Regulation, like taxing and spending, is a basic function of government. Each year, federal agencies issue between 3,000 and 4,000 final rules on topics ranging from the timing of bridge openings to the permissible levels of arsenic and other contaminants in drinking water. Unlike taxing and spending, however, the costs that nonfederal entities pay to comply with federal regulations are not accounted for in the federal budget process. Some policy makers have expressed an interest in measuring total regulatory costs and benefits. For example, the Congressional Office of Regulatory Analysis Creation and Sunset and Review Act of 2011 ( H.R. 214 , 112 th Congress) would require the newly created office to issue "an annual report including estimates of the total costs and benefits of all existing Federal regulations." As discussed later in this report, for nearly 14 years, Congress has required the Office of Management and Budget (OMB) to prepare a report each year on the aggregate costs and benefits of federal rules. However, measuring total regulatory costs and benefits is inherently difficult. For example, researchers must determine the baseline for measurement (i.e., what effects would have occurred in the absence of the regulation) and aggregating the results of studies conducted years earlier with different methodologies and quality can be highly problematic. Some observers, including OMB, currently doubt whether an accurate measure of total regulatory costs and benefits is possible. In September 2010, the Office of Advocacy within the Small Business Administration (SBA) released a report prepared for the office by Nicole V. Crain and W. Mark Crain entitled "The Impact of Regulatory Costs on Small Firms." Among other things, the report stated that the annual cost of federal regulations in 2008 was about $1.75 trillion. The September 2010 report was the fourth such report prepared for the SBA Office of Advocacy in the previous 15 years: In 1995, Thomas D. Hopkins estimated annual federal regulatory costs that year to be between $416 billion and $668 billion. In 2001, W. Mark Crain and Hopkins estimated the annual cost of regulations in the year 2000 at $843 billion. In 2005, W. Mark Crain estimated annual regulatory costs in 2004 at about $1.1 trillion. The $1.75 trillion estimate of regulatory costs has been widely quoted in the press, by witnesses at congressional hearings, and by Members of Congress, and it has been cited as evidence of the need for regulatory reform legislation and congressional oversight actions. Other observers, however, have criticized the estimate, saying that it overstates the total cost of federal regulations. This report examines how Crain and Crain developed the $1.75 trillion estimate of federal regulatory costs in 2008. It also compares the $1.75 trillion estimate for 2008 with the $1.1 trillion estimate for 2004, and with OMB's estimates of regulatory costs in 2008. Crain and Crain developed their $1.75 trillion estimate of total regulatory costs by adding together cost estimates for each of four categories or types of regulation: economic regulations ($1.236 trillion); environmental regulations ($281 billion); tax compliance ($160 billion); and regulations involving occupational safety and health, and homeland security ($75 billion). As Figure 1 below illustrates, the estimated cost of economic regulations was more than 70% of the authors' estimate of total regulatory costs. According to the Crain and Crain report, "[e]conomic regulations include a wide range of restrictions and incentives that affect the way businesses operate—what products and services they produce, how and when they produce them, and how products and services are priced and marketed to consumers." They said such regulations affect both domestic and international business operations, and include quotas and tariffs on foreign imports that "limit competition from outside the United States, restrict production and employment, raise prices, and generally curtail U.S. economic activities." To develop an estimate of the cost of economic regulations, Crain and Crain used a Worldwide Governance Index (WGI) of "regulatory quality" that was developed by Aart Kraay and Massimo Mastruzzi of the World Bank, and Daniel Kaufmann of the Brookings Institution. According to Crain and Crain, the WGI regulatory quality index "measures perceptions of the ability of governments to formulate and implement sound policies and regulations that permit and promote private sector development." Crain and Crain said the index was calibrated to range between -2.5 and +2.5, and that +2.5 represented "the minimal amount of regulation." In 2008, the WGI regulatory quality index score for the United States was +1.579. Crain and Crain used regression analysis in an effort to determine the impact of changes in the regulatory quality index on real Gross Domestic Product (GDP) per capita, holding constant four other variables that they said the literature suggests explain differences in economic development across countries and over time: country population, primary education as a share of the eligible population, foreign trade as a share of GDP, and fixed broadband subscribers per 100 people. Using this approach, Crain and Crain concluded that a one-unit change in the WGI regulatory quality index (e.g., a change from +1.5 to +2.5 on the scale) represented a 9.4% change in real GDP per capita. Because the regulatory quality index for the United States in 2008 was +1.579, Crain and Crain said that the 0.921 difference between that value and the +2.5 maximum represented an 8.7% reduction in GDP (0.094 times 0.921) because of economic regulations. Because GDP in the United States was about $14.2 trillion in 2008, Crain and Crain concluded that the types of economic regulations included in the regulatory quality index reduced real GDP per capita in the United States by about $1.236 trillion ($14.2 trillion times 0.087). According to Kaufmann, Kraay, and Mastruzzi, the WGI index of regulatory quality for the United States in 2008 was determined by aggregating six expert-based measures and two surveys, each of which was scored on a 0 to 1 scale. The six expert-based measures, their scores, and the particular factors considered in each measure were as follows: Economist Intelligence Unit (scored at 0.70), a commercial business information provider headquartered in London, England. The score is based on its experts' judgment of 16 factors, including "protectionism in the country negatively affects the conduct of business," "access to capital markets (foreign and domestic) is easily available," "real corporate taxes are non distortionary," "labor regulations hinder business activities," and "easy to start a business." Global Insight Business Conditions and Risk Indicators (scored at 0.94). Global Insight is a commercial business information provider headquartered in Boston, Massachusetts. The score is based on its experts' assessment of two factors: (1) "tax effectiveness," defined as "how efficient the country's tax collection system is"; and (2) "legislation," defined as "whether the necessary business laws are in place, and whether there any outstanding gaps." Global Insight Global Risk Service (scored at 0.95). Global Risk Service is a commercial business information provider headquartered in Boston, Massachusetts. The score is based on its experts' judgment of five factors: (1) "export regulation," (2) "import regulation," (3) "other business regulation," (4) "nonresident business ownership restrictions," and (5) "nonresident equity ownership restrictions." Heritage Foundation Index of Economic Freedom (scored at 0.73). The Heritage Foundation is described by the WGI index as a "nongovernmental research and educational institute headquartered in Washington, United States, advocating conservative public policies." The index score is based on its experts' judgment of two factors: (1) "foreign investment" and "banking/finance." Institutional Profiles Database (scored at 0.89), which is provided by the French government's Ministry of the Economy. The score is based on its experts' judgment of four factors: (1) "ease of starting a business," (2) "administered prices and market prices," (3) "competition: productive sector: ease of market entry for new firms," and (4) "competition between businesses: competition regulation arrangements." Political Risk Services International Country Risk Guide (scored at 1.00). Political Risk Services is a commercial business information provider headquartered in Syracuse, New York. The score is based on their experts' judgment of one factor entitled "investment profile," summarizing the investment environment. The two surveys used to develop the regulatory quality index, their values, and the particular factors considered in each survey were as follows: Institute for Management and Development World Competitiveness Yearbook (scored at 0.50). The Institute for Management Development is an educational and research organization headquartered in Lausanne, Switzerland. The score is based on a survey of business people working in the United States, who are asked to comment on the same 16 factors used by the Economist Intelligence Unit mentioned above (e.g., "protectionism in the country negatively affects the conduct of business," "access to capital markets (foreign and domestic) is easily available," "real corporate taxes are non distortionary," "labor regulations hinder business activities," and "easy to start a business"). World Economic Forum Global Competitiveness Report (scored at 0.62). The World Economic Forum is an international organization based in Switzerland.