Report Looks at Obama Administration's 'Failed Promise of Regulatory Reform'

September 14, 2011 09:36 AM

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

President Obama recently halted the implementation of a controversial job-killing regulation from the Environmental Protection Agency (EPA), saying he recognized the "importance of reducing regulatory burdens and regulatory uncertainty" in the economy. While the president has spoken about, and even launched an effort to evaluate regulations that create unnecessary burdens, a hearing today noted that agencies in the Obama administration have regulated in the opposite direction. Spotlighting these regulatory failures and impacts on job creation is the focus of a newly released report and hearing held today by the House Oversight and Government Reform Committee.

"The federal regulatory process is broken, being manipulated and exploited in ways that benefit allies of the Obama Administration such as environmental groups, trial lawyers, and unions. Regulators have, in too many instances, been willing accomplices in the strategy advanced by outside interest groups to circumvent the oversight and accountability checks in the regulatory process," Chairman Darrell Issa (R-Calif.) said.

The report released by Chairman Issa and the Oversight Committee documents, according to the panel, "a flawed and broken system that punishes job creators and stifles economic growth." Key findings include:

  • The number of proposed rules has increased from 2,044 in 2009 to 2,439 in 2010;


  • Employment at regulatory agencies has climbed 13 percent since President Obama took office, and the number of staff working on regulatory matters is on schedule to increase at a rate of 10,000 new employees per year in 2011 and 2012;


  • The number of full time regulatory employees is expected to reach an all-time high of 291,676 in 2012;


  • The Obama Administration has already imposed 75 new major regulations that will cost more than $380 billion over ten years;


  • The Administration has 219 economically significant regulations in the pipeline right now—that, if finalized will impose costs of at least $219 billion on the economy over ten years.


In addition, the report outlines numerous examples in the rulemaking process "where federal agencies and regulators ignored, circumvented or openly flouted direction given by the president." It spotlighted EPA's "sue-and-settle approach to bypass the process and avoid transparency on a recent lead paint rule with dire consequences for job creators; abuse of the emergency rulemaking process and use of 'interim final rules' regarding Obamacare, causing health plans to lose grandfathered status; and, an 'enhanced review process' initiated by EPA of a Clean Water Act provision in violation of the Administrative Procedures Act, among others."

"The businesses owners and workers who bear the brunt of these regulations are not Fortune 500 executives, they are main street business owners and workers from around the country," Issa said. "These firms, their families, suppliers, customers and employees all bear the cost of these new and proposed regulations. For them and businesses around the country, the price is greater than just compliance—it is a hidden tax of uncertainty on our economy," he added.

OIRA. Beyond the costs and implications for job creators from regulations, the Oversight Committee report also pointed out that the Office of Information and Regulatory Affairs (OIRA), the federal agency charged with serving as a watchdog over federal rulemaking, has failed to take meaningful action to address the breakdown in the process.

"Thus far, the rhetoric we have seen from the Obama Administration on the issue of regulatory reform has not been matched in deed," Issa said.

The document noted that, "Essentially, regulatory agencies are avoiding meaningful scrutiny by employing numerous gimmicks" by:

-- Refusing to perform accurate cost-benefit analysis
-- Overturning decades of precedent without justification
-- Entering into sue and settle agreements
-- Enacting policy changes through guidance documents
-- Improperly issuing emergency rulemakings

One of the examples cited was USDA's controversial GIPSA rule. The report noted the following:

"The U.S. Department of Agriculture Grain Inspection, Packers, and Stockyards Administration (GIPSA) failed to conduct a proper economic analysis as required by Executive Order on a proposed rule projected to have a $1.64 billion impact on the beef, poultry and related sectors."

The report detailed the following regarding the GIPSA rule:

A. Grain Inspection, Packers, and Stockyards Administration Proposed Rule

i. Rule and Purpose

On June 22, 2010, the U.S. Department of Agriculture (USDA) Grain Inspection, Packers, and Stockyards Administration (GIPSA) proposed a rule pursuant to the Food, Conservation, and Energy Act of 2008 (Farm Bill) intended to "increase fairness in the marketing of livestock and poultry" and "clarify conditions for industry compliance with the [Packers and Stockyards Act of 1921]." More simply, the proposed rule is an attempt to regulate livestock marketing practices. This change has caused a significant amount of alarm in the agricultural sector because it could "dismantle the business models used by livestock producers, meat packers, and poultry processors" by making commonly used marketing agreements legally risky and subject to challenge by those who are not a party to the agreements. As a result, these agreements would be less attractive to industry and lead to higher prices and fewer options for consumers.

ii. Broken Process

Ranchers, livestock packers and producers, meat companies, as well as others in this community have expressed serious concerns with the development of this rule. These stakeholders argue that GIPSA has deliberately avoided conducting a meaningful cost-benefit analysis. Moreover, they argue GIPSA has not complied with the mandates of E.O. 12866 because the rule exceeds congressional authority and will encourage litigation.

In the first instance, GIPSA failed to conduct a proper economic analysis of the proposed rule in violation of E.O. 12866. Under E.O. 12866, agencies are to conduct a cost-benefit analysis in cases where the rule is determined to be "significant." While GIPSA determined the rule to be "significant," it did not attempt to estimate the total of the costs or benefits of the rule. Instead, GIPSA conducted a very minimal cost estimate of portions of the rule and provided generalized statements that it "believes potential benefits are expected to exceed costs." However, this bare bones analysis "never references potential costs to consumers" as well as other factors that will increase its implementation cost.

In contrast to the Administration’s lack of economic analysis, the private sector conducted three in-depth studies to understand the economic impact of the rule. The studies use various methodologies and project different final costs; however, the conclusion is the same—the rule is not only significant, it is "economically significant," meaning it will cost more than $100 million annually.

In reaction to these studies and over 60,000 public comments, GIPSA finally agreed to conduct a more "rigorous" cost-benefit analysis. Further, USDA’s Chief Economist, Joe Glauber, recently testified at a Congressional hearing that the rule is being reclassified as "economically significant." This designation is extremely important because it heightens the required analysis; the fact that the rule was improperly classified at its inception likely impacted the scrutiny originally applied to it. Accordingly, those in the agricultural sector have requested GIPSA reopen the rule for public comment after the new economic analysis is complete. In addition, Senator Pat Roberts has asked OIRA Administrator Sunstein to ensure that GIPSA complies with E.O. 12866, as well as requirements under the Regulatory Flexibility Act. Unfortunately, Secretary of Agriculture Tom Vilsack indicated that GIPSA does not plan to reopen the comment period once the new cost-benefit analysis is complete. To date, Administrator Sunstein has not replied to Senator Roberts’ request.

The pattern of excluding public comments goes back to the earliest days of the proposal. In March 2010, prior to proposing the rule, the USDA initiated a series of five workshops to explore competition and regulation in the agriculture industry. One of the workshops, in May 2010, specifically addressed the poultry industry; another, in August 2010, addressed the livestock industry. Despite the close proximity of these workshops to the rule’s proposal, on July 8, 2010, GIPSA Administrator Dudley Butler wrote to members of the livestock industry to inform them that these workshops were "separate and distinct from the GIPSA rulemaking process," the comments made at the workshops "fall outside the comment period," and would not be considered despite the fact they were related to the proposed rule. Yet, in direct contrast to Administrator Butler’s letter, GIPSA used anecdotes from the May 2010 poultry workshop in an "Examples of Market Behavior" document released in conjunction with the proposed rule.

After inquiries from numerous Senators about the objectivity of GIPSA’s rulemaking process, Secretary Vilsack reversed the decision of Administrator Butler and decided that the comments at the workshops would be considered in the rulemaking process. Absent this concession, Administrator Butler’s refusal to include such comments runs contrary to the requirement in E.O. 12866 that agencies seek the involvement of those expected to be burdened by a regulation before issuing a notice of proposed rulemaking.

During the public comment period GIPSA also took the unusual step of publishing an advocacy document entitled, "Misconceptions and Explanations," related to the proposed rule.62 Some argue that the document was an attempt to combat against a very contentious House Agriculture Subcommittee hearing in June 2010 where broad, bipartisan concerns were raised about the proposed rule. On its face, the document appears to attempt to persuade Congress, the press, stakeholders, and the public that the rule is needed. It has been argued such advocacy by a federal agency is "contrary to the spirit and intent of the Administrative Procedures Act."

Not only did GIPSA fail to conduct a meaningful cost-benefit analysis of the rule and sought to exclude public participation, GIPSA also violated E.O. 12866 because the rule exceeds the agency’s delegated authority and will likely spur litigation. E.O. 12866 mandates that federal agencies promulgate regulations required by law and do so in a way that minimizes the potential for litigation. When Congress debated and passed the Farm Bill, it directed USDA to issue rules that address specific topics. However, GIPSA’s proposed rule includes provisions that were explicitly rejected during the Farm Bill debate. For example, the proposed rule includes a provision that requires certain livestock packers and dealers to "maintain written records that provide justification for differential pricing or any deviation from standard price or contract terms offered to certain livestock producers and growers." A similar provision addressing business justification was included in a Senate floor amendment to the Farm Bill that did not pass. The requirement is problematic because it neglects the realities of livestock procurement. Thousands of transactions between packers and producers take place "in the field" and varying prices may be merely the result of better negotiation.

Also, the proposed rule would no longer require a plaintiff to show "competitive injury" to the marketplace, meaning actions that "adversely affec[t] or [are] likely to adversely affect competition" in a lawsuit brought under the Packers and Stockyards Act of 1921. This language was included in a discussion draft at a Senate committee mark-up of the Farm Bill, but was subsequently deleted. In addition to being contrary to congressional intent, it is also inconsistent with the law as interpreted by eight federal circuit courts. These courts, prior to and after enactment of the Farm Bill, have held that "only those practices that will likely affect competition adversely violate the Act." (emphasis added). This provision will undoubtedly increase litigation because it lowers the standard of proof necessary to demonstrate a violation of the Act. Arguably, plaintiffs will no longer need to show actual injury to the marketplace in order to prevail in court. Adding to the controversy, the author of the rule, Administrator Butler, is a former plaintiffs’ lawyer who lost a multitude of cases under the current law. Demonstrating clear bias, shortly after Administrator Butler was appointed to his position, he previewed the GIPSA regulations at a speech before the Organization for Competitive Markets. He indicated terms in the rule would be "a plaintiff lawyer’s dream" and continued, "we can get in front of a jury on [these terms]." (emphasis added). Administrator Butler’s clear conflict-of-interest and bias is even more troubling in light of the many ways his agency sought to avoid vetting the rule through the scrutiny of the administrative process.

iii. Impact

The impact of the proposed rule would be extremely costly to the economy and those regulated by the rule. For instance, John Dunham and Associates, a bipartisan firm that conducts economic impact studies on various pieces of legislation, estimated the proposed rule would reduce national GDP by $14 billion, come with a price tag of $1.36 billion in lost revenues to the federal, state, and local governments, and jeopardize 104,000 American jobs in the meat and poultry industry. The study also predicts livestock producers would be especially impacted by the rule, costing up to 21,274 jobs, primarily in rural America. The study also evaluated the impact of the rule on consumers. It concluded that the cost of meat and poultry products would increase by approximately 3.33 percent, meaning consumers would pay an additional $2.7 billion to maintain their current meat consumption.

These findings are bolstered by two additional studies. Informa Economics, Inc., a world leader in domestic and international agricultural market research, estimated the rule would result in ongoing and indirect costs to the livestock and poultry industries of more than $1.64 billion. More specifically, it would result in losses near $880 million for the beef industry, more than $401 million for the pork industry, and close to $362 million for the poultry industry. Similarly, FarmEcon LLC, an agricultural consulting firm, estimated the impact of the rule solely on the broiler chicken industry. It concluded the rule would cost more than $1 billion over five years in reduced efficiency, higher costs for feed and housing, and increased administrative expenses. The study also warned the rule would "likely slow the pace of innovation, increase the costs of raising live chickens and result in costly litigation." Equally concerning, the study found the rule could negatively impact U.S. competitiveness abroad. According to the study, the Proposed Rul[e] place[s] cost burdens and regulatory restrictions on U.S. broiler companies that do not apply to foreign competitors. To the extent that U.S. chicken company competiveness in global markets is reduced, U.S. chicken net exports would likely decline in a manner similar to the recent decline in EU chicken net exports. Export competitor countries such as Brazil could reap significant benefits from the Proposed Rul[e].

One job creator, Robbie LeValley, and her family, who co-own Homestead Meats, a small direct-beef marketing business, believes the proposed rule "will destroy our small business model, force us to lay off our employees, cripple our ability to market our cattle the way we want to, and limit consumer choice." She believes alternative marketing agreements are "the heart of [their] small business," and the agreements do not warrant further government intervention or being subject to potential litigation.

Links: A copy of the Committee's report is here and testimony and other hearing-related information is available here.


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

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