report claiming sequestration has not had much impact on the overall budgets of federal regulatory agencies. Perhaps the biggest single problem with their analysis is, despite the title of their report (Sequester’s Impact on Regulatory Agencies Modest), it does not analyze sequestration’s impact whatsoever.

Dudley is the director of George Washington University’s Regulatory Studies Center and, through a recess appointment by President George W. Bush, formerly headed the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA), a highly influential but little known office. She was seen by many critics as anti-regulatory. Warren, a longtime collaborator of Dudley’s, heads the Weidenbaum Center on the Economy, Government, and Public Policy at Washington University in St. Louis.

Sequestration is a technical term referring to automatic budget cuts, mostly to the discretionary parts of the federal budget, which funds regulatory agencies, among other programs. The regulatory agencies faced a 5.1 percent cut to their budget levels. Unless sequestration is replaced or repealed, the cuts will be deeper next year (the cuts were not as deep this year due to the fiscal cliff deal that garnered some additional tax revenue).

Dudley and Warren base their report on the president’s annual budget plan for proposed fiscal year (FY) 2014 spending levels. It includes estimates of the spending levels for this year (FY 2013). Neither of those two years’ levels in the president’s budget factor in the effects of sequestration. The president’s budget states in numerous places: “…the budget assumes this account is operating under the Continuing Appropriations Resolution, 2013 (P.L. 112–175). The amounts included for 2013 reflect the annualized level provided by the continuing resolution…” These continuing resolution levels are pre-sequester levels.

Unfortunately, numerous news outlets did not critically examine Dudley and Warren’s misinformation and reported their overall finding that “FY 2013 outlays are on track to be 0.9 percent higher than in FY 2012.” If you subtract 5.1 percent from 0.9, there actually should be about a 4.2 percent decrease in outlays generally.

For the most part, the sequester has cut federal regulatory agencies’ budgets (one notable exception is the Consumer Financial Protection Bureau, which is a new agency and is just getting off the ground). The impacts have not been obvious because most agencies have used reprogramming authority to prioritize their activities that could lead to short-term problems at the expense of programs that have longer-term implications.

Take, for instance, the Occupational Safety and Health Administration (OSHA).  As the Bloomberg Bureau of National Affairs reported, OSHA shifted money away from compliance assistance – helping companies do the right thing before something bad happens, such as revising safety policies and implementing new systems – to protect its enforcement budget from any cuts. But OSHA as a whole is still getting cut.

“We can’t get to where we want to go with just enforcement,” former OSHA Administrator John Henshaw said at a conference in late May, as reported by EHS Today. Assistant Secretary of Labor for Occupational Safety and Health David Michaels agreed with him. Michaels added, “We made the decision when the sequester came down to do everything we could not to furlough our staff. The consequence is that we have to cut everything else.” For instance, the cuts exacerbate efforts to issue new safety and health standards that can have wide-ranging positive effects across industries, according to one journalist’s review.

Regulatory Budgets in Context: Have They Kept Up With Economic Growth?

Dudley and Warren also do a disservice to readers by failing to analyze the budgetary trends in context. For instance, if the pharmaceutical industry grows substantially, one might expect the Food and Drug Administration to try to keep up with more resources. Similarly with financial regulators and the growth of the financial sector, which grew as a share of the economy from 4.9 percent in 1980 to 8.3 percent in 2006. More workers and workplaces would seem to suggest the need for more OSHA inspections to keep pace. And on and on.

Furthermore, Dudley and Warren do not state that the overwhelming driver of the long-term growth in “regulatory” spending is the expansion of homeland security-related agencies, which are not traditionally considered regulatory. These agencies – such as Customs and Border Protection, Immigration and Customs Enforcement, and the Transportation Security Administration – represent 54 percent of the total “regulatory” agency budget growth between 1980 and 2012. These homeland security agencies’ budgets grew far faster – at 537 percent after adjusting for inflation – than all the other regulatory agency sectors’ during this time period. Thus, lumping homeland security agencies in with the rest distorts the picture of budget growth of regulatory agencies, many of which have seen relatively small increases in their budgets despite larger increases in the size of their missions.

If you subtract homeland security from the rest, a different picture emerges. The economy grew in real terms by 132 percent from 1980 to 2012, while the budget of the regulatory agencies (minus homeland security) only grew 122 percent. A reader, relying on Dudley and Warren’s analysis alone, would not learn that the U.S. economy has grown far faster than these parts of the federal budget. Moreover, these agencies are mostly seeing real reductions now in their budgets even as the economy slowly expands. Instead of regulatory agency spending gone wild as Dudley and Warren would have you believe, it appears that this part of the federal budget overall is losing ground (although some have seen substantial growth).

Others have criticized Dudley and Warren’s report as being misleading, as well. For instance, “One immediate and substantial error from this methodology is that FDA’s ‘regulatory growth’ is calculated by including the President’s request for more than $200 million in food user fees, for which, at least to date, there is no Congressional effort to enact,” according to Steve Grossman, the deputy executive director at the Alliance for Stronger FDA.

An informed reading of Dudley and Warren’s report shows that it is mainly a political document meant to misinform the public about the true state of the regulatory agencies’ budgets.

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