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REFORMING REGULATION TO KEEP AMERICA’S

SMALL BUSINESSES COMPETITIVE

HEARING

BEFORE THE

SUBCOMMITTEE ON REGULATORY REFORM AND 

OVERSIGHT

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

WASHINGTON, DC, MAY 20, 2004

Serial No. 108–66

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

SAM GRAVES, Missouri 

EDWARD SCHROCK, Virginia 

TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

TRENT FRANKS, Arizona 

JIM GERLACH, Pennsylvania 

JEB BRADLEY, New Hampshire 

BOB BEAUPREZ, Colorado 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

FRANK BALLANCE, North Carolina 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

GRACE NAPOLITANO, California 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

BRAD MILLER, North Carolina 

[VACANCY]

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Policy Director 

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT 

EDWARD SCHROCK, Virginia, Chairman 

ROSCOE BARTLETT, Maryland 

SUE KELLY, New York 

TRENT FRANKS, Arizona 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

[RANKING MEMBER IS VACANT] 

DONNA CHRISTENSEN, Virgin Islands 

ENI F. H. FALEOMAVAEGA, American 

Samoa 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

DENISE MAJETTE, Georgia

ROSARIO PALMIERI, Senior Professional Staff

(II) 

C O N T E N T S 

WITNESSES

Page 

Hayworth, Hon. J.D., U.S. Representative (AZ-5), U.S. House of Representatives ....................................................................................................................... 4

Dudley, Ms. Susan, Director of Regulatory Studies Program, Mercatus Center .......................................................................................................................... 13

Gattuso, Mr. James, Research Fellow in Regulatory Policy, The Heritage 

Foundation ............................................................................................................ 15

Arch, Mr. Raymond, President, Phoenix Products ................................................ 17

APPENDIX

Opening statements: 

Schrock, Hon. Edward L. ................................................................................. 29

Prepared statements: 

Hayworth, Hon. J.D., U.S. Representative (AZ-5), U.S. House of Representatives ................................................................................................... 31

Dudley, Ms. Susan, Director of Regulatory Studies Program, Mercatus 

Center ............................................................................................................ 36

Gattuso, Mr. James, Research Fellow in Regulatory Policy, The Heritage 

Foundation ..................................................................................................... 44

Arch, Mr. Raymond, President, Phoenix Products ........................................ 53

(III) 

(1)

REFORMING REGULATION TO KEEP 

AMERICA’S SMALL BUSINESSES COMPETITIVE 

THURSDAY, MAY 20, 2004

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON REGULATORY REFORM AND

OVERSIGHT

COMMITTEE ON SMALL BUSINESS

Washington, D.C. 

The Subcommittee met, pursuant to call, at 10:41 a.m. in Room 

311, Cannon House Office Building, Hon. Edward L. Schrock 

[Chairman of the Subcommittee] presiding. Present: Representatives Schrock, King, Case and Velazquez. 

Chairman SCHROCK. This hearing will come to order. Good morning, everyone. We are having this hearing today on keeping America’s small businesses competitive. Our economy has 

turned the corner. Small businesses, which are responsible for employing half of our workforce and providing 75 percent of the net 

new jobs have led the way in this recovery. Frankly, I think it is the job of Congress to set the right condi- tions for economic growth and then, quite frankly, get out of the 

way. Most small business men and women do not want a hand out 

or a hand up but just hands off. The United States has the most 

creative, most productive, most entrepreneurial citizens of any nation on this Earth. It is incumbent on the government to not mess 

things up. Everyone here has heard the statistics about the cost of regula- tion to our economy. And I am sure we will discuss them further 

today. Some of the numbers that just get to me though are the 

hours of paperwork burden that agencies have imposed upon the 

public. Whether it is the 149 million hours imposed by EPA, the 

165 million hours from Labor, the 254 million hours from the Department of Transportation, the 276 million hours from HHS and 

the 6.5 billion hours imposed by Treasury and the IRS. It is just 

a mass diversion of our economy’s productive resources into red 

tape and paperwork. And other than paper mills, it is not stimulating the economy. 

So today we have gathered some of the foremost experts on regulation to discuss possibilities for reforming the system. Several attempts at reform have even been made this week. On Tuesday we 

passed a series of reforms to improve the OSHA adjudication process which has for too long stacked the deck against small businesses. We also passed Representative Doug Ose’s H.R. 2432 which 

will improve regulatory accounting and permanently authorize the 

2

Congressional Office for Regulatory Review inside the General Accounting Office. 

We are very lucky to have Representative J.D. Hayworth from 

Arizona with us today. J.D. has been a tireless warrior in the fight 

to fundamentally reform the system of regulation we have in place 

today. I am a co-sponsor of his legislation. And, Congressman, we 

are happy to have you here today. Creating a system where common sense, transparency and fairness rules the day in government 

regulations is one I look forward to. And I am anxious to hear the 

testimony of all our witnesses. 

[Chairman Schrock’s statement may be found in the appendix.] 

We will now have any additional opening statements. And I 

would ask the Ranking Member on the full Committee Ms. Velazquez if she has any comments. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman and welcome, Mr. 

Hayworth. 

Today the business world is getting increasingly competitive. It 

is more and more difficult for small businesses to maintain an 

edge. One reason for this is due to federal regulations. Unfortunately our government rules disproportionately weigh on our country’s most important economic sector, small businesses. In fact, a 

recent report commissioned by the SBA Office of Advocacy showed 

that the annual regulatory burden is 60 percent higher for firms 

employing less than 20 employees than for firms with more than 

500 employees. Instead of building their businesses and expanding 

their customer base our entrepreneurs are buried under a mountain of paperwork. 

The Bush Administration has acknowledged just how bad the 

regulatory burden is for small business. The president has talked 

about it in several policy speeches around the country. He has also 

vowed on many occasions to do something about it. But the truth 

is this administration holds the paperwork burden record for the 

largest increase in a single year. Since the administration took office it has published about a quarter of a million densely packed 

pages of regulatory proposals, notices and rulings. 

Another big problem is the failure of federal agencies to comply 

with the law. There are laws on the books that were enacted to 

protect small businesses in the rulemaking process. These include 

the Regulatory Flexibility Act and the Small Business Regulatory 

Enforcement Fairness Act. These laws require federal agencies to 

do their homework in an attempt to lessen the impact their rules 

will have on small enterprise by finding less burdensome alternatives. If these laws were being followed the SBA Office of Advocacy would not have reported to Congress that its intervention 

saved small businesses $30 billion in additional regulatory compliance cost. 

Clearly this shows how agencies are reluctant to fully comply 

with their requirement of RFA. This is a shame for small businesses and it just puts them in another one down position when 

compared to their corporate counterparts. 

There have been several proposals before this Committee on how 

we can make the regulatory environment more small business 

friendly. Even the president signed an executive order to this end 

but it did little more than restate current law. If we are going to 

3

make changes to the system they need to be bold ones that place 

a premium on enforcement. 

Just recently our Committee held a hearing on legislation that 

will strengthen the RFA. H.R. 2345, the Regulatory Flexibility Improvement Act of 2003 seeks to better define and expand which 

economic effects are to be examined by these agencies and requires 

them to use greater precision in performing the analysis. Most importantly, it brings the agencies that develop and implement regulations which weigh most heavily on small businesses, like the IRS, 

CMS and FCC, under SBREFA panels just like the EPA and 

OSHA. 

Although there is no quick fix for providing small businesses 

with regulatory relief there are proposals out there that could ease 

the regulatory burden they currently face. If we could strengthen 

the laws already on the books and ensure enforcement of these 

laws, small businesses might just spend less time on paperwork 

and more time on helping their customers or hiring new employees. 

With that I look forward to the testimony of the witnesses. 

Thank you, Mr. Chairman 

Chairman SCHROCK. Thank you, Ms. Velazquez. 

I believe the gentleman from Iowa, Mr. King, has opening comments. Mr. King. 

Mr. KING. Thank you, Mr. Chairman. I appreciate you holding 

this hearing. And I appreciate you coming to testify, Mr. Hayworth. 

I would associate myself with some of the remarks made by 

Ranking Member Velazquez in that we need to make some bold 

changes. And I am one of those people that believes that there are 

foundational issues that have to do with the Constitution and free 

enterprise and law that if we get them wrong in our foundational 

portion then things grow out of them that we never intended, 

things grow out of bureaucracy that are so complicated that if we 

begin to just go in and trim the bushes and rearrange and grab 

some branches out there we will never get at the root cause of the 

problem. We have got to at it and chop the roots, we have got to 

be bold. 

And when I look back also in I have had now eight years in legislative life, sum total of state and federal, and I have seen time and 

time again that elected legislatures want to put a shield between 

them and accountability with the people. So we put a board or a 

commission or a bureaucrat in front of us to be a shield for accountability and we give those people the authority to make decisions. And what grows out of that? Inside the Beltway bureaucratic 

mentality where the bureaucrats that write the rules are looking 

across the table at the citizens who are affected by the rules but 

there is a disconnect because there is not a way that citizen can 

hold the bureaucrats accountable. And there is not really an effective way we, as members of this Congress, can hold the bureaucrats accountable. 

So I am very interested in H.R. 110, not because I think that we 

will amend very many rules in Committee or on the floor of Congress, but because we can because then that bureaucrat that sits 

behind the table will realize that the citizen who is affected by the 

rules that they are about to write has an alternative to come to 

their member of Congress and make an appeal whereby then the 

4

threat that we can amend the rule or remand it back to be written 

with instructions or repeal the rule is all part of Congress stepping 

up to their responsibility. 

This is swinging for the fences in a way. The first 150 years of 

the United States that is how it was done. And it worked pretty 

well up to just before World War II. But today we need to get back 

to congressional accountability and streamline this regulatory process. And I think it will be streamlined incrementally because we 

will have changed the foundation and corrected it so that we have 

the right foundation. 

So I am interested in the testimony. I appreciate the hearing. I 

am looking forward to it all. Thank you very much. 

Chairman SCHROCK. Thank you, Mr. King. 

And speaking of bold and tearing down barriers between the regulators and the public that is why J.D. Hayworth is here today. 

J.D. Hayworth is not only passionate about this subject, J.D. 

Hayworth is passionate about everything he does up here. J.D. 

Hayworth is passionate about life. So he is probably the absolute 

perfect person to come up and speak to us. So with that, J.D., the 

floor is yours. 

STATEMENT OF THE HONORABLE J.D. HAYWORTH (AZ-5), U.S. 

HOUSE OF REPRESENTATIVES 

Mr. HAYWORTH. Chairman Schrock, Ranking Member Velazquez, 

Congressman King, Congressman Case, my colleagues, thank you 

very much. And with that wonderful introduction, Mr. Chairman, 

I would ask that my entire albeit passionate statement be included 

in the record this morning. 

Chairman SCHROCK. Without objection so ordered. 

Mr. HAYWORTH. I thank the Chairman. 

Colleagues, the Constitution is clear. Article I, Section 1, ‘‘All legislative powers herein granted shall be vested in a Congress of the 

United States.’’ And as Congressman King pointed out in his opening statement, for the first 150 years of our republic, the Supreme 

Court held that the transfer of legislative powers to another branch 

of government was in fact unconstitutional. In the late 1930s, however, the Court reversed itself, and upheld laws by which Congress 

merely instructed agencies to make decisions that served ‘‘the public interest.’’ Since then, Congress has ceded its basic legislative responsibility to executive agencies that craft and enforce regulations 

with the full force of law. The Supreme Court has not invalidated 

a single delegation of power since 1935. 

Now, law-making was never intended to be in the hands of executive branch employees. As the Constitution enumerates, the 

power to make laws was solely vested in Congress, because Congress is directly accountable to the people. 

The founders knew that law-making authority vested in Congress would make for good government because our elected officials 

would be directly accountable to their constituents. I often ask 

those whom I am honored to serve: Do you believe unaccountable 

employees in the executive branch should have the power to make 

laws? To this day, I have not heard one person answer this question in the affirmative. My constituents understand the ramifications of granting broad powers to the executive branch to make 

5

laws. Yet, to the chagrin of many whom I serve this is the case in 

America today. 

It is no wonder why so many of our constituents, why so many 

citizens are so disillusioned with what they deem to be an unresponsive government. H.R. 110, the Congressional Responsibility 

Act, will rightly return legislative powers to the Congress by requiring Congress to vote on all rules and regulations, as defined in 

section 551(4) of title 5, United States Code, except those regulations of particular applicability, any interpretive rule, general 

statement of policy, or any regulation of agency organization, personnel, procedure, or practice. It is important to note this, my colleagues, Mr. Chairman, my legislation will apply only to new regulations and will not be retroactive. 

Now, detractors say there is no way that Congress has the time 

to review all rules and regulations that are promulgated by the executive branch. Regardless of time implications, however, it is the 

duty of Congress to review rules and regulations, as I just pointed 

out and was clearly enumerated in Article I, Section 1 of our Constitution. 

Now, I should also note that it has been my honor and privilege 

to serve on occasion as Speaker Pro Tempore of the House. And on 

more than one occasion, I have presided over largely ceremonial debate in which we took several hours to name federal installations 

after famous Americans, and some Americans quite candidly who 

might not be that famous. The question is simple and it is this: If 

we can name courthouses, airports, military bases, and other 

places, should we not take the time and do we not have enough 

time to vote on rules and regulations that profoundly affect the citizenry and the small businesses of this country. 

With these time constraints in mind, however, the Congressional 

Responsibility Act provides an expedited procedure for considering 

rules and regulations. Within three days after an agency promulgates a rule, the Majority Leader of both the House and Senate, 

by request, must introduce a bill comprised of the text of the proposed regulation. If the bill is not introduced in three days, any 

member thereafter may introduce the bill. The bill is not referred 

to Committee unless a majority of the members agree and send it 

through the normal legislative process. Within 60 days of being introduced, however, the legislation must come before the respective 

chamber for a vote. The bill shall be limited to one hour of debate 

and cannot be amended. If a majority of members of the body vote 

for the bill, it is sent to the other body for approval. Upon approval 

of both bodies, the legislation would be sent to our president to sign 

or veto. 

Some other opponents of this legislation might argue that this 

would delay the implementation of rules and regulations. In reality, I do not believe it would. Rules and regulations are often the 

subject of countless and endless lawsuits. For example, the final 

rule for leaded gasoline took nearly 10 years to promulgate because 

it was the focus of intense litigation. Congress now becomes the 

final arbiter in rule making and the Congressional Responsibility 

Act states that a regulation contained in a bill is not an agency action for the purpose of judicial review under chapter 7 of title 5, 

6

United States Code. This would bring to a halt litigation that 

delays implementation of regulations. 

Finally, opponents of delegation say this is a backhanded attempt at regulatory reform. The Constitution makes clear that all 

legislative powers are vested in the Congress. Article I asserts that 

this legislative power includes the power to regulate. By returning 

the power to regulate to the Congress, we will make Congress accountable for federal laws. This will make for better government. 

This will make for a real reform and restoration. It is a laudable 

goal that we as well as the American people should desire. 

In my opinion, delegation is one of the root causes of the American people’s disenchantment with government. We can take a step 

in the right direction by ending the unconstitutional delegation of 

powers. By taking this step, we will help restore confidence and integrity to the federal government. Many people agree with this 

analysis, and this is why the concept of non-delegation is embraced 

by folks across the political spectrum, by liberals, such as Nadine 

Strossen of the American Civil Liberties Union, and conservatives, 

such as Judge Robert Bork. In fact, it was new Justice Stephen 

Breyer who wrote in 1984 how the legislative veto should be replaced by an expedited procedure for Congress to resume its rightful role in passing rules and regulations. 

Congressman Bob Ney, Congresswoman Ginny Brown-Waite, and 

I have each introduced legislation, as the good Chairman and the 

gentleman from Iowa have likewise co-sponsored, that will provide 

more congressional oversight of the regulatory process. My bill 

would end delegation of legislative power to the executive branch. 

Congressman Ney and Congresswoman Brown-Waite’s legislation 

would set up congressional Committees charged with reviewing all 

of these regulations before they have the effect of law. The legislation they offer is modeled after the Ohio and Florida state systems 

respectively. 

I see these new bills, and this weeks’ highlighting of the need for 

a reduction in red tape, as Congress awakening to a very important 

issue. I have heard it said that Congress only considers the urgent, 

while brushing aside the important. The Congressional Review Act, 

signed into law in 1996, seems to reflect that adage. Congress only 

considers repealing regulations through the disapproval resolution 

process if the matter is made urgent. Congress should examine 

each proposed rule before it goes into effect. 

Let me again pause and thank Congressman Steve King and 

Congressman Dennis Cardoza, who are co-sponsors of this bill, 

again, along with the aforementioned Chairman of this Subcommittee and my good friend, Ed Schrock, and so many other 

members who have helped out with the support. We have 22 other 

co-sponsors, including Congressman Paul Ryan of Wisconsin, who 

has supported this legislation since the day he came to Congress. 

Mr. Chairman, my colleagues, I would like to end my testimony 

by quoting John Locke’s admonition that ‘‘the legislative cannot 

transfer power of making the laws to any other hands.’’ Delegation 

without representation is as wrong today as taxation without representation was in the 1700s. It is time Congress took back its constitutionally granted power to make laws. 

7

Again let me thank you, Mr. Chairman. Let me thank all the 

members of the Subcommittee for allowing me this opportunity to 

testify here today. We have talked in Congress a lot about reform. 

Reform needs to move past rhetoric to reality. I think that ending 

the delegation of powers from the legislative to the executive 

branch could be the single most important reform this Congress addresses. I am hopeful we can make a substantial change to this 

glaring problem in the next year. 

And again I thank you, Mr. Chairman. That concludes my testimony. 

[Rep. Hayworth’s statement may be found in the appendix.] 

Chairman SCHROCK. Thank you, Congressman. You got us all energized now so I think we are ready to go. 

Congressman, are you at all worried that Congress might stifle 

agency attempts at deregulation by stopping them with a vote? 

Mr. HAYWORTH. No, I do not believe so. In fact, if you take a 

look—and I talked about the Supreme Court really kind of changing this concept in the 1930s—but take a look at the dynamic 

under which we serve right now. Let us just face it, as members 

of Congress how many times have we heard from constituents saying, Gee, as we are trying to work out this regulatory dispute we 

do not believe that the implementation of the regulation is really 

carrying out the will of Congress. We believe that the unelected are 

foisting their own prejudices on a certain rule because so often 

when we have dealt with a variety of issues we have used language 

that is open to interpretation. 

And so we are put in a situation where we will call up or we will 

write an agency and we will say, in kind of an unfortunate and 

poor impersonation of Bill Murray in ‘‘Caddyshack’’ that seems to 

embody this, to show the frustration, we will go, Please, please, 

please, Mr. and Mrs. Unelected Regulator, wouldn’t you just please, 

please, please take a second look because this is how we implemented the—this is how we enacted the legislation and this is how 

my constituent is trying to come back and deal with it. And yet 

you, who are unelected and unaccountable, say that it is just not 

good enough. 

Understand what we structurally have put in place, and it was 

not because of any avarice or any type of evil. Indeed, in the progressive era it was Theodore Roosevelt in the early 20th Century 

who said we had to bring experts into government. We took a look 

at enacting safeties for food and drugs and cosmetics. But we have 

gotten away for three-quarters of the 20th Century and now into 

the 21st Century we have gotten away from experts helping us in 

terms of real science. Instead now the greatest growth has come in 

the notion of regulatory law. And the unelected bureaucrats, the 

one area of responsibility that is some form of merit is the promulgation of new regulations. 

Some of them may be needed, because we certainly need a modicum of regulation in a variety of industries, but many of them are 

so parenthetical and so specific and, quite frankly, in terms of 

small business so out of touch with reality, that we end up with 

the massive amount of paperwork that the ranking member pointed out and criticized. 

8

And I would say for today’s purposes, mindful of the fact we are 

less than 170 days away from a general election, I will accept in 

good faith your criticism of this administration. I would say also 

that it spans other administrations. We have had real problems 

with all the rules proposed ending up in the federal register. And 

what we are doing with this legislation is this: we are rightfully restoring the role of Congress. 

Now, to be frank about it a lot of our brethren are perfectly 

happy with not having the responsibility. A lot of folks like the situation where we go and we kind of by request we go hat in hand 

to the unelected. But, see, I do not believe we are elected to be ombudsmen or ambassadors from our district to the burgeoning bureaucracy known as the executive branch and all the alphabet soup 

of administrative agencies. I believe we are here to be law makers. 

And by enacting this legislation we control or we take final responsibility for the promulgation of rules and regulations. 

Chairman SCHROCK. You said that in your proposal we will look 

at rules as we go forward, but what do you think we should do 

about all the unnecessary and burdensome regulations in the past? 

That is what is driving people crazy right now. How do we deal 

with that? One step at a time I gather? 

Mr. HAYWORTH. That is true, Mr. Chairman, colleagues. In fact, 

something that we made use of in the 104th Congress, which I believe is still with us in the rules of the House, something called 

Corrections Day. And perhaps we ought to take a look at that as 

we are dealing retrospectively. But for our purposes for reform, you 

know, it is inherent, even something as sweeping as this type of 

restoration of rightful powers to Congress has to start somewhere. 

And I think it is better to start prospectively. But I would encourage you to take a look as we know other bills are out there. They 

are already in practice I believe, and I do not believe we have 

changed the rules of the House. We have within our power now to 

bring up in essence Corrections Day to eliminate some red tape. 

But I think this restoration—it is really a misnomer to call it 

genuine reform—this restoration of rightful constitutional powers 

is so important and let us take it prospectively and we can look at 

a variety of other remedies to deal after the fact. 

Chairman SCHROCK. Before I yield to Ms. Velazquez, what do we 

need to do to help you move this legislation forward? 

Mr. HAYWORTH. Well, I would call on folks really, not even in a 

bipartisan manner but in a non-partisan manner, to take a look at 

this. I think it is important. And as I pointed out, folks across the 

political spectrum from the left to right understand the need to do 

this. Indeed, this procedure was outlined by now-Mr. Justice 

Breyer when he was talking about the constitutional problems that 

we have earlier in our history in the 1980s with the so-called legislative veto. He saw this as a constitutional way to restore the powers of article I, section 1. 

And it is in that spirit we come today because, again, as the 

ranking member pointed out in her comment, there are some legitimate concerns. Because nobody here is talking about the decimation of regulation. We all understand that a modicum of regulation 

is required for so many businesses, for environmental protections, 

9

for so many different agencies. But what we need to do is take back 

the responsibility. And that is what H.R. 110 will allow us to do. 

Chairman SCHROCK. Thank you. 

Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you for your testimony on your legislation. 

You know, one of the characteristics of this Committee is that it 

is non-partisan compared to any other Committee. And I have to 

say that I strongly criticized the Clinton Administration regarding 

the economic impact on small businesses, regulations and paperwork. But there is a difference, the difference is that when this administration walked into the White House they made paperwork 

burden and regulations a top priority. The numbers does not, do 

not back that up. And that is what makes this quite amazing. 

Mr. HAYWORTH. Well, I thank you, Ranking Member Velazquez. 

And again, I offer, I think you offer constructive criticism. And we 

all rejoice in the fact that in less than 170 days all Americans will 

go to the polls. And I think really this is more not so much partisan 

as it is institutional. It is our role to be law makers. It is our job 

to, I believe, to reestablish what the Constitution says in article I, 

section 1. 

And so it is in that spirit I come today. And I would call on folks, 

Ranking Member Velazquez, I hope you will review the legislation, 

we would love to have you as a co-sponsor. Hope you can join with 

us in this effort. 

Thank you. 

Chairman SCHROCK. Mr. King. 

Mr. KING. Thank you, Mr. Chairman. 

I would just point out an anecdote that I think illustrates some 

of the problem that we have. And that is some months ago I wrote 

some legislation that I was the drafter of that legislation, introduced it and it went into the bill, a separate section. I will not give 

you the number here in this hearing. That separate section addressed with a specific issue, specific issue that had to do with 

things that I was concerned about. The legislation passed with my 

text precisely the way I drafted it. 

But when the rules came out they did not reflect the legislative 

intent whatsoever and, in fact, it provided benefit to the people I 

was trying to bring the balance back in competition to. And the bureaucrats had the audacity to argue to my chief of staff that we did 

not understand the legislative intent. Well, there was no more definitive authority on that particular section of the bill than Steve 

King. 

And I am going to ask you to speak to that kind of issue but also 

there is a couple things. First of all, it is a non-partisan and it is 

addressing an institutional, and I appreciate that testimony on 

that. I am going to ask you about how to address legislative intent 

and those kind of things, but also the how do we prevent as the 

rules are being written the undue influence on the amount of leadership and Committee chairs and ranking members on the rule 

writers? How do we counterbalance that with this legislation and 

how do we counterbalance it without that legislation? 

Mr. HAYWORTH. Mr. Chairman, Congressman King, I think the 

answer is implicit in the anecdote that you offered us. In other 

10

words, take a look at the process. Right now what you have is 

such—and I am sorry it is a strong term but I think it is realistic—

what you have right now is a perversion of what our founders intended because you have the unelected, that is to say also the unaccountable and the unresponsive, drafting rules in their own 

image. And it is paternalism and arrogance of the worst variety. 

And, quite frankly, I do not believe in the construct that Committee chairs or other legislative leaders in any way influence it because what we have set up in this bill within the process is to bring 

the proposed rule and regulation word for word to the floor of the 

Congress of the United States. And by doing so, we are offering, 

we are taking a look at the fact that, yes, we will grant that there 

is certain technical, scientific expertise that government must call 

on that all regulation is not bad, that yes, given the sophistication 

and the complexity of what we confront now as a society we do not 

believe it would be like lightening striking twice or something incredibly rare but, yes, from time to time the unelected can have 

good ideas, but that we should offer our imprimatur of approval or 

disapproval of those ideas and in that—and in so doing be responsible to our constituents. And that way we are resuming and taking 

back the responsibility the Constitution gave us and we are offering accountability. 

And if there are those in the electorate who believe that the 

unelected should absolutely have that power to move forward or 

perhaps disagree with our take, then every two years we have the 

remedy likewise offered in article I of the Constitution in terms of 

the fact that we stand at the bar of public opinion and we can be 

replaced. But we will have in place, for lack of a better term, a forward loaded mechanism that brings legislation to the floor, that allows us in its purest form to say either yes or no to the promulgation of a regulation from an unelected and therefore unaccountable 

federal bureaucrat. 

Mr. KING. Do you believe that under current structure of rules 

and legislation today that there are chairs, leaders, ranking members who occasionally will give a member language in the code but 

also provide license among the bureaucrats to take that effectiveness of that language away through the rules? 

Mr. HAYWORTH. I believe that our system, and I am not a lawyer, 

do not play one on T.V., but just as a citizen who observes history 

I believe that it may not have been the intent but in essence the 

practical effect of what has happened for the bulk of the 20th Century, now into the 21st Century, has turned the entire process of 

legislative intent and the making of law and then the implementation on its ear. 

And nowhere do we see it more than, as the ranking member 

pointed out, in the promulgation of all these regulations that show 

up in the Federal Register. And we need to move those front and 

center because they carry the weight of law, because if you violate 

these regulations you are subject in many cases to fines and/or imprisonment or sometimes both. 

It seems to me in essence these are not rules and regulations, 

they are laws. So we bring it back to the source. And I think this 

has a restorative effect that brings back the proper balance and I 

think helps strike a blow for accountability of the elected and for 

11

a sober reassessment of what has become in essence the fourth 

branch of government, the regulatory branch. 

Mr. KING. Mr. Hayworth, I am in enthusiastic agreement. And 

I yield the balance of my time. 

Thank you, Mr. Chairman. 

Chairman SCHROCK. Mr. Case. 

Mr. CASE. Thank you, Mr. Hayworth. Good to work with you. 

Mr. HAYWORTH. Congressman Case, thank you. 

Mr. CASE. I share your sentiments and I share your frustration. 

I think I speak for a lot of small businesses out there. We both 

have experience in small business. 

I took a look at your bill very closely from that perspective, and 

came to my own conclusion that to require every regulation to go 

through Congress up front probably was not the way to go, just to 

be up front with you. But I am certainly looking for some way to 

get at the same problem that we both agree on. In putting your bill 

together did you consider why the current law passed in 1996 requiring congressional—the ability to Congress to disapprove of a 

rule or a regulation, why that is not used more by Congress, number one? And number two, whether there would be a way to improve upon that scheme which essentially gives Congress a veto 

right, I guess you could put it that way, over a regulation? 

I guess what I am looking for is a midpoint that I could personally accept that improves on a system that does not seem to be 

working and yet does not go as far as your bill, to be quite honest. 

Mr. HAYWORTH. Well, Congressman Case, I appreciate your 

thoughtful criticism. And let me offer this response. As one who 

came here with a new majority in 1995 and who introduced this 

I think as the first piece of legislation I have brought to the floor 

and it is reintroduced each Congress, again it is not a democrat or 

republican issue, it becomes institutional. It is far simpler to us—

and I am not trying to indict everyone on the dais—but just us, 

Congress as congresspeople, it is far easier for us to go out and 

rant against a monolithic and faceless bureaucracy. And it is far 

easier, quite frankly, to be an ombudsman or an ambassador to 

that fourth branch of government rather than restore the powers 

the Constitution offers. 

And I think it is the—do not mean to get Shakespearean on 

you—but the fault, Dear Brutus, is not in the stars, it is in ourselves. And that is just inherent, it is just too tempting to sit back 

and just be able—and for members from both sides of the aisle to 

play the hand we are dealt now where we go in supplication to the 

unelected and say will you not please, please, please reexamine 

this? 

And to have, as one other noted thinker once said, if there were 

not a devil, man would certainly create one. And it is easier to demonize the bureaucracy and then to try and reconcile whatever 

problems we have on a case by case basis—that is one of the reasons we call it case work—for so many small businesses, for so 

many constituents rather than take this again by the roots and restore the fundamentals of the Constitution and take upon our 

shoulders clearly and unashamedly and unmistakably the imprimatur the founders gave us. 

12

And, indeed, again not to make it partisan, but I have heard so 

many of my friends on the other side bemoan our current schedule 

and bemoan the naming of honorifics for Americans and being in 

the naming business for suspension bills so many times, it seems 

to me that we can make the time and, indeed, we should take the 

time for this fundamental reform. There have been efforts tried in 

the past. But until we take up a structural reform—this is where 

you and I have a legitimate disagreement—until we take up the 

structural reform it is just far easier to go ahead and let the unresponsiveness and the unaccountability of the unelected continue to 

proceed. It just happens to us. 

On another note, when I was first elected, Congressman Case 

and Mr. Chairman and my colleagues, Senator McCain called me 

and he said, Hey boy, congratulations. He said, When you get to 

Washington you are going to feel like a mosquito in a nudist colony. 

I said, Excuse me? 

Yeah, he said, there are so many targets of opportunity, there 

are so many problems to solve. 

And again there are some who rightly say just the sheer weight 

of this would be tough. And I appreciate that criticism but I think 

it is far better to deal with these on the front end because just with 

what we have to deal with and just the electoral or the political 

convenience, and that may not be the intent on either side of the 

aisle but it is the practical result. Which is why this ain’t rhetoric, 

this is a reform that is a restoration that puts the Congress back 

front and center in making laws. 

But I really do appreciate your thoughtful criticism. 

Mr. CASE. Thank you very much for your efforts. 

Mr. HAYWORTH. Thank you, sir. 

Chairman SCHROCK. J.D., thank you very much. I was fascinated 

by the question of Mr. Case, how do we make this all happen? But 

if we do not do something we are going to continue to harm small 

business in this country that other companies offshore do not have 

to deal with. And every regulation we pass just hampers them 

more and more and more. And we simply have to get that under 

control. 

And I think what you are doing here is trying to bring attention 

to it and, hopefully, get something done that is reasonable. And you 

are right, we can spend all day Tuesdays naming bridges, highways 

or whatever else. And to me that is okay but I think this is far 

more important to the vitality of business in this country. We have 

got to get this under control. 

Mr. HAYWORTH. Well, Mr. Chairman, I thank you. And again, 

just to say to my colleagues if we are able to move forward with 

this, again embraced by members on both sides of the aisle, in fact 

outlined by now Mr. Justice Breyer in some of his writings, this is 

not a republican/democrat conundrum, this is a structural reform 

that is not a ruse, it is a restoration of the legitimate function of 

the legislative branch. And we ignore it at the peril of our country, 

the peril of small business and the ultimate peril of our citizenry. 

And I thank you very much. 

Chairman SCHROCK. Thank you. Thank you for your patience 

and thank you for coming. 

13

My 90, almost 91-year-old father thinks J.D. Hayworth was sent straight from heaven and is the finest congressman that he has 

ever seen. Not me but J.D. Hayworth. And he would be delighted 

to know that I spent time with you today. And we really appreciate 

you coming. 

Mr. HAYWORTH. Mr. Chairman, thank you for that praise. I think 

you would get a few arguments both theologically and practically 

from other folks. But I appreciate your father’s support and I appreciate the wonderful reception of the thoughtful criticism and the 

thoughtful plaudits for this legislation. And I hope we can move 

forward. 

Chairman SCHROCK. Thank you very much. 

Mr. HAYWORTH. Thank you. 

Chairman SCHROCK. We will take about a four minute break 

while we set up for the next panel. Thank you very much. 

[Recess.] 

Chairman SCHROCK. Well, thank you all for being here. I feel 

sorry for the three of you that have to follow J.D. Hayworth. That 

is one tough act to follow. But he is really passionate about what 

he does. And I am glad you were here to hear him speak. 

Before we begin testimony from these witnesses I would like to 

remind everyone that we would like each witness to keep their oral 

statements about five minutes. In front of you on the table you will 

see a box that will let you know when your time is up. When the 

light is yellow that means you have one minute remaining. When 

it turns red at the five minute point the trap door opens and away 

you go. Once the red light the Committee would like you to wrap 

up as soon as you can. 

We are going to hear next from Susan Dudley. Ms. Dudley is the 

Director of Regulatory Studies Program at the Mercatus Center at 

George Mason University out in Fairfax County, Virginia. Additionally she is an adjunct professor at both George Mason University School of Law and Georgetown University. Ms. Dudley previously worked for the Environmental Protection Agency and the 

Office of Management and Budget in addition to positions within 

the Department of Energy. And she has written numerous articles 

on issues of regulation. 

So we are delighted to have you today. And with that I turn the 

floor over to you. 

STATEMENT OF SUSAN DUDLEY, MERCATUS CENTER 

Ms. DUDLEY. Thank you, Chairman Schrock, Congressman King 

and Congressman Case. Thank you for inviting me to testify on 

this important issue of reforming regulations to keep America’s 

small business competitive. My testimony reflects my own views 

today and not that of either university that I am affiliated with. 

I appreciate your efforts this week to highlight the impacts of 

federal regulation. And I thought your opening statements were inspiring and right on point. Our research at the Mercatus Center 

supports your concern that regulatory activity and the burdens 

that activity imposes on small business is growing. 

Our detailed survey of 100 U.S. manufacturers suggests that the 

average manufacturer spends roughly $1,700 per employee to comply with workplace regulations alone. For small manufacturers, 

14

those employing less than 100 workers, costs are about $2,500 per 

employee, that is 68 percent higher than the cost per employee for 

firms with 500 or more workers. 

So understanding the impact of federal regulation is the first 

step in reforming it. With that in mind I have three recommendations for regulatory reform. 

My first recommendation is to explore ways to treat regulatory 

expenditures in a manner similar to on-budget expenditures. For 

federal spending to be dedicated, Congress must first authorize an 

activity, and then appropriate the necessary resources. Regulatory 

spending, the cost that consumers, workers, and employers pay to 

comply with regulatory requirements, on the other hand, is authorized in statute, often in broad terms, with little follow-on action. 

Recognizing that regulations, like on-budget federal programs 

funded by taxes, divert private resources to broader national goals, 

Congress could consider treating regulatory expenditures more like 

on-budget expenditures. By adding the appropriations function that 

is missing from the current process, it could make implicit expectations of costs and benefits more explicit and provide much needed 

guidance to executive branch agencies to whom responsibility for 

promulgating regulations are delegated. 

My second recommendation is that agencies condut—should conduct ex post analyses of the costs and benefits of regulations. After 

a regulation is in place, Congress and executive agencies should follow through to ensure that its intended impacts, both the benefits 

and the costs, are being achieved. 

Executive Order 12866, SBREFA, and individual statutes require 

agencies to conduct benefit-cost analyses of significant regulations 

as they are being developed, but these ex ante predictions of the 

impacts of regulations are not always accurate. One way to improve our estimates of the real impacts of regulations would be to 

encourage more ex post assessments based on actual experience. 

When they have been undertaken in the past, these ex post assessments have proved illuminating. 

Making retrospective analysis of the impact of regulations a 

standard practice rather than an exceptional exercise would inform 

the policy debate in beneficial ways. Policy makers would have information with which to eliminate or modify ineffective rules, expand more effective rules, and design future regulations that meet 

the needs of American citizens. 

My final recommendation is for a legislative branch review body 

which could provide a more independent assessment of the regulatory costs and benefits. 

It is not clear that the Office of Information and Regulatory Affairs, from its location in the executive branch, is in a position to 

provide the necessary check or independent assessment of costs 

and benefits. OMB should continue to enforce the principles of Executive Order 12866 and hold agencies accountable for ensuring 

proposed regulations do more good than harm. Americans may also 

benefit from a legislative oversight body. Indeed, Congress has authorized a Congressional Office of Regulatory Analysis to be housed 

in the General Accounting Office, but it has not been funded. Such 

a body could provide Congress and U.S. citizens with an independent assessment of the total costs and benefits of regulation, 

15

and also help ensure that statutes are being implemented so the 

benefits to Americans outweigh the costs. 

In conclusion, over 60 executive branch departments, agencies 

and commission employ over 190,000 people to write and enforce 

thousands of new regulations every year. It is important for the 

legislative branch to monitor this activity and set constraints. I 

truly appreciate this Subcommittee’s recognition of this and its efforts to keep regulators accountable. 

Thank you. 

[Ms. Dudley’s statement may be found in the appendix.] 

Chairman SCHROCK. Thank you, Ms. Dudley. A hundred and 

ninety thousand people. That is bigger than 90 percent of the cities 

in this country, is it not? 

Our next witness this morning is James L. Gattuso who is a Research Fellow in Regulatory Policy at The Heritage Foundation. He 

has previously served as the Vice President for Policy at the Competitive Enterprise Institute. His service also includes time at the 

Federal Communications Commission and the first Bush administration as Associate Director of the President’s Council on Competitiveness. 

And we are delighted to have you today and are anxious to hear 

what you have to say. 

STATEMENT OF JAMES GATTUSO, THE HERITAGE 

FOUNDATION 

Mr. GATTUSO. Chairman Schrock and members of the Subcommittee, thank you for inviting me today to testify on this important issue. First let me say the views expressed by me today are 

my own and do not reflect an institutional position of The Heritage 

Foundation or its board of directors. 

Regulation is an overlooked issue, it is a hidden tax on Americans. It is unlike federal income taxes, there is no bottom line, no 

April 15 when the costs of regulation are paid but, as you know, 

they are real and substantial. I will not go over the numbers today. 

You know them. Here is the headline numbers; $843 billion in 

costs as reported by a study performed for the Small Business Administration. Let me say that I think even that number may be understated. 

I have spent a lot of time, for instance, in the regulatory field involving high technology and innovative industries. And when you 

have regulation that constrains innovation, that constrains competition that leads to innovation, the costs are almost immeasurable. You know that you are losing something but you do not 

know what has not been invented. 

To its credit I think the Bush Administration has recognized the 

problem of regulation and has taken several steps to try and slow 

the growth of regulation, revitalizing the Office of Information and 

Regulatory Affairs, and giving more authority to the Office of Advocacy at the Small Business Administration. And this has led to 

some successes. But while I think the growth of regulation has 

slowed somewhat, burdens are still growing, not shrinking. We are 

not winning this battle. 

For instance, the 2003 addition of the Code of Federal Regulations weighed in at a whopping 144,177 pages, about 1,000 pages 

16

less than 2002, the record year, but still 4 percent more than when 

President Bush took office in 2000. 

Similarly, the number of federal rule making procedures—proceedings which increased burdens on the private sector still substantially outnumbered those which decreased burdens. According 

to General Accounting Office numbers, the database under the 

Congressional Review Act of all major regulations, if you look at 

regulations excluding those that are budgetary in nature, excluding 

those that do not clearly increase or decrease burdens on the private sector, there have been 30 major final rule makings under 

those criteria from the start of the Bush Administration to the end 

of 2003. Of these, 21, or 70 percent, increased regulations rather 

than decreased them. 

Now, that is a little bit better than the record under the Clinton 

Administration where about 75 percent increased regulation. 

These numbers, by the way, get higher if you exclude actions by 

independent agencies. The Clinton record was over 90 percent of 

rule makings increasing regulation if you look at their executive 

branch actions. Bush’s, President Bush’s executive branch actions 

increased burdens 74 percent of the time. So clearly regulation is 

expanding, not shrinking. 

What can be done to curb unnecessary regulation? There are several proposals pending in Congress that represent steps in the 

right direction. I generally agree with the direction taken by H.R. 

2345 and H.R. 2432. However, I do not think that they will totally 

solve the problem. In addition to a requirement, for instance, that 

agencies put more analysis into their regulations that they perform, more cost/benefit analysis, more regulatory flexibility analysis, we need to make those analyses independent and make sure 

that the effect of regulation is considered at every level of the debate, not just in a separate analysis done after the real decision 

has been made. 

So let me suggest some reform proposals that would help move 

us in the right direction in addition to these two bills. 

First, establishment of an independent Office of Regulatory Analysis. Congress is taking now a small step in that direction. I think 

much more needs to be done. Congress needs an independent 

source of analysis on regulations similar to the Congressional 

Budget Office. 

Second, we should establish regulatory review offices, or miniOIRAs, inside each agency. Regulatory review, consideration of regulatory costs, should not be begun once the regulation has left the 

agency, it should occur internally. I would have these mini-OIRAs 

somewhat independent from the agency itself, as a separate organizational unit, but involved in the regulatory process from the beginning as part of the agency. 

Thirdly, we should designate regulatory reform ‘czars‘ at each 

agency. There is no better way to ensure that an issue or a set of 

factors are considered than to make sure that someone in the bureaucracy has it as their focus. Make it part of their job description. They will not always win their internal battles but they will 

be there to make sure that the problems of regulation, that the 

costs of regulation are considered. 

17

Fourthly, require independent agencies to submit analyses to OMB. A large portion, about one-third of the regulations, major 

regulations promulgated last year were by independent agencies. 

And those underwent no independent review whatsoever. A large 

number of those underwent no cost/benefit analysis even by the 

agencies that promulgated them. 

If placing independent agencies completely under the executive 

branch review process is infeasible at this time, I think we should, 

Congress should at least require those agencies to prepare regulatory analyses of planned significant rules, and forward those 

analyses to OIRA for non-binding review as a first step. 

And fifthly, I do think that Congressman Hayworth is correct 

that we need to have congressional approval of rules. Under the 

Congressional Review Act, Congress has the ability to veto new 

regulations but that authority has only been used once. Our system 

of government requires that Congress take responsibility for new 

rules imposed on society. Congressional review and approval of 

major new burdens should be required. 

Thank you very much. 

[Mr. Gattuso’s statement may be found in the appendix.] 

Chairman SCHROCK. Thank you. It is just developing the will up 

here to make that happen. And sometimes that is the most difficult 

thing. 

Thank you very much. 

Our last witness this morning is from the state of my birth, Ohio. 

And he is Raymond Arth who is a small business owner from Avon 

Lake, Ohio. He is the President of Phoenix Products, a Clevelandbased faucet maker. 

We are getting ready to rebuild our house. Maybe I need to come 

see you, hey? 

Mr. ARTH. We can talk. 

Chairman SCHROCK. You can talk. 

Mr. Arth also serves as the Chair of the National Small Business 

Association’s Board of Trustees. And we are delighted to have you 

today and anxious to hear your testimony. 

STATEMENT OF RAYMOND ARTH, PHOENIX PRODUCTS 

Mr. ARTH. Thank you very much, Chairman, Schrock and Congressman King, Congressman Case. I appreciate the opportunity to 

be here today and I also want to thank you for taking the time to 

participate in person. 

As you mentioned, I am Chairman of NSBA. And we just concluded our annual Washington gathering for small business owners 

around the country to come here, meet with the members of Congress, the administration and go and lobby our elected officials. It 

is clear to me after three days in Washington that Congress knows 

everything in my testimony and the testimony of the people who 

came before me. Virtually all of it came out of the mouths of the 

people who presented to us over the last couple days. So I am not 

going to presume to tell you anything that you do not know or 

waste a lot of time repeating what is in my testimony. 

This week, as evidence of the fact that Congress is aware of this, 

you passed a handful of OSHA reform bills that we have lobbied 

to see passed. We appreciate the fact that they have moved 

18

through the House. And we hope you can bring some pressure on 

the Senate to see action over there as well. 

Chairman SCHROCK. Good luck. 

Mr. ARTH. All I can do is write letters. You folks have a little 

more access perhaps than I do. 

So I guess I would like to share some personal thoughts that 

maybe can at least bring something new to the table that you are 

not already familiar with. The first one is the real economic impact 

that regulations have. 

My company for its entire history, for over 25 years we have 

faced foreign competition, most of it from Asia. And for 25 years 

we were very successful in meeting that competition time and 

again, finding ways to continue to offer a value proposition that 

made sense to our customers and to win more often than we lost. 

I think that we have seen some fundamental changes in the economic environment in which the United—that the United States’ 

position in the world has changed fundamentally and that we are 

at a point today where I am losing more often than I am winning. 

I think we are at a point today where the excessive regulation 

that we could afford in the past because of the unique position we 

had in the global economy is gone and that we need to start to really consider the costs of regulation and accept the fact that everything has been regulated several times and we can continue to regulate it. But at some point people have to understand that the 

trade-off is diminished economic performance and a decrease in the 

economic standard of living of Americans if we want to continue 

down this path. 

We have to admit that fact. We have to educate the American 

public to that fact. 

I also cannot emphasize enough that small businesses are not 

just miniature big businesses. Enron Corporation is a C corporation 

that had a 401(k) plan. Phoenix Products is a C corporation that 

has a 401(k) plan. They did some things that caused some problems that resulted in all sorts of legislation which will generate all 

sorts of regulation. Two C corporations, two 401(k) plans, we will 

both be treated essentially the same. But when you treat my company the same way you treat a global organization you end up with 

inappropriate and unreasonable regulations. What it becomes is 

overkill. 

And ‘‘kill’’ is the operative word in there because at some point 

the costs—I have two choices, I either do not comply and run the 

risks of getting caught, or I bear the burden of complying which 

eventually becomes so costly that my 401(k) plan goes away because it is no longer worth the effort. 

As legislation goes forward, as regulations are promulgated there 

has to be more consideration given to the legitimate differences between large businesses and small. And to give you one more quick 

example of that there was a company in Cleveland I am somewhat 

familiar with that recently was caught because of some irregularities with their pension plan, all of this years after the previouslymentioned Enron situation. It has been litigated. The individual is 

currently in bankruptcy where he belongs. The assets that could be 

recovered have been recovered and restored to the fund. And I 

think the criminal charges are moving along at appropriate pace. 

19

He is not holed up somewhere in an estate while underlings are 

going before the mill. 

In legislation I think there is an awful lot of too much of the how 

and not enough of the what. I did not realize it at the time but that 

statement that it depends on what your definition of ‘‘is’’ is, is as 

much as comment about the statement of our legal environment 

today as it is about the character of an individual. It seems as 

though no matter how carefully a regulation is crafted, no matter 

how smart the people are who draw it up there is always going to 

be someone out in the real world who is just a little craftier who 

is going to find that tiny little loophole that they can steer through 

which will create a whole new round of regulation, which is going 

to have a whole new bunch of loopholes. 

Let us focus more on what the goals are and a little less on telling me exactly how I can make my punch press safe. I want to 

keep all my fingers, thank you very much. Trust me, I know how 

to do it as well or better than most of the people who actually write 

the regulations. 

So I guess I will finish where I started. Congress knows, you 

have known since 1980 when the Paperwork Reduction Act was 

passed, and 25 years later paperwork it certainly has not gone 

down, and I shudder to think where it would be without it. We did 

SBREFA in 1996 and it is still pretty much a toothless tool that 

is not having the impact that all of us had hoped. 

I think it is time that Congress turn that knowledge into action, 

not more legislation, but putting some teeth into those that already 

exist. 

Thank you very much. 

[Mr. Arth’s statement may be found in the appendix.] 

Chairman SCHROCK. Thank you very much, Mr. Arth. You make 

some incredibly good points on things we need to listen to up here. 

Ms. Dudley, your testimony cites how many regulatory initiatives 

are funded in perpetuity without regard to their effectiveness. 

What kind of impact would a more extensive analysis of the effect 

of this, of each regulation do and what would actually be able to 

make a factual case that a regulation is not doing anything? 

Ms. DUDLEY. Well, that is a good question. And I think we have 

not done enough retrospective analyses to know what they might 

show. In my written testimony I have an interesting story about 

Highway Safety Administration, the high-mounted brake lights on 

our cars, and how very careful benefit/cost analysis beforehand 

showed that the benefits in terms of accident reduction would be 

huge from that. 

After the fact, after the brake lights were on everybody’s cars 

they did a retrospective ex post look and found that, indeed, the accident reduction was one-seventh of what they predicted. Why? Because when you can see the brake light high you can drive closer 

to the car in front of you so you collide, you collide anyway. 

So you do not catch these behavioral, the best cost/benefit analysis in the world cannot really capture some of these behavioral 

impacts of regulations. 

So I think doing some more case studies would be a first start. 

But I think requiring it as a standard rule would be an excellent 

thing to do. 

20

Chairman SCHROCK. Yes. They are putting sensors on front 

bumpers now, did you notice that, and back? I have it on the back 

and believe me it has saved me lots. And I wonder what putting 

them on the front is going to do. It is going to be interesting to see 

if that is really going to pay off. 

Ms. DUDLEY. So it gives you an alarm, it that what a sensor 

does? 

Chairman SCHROCK. Yes. So it could get you close to that light 

you know. Amazing. 

Mr. Gattuso, you referred to hindered innovation being the primary cost of regulation. And how does this affect the future of the 

U.S. economy? 

Mr. GATTUSO. You think I would have remembered that. 

In today’s economy we are more and more dependent upon innovations, upon change, upon inventions than ever before. The percentage of the economy that is information based is I believe a majority of the economy right now. I cannot say for sure. But it is 

clearly the driving force of the economy today and of the world 

economy. 

It is no longer a situation where you can just look at a burden 

in terms of paperwork or a burden in terms of the cost to buy 

something. You have to look at these unknowables. It is just essential. 

Chairman SCHROCK. Stifling innovative thinking obviously. 

Mr. GATTUSO. That is right. And the worst part about it I think 

is that we will never know what is lost. 

Chairman SCHROCK. That is right. 

Mr. GATTUSO. We could do all sorts of studies. 

Chairman SCHROCK. If you do not have something you cannot appreciate what you do not have. 

Mr. GATTUSO. Exactly. 

Chairman SCHROCK. Yes. 

Mr. Arth, as a small business owner what do you feel is your 

greatest loss due to excessive regulations? And did this affect your 

ability to grow your business? 

Mr. ARTH. My greatest loss due to regulation? 

Chairman SCHROCK. Yes. What part of your business has been 

severely hampered by the regulation you are forced to live under? 

Mr. ARTH. I think typically the first thing that small businesses 

will point to are all the costs, the compliance costs imposed by the 

Internal Revenue Service and Treasury Department, predictably. 

You have to keep in mind that our best and brightest are the 

ones who are devoting their time and energy to making sure that 

all the filings are done on time. The money we spend to hire the 

best and brightest they are not working on new products, new marketing programs, on identifying customer needs, they are working 

on making sure that our eight monthly payroll deposits are being 

made on time, that 941s are filed on a timely basis. So, clearly, the 

time and money and energy that has been devoted to all of that. 

And I will remind you the payroll tax issue in particular, you 

know, during down periods of time payroll taxes, the FICA and 

medicare tax is a tax on employees and so it discourages hiring. I 

may be losing money but I am still contributing that half of the 

FICA and medicare tax. I never asked to become the collection 

21

agent for the federal Treasury and I am not compensated to do so. 

But should I be a day late in making one of those eight monthly 

deposit periods the IRS is not going to cut us much slack in imposing penalties and so forth. 

So I cannot point to a thing, as was just said, it is the things 

that we did not develop or deliver because of the money and energy 

that we had to devote just to running the business legally and ethically to comply with all those regulations that exist that has been 

my biggest cost. 

Chairman SCHROCK. Okay. For the three of you, what is the one 

thing that we up here could do for you this year that would help 

get the regulators under control? 

Mr. GATTUSO. We only have one? 

Chairman SCHROCK. Well, if there is more hit us with them. 

Mr. GATTUSO. I think as important as I think that Congressman 

Hayworth’s proposal is, and I think that is a critical reform to get 

congressional review, in terms of things that can be done this year 

I think that establishing review offices in each agency, establishing 

regulatory czars are ideas that can be done immediately. And I 

cannot see those as being too controversial but can have a real 

practical effect. 

And next to that, establishment of a funded congressional review 

office that will provide real analysis and independent analysis of 

regulations. 

Chairman SCHROCK. Ms. Dudley? 

Ms. DUDLEY. Yeah, let me second that one because you have 

got—you have authorized this office. And funding it would give you 

the independent analysis that I think that you need. So that would 

be a quick step. 

And then the other one would be when new statutes are written 

they should have a budgetary component. You should say this is 

how much we think it will cost. We have these goals for what this 

legislation will do and this is our expectation of how much it will 

cost. 

Chairman SCHROCK. Economic impact on each regulation. 

Ms. DUDLEY. Uh-huh. 

Chairman SCHROCK. Mr. Arth? 

Mr. ARTH. Well, I do not see much prospect of getting a law 

passed that would require members of Congress and the Senate to 

go back into the real world every few years and actually try to comply with all the regulations they have created. So I have got to say 

that as an organization we have been a strong advocate in favor 

of the cost/benefit analysis and regulatory review. 

Chairman SCHROCK. That is a wonderful statement by the way. 

Mr. Case. 

Mr. CASE. Ms. Dudley and Mr. Gattuso, I just have to agree with 

Mr. Arth that Congress knows what the problem is but does not 

know what to do about it. We struggled with this in Hawaii and 

many other states have struggled with this over a long period of 

time. We thought about every single idea that has been proposed. 

We implemented some of them, some successfully, some not so successfully. 

We thought about a legislative veto. We thought about the state 

equivalent of Mr. Hayworth’s bill. We thought about the czar, the 

22

ombudsman, the cost/benefit ratio, regulations applicable only to 

certain employees, over 20 employees, you know, certain companies 

over 20, every single thing under the book. I do not think we came 

up with a better answer or worse answer than any other state. 

But it does strike me that the answer to this, how to get it done, 

having identified the problem pretty specifically, lies in part on the 

states. Are there states out there in your mind, to your knowledge 

that are doing a really good job in this area that have an outline 

that could work for us in the federal government? 

Ms. DUDLEY. I will give you a quick two-part answer and then 

I would love to do some more research and follow up on that question because I think it is a good one. 

The first part of the answer is that a large portion of the regulatory burden at the state level is federal regulations. So often, so 

that may be part of the answer that it is hard for a state. They 

can constrain maybe 10 percent or take control of maybe 10 percent of the regulatory activity but most of it comes straight from 

the federal government. 

I know several states have got programs in place, including Virginia. I think Pennsylvania does. But I would love to offer to follow 

up on that and do some research on it and get back to you because 

I think it is a very interesting question. 

Mr. CASE. Mr. Chair, I would ask consent for the Subcommittee 

to entertain that when it comes in. 

Chairman SCHROCK. Without objection. That is a great idea. 

Mr. CASE. Mr. Gattuso? 

Mr. GATTUSO. If I may add, I think it is worth following up and 

providing specific information for you. I am aware that Colorado 

has a very active regulatory review and analysis of efforts going on, 

initiative. They have done a number of things to focus efforts, to 

increase reviews of regulation. 

I do not know quantitatively what the outcomes have been yet. 

I believe this is a relatively new effort over the last couple of years. 

But that is one state to look at. And I also would like to follow up 

on that. 

Mr. CASE. Thank you. 

Switching back again, I am picking up on Mr. Arth here because 

he is the guy that lives in the real world, I was especially struck 

by his observation that small business is not big business in this 

area. And, frankly, when I took a look at the title of this hearing, 

how to make small business competitive, I was wondering whether 

we were talking about small business versus foreign companies or 

small business versus big business, because it is not a direct proportional relationship. 

And we have similarly thought and even implemented in federal 

law from time to time distinctions between ‘‘small business’’ and 

‘‘big business’’ in the regulatory scheme. But it always seemed to 

lead back to subversion really by non-small businesses to get themselves in under the box. We have seen, for example, on this Committee how non-small businesses have become small businesses for 

federal preference contracting. I have certainly seen it in my state 

where the Prepaid Healthcare Act applies to the employees or companies with employees of 20 hours or more per week. And all of a 

sudden you have a lot of 19 hour employees. 

23

Is there in your view an effective way to distinguish between 

small businesses and larger businesses for the purposes of equalizing, if we can put it that way, the regulatory burden where you 

would in fact say to small businesses we are not going to ask as 

much of you? Because the consequence of going in that direction is 

that all of a sudden everybody tries to become a small business to 

drive through the loophole that Mr. Arth just noted. Because everybody wants to drive a loophole somewhere. 

Is there anything that works from that perspective to—or is the 

answer, as I suspect it is, simply to reduce the burdens for everybody and let it, you know, take its proportional effect on small 

businesses? 

Ms. DUDLEY. And I think all the points you have made are right. 

When you have a cutoff not only do you find people trying to cheat 

to get in the cutoff but you also prevent small businesses from 

growing. So someone who is innovative and has some good ideas 

cannot grow because then suddenly they will get whopped with the 

full burden. So it is difficult. 

I think one of the things that happens in Washington, and I 

think your Committee is a counterweight to it, and people like Mr. 

Arth are a counterweight, is that the large companies—and everybody when it comes to regulation is trying to shift the burden to 

someone else. Large businesses they are very happy to take on 

some big regulations—I mean you, Chairman, you were talking 

about innovation. The innovators in pharmaceuticals and agricultural chemicals, large, large companies are more than happy to 

have difficult regulatory requirements because then when a small 

one comes up with a great innovation it has to get bought up by 

the large company in order to actually pursue it. 

I guess I am agreeing with your problem but I am not sure I 

have got a good response. But James does. 

Mr. GATTUSO. Thank you. Hand it over to me. 

No, I am also I am skeptical about whether that can be done in 

a way that does not distort the economy, as Susan said, keeping 

people so that they can get in the system, maybe discouraging 

them from growing. Which I do not know whether it can be done. 

I am also doubtful that it is something that should be done. I 

think it is important to remember that big businesses two or medium size businesses, businesses of any size are hurt by regulations 

and their consumers are hurt when those businesses are over-regulated. Excessive regulation on a Target or a Wal-Mart or a Southwest Airlines or United Parcel Service hurts consumers as much as 

excessive regulations on small businesses. So we have to keep ultimately the consumer in mind. 

And also it is important to remember that regulations on larger 

businesses also come back and hurt small businesses. For instance, 

in the telecommunications field excessive regulations on telecommunications providers can keep new innovations or keep prices 

high for existing communications systems that are required and 

needed by small businesses. 

So I would support keeping the focus on reducing regulation 

across the board without trying to segment the market. 

Mr. CASE. Well, I will just conclude by observing what Mr. Arth 

is thinking here, which is that what hurts a big business drives a 

24

small business out of business. And that is the dilemma that we 

have. 

Thank you. 

Chairman SCHROCK. Mr. Case talked about agonizing over these 

regulations. And every state goes through it. But I guess if you 

have to agonize, Hawaii is not a bad place to agonize. 

Mr. CASE. Right. 

Chairman SCHROCK. Mr. King? 

Mr. KING. Thank you, Mr. Chairman. 

As I sit here and listen to this testimony—and I appreciate the 

testimony of every one of you—I am particularly interested in Mr. 

Arth’s because you are living under these regulations. And a little 

thing comes to mind that some years ago I remember a mentor of 

mine that told me when he was young he learned early on that if 

you are going to have anything to do with interest he wanted to 

be the one collecting it rather than the one paying it. 

And it occurs to me if you are going to have anything to do with 

regulation you want to be the one that is writing and enforcing 

rather than the one that is complying. And particularly for me because the 31st of this month I marked the one year anniversary of 

my significant freedom from complying with regulations because I 

sold my 28-year business to my oldest son who now has that burden and who lobbies me continually about the load that you described here today. 

There is so much that I would say about this. And but about 

1991 or 1992, shortly after the Berlin Wall came down and the Soviet Union was breaking up and then reformed, somewhere in 

there I held a meeting in my office, my construction office in 

Odebolt, Iowa. I had 15 contractors from around the Midwest and 

Nebraska, Iowa, Illinois mostly. As they sat there around that 

table we discussed our business issues. And in the end I asked for 

a summary, what is the biggest problem that you have, the biggest 

difficulty you have in business? 

They all said it a different way but after all 15 had had their say 

they came down to one word: regulation. And that is what we are 

against. There are 43 different agencies that regulate my King 

Construction. And I would ask this question, and it is only going 

to be rhetorical because I would not put anybody on the spot: if 

someone wants to volunteer and say they own and operate a business, particularly a small business, can make the allegation that 

they are in compliance with all the regulations out there out of 

those 43 agencies that would be a most foolish thing to do. The bureaucrats would find you and prove to you that it was an outrageously erroneous statement. 

When we have that kind of a regulatory structure in this country 

it is time to move and change this. So I have got two big pieces 

here that I would like to address. And I am going to address them 

both to Mr. Arth. And hopefully I have got time. 

But litigation and insurance, could we in your opinion dramatically reduce and eliminate regulations, both federal and state regulations where we could, and rely more on, I mean 3 percent of our 

GDP is consumed by the trial lawyers today anyway, can we not 

rely on that deterrent and could we not rely on the cost of insurVerDate 0ct 09 2002 15:18 Oct 08, 2004 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\HEARINGS\94132.TXT MIKEA
25

ance premiums that have far less federal regulation and have more 

productivity, Mr. Arth? 

Mr. ARTH. Congressman King, I think if I understand the question moving more to a civil action model as opposed to a government enforcement model, it may well work. The insurance piece 

may not fully apply because to the extent that it would constitute 

an intentional act, intentional tort, insurance benefits typically will 

not pay damages. 

But, quite frankly, I sometimes feel that the regulatory structure 

actually gives people a wall to hide behind. When they are—when 

they have found that loophole they can get through it and after the 

fact say, but I complied with all the regulations. 

I am often surprised when we have an event like some of the financial scandals that we have had over the last few years that it 

results in a flurry of new legislation. Because what was done, in 

my mind as I understood the law, and I practiced for a brief period 

of time as a CPA, was already illegal. So why are we passing yet 

a new round of laws when theoretic—I cannot imagine there are 

that many huge holes in the laws that exist today that many of the 

things that spur new legislation could not already be passed under 

what exist—or I mean could not already be punished under the 

laws that already exist, if that makes sense. 

If I could, and I am sorry that Congressman Case had to leave, 

as we were talking about solutions I was reminded of something 

that almost might apply in this case. I ran across a theory in 

human relations management called the manage the worst trap 

which basically says that we all make a mistake with our employees because you have got a certain group that are always going to 

work very hard no matter what you do to them, a large group that 

will always work based on the rewards and penalties in place, and 

then that small group that no matter what you do they are always 

going to be scoundrels. 

Those people, that little group of troublesome employees are the 

ones we write our handbooks for. So we discourage the big group 

who want to do things right in the first place and we put barriers 

in the way of that other group who are always going to behave appropriately no matter what you do and we come up with all these 

rules and regulations to try to outsmart the bad guys. 

I think at some point we just have to admit there are always 

going to be bad guys, we should have laws broad enough that bad 

behavior like that is clearly punished, and quit trying to manage 

the worst through legislation and regulation. 

Mr. KING. Thank you. Mr. Chairman, I ask unanimous consent 

for a few more minutes? 

Chairman SCHROCK. Please. 

Mr. KING. Thank you. 

I would like to offer an opportunity to comment to each of the 

other witnesses on that question. Then I have another question I 

would like to raise. If you would want to address the subject matter 

of whether we could move more to a civil model and less of an enforcement model and what you might think of the protection or the 

shield that current regulations might provide for people? Mr. 

Gattuso? 

26

Mr. GATTUSO. Just very briefly. I think as a general matter I 

prefer common law solutions, solutions in court rather than regulatory solutions. They are more flexible. When done properly they 

become better solutions than a one-size-fits-all regulation. 

That is a very big caveat though because I do not think we have 

a well-functioning tort system right now. So I would hesitate to 

throw the solutions into the court system, the tort system as it now 

exists. So even though the common law is in theory a better alternative I do not think we have that court system working well 

enough to serve that role. 

Mr. KING. I hope to be at that hearing too. 

Ms. Dudley? 

Ms. DUDLEY. I would agree that before we had the regulatory 

state that we have now we had a common law system that was 

much better at adapting to the circumstances of the individual 

cases. If somebody spilled waste in my yard I could take them to 

court and they would have to clean it up. Now if somebody spilled 

waste in my yard it is okay as long as it meets the standards that 

EPA has set. And I think a common law system would be better. 

Mr. KING. Thank you. 

And then returning to Mr. Arth, another thing that you said interested me significantly and that was that the heaviest regulatory 

burden that you have to comply with is the IRS and payroll withholding taxes and being a collecting agent for the federal government, an uncompensated collecting agent for the federal government. 

And I am one of a growing number of members of this Congress 

who believes that we need to eliminate the internal revenue code, 

the Internal Revenue Service, untax our businesses since they are 

collectors of taxes, not taxpayers, and free this country up and 

move to a consumption tax on sales and service. The structure exists today in 45 states, there is about a trillion dollars of burden 

on our $11.4 trillion GDP that is because of our internal revenue 

code. 

From a business perspective could you describe for this Committee how that might affect the way you do business, your bottom 

line and the employment levels you could offer and the benefits and 

payroll that you could offer? 

Mr. ARTH. Certainly. Thank you. 

You may be aware that NSBA is perhaps one of the first business organizations that came out in support of the Fair Tax which 

is in fact a national sales tax model predicated upon the elimination of the income tax system in its entirety. And the Fair Tax 

would provide not only revenue to fund the federal government but 

would also generate sufficient funds to replace the current payroll 

tax structure. So the organization and myself personally, you know, 

support this notion. 

One area in particular—well, first of all let me say it is not going 

to be totally simple because the state of Ohio does have a state 

sales tax and, as you said earlier, anyone who would say they are 

in full compliance, you know, just ask the bureaucrats to come in 

and prove them wrong, there are even in the existing sales tax 

laws a great deal of complexity. And so all the complexity does not 

disappear. 

27

But I think it would be a much more transparent process—I am 

sorry, not transparent—visible process. Everybody involved in paying taxes would see that they are paying taxes. We do not have 

that today. 

In a competitive arena as we have now with global competition 

it would actually put us in a more advantageous position face to 

face with our foreign competitors. In fact, I find it ironic that we 

have got this problem with our foreign sales corporations that are 

I guess in large part a result of our current income tax structure 

as opposed to advantages inherent in the VAT taxes that other 

countries have. 

So I can see economic advantages to it. I can see simplicity factors involved. All the way around I would support it 100 percent. 

Mr. KING. I thank you, Mr. Arth. Would any of the other witnesses testify on that? 

And I do not blame you for taking a pass on that. It is a little 

off the subject matter. 

But I want to thank the Chair for indulging me. And any time 

I get the chance to get some of that on record, especially with the 

level of background and expertise that is demonstrated her I appreciate it. Thank you, Mr. Chair. 

Chairman SCHROCK. Thank you, Mr. King. 

Mr. Gattuso, in your testimony you called for new government 

bodies to be created to focus on regulatory analysis. And I think 

those are good ideas, very innovative ideas. Could not expansion of 

the SBA’s Office of Advocacy serve the same purpose, could providing more resources to OMB do it? 

Mr. GATTUSO. Well, I certainly think that that would be a contribution to the solution. But I think you also need an agency that 

is independent completely of the executive branch. Expansion of 

the SBA, obviously as I said, I do not believe would be a good substitute for a congressional review office. 

Chairman SCHROCK. Separate and apart from either agency? 

Mr. GATTUSO. That is right. That is right. 

Chairman SCHROCK. In the president’s manufacturing agenda he 

announced plans for a regulatory review function in the Department of Commerce. Its purpose though is to review regulation from 

other agencies. Does that have merit? Does that have promise? 

Mr. GATTUSO. Oh, I am in favor of anyone who wants to take a 

hard look at regulations and see whether they in fact are serving 

their purpose as well or effectively as possible. Again, however, I 

think that there is a need for the review, some review, to be independent. Any review mechanism that is inside the executive branch 

will face institutional conflicts. 

If it is the policy or especially looking at regulations that have 

already been adopted it would be very difficult for one department 

of the executive branch to come back and say, well, this was unjustified, this was not adequately done. Just politically that would 

be very difficult. That is again why you need independence. 

Chairman SCHROCK. The bottom line is it needs to be independent? 

Mr. GATTUSO. Yes. Among other places. 

Chairman SCHROCK. Okay. Do you all have any concluding comments, any thoughts before we adjourn? Ms. Dudley? 

28

Ms. DUDLEY. Let me just respond briefly to that. 

Chairman SCHROCK. Sure. 

Ms. DUDLEY. Because I agree with James. I think you need your 

own office that is independent from the executive branch. That 

does not mean that OMB is not doing a good job. And the Office 

of Advocacy I think they have been very effective since SBREFA 

was passed. So I have high hopes for the Commerce Department 

office as well because I think what you have done with those recent 

bills really, with the SBREFA really has made a difference. But 

you do need your own office. 

Chairman SCHROCK. I think the Office of Advocacy, correct me 

if I am wrong, saved businesses $60 billion last year—$6 billion. 

Oh, it would be nice if it was 60. Six billion, that is a lot of money. 

Ms. DUDLEY. Yes. 

Chairman SCHROCK. So they do a good job. 

Well, we thank you all. You have really given us a lot to think 

about. Thanks for coming all the way from Ohio, we really appreciate it. You are on the frontlines, you are at the top of the spear 

so you know very well what is going on and we need to listen to 

you. 

Mr. ARTH. Well thank you. 

Chairman SCHROCK. And I appreciate you being here because 

this is something we are going to go forward with. We are dead serious about making some of these things happen. Because I hear 

it when I go home all the time that we just need to make sure we 

put your words to actions and get on with it. And I think we will. 

So thank you all for being here. This hearing is adjourned. 

Thank you. 

[Whereupon, at 12:10 p.m., the Subcommittee was adjourned.]

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