“Public Servants” Are Better Treated Than Private Sector Workers

But We are Still Pressured to Pamper Them with Additional Advantages How Did We Get Here and What Can We Do About It?

by J.C. Pate

June 15, 2022

We often hear public sector workers referred to as “public servants.” When you think about it, this is an odd term. After all, we don’t refer to private sector workers as “private servants.” It makes more sense after one realizes that this characterization is part of a cynical strategy that is often rolled out to pave the way for some proposal to dispense more money or special treatment to public sector employees. When this happens, these workers are portrayed as martyrs who are making significant sacrifices for society as they selflessly toil away in their jobs. This is deeply misleading. For one thing, public sector workers tend to be better compensated than their private sector counterparts. What’s more, public sector workers benefit from a range of very valuable non-monetary advantages over private sector workers including better job security, greater stability in compensation, and more predictable career advancement opportunities. Certainly, public sector employees are not disadvantaged, downtrodden, or in need of more advantages. Rather, the privileged position enjoyed by public sector workers is so striking that we should ask how we ended up in this situation and what can be done to remedy it.

Better Pay and Benefits for Public Sector Workers

Let’s start with the basics by comparing compensation in the public sector to the private sector. The public sector category in the United States is quite broad, ranging from approximately 2.1 million federal workers to an even bigger group of approximately 16.4 million people employed by local and state governments.

This is a large and diverse group, so it is difficult to rely on a single measure when comparing compensation to the private sector. A good place to start is by looking at the federal workforce because there is a fair degree of uniformity in the structure of compensation for this group of employees. According to the Bureau of Economic Analysis (BEA), the average wage in the civilian federal workforce was approximately $117,676 in 2020, about 67% higher than the average wage in the private sector of $70,369.^[1]

These comparisons are averages from across the entire workforce, so they are not directly comparable because there are many differences in the kinds of jobs and the employees who fill them. To produce a more accurate comparison, the Congressional Budget Office (CBO) analyzed variations in compensation in the federal government versus the private sector after taking into account differences in occupations, education levels, work experience, geographic location, and certain demographic factors.

In this 2017 study, the CBO concluded that overall wages in the federal sector for similar jobs filled by comparable workers were about 3% higher than in the private sector.^[2] Breaking down the results revealed significant differences based on the level of worker education. Specifically, this study determined that less-educated workers were more highly paid in the federal workforce while more highly-educated workers were better paid in the private sector.^[3] As shown in the table below, this study found that wages for federal workers with a high school diploma or less were 34% higher than wages for private sector workers with similar education levels. Only when employees attained professional degrees or doctorates did private sector workers start to earn higher wages on average than federal workers with comparable educational levels.

This might occur because the private sector provides more opportunities for employees to be compensated for higher performance and unique skill sets. On the other hand, less-educated workers can benefit from certain institutional advantages in the public sector working environment such as more rigidly defined pay schedules, employee protections provided by civil service rules, and more pervasive collective bargaining agreements.

As the table above shows, the advantages enjoyed by federal employees relative to private sector workers is even more pronounced when analyzing total compensation, which includes benefits such as health insurance and retirement plans. For example, looking at the CBO data for workers with a bachelor’s degree, federal employees enjoyed a 5% wage premium over private employees but a 21% advantage in total compensation after adding in the value of benefits. Similarly, when analyzing the entire pool of workers, the found CBO that employees in the federal government received 17 percent more in total compensation than similar workers in the private sector with comparable qualifications.^[4]

Among the suite of non-wage benefits provided to federal workers, the CBO observed that the availability of defined benefit pension plans was the most important factor contributing to the greater amount of non-wage compensation received by federal workers.^[5] Defined benefit plans are a highly valuable retirement benefit and have long been a significant advantage enjoyed by public sector workers relative to private sector workers.

Under a defined benefit plan, an employer makes promises to pay certain retirement benefits to pensioners and bears the financial risk of finding investments to generate sufficient returns to fund those payments, with any shortfalls made up by the employer. When the employer is a government entity, this arrangement shifts all the investment risk to the taxpayers. In contrast, under defined contribution plans, workers and their employers make contributions into the workers’ accounts. Thereafter, any future gains or losses accrue to the account holder, thereby shifting the investment risk from the employer to the retiree. Many private sector employers have transitioned to defined contribution plans for this reason.

In 2019, only16 percent of private sector workers had access to defined benefit plans.^[6] However, within the federal workforce, almost all employees are covered by two major defined benefit retirement plans, the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS), a plan which is supplemented by Social Security. These defined benefit plans are further enhanced by “cost-of-living adjustments” (COLAs) that help protect their beneficiaries from inflation.^[7] This type of built-in inflation protection is much less common in the defined benefit plans that exist in the private sector.^[8]

Federal workers are also entitled to generous vacation allotments which increase with years of employment. For the first 3 years of employment, federal employees receive 13 vacation days, for years 3 to 15 they receive 20 vacation days, and after 15 years they receive 26 vacation days.^[9] This is in addition to 11 federal holidays each year. By contrast, after 5 years of service, the average private sector worker at a company with over 100 employees receives 16 paid vacation days.^[10] Regardless of the length of service, federal employees are allocated 13 days of paid sick leave a year, which can be accumulated and carried forward if not used.

So, we can see that federal workers often receive higher compensation than many comparable private sector workers. A similar dynamic is evident when looking at the much larger group of 16.4 million state and local government workers. For this group, the BEA found they received 16% more in total compensation than workers in the private sector.^[11] Like their brethren in the federal workforce, many state and local government employees have their total compensation substantially improved by valuable non-wage perks such as defined benefit pension plans. According the Urban Institute, 83% of full-time state and local government workers participated in a defined benefit plan and 94% had access to such plans as of 2018.^[12] As mentioned above, only around 16% of private sector workers had access to such defined benefit plans.

Above Average Health Insurance for Public Sector Workers

Public sector workers tend to have access to better health care plans than private sector workers. One indication of this advantage is the larger size of the health insurance premiums that are associated with plans for government workers. According to the Bureau of Labor Statistics (BLS), by 2014 public health insurance premiums exceeded private health insurance premiums by between 14% and 19%.^[13] In this study, the BLS estimated that somewhere between 16% and 25% of this variation was related to the higher quality of the public sector plans, while the rest of the differential was related to other factors such as worker age, gender, marital status, educational levels, and more unionization.

According to the BLS, private sector workers had to contribute more for their health insurance by paying 25% of the premiums while local government workers only paid 13% of the premiums. This study also found that retiree health insurance was much more widely available for public sector workers, with a 40 to 50 percentage point differential in the rates at which public sector employers were offered this benefit relative to private sector workers.

Other Fringe Benefits

There are other benefits available to public sector workers that are not included in the analyses of public sector compensation previously discussed. For example, public sector workers benefit from generous student loan repayment and forgiveness programs. Under the Federal Student Loan Repayment Program, federal agencies may make payments to their employees with student loans up to $10,000 per year up to a maximum of $60,000 per worker.^[14] Under another plan, the Public Service Loan Forgiveness Program, the federal government will forgive the balance of eligible student loans for borrowers who have made income-based repayments while working for at least 10 years in the U.S. federal, state, local or tribal government, the military, or a 501(c)(3) non-profit organization.^[15] This program is much more attractive than the income-based repayment plans currently available for private sector workers, which require at least 20 years of payments before loan balances are forgiven.^[16]

Greater Job Security, Stability of Compensation, and Predictability of Promotions

Public sector workers are fortunate in that they generally benefit from better pay and benefits than their private sector counterparts. But perhaps the most valuable advantages of working in the public sector are somewhat less quantifiable: increased job security, more stability of compensation, and greater predictability of promotions.

Public sector workers have a high degree of job security while private sector workers are much more exposed to the vicissitudes of the economic cycle and the performance of their individual employers. This can be seen by looking at the level of layoffs and discharges in the public sector, which is around one-third of that in the private sector.^[17]

Public sector workers tend to benefit from greater stability in their compensation mainly because their wages are usually determined in accordance with pre-established pay schedules, such as the General Schedule (GS) pay scale which applies to about half of federal workers.^[18] In addition, public sector workers often receive promotions in a lockstep manner. According to the CBO, “most federal workers compensated under pay schedules move to progressively higher pay levels as they become eligible for those levels on the basis of their years of federal employment.”^[19]

The combination of higher compensation, enhanced job security, more stability in pay, and greater predictability of promotions results in a much attractive employment proposition for public sector workers than for private sector workers. This is not just an extrapolation from the litany of advantages enjoyed by public sector workers discussed above. The proof is in the pudding. Public sector workers stay in their jobs to a much greater extent than private sector workers. This can be seen by looking at the quit rate for government workers, which is consistently less than half the rate for private sector workers.^[20]

How Did We Get Here?

The most important factor driving the significant advantages enjoyed by public sector workers is their position within the overall employment structure of the economy.

For example, the politicians and bureaucrats who determine the compensation for public sector workers do not directly bear the actual costs of these labor agreements. Rather, they are able to pass on these costs to the taxpayers. In this process, the politicians and bureaucrats are able to draw on a huge pool of financial resources that they perceive as having very little practical limitation. Conversely, the ability of companies in the private sector to compensate their workers is ultimately constrained by the capacity of those businesses to generate value in the competitive marketplace.

Another factor favoring public sector workers is their ability to organize themselves into highly effective lobbying groups, such as unions, which often mobilize votes and political contributions for the very politicians who are ultimately responsible for determining their compensation. This problem has gotten worse over the years as unionization in the U.S. has undergone a steady transition away from the private sector to the public sector. By 2021, the percentage of workers represented by unions in the public sector (37.6%) was more than five times the rate in the private sector (7%).^[21]

More broadly, the general design of public sector working arrangements, with pre-set wage schedules and lockstep promotions, has the negative result of putting too many aspects of the government’s employment relationship with its workers on autopilot. This means public sector workers tend to be somewhat insulated from the free-market forces that would otherwise provide market-based feedback on appropriate compensation levels.

Over the years, the advantages enjoyed by public sector workers over private sector workers have continued to build. Unfortunately, this is a predictable example of the harmful outcomes which usually result when there is a group that is highly motivated to capture certain concentrated benefits while the related costs are more widely dispersed. In this case, the costs are spread across the entire cohort of taxpayers. Because the amount falling on each individual taxpayer is relatively small, taxpayers are less motivated to object or perhaps to even notice. This problem is compounded by the tendency of politicians to design some aspects of public sector compensation in a very opaque manner. For example, the real costs of defined benefit pension plans are often obscured because the accounting of pension liabilities is very complex, making it difficult for taxpayers to understand the ultimate cost. Also, a significant portion of these pension payments are deferred far into the future, allowing the issue to fall down the list of urgent matters for both the politicians and taxpayers.

What Can Be Done to Reduce this Unfairness?

The problem of making public sector workers better off than private sector workers is deep and longstanding, so it should be attacked on multiple fronts. One of the main drivers of this disparity is the temptation for politicians to favor public sector workers in exchange for votes or campaign contributions. This impulse could be limited by increasing the involvement of independent third parties in contract design and negotiations. Also, these issues could be mitigated by improving the process for benchmarking public sector compensation to the private sector, for example by using independent consultants to provide more robust analysis.

Unfortunately, experience tells us these types of approaches are likely to be of limited effectiveness. For example, the Federal Employees Pay Comparability Act of 1990 requires that federal salaries should be set at rates that are comparable to salaries for nonfederal workers “for the same levels of work within the same local pay area.”^[22] Historically, these attempts to benchmark public sector compensation to the private sector have fallen short. In the future, these benchmarking efforts need to be pursued with greater rigor to combat the deep-seated factors driving favoritism toward public sector workers.

Another reform that could potentially help to address this problem is to significantly increase the transparency of public sector working arrangements. For example, there could be requirements for regular public reporting of the advantages accruing to government workers relative to the private sector. This disclosure should cover not only compensation comparisons, but also advantages with respect to other working arrangements such as better job security, stability of pay, and predictability of promotions. Such disclosures would give taxpayers the data they need to hold accountable the politicians who want to favor public sector workers as a way to gain votes or campaign contributions.

Another commonsense reform would be to transition public sector workers from defined benefit pension plans to defined contribution plans. As discussed above, defined benefit plans are a large contributor to the compensation advantages enjoyed by public sector workers, so transitioning public sector workers to defined contribution retirement plans would achieve greater comparability with private sector workers. This reform would also reduce the amount of investment risk that is shifted to taxpayers. In addition, defined benefit plans are quite pernicious because they allow politicians to obscure the true costs of these plans with complex pension accounting and by deferring large payments far into the future. Thus, moving to defined contribution plans would make it more difficult for politicians to hide from taxpayers the actual costs of the retirement plans provided to public sector workers.

In general, public sector pay and promotion procedures are overly rigid, resulting in overpayment and too many lockstep promotions. Improvements could be pursued by reducing overcompensation and promotion of underperforming employees while at the same time increasing compensation and promotion of strong performers.

However, to fundamentally deal with the problem of overcompensating public sector workers, we must address the main structural driver of this asymmetry, which is that public sector contracts are not negotiated on an arm’s-length basis. Rather, these agreements are made with bureaucrats and politicians who don’t bear the costs but are incentivized to be agreeable in public sector labor negotiations in order to gain political support from these powerful interest groups. As long as these dynamics continue, we can expect that public sector workers will be advantaged relative to private sector workers.

To directly address this root cause, the most effective remedy would be to aggressively reduce the size of the public sector workforce. This can be achieved by outsourcing to the private sector many of the functions currently performed by the public sector. Because this approach would involve the private sector submitting bids to perform designated services, it would impose market discipline and provide a mechanism to fairly determine overall levels of compensation. A process should be institutionalized that includes an established procedure to examine every function of government and pursue outsourcing to the private sector if at all possible.

Conclusion

Public sector workers benefit from a long list of advantages relative to workers in the private sector, ranging from easily quantifiable categories such as higher salaries and more generous benefits, to less tangible ones like enhanced job security, greater stability in compensation, and more predictable promotion opportunities. These non-monetary advantages are so valuable that one could reasonably argue that public sector workers should receive lower overall compensation than comparable private sector workers to bring the two groups into greater balance.

We can start to rectify these disparities through a variety of initiatives, including better benchmarking, improved transparency, transitioning public sector workers from defined benefit pensions to defined contribution plans, and reforming the process for negotiating the working arrangements between the government and its employees. However, these types of reforms will only have a marginal impact unless we address the root cause of these inequities – namely, that public sector workers are insulated from market forces. As part of this dynamic, public sector workers benefit from an unhealthy feedback loop whereby politicians continuously direct advantages to government employees in exchange for votes and campaign contributions. This problem can be mitigated by outsourcing government functions as much as possible to the private sector to allow market forces to determine the fair levels of overall compensation. Not only would this result in greater equivalence between the public sector and the private sector, this approach could start to break the cycle of politicians dispensing favors to public sector workers in exchange for political support. Greater private sector involvement through outsourcing would have the added benefit of increasing overall productivity, efficiency, and growth in the economy.

In the meantime, we should resist further special government handouts to “public servants” at the expense of private sector workers and taxpayers. It is important to remember public sector employees don’t take their jobs because they are altruists intending to make sacrifices for the greater good. They take those jobs because they have concluded that the benefits they receive are a good deal in exchange for the work they provide.

[1] U.S. Bureau of Economic Analysis, “National Income and Product Accounts,” Tables 6.2D, 6.5D and 6.6D, last revised July 30, 2021, www.bea.gov/iTable/index_nipa.cfm. Data are for civilian federal workers, excluding postal workers.

[2] Congressional Budget Office, “Comparing the Compensation of Federal and Private-Sector Employees: 2011 to 2015,” April 2017, pp. 2, 3, (https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52637-federalprivatepay.pdf).

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Bureau of Labor Statistics, “Employee Benefits Survey,” last modified April 23, 2020, https://www.bls.gov/ncs/ebs/factsheet/defined-benefit-frozen-plans.htm.

[7] Congressional Research Service, “Federal Employees Retirement System: Summary of Recent Trends, updated January 10, 2020,” https://sgp.fas.org/crs/misc/98-972.pdf.

Addendum.COLA.Study.Report.1st.Draft.Private.Sector.COLAs.Sec.VII.E.

[9] U.S. Government Accountability Office, “Benefits,” accessed June 2022, https://www.gao.gov/about/careers/benefits.

[10] Bureau of Labor Statistics, “TED: The Economics Daily,” June 28, 2018, https://www.bls.gov/opub/ted/2018/private-industry-workers-received-average-of-15-paid-vacation-days-after-5-years-of-service-in-2017.htm.

[11] U.S. Bureau of Economic Analysis, “National Income and Product Accounts,” Tables 6.2D and 6.5D, last revised July 30, 2021, www.bea.gov/iTable/index_nipa.cfm. Data are for civilian federal workers, excluding postal workers.

[12] The Urban Institute, “State and Local Government Pensions,” urban.org, accessed June 2022, https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/projects/state-and-local-backgrounders/state-and-local-government-pensions.

[13] Alice M. Zawacki, Jessica P. Vistnes, and Thomas C. Buchmueller, “Why are employer-sponsored health insurance premiums higher in the public sector than in the private sector?,” Monthly Labor Review, U.S. Bureau of Labor Statistics, September 2018, https://www.bls.gov/opub/mlr/2018/article/employer-sponsored-health-insurance-premiums.htm. By 2014, public health insurance premiums exceeded private health insurance premiums by 14 percent when comparing local government premiums to private sector premiums and 19 percent when comparing state government premiums to large-firm private premiums.

[14] U.S. Office of Personnel Management, “Policy, Data, Oversight: Pay and Leave,” accessed June 2022, https://www.opm.gov/policy-data-oversight/pay-leave/student-loan-repayment/.

[15] Federal Student Aid, an Office of the U.S. Department of Education, “Public Service Loan Forgiveness,” accessed June 2022, https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service.

[16] Federal Student Aid, an Office of the U.S. Department of Education, “What is Income-Driven Repayment,” accessed June 2022, https://studentaid.gov/app/ibrInstructions.action.

[17] Bureau of Labor Statistics, “Job Openings and Labor Turnover Summary (JOLTs), Table 5. Layoffs and discharges levels and rates by industry and region, seasonally adjusted,” last modified June 1, 2022. https://www.bls.gov/news.release/jolts.t05.htm.

[18] “Federal Government Jobs: Federal Employee Pay and Benefits,” federaljobs.net, accessed June 2022, https://federaljobs.net/benefits/.

[19] Congressional Budget Office, “Comparing the Compensation of Federal and Private-Sector Employees: 2011 to 2015,” April 2017, p.23. (https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52637-federalprivatepay.pdf).

[20] Bureau of Labor Statistics, Table 4, “Quits levels and rates by industry and region, seasonally adjusted,” last modified June 1, 2022,https://www.bls.gov/news.release/jolts.t04.htm.

[21] Bureau of Labor Statistics, Table 3, “Union affiliation of employed wage and salary workers by occupation and industry,” last modified Jan. 20, 2022, https://www.bls.gov/news.release/union2.t03.htm.

[22] Federal Employees Pay Comparability Act of 1990, 5 U.S.C. §5301 (2012).

Regulatory Reform: the Catalyst for Productivity

by J.C. Pate

September 9, 2020

Our government’s regulatory apparatus is one of the most important but least appreciated factors impacting the productivity and growth potential of the American economy. We constantly hear how the mounting level of government debt poses a threat to America’s future economic growth, but expanding regulations have a similar impact and should be approached with the same level of seriousness as government spending and taxation.

It has been estimated by the Competitive Enterprise Institute (CEI) that current federal regulations impose a cost of around $1.9 trillion (9% of GDP), roughly equivalent to the total amount of individual and corporate taxes collected by the federal government in 2019. This averages out to over $14,000 for each American household. CEI notes that the government’s disclosure of regulatory costs is incomplete, so the true cost is likely much higher.

Given the extensive impact regulations have on our economy and society, it is critical for our country’s growth potential that our regulatory system operates by applying principles of democratic accountability, transparency, efficiency, and fairness. To maintain a healthy regulatory structure over the long term, our government should formalize a process for robust oversight and continuous improvement in the regulatory space.

Principle One: Democratic Accountability

The regulatory system is one of the most significant ways our government interacts with its citizens and the economy, so it is important that regulations are designed and implemented through a democratic process with proper accountability to the members of society.

Our Constitution gives Congress responsibility for making the laws affecting our country and allows voters to provide input through the political process. In a complex society like ours, it is inevitable that government will need to delegate certain aspects of regulation to specialist agencies which, by their nature, lack direct democratic accountability. However, excessive delegation is an abdication of political responsibility. We need to find the right balance.

Unfortunately, bureaucracies like our regulatory system are prone to evolving in an anti-democratic direction for several reasons. It is well known that bureaucrats have a natural propensity to enlarge their agencies as a way to grow their influence and power base. Less appreciated are the incentives for politicians to enable the expansion of the regulatory structure as a way to avoid political accountability for difficult decisions by shifting responsibility to regulators. While taxes, spending, and government debt are clearly visible, the impact of regulations is much less transparent and harder to quantify. This makes the regulatory system vulnerable to abuse by politicians. When there is pressure on government budgets, politicians can use regulations as a way to achieve political goals by outsourcing the burdens onto society at large. Over time, these tendencies have resulted in an imbalance between the regulatory state and the rightful legislative function of Congress.

To reinvigorate the proper role of Congress, we can implement a range of reforms to our regulatory structure. Since regulations function like a tax, we can start to treat them like a tax. Congress should be required to explicitly approve regulations with a significant economic impact, say over $100 million, ensuring major regulations receive the scrutiny they deserve. Congress should set a budget for regulatory costs, just like it sets a budget for expenditures and taxes. This would force our politicians and regulators to weigh the costs and benefits of various initiatives and prioritize competing goals. After a period of time, laws and regulations should expire or “sunset” unless reauthorized by Congress. Circumstances change and a “sunset” provision would prompt a reassessment of specific regulations in light of the current situation, including new data on regulatory effectiveness and consideration of alternative approaches that could be better solutions.

Our federal system has the benefit of enhancing democratic accountability by delegating substantial political power to state and local governments, moving decisions closer to the people affected. Congress should build on the advantages of this arrangement by devolving as much regulatory responsibility as possible to state and local governments. Where it makes sense to regulate on a national basis, there should be a focus on effective coordination with state and local regulatory bodies. Done properly, this would help to counteract the inherently anti-democratic nature of distant, unaccountable regulators.

In addition to rebalancing the relationship between the elected members of government and regulatory agencies, the operation of the regulatory system can be further optimized by emphasizing the additional principles of transparency, efficiency, and fairness.

Principle Two: Transparency

Regulations impose a cost on society in a way that is much less visible than government spending or taxation, contributing to a deficiency in democratic accountability. It is difficult to manage or reform what you can’t see. One way to mitigate this issue is through improving regulatory transparency. Over the years, some attempts have been made on this front, but there is much room for improvement.

There are already some existing obligations for regulators to disclose proposed rules and seek public input, along with some requirements for benefit-cost analysis of regulations that exceed certain materiality thresholds. These steps are helpful, but they are not comprehensive enough nor do the regulatory agencies consistently follow these guidelines in practice.

First, some background on efforts to improve regulatory transparency. One of the earliest major attempts to establish some uniform standards for the operation of the regulatory system was the Administrative Procedure Act (APA) of 1946 which recognized the importance of a transparent process for establishing regulations. The APA includes requirements for public notice of proposed rules along with procedures to seek public feedback, with some exceptions if the rulemaking agency finds good cause that the notice and comment process is “impracticable, unnecessary, or contrary to the public interest.” Generally, public comment periods run between 30 and 60 days.

The most comprehensive public overview of the regulatory pipeline is “The Regulatory Plan and Unified Agenda of Federal Regulatory and Deregulatory Actions” (the Agenda), a report to Congress in which regulatory agencies outline their regulatory priorities and plans. While this report is supposed to be submitted annually, it is often late. Also, the activities of the regulatory agencies are not legally limited to what they disclose in the Agenda. The content of the Agenda is governed by the executive branch, not Congress, so its scope is subject to change as new administrations come into power.

In 1996, Congress passed the Congressional Review Act (CRA) which requires regulatory agencies to report to Congress all regulations with annual costs estimated to be $100 million or more. After a rule is submitted under the CRA, Congress has 60 legislative days to overturn it. However, not all rules have been submitted to Congress as required.

Over the years, Congress has passed a few pieces of legislation intended to limit some regulatory excesses and improve transparency. The Regulatory Flexibility Act of 1980 requires federal regulatory agencies to assess the economic impact of new regulations on small businesses and consider ways to reduce significant compliance burdens. The Unfunded Mandates Reform Act of 1995 covers regulations that affect state, local, and tribal governments with costs over $100 million. It requires the Congressional Budget Office (CBO) to perform benefit-cost analysis on these rules and seek input from affected parties.

There are other legal requirements for the regulatory bureaucracy to report on the costs of its actions. In 2000, Congress passed what is known as the “Regulatory Right-to-Know Act” which directs the Office of Management and Budget (OMB) to prepare an annual report with “an estimate of the total annual costs and benefits of Federal regulatory programs.” This Act requires that costs and benefits must be presented in the aggregate and broken down by agency, agency program, program component, and major rule. However, this report is often late, sometimes by years. Recent reports have also been incomplete – the last report that included the legally required presentation of aggregate costs and benefits was in 2002. At the very least, regulatory agencies should comply with the reporting requirements mandated by law.

Transparency is further diminished because regulatory agencies often find creative ways to skirt the process established for promulgating new regulations. Instead of issuing a regulation that is subject to the requirements for disclosure, public comment, and benefit-cost analysis, a regulator can instead release more informal “guidance.” This can manifest itself in a variety of forms including letters, bulletins, memos, notices, and administrative interpretations. Let’s call this “stealth regulation.” This strategy has often been used by regulatory agencies to achieve their objectives without going through the established regulatory governance procedures. While not formal regulation, these types of stealth regulation can be just as burdensome because regulated parties often conclude they have no choice but to comply. To be effective, regulatory reform must capture stealth regulations as well.

Recently, some progress has been made in addressing the issue of stealth regulations by subjecting them to procedures more consistent with those applicable to formal regulations. In 2019, the Trump Administration issued Executive Order 13891 to improve the process around stealth regulations. This executive order took an important step to improving transparency by directing regulatory agencies to create “a single, searchable, indexed database that contains or links to all guidance documents in effect.” Additional provisions applied to “significant” guidance documents including new procedures for public notice and comment and a requirement for regulatory analysis by the Office of Information and Regulatory Affairs (OIRA), along with a confirmation that benefits exceed costs. Regulatory agency compliance with this executive order is still incomplete, but the results so far demonstrate the importance of this issue: as of September 2020, CEI has counted over 72,000 guidance documents disclosed in response to Executive Order 13891.

At the same time, these reforms were further strengthened by Executive Order 13892, which focused on improving due process in regulatory enforcement by preventing agencies from alleging violations of stealth regulations unless they have gone through the process of disclosure in the Federal Register or elsewhere.

The result of these reforms has been to bring the process for issuing and enforcing stealth regulation more in line with the requirements applicable to formal regulations, including obligations for disclosure, public comment, and regulatory analysis such as the assessment of costs and benefits. While this progress is encouraging, more work needs to be done to improve transparency.

Principle Three: Efficiency

Regulations have an enormous impact on the productivity and growth potential of our economy so it is important that we design our regulatory system in a way that allows us to prioritize scarce resources and to achieve our objectives in the most efficient way possible.

A key building block in developing efficient regulation is robust benefit-cost analysis (BCA). When done properly, this allows us to understand the trade-offs inherent in imposing regulatory burdens on society and to create a framework to explore alternative methods of achieving regulatory objectives. Sound BCA is also a prerequisite to producing a level of transparency that is accurate and useful. In particular, we need to understand regulatory costs and benefits in order to identify the regulations with impacts that are significant enough to merit political oversight from Congress or other politically accountable bodies.

To be effective, BCA should be conducted in accordance with best practices. This should include public disclosure of all data, models, and assumptions used in the process. Analysis should be based on sound science that is reproducible, with input from independent advisors and peer reviews where appropriate. Consistency of approach is important to improve comparability among BCAs and to allow prioritization of different regulatory initiatives. The regulatory process should start by answering threshold questions including a discussion of the problem the rule is seeking to address, along with an examination of the alternative approaches. Rulemaking should only proceed when benefits exceed costs, except where explicitly required by law.

BCAs should focus on the primary benefits targeted by a specific regulation as opposed to secondary effects, sometimes referred to as co-benefits or ancillary benefits. BCAs should not double count the same benefit as a way to justify more than one regulation. When developing projections, BCAs should use realistic assumptions, not worst-case scenarios that can distort results. To enhance the analytical value of BCAs, they should include a breakout of gross benefits and costs, not only a presentation of net benefits. This would facilitate an assessment of the reliability of the projections because it is generally more difficult to predict benefits than costs. Also, this granularity is helpful because costs and benefits sometimes fall on different groups. Likewise, it would be informative to separately present domestic and non-domestic benefits.

There are some laws that require benefit-cost analysis for significant regulations (generally defined as having an economic impact in excess of $100 million), but most of the guidance on how to prepare BCAs comes from executive orders and internal agency instructions. Over the years, the executive branch has provided some constructive direction on how to perform BCAs, but this still falls short of implementing best practices. For example, sometimes data is not fully disclosed in a way that would enable reproducibility of results. Often, there is a troubling overreliance on secondary benefits to justify regulation. BCAs sometimes only present net benefits instead of disaggregating gross benefits and costs, thereby obscuring a full understanding of the economic impact of regulations. Regulatory agencies frequently ignore legal mandates to report the costs of their regulations. Finally, since the bulk of current guidance on the preparation of benefit-cost analysis derives from the executive branch, it can be revoked by future administrations.

As part of its focus on improving the efficiency of the regulatory system, the Trump administration in 2017 issued Executive Order 13771 which directed all regulatory agencies to repeal at least two regulations for each new “economically significant” rule, defined as having an economic impact of $100 million or more. Further, it required that the total costs of economically significant regulations enacted should at least be offset by the costs of regulations repealed. To revoke a regulation, the government must go through the same process used to implement a regulation in the first place, so reducing regulations takes time. The Trump administration reports that from 2017 to 2019, they have exceeded the two for one target by eliminating over seven existing regulations for each new one, saving around $50 billion in regulatory costs.

The reform efforts emanating from the executive branch highlight another issue in our regulatory structure. Independent regulatory agencies are by virtue of their design insulated from the influence of the executive branch and therefore not legally bound by its reform initiatives, resulting in a gap in the executive branch’s efforts to improve the regulatory system.

While the independent agencies are not legally obligated to follow directives from the executive branch, it would nevertheless be beneficial for the executive to issue guidance urging them to conform to regulatory best practices, including public notice and comment, proper disclosure, and robust benefit-cost analysis. Well-run independent agencies should strive to operate in line with regulatory best practices and publicizing these guidelines can help citizens understand the extent to which independent agencies are following good procedures. Ideally, Congress should take action to require independent agencies to conform to these guidelines.

Another opportunity to improve regulatory efficiency would be to address situations where more than one agency seeks to regulate the same issue by clarifying which agency is in charge. If there is an unavoidable overlap of responsibility for a particular regulatory area, a lead regulator should be designated and given primary authority. Efficiency could also be enhanced by promoting the coordination of global regulatory efforts, with American regulators working to align those activities with our national interests and encouraging sound principles of regulatory governance.

Principle Four: Fairness

Our regulatory system should strive for fair treatment across society and the economy without discrimination or favoritism. To work towards that goal, we should seek to ensure the regulatory process preserves fundamental rights, due process, and the equitable treatment of individuals and businesses.

An important part of enhancing fairness in the regulatory system is adherence to a clear framework for establishing regulations with requirements for accountability, transparency, and efficiency. Some progress has been made toward those goals, but there is more work to do and we need to eliminate other sources of inequity in the regulatory system.

Politicians have a tendency to use the regulatory system to achieve social and political goals by outsourcing their objectives onto the private sector. When this happens, some unlucky people and businesses end up bearing the burden while other members of society get a free ride. This inherent unfairness is made worse by the illegitimacy of the implementation process – when politicians implement their objectives via regulations instead of legislation, they are often pursuing initiatives that lack sufficient public support to gain approval through the democratic process. To avoid this type of unfairness, we should establish limitations on politicians’ ability to achieve socio-political objectives by transferring obligations to the private sector through regulations. For example, we should implement budgets for regulatory costs, expanded disclosure obligations, more effective benefit-cost analysis, and requirements for old regulations to expire unless specifically re-authorized.

We can also see unfairness in the way regulations often function as a barrier to entry, thereby benefiting large businesses and incumbents. Of course, regulations can impose monetary costs that discourage new entrants, especially smaller companies. But this issue is broader than the necessity for newcomers to spend money to comply with regulations. Complicated regulations require significant expertise and managerial resources to ensure compliance. As a result, many larger companies and incumbents actually encourage regulatory complexity as a way to deter new competitors. To enhance fairness, we need to ensure the regulatory system does not serve as a barrier to entry for new market participants. To this end, our regulations should focus on simplicity and efficiency to reduce compliance burdens. Not only will this improve the fairness of our system, it will also increase innovation and productivity.

Another manifestation of unfairness in the regulatory process is the implementation of rules that have the result of benefiting certain parties at the expense of others. This type of preferential treatment is rarely explicit, and sometimes appears in the guise of setting technical standards or operating procedures within a sector of the economy. Such favoritism can have the effect of government picking winners and losers, a role that bureaucrats are inherently ill-suited to play. We should guard against this type of discrimination and central planning. In addition to being unfair, this inevitably contributes to economic inefficiencies and reduced productivity.

The proper involvement of the judiciary in the regulatory system is also an important aspect of ensuring fairness for citizens and businesses. Unfortunately, the judiciary has often fallen short in fulfilling this responsibility by being overly deferential to regulatory agencies. One example is what is known as “Chevron deference.” This refers to a 1984 Supreme Court decision that says courts should accept the interpretations of regulators as long as they are “reasonable,” meaning the regulator’s decision is not “arbitrary, capricious, or manifestly contrary to the statute.” This is a relatively low standard to meet, allowing regulatory agencies to accumulate a significant amount of power.

The judicial branch has a critical role to play as a check on the overreach of regulators, and when it retreats from this responsibility it weakens the proper operation of the separation of powers. Further, the judiciary lets down our citizens when it fails to preserve due process and to defend the ability of parties to protect themselves by contesting improper regulation. Because companies and individuals benefit from certainty, legal predictability is important to achieve a healthy society with a growing economy. The judicial branch should do its part by upholding fairness in the regulatory system.

Principle Five: Formalize a Process for Continuous Improvement

Our economy and society are very complex and are constantly changing. Unfortunately, the regulatory system has not demonstrated a commensurate ability to evolve. To remedy this deficiency, Congress should create a permanent framework for enhanced oversight and updating of the regulation system. This effort should be guided by the principles of democratic accountability, transparency, efficiency, and fairness.

To improve transparency, this process should require disclosure of all regulations and guidance along with their costs in a comprehensive, consistent, and easily accessible format. Also, Congress should adopt a requirement that old regulations expire after a certain period of time. This would put the onus on lawmakers to affirmatively re-authorize regulations based on an updated assessment of the current situation, including revised benefit-cost analysis. This discipline will create a helpful check on the natural tendency for the regulatory state to expand. Often politicians find it challenging to make these types of difficult decisions because inevitably some special interest will be adversely affected. To address this concern, regulatory decisions could be presented to lawmakers as a package for an up or down vote, similar to the Base Realignment and Closure (BRAC) process used by Congress to rationalize military bases. As part of this process, Congress should review the scope and mission of regulatory agencies on a regular basis with a view to streamlining their responsibilities.

Over the years, some progress has been made in reforming the regulatory system through the issuance of executive orders that require additional transparency, enhance benefit-cost analysis, and impose some limitations on the economic impact of regulatory burdens. While constructive, these regulatory reform initiatives from the executive branch are less than ideal because they can be overturned by subsequent administrations. Despite this drawback, executive orders can still be a powerful impetus for reform because any subsequent repeal would highlight a retreat from sound regulatory practices. Hopefully, this would create a political disincentive to backtrack on reform initiatives. In any case, Congress should pass laws to formalize these reforms as a way to improve regulatory stability. More importantly, Congress should commit to robust oversight to ensure regulatory agency compliance with reforms on an ongoing basis.

Independent regulatory agencies are an increasingly significant contributor to regulatory costs and complexity, so they should not be ignored. As part of a more holistic approach to regulatory optimization, Congress should re-examine the operation of these independent agencies to improve transparency and efficiency.

The regulatory system can be thought of as a living, breathing organism that constantly grows and evolves to propagate its own power. In light of this reality, it is important for our government to formalize an ongoing process to update and optimize the regulatory system. Such a commitment to continuous improvement is the aspect of regulatory reform with the greatest potential for an enduring beneficial impact on our economy and society.

Conclusion

Over the years, our regulatory system has grown immensely in size and complexity and is now one of the most significant ways our government interacts with society. Even beyond the massive impact of the regulatory state, it is important to recognize that it is the very nature of this bureaucratic system that makes it particularly concerning. It is inherently prone to expansion because bureaucrats naturally tend to seek to increase their power. This problem is exacerbated by politicians who often prefer to achieve their political objectives by shifting responsibility to regulatory agencies as a way to avoid political accountability and obscure the costs of their initiatives. The result is an approach to governance that can be wasteful, opaque, and unfair.

A large, complex government needs regulations. But to manage and mitigate the natural weaknesses of the regulatory system, we need to focus on several key principles: democratic accountability, transparency, efficiency, and fairness. Periodic attempts at reform are not sufficient. A healthy regulatory system must not be neglected. The tendency of the regulatory bureaucracy to expand will inevitably return, along with the increasing costs it imposes on the economy and society. Therefore, it is important for our government to create a permanent mechanism for continuous reform and updating of the regulatory system.

Due to the significant impact of our regulatory system, when it functions poorly it can be a huge burden on the economy and our citizens. The massive reach of the regulatory system is also an opportunity – regulatory reform is one of the most effective ways for our country to enhance productivity, growth, and individual opportunity. It is time for regulatory optimization to be approached with the seriousness it deserves.