THE COST OF REGULATION TO SMALL BUSINESS

HEARING

BEFORE THE

SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT, 

AND GOVERNMENT PROGRAMS

AND

SUBCOMMITTEE ON REGULATORY REFORM AND 

PAPERWORK REDUCTION

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

WASHINGTON, DC

JUNE 6, 2002

Serial No. 107–60

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS 

DONALD MANZULLO, Illinois, Chairman 

LARRY COMBEST, Texas 

JOEL HEFLEY, Colorado 

ROSCOE G. BARTLETT, Maryland 

FRANK A. LoBIONDO, New Jersey 

SUE W. KELLY, New York 

STEVE. CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DeMINT, South Carolina 

JOHN R. THUNE, South Dakota 

MICHAEL PENCE, Indiana 

MIKE FERGUSON, New Jersey 

DARRELL E. ISSA, California 

SAM GRAVES, Missouri 

EDWARD L. SCHROCK, Virginia 

FELIX J. GRUCCI, JR., New York 

TODD W. AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

NYDIA M. VELAZQUEZ, New York 

JUANITA MILLENDER-McDONALD, 

California 

DANNY K. DAVIS, Illinois 

BILL PASCRELL, JR., New Jersey 

DONNA M. CHRISTENSEN, Virgin Islands 

ROBERT A. BRADY, Pennsylvania 

TOM UDALL, New Mexico 

STEPHANIE TUBBS JONES, Ohio 

CHARLES A. GONZALEZ, Texas 

DAVID D. PHELPS, Illinois 

GRACE F. NAPOLITANO, California 

BRIAN BAIRD, Washington 

MARK UDALL, Colorado 

JAMES R. LANGEVIN, Rhode Island 

MIKE ROSS, Arkansas 

BRAD CARSON, Oklahoma 

ANIBAL ACEVEDO-VILA, Puerto Rico 

DOUG THOMAS, Staff Director

PHIL ESKELAND, Deputy Staff Director

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT, AND GOVERNMENT 

PROGRAMS 

JIM DEMINT, South Carolina, Chairman

FRANK A. LOBIONDO, New Jersey 

MICHAEL FERGUSON, New Jersey 

FELIX J. GRUCCI, JR., New York 

DARRELL E. ISSA, California 

EDWARD L. SCHROCK, Virginia 

SHELLEY MOORE CAPITO, West Virginia 

JUANITA MILLENDER-McDONALD, 

California 

DANNY K. DAVIS, Illinois 

STEPHANIE TUBBS JONES, Ohio 

CHARLES A. GONZALEZ, Texas 

MIKE ROSS, Arkansas 

DONNA M. CHRISTENSEN, Virgin Islands 

NELSON CROWTHER, Professional Staff 

SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT 

MIKE PENCE, Indiana, Chairman

LARRY COMBEST, Texas 

SUE KELLY, New York 

SAM GRAVES, Missouri 

ROSCOE BARTLETT, Maryland 

TODD AKIN, Missouri 

PAT TOOMEY, Pennsylvania 

ROBERT BRADY, Pennsylvania 

BILL PASCRELL, JR., New Jersey 

CHARLES GONZALEZ, Texas 

DAVID D. PHELPS, Illinois 

JAMES P. LANGEVIN, Rhode Island 

ANIBAL ACEVEDO-VILA, Puerto Rico 

ROCARIO PALMIERI, Professional Staff

(III)

C O N T E N T S 

Page 

Hearing held on June 6, 2002 ................................................................................. 1

WITNESSES

Graham, Hon. John, Administrator, OIRA, Office of Management & Budget ... 3

McIntosh, Hon. David, Former Member of Congress, Partner Mayer, Brown, 

Rowe & Maw ........................................................................................................ 6

Hahn, Dr. Robert, Director, AEI—Brookings Joint Center for Regulatory 

Studies .................................................................................................................. 12

Langer, Andrew, Manager, Regulatory Affairs, National Federation of Independent Business ................................................................................................. 14

Arth, Raymond, President of Phoenix Products, for the National Small Business United ........................................................................................................... 16

APPENDIX

Opening statements: 

DeMint, Hon. Jim ............................................................................................. 22

Pence, Hon. Mike .............................................................................................. 24

Prepared statements: 

Graham, Hon. John .......................................................................................... 27

McIntosh, Hon. David ...................................................................................... 34

Hahn, Dr. Robert .............................................................................................. 63

Langer, Andrew ................................................................................................ 81

Arth, Raymond .................................................................................................. 89

Additional material: 

Letter to Committee from Jonathon Zuck, President, Association for Competitive Technology ....................................................................................... 101

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THE COST OF REGULATION TO SMALL 

BUSINESS 

THURSDAY, JUNE 6, 2002 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT, AND SUBCOMMITTEE

ON WORKFORCE, EMPOWERMENT, AND GOVERNMENT

PROGRAMS, COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The joint Subcommittees met, pursuant to call, at 2:00 p.m., in 

room 2360, Rayburn House Office Building, Hon. Mike Pence 

(chairman of the subcommittee) presiding. 

Chairman PENCE. This hearing of the Subcommittee on Regulatory Reform and Oversight of the Committee on Small Business 

is convened. 

Our hearing today addresses the cost of regulation to the small 

business community. Countless efforts to reform and reign in the 

regulatory state have met with increasing resistance from the government bureaucracy. In 2000, the Code of Federal Regulations required over 74,000 pages to record every executive agency rule and, 

if laid down next to each other, the volumes would literally extend 

19 feet in length. From 1991 to 2000, the Code of Federal Regulations increased by 28 percent and showed no signs of stopping in 

2000 when 4,699 rules were codified. 

Last year a report put out by the Small Business Administration’s Office of Advocacy calculated the cost of regulations to our economy at $843 billion per year, or $8,164 for every household. 

That number rivals our massive Federal budget this year. Even 

more troubling than that were statistics gathered on the impact of 

these regulations to small businesses. Small businesses face a regulatory burden that is 60 percent higher per employee than large 

businesses. Dr. Crain and Dr. Hopkins estimate in their report that 

the average small business is burdened with almost $7,000 per employee in regulatory compliance costs. The worst offender in the 

Federal Government when it comes to disproportionate costs to 

small businesses is the Environmental Protection Agency. Fully 

half of the estimated regulatory burden for small businesses identified in the report comes from environmental regulation. 

One of the most powerful weapons in our arsenal dedicated to 

beating back the regulatory state is the Regulatory Flexibility Act; 

and often our chief warrior in this battle is the Office of Information and Regulatory Affairs, or OIRA, in the President’s Office of 

Management and Budget. It is OIRA’s mission to hold agencies accountable to the laws that Congress has passed and the executive 

2

orders of the President when it comes to performing appropriate 

analysis and rulemakings. 

We are very pleased to have Dr. John Graham, the Administrator of OIRA, with us today to testify to his progress in restoring 

the proper role of his office in the Federal regulatory process. Dr. 

Graham will also be discussing the Draft Report to Congress on the 

Costs and Benefits of Federal Regulations which his office is statutorily required to prepare. Both subcommittees have taken note of 

your reviews of existing regulations to improve their net benefits, 

and we look forward to your continued progress on reducing the 

cost of regulations that are currently on the books. 

We are also very fortunate and honored to be joined by former 

Congressman David McIntosh, my predecessor in the Second Congressional District of Indiana. I can say without question that there 

are very few Members of this Chamber who could rival his knowledge of regulatory issues or his integrity or who have committed 

themselves and so much of their time and energy and intellect to 

this issue. Clearly, your days as chairman of the National Economic Growth, Natural Resources and Regulatory Affairs Subcommittee and your work leading the Competitiveness Council in 

the first Bush administration speak to the weight with which your 

testimony is held by both of these subcommittees. 

We are anxious to hear your thoughts on how the regulatory reform initiatives which you helped put in place are working and how 

we can be doing a better job still. Your outside perspective is especially appreciated since it has allowed me to follow you in representing the second district in the great State of Indiana. 

On a personal note, it is delightful to see you on that side of the 

desk, though I am daily reminded how many people wish you were 

still on this side. 

In a time when our economy relies so greatly on small businesses 

to keep our country moving, we cannot afford to stifle that progress 

by continuing to pile on costly regulations that disadvantage these 

groups. Half of our national workforce is employed by small businesses and two-thirds to three-quarters of net new jobs are created 

in the small business sector. Now is the time to do everything in 

our power to limit the reach of the regulatory state and lower the 

cost of regulation to small businesses. 

We very much look forward to your testimony and to that of our 

second panel. 

We will now have an opening statement from the chairman of 

the Subcommittee on Workforce, Empowerment and Government 

Programs who is co chairing and co hosting this Subcommittee 

joint hearing, Mr. DeMint. 

Chairman DEMINT. Thank you, Chairman Pence. It is good to 

have you folks here. David, it is great to have you back. 

I appreciate the opportunity in helping to convene this joint 

hearing to look at the cost of regulations on small businesses and 

entrepreneurs. As a former small businessman myself and a consultant to a number of other businesses, I am very aware of the 

extraordinary burden of excessive Federal regulations. At a recent 

field hearing in Spartansburg, I heard from a number of constituents in business who are struggling to comply with regulations, 

and it is clear that the burden is more cumbersome on smaller 

3

firms who do not have the resources to deal with it. This is very 

ironic that we do this, as Chairman Pence says, as most of the net 

new jobs are coming from these firms that we are smothering in 

regulations. 

It is vitally important that we pay close attention to the personal 

as well as the macroeconomic cost of regulations and other strictures that government unnecessarily places on small business owners. We on this Committee need to be an advocate for clearing the 

way for entrepreneurs to be free to run their businesses and not 

spend all of their time jumping through bureaucratic hoops. 

I am pleased to note that the regulations issued under President 

Bush are down in number, although they still remain very high. 

The 2001 Federal Register contains only 64,431 pages, more than 

a 13 percent decline. I am concerned that the unelected are doing 

the bulk of lawmaking here in D.C. While unaccountable regulatory agencies issued 4,132 rules last year, Congress passed only 

108 bills. 

The five most active rule-producing agencies—the Department of 

Transportation, Treasury, Interior and Commerce, and the Environmental Protection Agency—account for 48 percent of all rules 

under consideration. 

I want to thank the witnesses again who are participating in the 

hearing. I appreciate the work that has been done on the papers 

entitled ‘‘The Impact of Regulations on Small Firms’’ and the ‘‘Draft Report to Congress on the Costs and Benefits of Federal 

Regulations.’’ I look forward to hearing about both of these. 

Thank you very much. I yield back, Mr. Chairman. 

Chairman PENCE. Thank you, Chairman DeMint. 

The Chair will entertain opening statements from any colleagues 

who join us along the way. 

Both of these witnesses on our first panel are very veteran on 

Capitol Hill, but allow me to ask your forbearance in respecting the 

5-minute time limit, knowing that the entirety of your prepared 

statement will most certainly be added to the record if you are unable to get through all of it, but we will also make the practice of 

hearing from both of our witnesses before the panel is presented 

with questions by either chairmen or any other members who join 

us in the course of the hearing. 

Our first witness in this hearing on the cost of regulations to 

small business is Dr. John Graham, who is the Administrator of 

OIRA, the Office of Information and Regulatory Affairs, in the 

President’s Office of Management and Budget; and Dr. Graham is 

recognized for 5 minutes. 

STATEMENT OF THE HONORABLE JOHN D. GRAHAM, PH.D., 

ADMINISTRATOR, OIRA, OFFICE OF MANAGEMENT AND 

BUDGET 

Mr. GRAHAM. Thank you very much, Mr. Chairman—both chairmen, actually, for the two subcommittees hosting the hearing this 

afternoon. 

Since this is my first opportunity to testify before you, I thought 

I should say a few words about my background. I was born and 

raised in Pittsburgh, Pennsylvania, a very proud Steelers fan. Perhaps more importantly for the subject of this hearing, I was raised 

4

during a period where that city experienced substantial 

deindustrialization for a variety of reasons, and I saw the impacts 

of the lack of business growth and job growth as I was growing up 

as a young child in Pittsburgh. 

From there, I went to Wake Forest University and Duke University and then back to Pittsburgh for my Ph.D. at Carnegie-Mellon 

University. For the last 17 years, I have been on the faculty at the 

Harvard School of Public Health where I founded and ran the Harvard Center for Risk Analysis. 

For the topic of the hearing today, the impact of regulation on 

small business, I will start with an anecdote about the education 

of John Graham with regard to what regulation does to small businesses. 

My first opportunity to testify before a congressional hearing was 

on the Senate side in 1990 on a bill—on one of the early bills to 

amend the Clean Air Act that ultimately led to the 1990 amendments to the Clean Air Act. After I gave my testimony, I stayed 

and listened to a second panel. There were several witnesses from 

large Fortune 500 companies testifying in favor of multi-billion dollar regulatory programs under the Clean Air Act. 

That evening I went to dinner with a colleague of mine, Dr. Bob 

Crandall at the Brookings Institution, and asked him to explain to 

me what I thought was the surprising testimony of these Fortune 

500 companies. I said, is this a case of progressive businesses trying to clean up the environment? Bob has a good cynical mind, and 

he reminded me that you have to keep in mind that these large 

corporations, when we get into regulatory issues, oftentimes see 

regulation as an opportunity to raise capital costs for participants 

in an industry and to create entry barriers for new companies into 

those businesses. So, oftentimes, we have to understand that regulatory issues are not an issue of business versus other interests in 

society; they are oftentimes big business versus little business as 

part of the problem. 

That leads to the key finding of the Crain/Hopkins Report commissioned by the Small Business Administration. Firms with less 

than 20 employees face 60 percent larger regulatory burdens per 

employee than firms with greater than 500 employees. So I think 

it is important to realize that regulation for—particularly for larger 

companies, in certain circumstances they see that as a competitive 

advantage relative to small companies. 

There is, I think, an important piece of missing information in 

my written testimony. While we have information on the cost side 

of regulation by size of business, we have not yet been able to collect information on the benefits of regulation by size of business. 

In order to have a much more concrete handle on what the overall 

impact of regulation is, it would be useful to have that information 

on benefits as well as costs. 

I also wanted to make a point about the Unified Regulatory 

Agenda of the Federal Government, which was released last month. 

It lays out the pipeline of regulations expected over the next year 

in the Federal Government. As the so-called regulatory czar of the 

Federal Government, I would like to believe that we are in control 

of all of this activity but, in all candor, that is a little difficult to 

do. 

5

There are some interesting pieces of information from this agenda. First of all, the Agenda lists economically significant rules that 

cost the economy more than $100 million. The agencies that have 

most of those in the pipeline are one, EPA; two, HHS; three, U.S. 

Department of Agriculture; four, transportation; and five, the FCC. 

However, there is a separate piece of information in this agenda 

about rules in the pipeline that will have impacts on small businesses. I think it is a very interesting list, because it has a slightly 

different flavor to it. The top five agencies are the FCC, HHS, Commerce, Transportation, and SEC. If you take the independent agencies out, FCC and SEC, then you add USDA and EPA. I think an 

important thing to keep in mind there is the executive order we operate under at OIRA does not currently have authority for regulatory review over these independent agencies. 

With regard to collaboration in terms of small business issues, 

we have recently signed a memorandum of understanding with the 

Advocacy Office at the Small Business Administration Tom Sullivan and I will be working together to try to coordinate our evaluation of rules for small business impact. To make a long story 

short, we have committed that, on our end of the bargain, we will 

look carefully at any regulation with an impact on small business, 

and if they have not adequately taken into account the impact on 

small business, we will return that rule to the agency for reconsideration. 

I have a more extensive set of remarks in my written testimony, 

but I hope I have kept within the time limit. Thank you. 

Chairman PENCE. Well, you have. Thank you, Dr. Graham, for 

those insightful remarks; and we look forward to—both chairs look 

forward to dialoguing with you about the issues that were raised. 

We will enter your entire prepared statement into the record, without objection. 

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

Chairman PENCE. Our second witness is a former Member of the 

House of Representatives. 

Congressman David McIntosh is a partner at Mayer, Brown, 

Rowe and Maw. He served in this institution from 1995 to 2001, 

where he chaired the National Economic Growth, Natural Resources, and Regulatory Affairs Subcommittee of the Government 

Reform and Oversight Committee. As I mentioned earlier, he was 

the Executive Director of Vice President Dan Quayle’s Council on 

Competitiveness. 

While a Member of Congress, he authored many signature pieces 

of legislation, including, most notably, the Congressional Review 

Act, which became law and was deployed even by this Congress in 

its early days to address concerns Members of the House and Senate had over onerous regulations in the area of ergonomics. He has 

left an enormous footprint on this institution in the area of regulatory reform in particular, and we are honored to have him here. 

The gentleman from Indiana is recognized for 5 minutes. 

6

STATEMENT OF THE HONORABLE DAVID McINTOSH, FORMER 

MEMBER OF CONGRESS, PARTNER MAYER, BROWN, ROWE & 

MAW, MUNCIE, INDIANA 

Mr. MCINTOSH. Thank you, Mr. Chairman. Thank you both, 

Chairman DeMint and Chairman Pence. It is an honor to be here 

sitting in this seat before you. 

I would say, Mr. Pence, there are four members of the McIntosh 

family that are indeed glad that we have traded places; and I want 

to commend you on the great job you are doing and urge you to 

continue. 

It is also an honor to be here with the OIRA administrator, Dr. 

Graham; and I would second his initial insight about the tension 

between big business and small business. In fact, over and over 

again, it has come to my attention that that is what is behind 

many of the regulatory initiatives. 

In fact, when I worked with Vice President Quayle, a well-intended lobbyist from one of the Nation’s large businesses came in 

and said, we like what you are doing in cutting back on unnecessary regulation, but do not forget there are some regulations that 

are good. And I said, which ones do you have in mind? He said, 

well, there are some that we like because our competitors cannot 

quite comply with them yet. A moment of candor, and it gave me 

a great insight into what perhaps some of the motivation was behind different programs. 

So, John, I would wholeheartedly agree with you and keep that 

perspective. 

What I would like to do today is focus on a couple of main points 

in my testimony, and then perhaps others can be explored in response to your questions. 

First, the Crain/Hopkins study I think is alarming in that it 

shows that the costs are so high, $800 billion, that the disproportionate impact on small businesses, a 50 percent higher cost per 

employee, which effectively means every day when they are deciding do I add another employee to my business, they realize that it 

is going to cost them on the order of $8,000. It is an inhibitor for 

job growth and for recovery in our economy. I think it is alarming 

and something that everyone in the administration and in Congress should take to heart. 

Looking at SBREFA and the way it has been functioning, there 

are many good things in there in terms of furthering the emphasis 

on cost-benefit and looking at the impact on small business, but 

there are a few ways in which I think this Congress could try to 

strengthen that act, and I wanted to particularly draw your attention to those. 

One of them is that the 605(b) certification process seems to be 

greatly abused, where an agency does not have to go through a review of what the costs are to small business if they certify that the 

regulation will not significantly impact the small business. I would 

suggest that Congress look at a mechanism, perhaps similar to 

what it has set up in the Paperwork Reduction Act, where a central 

office has to sign off on that certification, perhaps OIRA, perhaps 

the SBA chief counsel, before that certification can allow them to 

escape the requirements for doing an impact analysis. 

7

The second point is that the regulations should clearly apply to 

standards that are not directly administered by an agency but set 

the standard for regulations at the State level. You think of the 

ozone and particulate standards that EPA issued a few years ago. 

They claim they did not have to do a small business impact, even 

though it would cost hundreds of millions of dollars to small businesses, because, ultimately, all it did was set a standard that then 

50 State governments had to implement in their clean air regulations. So by extending the application of SBREFA to those type of 

regulations, I think you would do a great service. 

The third is to more explicitly include an estimate of cost in the 

impact analysis. There I think OIRA has a tremendous definition 

of what costs and benefits should be included in their analysis, extend those definitions statutorily into what should be done by the 

agencies to make it clear that they have to identify cost as they do 

their analysis. 

Then, finally, one of the things that I think would be helpful is 

to direct the courts to give deference to the Small Business Administration in determining cases on how SBREFA should be applied 

to the agencies. Normally you have, under the Chevron decision, a 

great deal of deference to the agency that administers a program, 

but in this case, because the Small Business Administration does 

not actually administer the regulatory program, their view of what 

is required under SBREFA is not granted that type of judicial deference. You have a very good set of people there in the Small Business Administration who are familiar with the type of problems 

that different regulatory programs cause and direct the courts to 

give them that deference. 

The other parts of my testimony I would be delighted to talk 

with you about in question and answers, and I do appreciate you 

holding this hearing so that you can raise the standard for people 

in government and outside of government. Thank you. 

Chairman PENCE. Thank you. We will enter the balance of your 

prepared remarks in the record for this hearing without objection. 

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

Chairman PENCE. I want to defer to Chairman DeMint, since I 

gave the first opening statement, if he wants to begin the questioning. 

Chairman DEMINT. That is the kind of thing I guess that is politically good to talk about, and ever since I have been here we talk 

about the regulations and the cost, particularly on small businesses. I have had a lot of hearings myself. I, frankly, would like 

to know from you two if you had one suggestion as far as what we 

could do, not just as a part of this Committee, because this Committee needs the help of a number of others and the leadership to 

actually make some things happen, but what would you suggest we 

do to begin to make a dent in what is obviously a bad situation for 

our economy and our global competitiveness and the encouragement of entrepreneurism and innovation? I am just looking for a 

few little things I can sink my teeth into and maybe actually try 

to get something done. So I will start with you, Dr. Graham. 

Mr. GRAHAM. Well, let me start on the analytic side of the case 

for reform of regulation to protect small business. I think there has 

been, for a number of years, a good analytic case of the substantial 

8

costs of regulation on the small business community and the disproportionate nature of that cost. My own opinion is that the weakness in the analytic case is that we do not have the parallel body 

of information on the benefits side. 

The reason why that is important is that many people who believe that sometimes regulation is necessary fear that if we were 

to take away regulatory protections, it could either harm the consumer, the worker, or the environment or so forth. Until we get a 

good analytic foundation—like we have provided on the cost side of 

the ledger—on the benefit side of the ledger, we are always going 

to be vulnerable to people speculating about what is going to happen if you remove these regulations. I think that there should be 

no one in either party or of any ideology that should be against a 

good collective and a good objective body of information of what we 

really know about the benefits of these regulations that disproportionately impact small businesses. 

Mr. MCINTOSH. Let me add to that something that Dr. Graham 

worked on prior to coming to government. Risk assessment should 

be a key part of that benefit analysis, because it lets you in many 

ways prioritize which type of regulations give you, in the terms of 

health rather than cost, the greatest benefit, something we tried to 

do when I was in Congress but were unable to because of the political configuration of the Senate in the Clinton administration. That 

is a large project but one well worth fighting, because essentially 

what it does is it directs this whole regulatory apparatus towards 

maximizing the benefits out of it. They focus on those things that 

are most risky to people. Believe it or not, that is not what the government does currently, time after time. 

I guess if there were a statutory provision that I would recommend that focus be put on in terms of SBREFA, I think it would 

be that certification process where you have a mandatory check off 

by that centralized agency. The Paperwork Reduction Act is probably the most successful of all of the different congressionally created or administratively created review processes, because the form 

is invalid if the agency does not comply with it. Dr. Graham administers that program in OIRA. 

Taking a look at it from a larger scheme, there are two notions 

that I did not mention in my testimony but I think are important 

to start the dialogue on. One is finding a way to have more accountability by elected officials for regulatory decisions. 

The Congressional Review Act was a start in that direction, but 

one way conceptually to really make that effective is to change the 

presumption. The presumption in the Congressional Review Act is, 

if Congress does nothing, the regulation goes into effect. If you flip 

that and say until Congress ratifies the decision by the agency, and 

you would obviously have to limit it to major regulations or significant impact regulations, that would change the whole dynamic. 

Now, having sat in your seats, there is a lot of consequences that 

go with that, and there will be a lot of your colleagues who are perhaps happy not to have that type of accountability. There is a 

record created if they vote yes or no on a clean air regulation. But 

I think in our democratic system that type of accountability will 

lead to a better product by the Federal Government. 

9

The second large conceptual issue that I would love to see people 

work on is taking a look at the enforcement side and asking ourselves, what has happened in the last 100 years as we moved from 

an administrative state that did not have these regulatory bodies 

into a regulatory state for much of the Federal programs? Specifically, what has happened to the procedural protections in the Bill 

of Rights when those rules and regulations are enforced? 

It would be my premise that many of those protections have gone 

by the wayside. You still technically have the right to have your 

day in court and the fifth amendment, the seventh amendment, all 

of the different protections that go with that, but the reality is the 

enforcement of most of these programs is done by injunction, it is 

done by failure to give approval for a new product, it is administered through processes and remedies that the government has 

that are extrajudicial. 

One thing Congress should look at is, how do we apply those Bill 

of Rights or the concepts in the Bill of Rights to provide protection 

to the innocent citizen or small businessman or company when 

they are up against the leviathan of big government implementing 

these regulatory programs? It would protect against the petty bureaucrat who has a lot of power and very little control and oversight, but it would also, I think, force the government to do a better 

job in selecting how they enforce these regulations in the same way 

we feel that the Bill of Rights helps ultimately law enforcement do 

a better job of focusing in on its efforts to apprehend criminals. 

So those are two large conceptual areas that much work would 

need to be done to lay the groundwork to support those. But if you 

are of interest in those, I would be delighted to further work with 

you on them. 

Chairman DEMINT. I hope to follow up, and I thank you. 

I yield back, Mr. Chairman. 

Chairman PENCE. Dr. Graham, first, a very specific question that 

has to do with the status of the executive order that the President 

promised on March 19 of this year. What is the status of that order 

from the perspective of your office? 

Mr. GRAHAM. Well, I can tell you what I know about the status 

of it. The executive order process involves first the Executive Office 

of the President getting comfortable with a first draft and then 

sharing that with the agencies for interagency review. Then we 

come back and try to resolve any issues that are involved. So that 

is the three-step process. 

We are launched now into the second step where there is a draft, 

and it is undergoing interagency review. There will be comments 

taken, and then there will be a final piece put together. 

But you can be assured that there are people working hard on 

that, and we are definitely committed to an executive order that in 

particular will strengthen the ability of the Advocacy Office at the 

Small Business Administration to do their work and assure that 

agencies comply with the Reg Flex Act. 

Chairman PENCE. Well, let me say from the standpoint of this 

Subcommittee it would be our hope and, frankly, our expectation 

that the executive order have the strongest possible language to 

give the OIRA and SBA’s Office of Advocacy the tools they need to 

ensure that agencies comply with the Reg Flex Act; and that, if 

10

that was not the case, that you might be able to carry back to the 

deliberations that certainly this Subcommittee and perhaps Mr. 

DeMint’s Subcommittee and maybe the full Small Business Committee would likely have a hearing on that issue, if not more. 

Let me go specifically to some of your prepared testimony that 

I looked at last night. In today’s remarks, you used the phrase that 

OIRA is prepared to return any draft rules for agency reconsideration if they have not taken into consideration the impact of a draft 

rule on small business as required under Reg Flex Act. How do you 

plan to decide—how does your office, rather, plan to decide if an 

agency has taken small business into consideration? What is the 

objective or subjective standard for that reconsideration? 

Mr. GRAHAM. Excellent question. 

I guess the first point I would make, to be candid, is that the Office of Information and Regulatory Affairs is an organization that 

has a career staff of about 50 employees, and that compares to on 

the order of thousands upon thousands of people in the various 

agencies. We have 4,000 regulations each year—600 of them are 

significant, 50 to 100 of those are economically significant. So the 

first point I want to make is that, given all of the considerations 

that we look at when we review a regulation, while the small business consideration is extremely important, there are a variety of 

other considerations that are mandated in the executive order. For 

example, we look at overall cost-benefit on society—and that is why 

we believe that the role of the Advocacy Office at the Small Business Administration is, in fact, so critical. 

Because we do not have the detailed staff understanding of 

guidelines around what is an adequate analysis for small business, 

we do not have the experience of dealing with agencies specifically 

on small business issues that the Advocacy Office has. We will be 

looking to Mr. Sullivan to give us an objective opinion on each of 

these rules on whether or not the agency has, in fact, treated the 

small business issue fairly. 

Now what we have pledged to do in the memorandum of understanding is, if Mr. Sullivan’s office indicates that there has not 

been an adequate regulatory flexibility analysis and if we believe 

that judgment is a reasonable one, then basically we do not need 

to get to a lot of other issues. My boss, Mitch Daniels, has told me 

that, at that point, the rule goes right back to the agency. 

Chairman PENCE. Okay. One question for Mr. McIntosh. I am 

very intrigued by some of the proposals that came up in your testimony with Chairman DeMint. But, specifically, in your written testimony you spoke about a new role for OIRA and SBA’s Office of 

Advocacy in agency reg-flex certifications. Can you expand on that, 

what the impact of that would be and what specifically you were 

alluding to? 

Mr. MCINTOSH. The practical impact would be to take the process 

that Dr. Graham just described and make it mandatory, that some 

combination of those two offices would have to grant—and the way 

they do it in the Paperwork Reduction Act is they give a number 

that is put on the form that shows it has been cleared by OIRA, 

but some indication to the world that that impact analysis has 

been signed off on. Perhaps because of staffing constraints, maybe 

the Small Business Advocacy Office is the best of the two, or let 

11

the President decide. There are ways, multiple ways Congress 

could choose to do that. 

But essentially what it does is give private rights to the regulated community. If those regulations have not had the impact 

analysis done adequately, then the regulation would not be enforceable against those small business entities. A powerful tool, because 

what it does is it dramatically increases the seriousness with which 

the agencies have to do that review. 

One other thing. Data collection that you all could consider along 

the way would be—my recollection was that GAO did a study in 

the Clinton administration that was referred to the Subcommittee 

I chaired on compliance with SBREFA, and you might consider 

asking GAO to update that study to see—and that, I think, would 

help Dr. Graham also in identifying if there are some agencies that 

have a tendency to ignore the requirement for the small business 

impact. 

Chairman PENCE. I am told that Chairman DeMint for this panel 

did not have any additional questions, so I will maybe offer one generic question to both of our witnesses before we dismiss and go 

to the next panel. It might have to do with what Congressman 

McIntosh was just alluding to, and that is the data issue. How do 

you think we can improve the data that is available on the impact 

on small businesses that you have? Are there recommendations 

that these subcommittees could consider and proposals Congress 

could consider? 

I will recognize Dr. Graham first. 

Mr. GRAHAM. Well, I cannot give you a comprehensive answer to 

that question, but I think I can give you a very interesting example 

of the problem we face with data. 

The National Highway Traffic Safety Administration, the organization that regulates car safety and tire safety, is now in a major 

proposed rulemaking on improving the quality of tires. In their proposed rulemaking, they have apparently determined that there are 

no small businesses affected by the particular proposed rule dealing with tire safety. We have had both letters and visits from companies—people who are in the tire business, who profess to me that 

they are executives in small businesses, who look, as far as we can 

tell, like they are small businesses. Yet we have an official Federal 

Register notice out there by the Federal agency stating there are

no such businesses in the United States of America. 

It is fascinating to me to think through the question; how are we 

going to get agencies at least to the point that they are aware that 

there are small businesses in some of these industries that they are 

proposing rather substantial regulations to affect? 

Now, I think those businesses did submit comments through the 

public comment process to NHTSA. We are certainly hopeful that 

they will take seriously their concerns. But obviously we have a 

data problem when we have agencies declaring that there are no 

small businesses within a particular industry, when, in fact, we are 

having visits from businesses who are well aware of these regulations and concerned about them. 

Mr. MCINTOSH. Let me mention one other idea that has been 

worked on in the past and I think would help in the acquisition of 

data. That would be a move toward a regulatory budget that would 

12

be in the same time frame and the same process to the spending 

budgets that the agencies put forward, again, with OMB in the 

same role they are as with the budget, having a lot of insight and 

control over what the agencies do to make sure they comply with 

the President’s policy directives. There is a lot of work that would 

need to be done, but the requirement of a budget would then force 

agencies to provide data about what are the costs and benefits of 

their various regulatory programs. 

Chairman PENCE. On behalf of both subcommittees, allow me to 

thank this panel for your very thought-provoking commentary. 

With that, you are dismissed; and we will invite our next panel to 

take their seat at the table. 

Mr. GRAHAM. Thank you to both of you. 

Mr. MCINTOSH. Thank you very much. 

Chairman PENCE. We will now entertain testimony from the second panel in this hearing on the cost of regulations to small business convened by the Subcommittee on Regulatory Reform and 

Oversight and the Subcommittee on Workforce, Empowerment, and 

Government Programs of the Committee on Small Business. 

We welcome our new panel. We thank you for your willingness 

to participate in the process; and, as was mentioned to the previous 

panel, you will be recognized for 5 minutes. We ask you to respect 

the light board in front of you and conclude your remarks at the 

appropriate time. Knowing that all of your prepared remarks will 

be entered into the full record of this hearing, so you need not feel 

hurried or rushed but rather might take the minutes that you have 

to amplify points that might be of particular interest to the two 

Chairs represented here. 

Next, the subcommittees will hear from Dr. Robert Hahn. Dr. 

Hahn serves as the Director of the AEI-Brookings Joint Center for 

Regulatory Studies, as well as a research associate at Harvard University. Dr. Hahn has his Ph.D. in economics from the California 

Institute of Technology and previously served as a senior staff 

economist in the President’s Council of Economic Advisors. He has 

written extensively on the topic of regulation and is regularly consulted by government agencies for his expertise and acumen. 

Dr. Hahn, we are grateful for your participation in this panel 

and for traveling to this joint hearing. You are recognized for 5 

minutes. 

STATEMENT OF DR. ROBERT HAHN, DIRECTOR, AEIBROOKINGS JOINT CENTER FOR REGULATORY STUDIES 

Mr. HAHN. Thank you, Chairman Pence and Chairman DeMint. 

It is a pleasure to be here. I think looking at the impact of regulations on small business is a very important topic, and I think Dr. 

Graham and former Congressman McIntosh made several points 

that I would agree with, and I am not going to dwell on them. 

My general view of the impact of regulation on small business is 

related to a quotation I think that was due to Oscar Wilde where 

he said, ‘‘I have been rich and I have been poor and rich is better,’’ and for those reasons, you might imagine why small business 

sometimes gets the short end of the stick. 

One of the issues that you raised, Chairman Pence—and Dr. 

Graham, who was formerly my colleague at Carnegie-Mellon, I 

13

know is intensely interested in—is how you get better information 

into this process? I simply want to state for the record that I think 

the general quality of information is fairly poor in the regulatory 

process, and the Joint Center has several researchers who did a 

study that I cite in my testimony, which talks about the fact that 

many of the regulatory analyses that we reviewed over the last several years did not even seriously consider regulatory alternatives or 

costs and benefits. So it is hard to make a strong claim that the 

quality of information that we are getting generally is very good. 

What we tried to do in this joint testimony—and I should say 

that it is joint testimony with my co-director, Bob Litan of the 

Brookings Institution, who sends his regrets for not being able to 

be here today—is to develop a set of recommendations that we 

think would engender bipartisan support. They are probably not as 

far as we would go individually as economists, but, nonetheless, we 

recognize or at least we think there is not a very strong sentiment 

for changing the world radically with respect to regulation and its 

reform right now. So we think some incremental steps in the direction of reform would be welcome. 

We go a little bit further in our comment on the OMB draft report, which I also left on the table over there and would be happy 

to e-mail to you if you would like to see it. 

So let me just briefly turn to the recommendations. We can talk 

about them, and feel free to stop me if you have questions. 

The first one, though it might seem unobjectionable, is not happening as quickly as we might like. That is for the agencies to get 

the regulatory information out there before the decisions are actually made. Specifically, we say that Congress should require that 

agencies make each regulatory impact analysis and supporting documents—and I think that is important—available on the Internet 

before a proposed or final regulation can be considered in the regulatory review process. Why? Because we think one very important 

aspect of improving Federal regulation is increasing transparency 

in the regulatory process. We have the Internet out there. Why not 

make better use of it? 

Dr. Graham has done a great service to the public by putting 

more and better information on the OMB website. I think some of 

the other agencies are moving in that direction. I would like to see 

them move faster, and I would also like to see that include independent agencies. 

Our second recommendation may sound surprising. All we would 

ask is that in the regulatory impact analysis that agencies are required to do for regulations that would impose burdens on the 

economy exceeding $100 million annually, that they include a simple executive summary with what we call a standardized regulatory impact summary. I include an example of the regulatory impact summary at the end of the testimony. It contains questions 

such as; Did you consider cost? Did you consider benefits and so 

forth? What is your bottom line? 

So, if you are not interested in reading 300 pages of gobbledygook you can see what the bottom line is very quickly, or your staff 

can cut to the chase fairly quickly. 

Our third recommendation, which is something I feel most 

strongly about, is that the Congress consider establishing what we 

14

call Congressional Office of Regulatory Assessment. The essential 

idea is to be a counterpart to OIRA. Why? To keep it honest. We 

have the same process going on now with the Congressional Budget 

Office and the Office of Management and Budget. We already have 

legislation on the books, I believe, in the Truth in Regulating Act 

that puts this function at GAO. 

Both Professor Litan and I think it would be a really good invest- ment to appropriate the $5.2 million annually for the pilot project 

at GAO that is in that legislation. We think that OMB is constrained in what it can say about certain regulations because it is 

part of the White House and the executive apparatus. Having an 

agency that is outside of OMB providing an independent assessment is a good thing. So that is our bottom line there. 

I see that I am out of time. I will stop there; and if you want 

to talk about any of my other recommendations, we can do that. 

Thank you very much for giving me an opportunity to talk. 

Chairman PENCE. Thank you very much, Dr. Hahn. I am sure 

that Chairman DeMint and I will both have questions to follow up 

on your prepared remarks and your comments today. 

[Mr. Hahn and Mr. Litan’s statement may be found in the appendix.] 

Chairman PENCE. The subcommittees will now hear from Andrew Langer, who is manager of Regulatory Affairs at the NFIB. 

Mr. Langer previously served at the Competitive Enterprise Institute and Defenders of Property Rights and is recognized for 5 minutes with appreciation. 

STATEMENT OF ANDREW LANGER, MANAGER, REGULATORY 

AFFAIRS, NATIONAL FEDERATION OF INDEPENDENT BUSINESS 

Mr. LANGER. Thank you, Chairman Pence and Chairman 

DeMint. It is my pleasure to be here before you today representing 

the National Federation of Independent Business. 

A reasonable government regulation, especially on onerous paperwork burdens, continues to be a top concern. Regulatory costs 

per employee are obviously, as we have said, highest for small 

firms; and our members consistently rank those costs as one of the 

most important issues that NFIB should be working on. Thus, I am 

very pleased to be here to offer my perspective on behalf of the regulatory state on small business. 

Our members view regulation as a serious problem. Most small 

business owners are unhappy with the difficulties regulation creates and the time it takes them away from their business, rather 

than any limitation on freedom those regulations might impose; 

and they identify Federal regulation as the biggest culprit in creating those difficulties. 

The volume of regulation, obviously, is enormous. We all know 

just how long the CFR—how far the CFR is, how long it extends, 

19 running feet; and that is only codified rules and not the other 

myriad documents that small business owners must follow. 

But most important, of course, is the direct costs. As we have 

said, a couple of people have said repeatedly here, for businesses 

with fewer than 20 employees, which accounts for roughly 90 percent of all small businesses, the cost of regulation per employee is 

15

nearly $7,000. Health, safety and environmental regulations are a 

huge chunk of this, of course, and the Crain/Hopkins study confirmed that. 

But, unfortunately, it is difficult for our members to point to a 

single regulatory scheme which poses problems. To them, regulation is death by 1,000 pinpricks, the sheer volume of requirements 

coming at them from every direction. 

NFIB continues to examine the impact that multiple agencies 

and duplicative regulatory regimes have when dealing with a single regulated entity. To us, a prime candidate for further examination is the soon-to-be-implemented reporting requirement for lead 

under the toxics release inventory. This new standard alone will, 

by EPA’s own estimates, cost a small business owner 60 hours to 

prepare their necessary paperwork, and if errors should be found 

by EPA in that paperwork, an owner will spend an additional full 

business week correcting that problem instead of engaging in their 

business. Clearly, this is problematic, especially for a regulation 

which may not ought to have been implemented in the first place. 

On the other hand, it is the paperwork associated with tax preparation that our members cite as their biggest regulatory headache. 

What began in 1913 as a two-page form backed up by 14 pages of 

law has now become a 17,000-page maze that requires 703 different forms. The Tax Code’s 5.5 million words have created a 

nightmare of complexity that zaps the economy’s strength by punishing work, saving, investment, risk taking and entrepreneurship, 

the backbone of our economy. 

We believe Congress can make great inroads into relieving taxrelated paperwork by, for instance, increasing section 179 expensing limits, addressing the alternative minimum tax, establishing a 

standard home office deduction, and clarifying the definition of 

what it means to be an independent contractor. 

But NFIB wants to make certain that both subcommittees are 

aware of the efforts being made by this administration to shape 

policies which are small-business-friendly. As you know, President 

Bush himself made a commitment on this when he outlined his 

proposals on behalf of small business, and the IRS continues to address small business owners’ greatest headaches with tax paperwork by, for instance, clarifying the rules on cash versus accrual 

accounting methods. 

We are also pleased with how SBREFA requirements are being 

met by this administration but believe that, as always, more can 

be done. OIRA and SBA have continued to be particularly helpful. 

Not only has the Office of Advocacy board been working closely 

with OIRA in improving regulations themselves, but both are making great strides in reducing the overall burden by making what 

remains easier to understand. OIRA’s efforts can only serve to benefit the small business community; and the use of such tools as 

prompt letters, return letters and especially comparative risk analysis will only help improve the regulatory state. 

But one of our concerns is that OIRA, an organization that really 

does ‘‘get it,’’ may not have the manpower necessary to take on the 

Herculean task of a regulatory state that continues to grow. And 

I would ask—we would ask that among the recommendations that 

16

your Committee ultimately makes is to help OIRA by giving them 

the tools necessary to deal with what is absolutely an essential job. 

We also appreciate the SBA administrator’s efforts and those of 

his team. The Office of Advocacy is at the forefront of groups fighting on behalf of small business owners everywhere; and we are 

grateful that the Ombudsman Office, one that really has not gone 

recognized in this hearing, has made a strong commitment to ensuring that our members and other members of the community are 

not trampled by agency overreaching. 

Thank you all for the opportunity to testify, and I look forward 

to any questions that you might have. 

Chairman PENCE. Thank you, Mr. Langer. 

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

Chairman PENCE. Our last witness comes not from the halls of 

government or the academic world but brings with him the bona 

fides of the trenches of small business America. We may well have 

saved the best for last. 

The Chair recognizes the small business owner from Avon Lake, 

Ohio, Mr. Raymond Arth. Mr. Arth is President of Phoenix Products, a Cleveland-based faucet maker. Mr. Arth also serves as a 

member of the National Small Business United Board of Trustees 

and is currently chairman of their Legislative Affairs Council. 

We are grateful in the midst of your busy schedule that you 

would travel to our Nation’s Capital and bring your particular expertise to this conversation today. And you, Mr. Arth, are recognized for 5 minutes. 

STATEMENT OF RAYMOND ARTH, PRESIDENT OF PHOENIX 

PRODUCTS, AVON LAKE, OHIO, FOR THE NATIONAL SMALL 

BUSINESS UNITED 

Mr. ARTH. Thank you, Chairman Pence and Chairman DeMint. 

Chairman Pence, you have already done my introduction for me, 

so we will see if we can get this done in a little less than 5 minutes. 

As a small business owner and as a representative of National 

Small Business United, I can tell you that we support many of the 

points that have already been made, and I will try to avoid repeating information that has already been given. 

The Crain-Hopkins report has had a lot of attention. I will tell 

you as a small business owner that the numbers feel right. There 

are people in my company and activities that we do that I can 

point to and say, this has nothing to do with running my business; 

this has to do with keeping me out of jail, avoiding penalties, avoiding fines, and so forth. And, unfortunately, a lot of those activities 

aren’t necessarily making my workplace safer, making my benefits 

more fair to the employees, and things like that. 

I think the numbers have a certain feel that, as I say, it kind 

of feels right to me. And to cite one number, they mentioned that 

the cost for manufacturers, which would be me, is about 3.4 percent of revenues. That is greater than my historical net before 

taxes earnings over 25 years in business. That is millions of dollars 

that my company has spent that didn’t go into new products, improving processes, creating new jobs. And while not all regulations 

are bad, a lot of the hoops we have to jump through, as I say, don’t 

17

make the world any safer, don’t make our products any safer, and 

doesn’t improve the workplace to a great degree. 

I also would like to emphasize a point that was made earlier in 

testimony about the impact that regulations have on job creation. 

Three years ago it was a stated goal at our company to increase 

our output without increasing employment. We had 98 employees 

at that time. We did not want to pierce the 100-employee threshold 

because a new round of regulations kick in at that point. Unfortunately, fate and the economy have intervened, and today we are 

now down below about 60 employees. But, again, recognizing the 

costs associated, we don’t run out and add bodies, we try to find 

other ways to get production done and other ways to run the business without adding to the cost of payroll and full-time employees. 

I would like to focus the balance of my comments here on that 

portion of my testimony that referred to a tax study that was recently completed and issued by NSBU. It was conducted for them 

by the Prosperity Institute, and the point of that study was to really focus on the way that the Income Tax Code deliberately or inadvertently discriminates against small business. The report has been 

circulated; I have a copy here that I could leave as part of the testimony, if that’s appropriate, and it would be available at the NSBU 

Website, www.nsbu.org. 

But essentially what they have done is looked at the way the Internal Revenue Code tilts the game in favor of bigger companies, 

in favor of C corporations versus sole proprietorships, kind of perverse situations where we want to encourage small businesses to 

offer fringe benefits, but we tie the hands of the small business 

owner in terms of the deductibility of their own costs for the benefits they offer to their employees; rules for qualifying plans that 

make it difficult to offer qualified benefits in the smallest companies; situations where you need at least seven employees before you 

would be able to meet the matching tests to have a qualified life 

insurance program, for example; all sorts of top-heavy testing that 

is required of small business owners. 

I sponsor a 401(k) plan. I match my employees’ contributions. 

That match almost literally comes out of my left pocket, which is 

the one I think of as the business, as opposed to the right pocket; 

yet my contributions to the plan are a function of my employees’

contributions. There is no counterpart in the large corporate world 

where the owners, the leaders of those companies, have their hands 

tied, have their benefits restricted the way we do in small business. 

And perhaps what is most frustrating about all of that is that 

it is hard to understand some of these rules, some of these regulations unless you assume that the people who enacted them believe 

that as a small business owner I am dishonest, I am unethical, I 

am ignorant, maybe I am stupid, because otherwise a lot of these 

things just don’t make sense. It takes quite a toll as well. 

That said, I think I will wrap up my comments and be glad to 

answer any questions. Thank you. 

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

Chairman DEMINT. Mr. Langer, you mentioned the Tax Code, 

and that is probably the biggest regulatory problem of small business, and certainly I have experienced that. Does NFIB support a 

particular type of tax reform? And I hope you would support the 

18

current sunset, the Tax Code proposal that we are trying to get 

back on the floor. 

Mr. LANGER. Well, we are working on a number of different 

things. To be honest, tax issues aren’t my specialty. I came on 

board NFIB just under 2 months ago to deal with general regulatory issues. And so I would be happy to share with you and bring 

with you NFIB’s experts on that subject, if you would like. 

Chairman DEMINT. Good. I look forward to that. 

Mr. LANGER. And certainly NFIB’s position is definitely reflected 

in my testimony on those issues. 

Chairman DEMINT. Mr. Chairman, I don’t have any additional 

questions. Thank you. 

Chairman PENCE. Thank you, Chairman. 

A couple of questions. Dr. Hahn, we are told on our Subcommittee that the problem with our current regulatory structure 

is that agencies not only use, as you said today, inadequate data, 

but they also use bad analysis to show that benefits outweigh costs. 

And in a meeting in my office not long ago with someone you would 

have heard of in the administration, that was in full display, that 

there just seems to be bad information that is followed by bad analysis. 

Now, today you are saying that the Agency’s own regulatory impact analyses, which are designed to prove their case, don’t even 

pass the costs/benefit test. Is that your assertion today, or am I 

misreading your testimony and your comments? 

Mr. HAHN. I think you are reading them correctly, but I wouldn’t 

call it an assertion in the sense that I think that I have data to 

support that statement. 

Let me respond to your comment a little bit more broadly. Now, 

Justice Stephen Breyer, who I consider one of the wisest and most 

intelligent people on the planet, wrote a book some years ago called 

Breaking the Vicious Circle. He was concerned with the fact that 

we had regulations—and I might not be getting this exactly right, 

but we had a Superfund regulation that he had to look at when he 

was on the Court. The essence of the regulation was that you had 

to make the dirt around a Superfund site clean enough so that if 

a kid ate it 300 days in the year, it wouldn’t kill him by the time 

he was 70. And Justice Breyer probably scratched his head and 

said, well, what is wrong here? What is wrong with this picture? 

And part of what was wrong was fundamentally the way we structure our regulatory agencies today. 

Each of our agencies is given a single mission: EPA, the environment; NHTSA, traffic safety; and you could go down the list, Consumer Products Safety, and so forth. 

So, how did they further their own agenda? Well, they furthered 

their own agenda by trying to promote regulations in their domain. 

And so Justice Breyer labeled this phenomenon ‘‘tunnel vision’’. 

But a less polite way of looking at tunnel vision was the example 

you just gave, where there are incentives that people face in these 

agencies to develop regulations that look good when a disinterested 

observer like myself might say they don’t pass a benefit/cost test. 

I have seen such biases several times when I was working at the 

Council of Economic Advisers, where I really underwent a rude 

awakening, because I thought—when I used to teach cost/benefit 

19

analysis at Carnegie Mellon, I used to teach and say these are the 

principles; and I came down here, and noticed all the fudge factors 

being written in, and the way benefits and costs were counted were 

not kosher, so to speak. 

It is a very real problem. OIRA, to some extent, puts some constraints on that process. The reason I strongly endorsed the Congressional Office of Regulatory Analysis or its counterpart at the 

GAO is because I think it would also serve as a constraint—putting 

agencies on notice that, if they do bad quality regulatory analysis, 

you folks are going to hear about it and respond accordingly. 

Chairman PENCE. Thank you. 

Mr. Langer, your comments were memorable, particularly your 

reference to regulation as death by a thousand pinpricks. Good description. 

Mr. LANGER. Thank you. 

Chairman PENCE. What do you think we can do to get agencies 

to look beyond themselves, as Dr. Hahn just suggested, and see 

their regulations in a larger context, to understand that they are 

not the only agency that is regulating small business, and do the 

cost/benefit analysis in—whatever the opposite of a vacuum is. 

Many of them, as Dr. Hahn just implied, regulate as though they 

were operating in a vacuum. And how do we get on a practical 

level? 

Mr. LANGER. Well, I think some of the best guidance can be had 

from the Office of Advocacy at SBA. You know, I think that using 

that office to act as a liaison, creating working groups between various agencies on regulations might be the best possible way to do 

it. If you get the agencies working together to see that their regs 

aren’t alone, then we might be able to get some traction on this. 

I think also that OIRA needs to be expanded. I briefly touched 

on that in my comments. It is very clear from OIRA’s draft report 

to Congress that, well, they are only starting now to increase their 

staff levels. Their staffs have been decreasing for some time. I 

think it is very clear that in order to make greater headway—I 

mean, the fact is OIRA has gotten roughly 1,000 comments on their 

draft report to Congress, I think a little bit more, and it is going 

to take them quite a while to wade through those in addition to everything else that they are doing. I think giving OIRA additional 

resources and allowing them to have additional staff will allow 

them to get a better handle on these sorts of regulatory problems. 

So I think with OIRA and the Office of Advocacy, the two of 

them really have to work together on this, and that is pretty much 

it. 

Chairman PENCE. One last question for Mr. Arth, who I think 

wins the prize for the most eloquent statement of the day, Mr. 

Chairman, when he said, ‘‘A lot of these just don’t make sense.’’ I 

thought that really summed up what we struggle with. And although on that side of the table is a guy who is out there making 

a company work, it may seem as though people on this side of the 

table don’t appreciate that reality, but many of us do, and I appreciated your candor. 

A quick yes/no answer from your standpoint. Would you like to 

see the IRS subject to the Regulatory Flexibility Act? An awful lot 

of your comments related to the impact of the Internal Revenue 

20

Service on your business and IRS as a regulatory agency. Do I 

imply from your comments that that is a strong affirmative? 

Mr. ARTH. Yes. You asked for a quick yes/no. I will say yes, absolutely. 

Chairman PENCE. Let me—duly noted. 

Let me ask you a question about kind of where we started in the 

last panel. And, forgive me, Mr. Arth, I don’t know if you were in 

the room when we began. 

Mr. ARTH. Yes, I was. 

Chairman PENCE. But Dr. Graham early on and Congressman 

McIntosh talked about anticompetitive practices. From your standpoint in the faucet business, is it your impression—and also from 

your position as chair of the Legislative Affairs Council for National Small Business United—is it your sense that the source of 

the regulatory momentum in this country is in Washington, D.C., 

or do you suspect that it comes more from your larger competitors? 

Mr. ARTH. No. Quite frankly, I think that really the source is 

more here in Washington, D.C., but once we start down that path, 

I would say my competitors will look for opportunities to spin it to 

their advantage. And if you have a moment, I can give you a quick 

example. 

Chairman PENCE. Sure. 

Mr. ARTH. The 1996 safe drinking water amendments enacted required a new regime for chemical leaching with a heavy emphasis 

on lead leaching from brass castings into drinking water. The scientific basis for this whole thing is very questionable. I have talked 

to the chief engineers of Delta and Moen and others, and none of 

them are really convinced we have made the world any safer for 

our children or anyone who draws a glass of water out of our products, but their costs of compliance and my costs of compliance are 

virtually identical. I am talking probably close to a couple hundred 

thousand dollars over the last couple years for me to get lead letters, get product listings and all of the different things that are required, whether I am selling 2 million faucets a year or I am selling 2 million faucets a week. And so it clearly does put me at a 

competitive disadvantage just because the economies of scale really 

work to their benefit. 

It was an industry consensus standard. The faucet manufacturers were there, but, of course, it was the big guys who have the 

engineering staff and the depth of resources to staff those committees. And I won’t accuse anyone of nefarious motivations, but I 

have seen firsthand how all of us complying, the impact is certainly 

very different. 

Chairman PENCE. Well, let me say that is a wonderful steppingoff point, and maybe we could enlist Chairman DeMint, that our 

Subcommittee is currently taking a very hard look at the EPA lead 

rules and may well convene hearings in the near term to examine 

the impact of those regulations on small business, Mr. Arth. So you 

can add your name to the people that have encouraged us to do 

just that. 

Mr. ARTH. Very good. 

Chairman PENCE. But thank you for your candid remarks. 

And with that, Chairman DeMint, did you have any further 

questions or follow-up, closing remarks? 

21

I would just simply like to thank this very distinguished panel, 

Mr. Langer, Mr. Arth, and Dr. Hahn, very insightful remarks. And 

we are adjourned. 

[Whereupon, at 3:20 p.m., the joint subcommittee was adjourned.]

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