While the federal deficit has taken center stage in the national economic policy debate, little press coverage and political attention are being given to the $650 billion annual cost of federal regulations on the private productive economy. The $650 billion is more than three times larger than the projected annual deficits of $200 billion "as far as the eye can see." (Chart 1)

Federal regulatory costs are buried in everything we buy from autos to education, housing, health care, manufacturing, and vacations. Because these costs are widely dispersed and hidden they have been easy picking for politicians, i.e., pass a law and make the private sector bear the costs. This approach dominated the political landscape especially during the 1970-95 period--the same period when "balancing the budget" has been talked about by both political parties. (Chart 2)

When the indirect economic burden of federal regulatory compliance is added to the direct cost of federal spending, it is easier to understand why overall economic growth has been much less than it would have been otherwise. During 1994, direct federal spending was about $1.5 trillion, federal regulatory costs borne by the private sector amounted to about $650 billion. Adding $1.5 trillion to $650 billion gives a total of $2.150 trillion. The 1994 gross domestic product (GDP) was about $6.5 trillion. Thus, the total federal government burden on the private sector was about 33 percent. To this percentage must be added the cost of state and local taxation and state and local regulations of private activity. This calculation gives a conservative total government spending burden of well over 40 percent. (Chart 3)

Unless these long-term trends are changed, i.e., getting the economy to grow faster than the public sector it must support, overall living standards will continue to decline. This is the economic nub of the current political debate over the size and intrusiveness of direct federal spending and federal regulations. President Clinton’s budget plan agrees to balance the budget in seven years through higher taxes and no fundamental structural reforms in Medicare and Medicaid, with any reductions in these major programs postponed until the last two of the seven-year period. The Republican plan calls for tax rate reductions (capital gains and estate taxes), structural reforms in Medicare and Medicaid and cuts in other programs without loading cuts in the "out years." What does all this mean for farmers and the regulatory reform process?

In the broad federal budget debate agreement to balance in seven years means that domestic discretionary spending, which includes farm programs, must be substantially reduced under President Clinton’s proposal in order to fund Medicare and Medicaid without reforms. Interest on the debt (now at $230 billion a year) must be paid and both parties agree that defense spending has been cut about as far as it can be. Agriculture will be forced to compete with other groups (with more votes) for the rapidly shrinking "domestic spending" part of the budget. (Chart 4)

The current and longer-term federal budget realities have serious implications for future federal regulations and the economic impact on farmers and ranchers. The political temptation in the face of "the 7-year deal" will be to impose further regulations on the private economy in order to achieve policy outcomes, particularly in the environmental area. Farmers and ranchers will not be spared from these potential pressures, particularly if regulatory reforms continue to languish in the Senate and political opposition by environmental radicals continues to mount in the country.

Since farm/ranch production accounts for about 3 percent of total output in the economy, it follows that 3 percent of the $650 billion annual federal regulatory cost burden can be traced to farms and ranches. (Since agriculture is in the eye of the environmental storm, the $19-$20 billion is probably a conservative number.) Farmers and ranchers cannot pass the regulatory costs onto their customers. The economic impact must come out of either: A) net farm income or B) structural changes in farm numbers, i.e., midsized farms are under increasing pressure to get out of production, in part, because of the economics of scale in complying with federal rules. (Chart 5)

The policy problems in federal regulations for 1996 and beyond will be in the following areas: 1) the lack of a national budget for regulatory costs; 2) the fact that there is no sunset provisions on federal regulations, e.g., the Coastal Zone Management Act (CZMA) is likely to end up as a major federal bureaucracy of several thousand employees long after the coastal zones have been "cleaned up"; and 3) there are no congressional paw prints on major federal rules before these take on the status of law, e.g., where would farmers be today had there been an up/down congressional vote on the asinine wetland regulations farmers are "bogged" down in?

If these three simple steps were now in place, they would go a long way toward redirecting the federal regulatory agencies away from micro meddling every farm, ranch and other business. Agencies like the Environmental Protection Agency (EPA) could get about doing those things like conducting the scientific research needed to determine water quality; figure out the real risks humans face, the costs of risk reduction and alternative market and property rights-based solutions to real problems where these do exist.

Federal regulatory redirection cannot be done by continuously grafting onto existing rules the "right" set of regulations. This approach concedes that government incentives are the first line of action when these should be done as a last resort, if there is to be any efficient allocation of scarce private resources. Forcing all farms and firms to adopt central regulatory plans in order to capture that 10 percent of real problem cases is absolutely the worst case of economic inefficiency.

What can be done? The regulatory problem needs to be put back in front of the press and politicians. Farmers and ranchers will need to continue to press the case for risk assessment and cost-benefit analysis. That’s a given. Keep doing what we’ve been doing especially in the Senate. In addition, in order to energize the issues with new ideas for the media and the politicians, farmers and others of like mind need to advance these "bumper stickers" for regulatory redirection. 
(Chart 6)

"Regulations Aren’t Free: They Cost Real Money" (National Regulatory Budget)

"Sunset Review Provisions on All Current and New Regulations"

"Congressional Accountability on All Federal Regulations"

The ultimate goal of redirecting the federal regulatory apparatus should be fewer laws and more reliance on market incentives, property protection, and common law. From an economic standpoint, fewer laws will mean increased economic growth and opportunities for individuals including farmers and ranchers. Economic growth will mean more revenues for the federal government and, therefore, make long-term budget balancing a nonissue once major entitlement laws are fundamentally changed.

Eleven pieces of federal legislation contain the authorization for the majority of the environmental regulation of agriculture. These are:

1. Clean Air Act (initially passed in 1955, but substantially amended in 1970, 1977 and 1990). Overall, this legislation has a minor impact on agriculture, although in some areas, the PM-10 regulations are significant.

2. Federal Water Pollution Control Act Amendments (Clean Water Act of 1972). This legislation pertains to the cleanup and preservation of surface water. It has tremen-dous impact on agriculture through control of discharges of pollutants into surface waters. Much of the CAFO (Confined Animal Feeding Operations) regulations get their authority from this legislation. This legislation is also the basis for much of the state regulation of animal waste facilities.

3. Comprehensive Environmental Response Compensation and Liability Act (CERCLA-1980). This legislation regulates sites where environmental contamination has occurred and makes liable for cleanup all parties to the initial contamination as well as those who currently own or least the site. Major direct impacts on agriculture include underground storage tank cleanup, well cleanups, trash-dump cleanups, especially those used for pesticide can disposal, etc.

4. Federal Insecticide, Fungicide and Rodenticide Act (FIFRA-1972). This act restricts the use of agricultural chemicals including those used for weed control, insect control, rodent control, parasite control, etc.

5. National Environmental Policy Act (NEPA-1969). Establishes general policies and national goals for environmental protection. Large farms and ranches requiring construction of major facilities are regulated.

6. Safe Drinking Water Act (SDWA-1944). This legislation is aimed at ensuring that public water supply systems meet minimum standards for the protection of public health. Larger farms and ranches may be subject to the act. Irrigation return flows are regulated.

7. Resource Conservation and Recovery Act (RCRA-1976). This act regulates waste disposal of any kind. It has major impacts on farmers and ranchers use, storage and disposal of agricultural chemicals.

8. Surface Mining Control and Reclamation Act (SMCRA-1977). This legislation protects surface and groundwater from mining operations and post-mining reclamation. The impacts on agriculture are minor, although some livestock operations are affected, especially cattle operations involved in using reclaimed lands.

9. Toxic Substances and Control Act (TSCA-1976). A catchall for the control of all chemicals.

This act has provided the authority for the banning of PCB’s.

10. Endangered Species Act (ESA-1973). This legislation has had a major impact on agricultural land use and activities. It has been very onerous in those cases where endangered species are actually found to be on the land, but its impacts have not been limited to just the land on which the endangered species are found. Neighboring lands have also been affected by the regulations which were spawned from this legislation.

11. Food Security Act of 1985 (FSA-1985). This legislation established swampbuster and sodbuster restrictions as well as conservation compliance requirements. Regulatory definition of jurisdictional wetlands has evolved as a result of this legislation.

In addition to these federal laws, there are numerous state environmental laws and regulations which impact agricultural production. Recently, the states of Iowa and Illinois to name a few, have enacted new environmental regulations directly aimed at livestock production. Often, there is an attempt to direct these laws at larger operations, but many times, it is the smaller operations that end up being ensnared in the tangled web of regulation.

To be sure, there are reasons why legal constraints may be needed. First, it may be profitable to pollute, even for farmers and ranchers who are acting very rationally, at least from an economic point of view. The full and complete costs of economic activity are not always borne by the same firms or individuals receiving the benefits from that activity. Such dissociation of costs and benefits may create incentives and motives to use least cost methods of disposal of production or consumption residuals.

In general, the market system of economic decision making works acceptably if all of the costs and all of the benefits of a particular activity are borne totally by the dame individual or firm. However, such is rarely the case. In some instances, society may accept such dissociation of costs and benefits or "externalities" as being consistent with public policy and the public well-being. In other cases, however, firms or individuals may be required to internalize such externalities through legal regulation or through the imposition of taxes.

Public policy in the environmental area is presumably developed in accordance with overall socioeconomic objectives. These may include:

* Improvement of per capita income levels over time through economic growth which emphasizes: improved efficiency, increased output, increased investment and/or adoption of new technology.

* Maintenance of acceptable patterns of income distribution.

* Assurance of relatively stable economic and political conditions.

* Attainment of acceptable levels of environmental quality in its various dimensions.

Possible solutions to problems of environmental preservation include:

* Development of an ethic of environmental preservation.

* Use of the legal system to create economic incentives or disincentives to achieve the desired behavioral patterns. (This is the Tort Law approach which relies on nuisance (in its various forms), trespass and negligence.

* Impose legal regulations or create legal sanctions to circumscribe undesirable behavioral patterns (Regulatory approach).

* Establish disincentives through the tax code.

There are costs and benefits to each of these approaches to environmental preservation as well as various degrees of effectiveness. Balancing the costs (both to society and to the individual) against the benefits which may be obtained is a difficult task. Not only are the costs often difficult to estimate, but the benefits may be difficult to quantify, qualify or even identify. Furthermore, the benefits may not even accrue in the same timeframe as the costs are imposed.

Overall, environmental regulations are contributing to the economic burden of agriculture. However, to date, few ex-post analyses have been made to quantify these economic impacts. Furthermore, few studies have examined the structural impacts that environmental regulations are having. (It is hypothesized that environmental regulations are speeding up the structural changes underway in the swine industry.) The potential for increased environmental restrictions on farming, with substantially greater economic and structural impacts, suggests the importance of more ex ante research and valid information for policy decisionmakers.

Chart 1. Regulation: Triple the Deficit, One-third the Level of Federal Spending

Chart 2. Growth of Regulatory Agencies

Chart 3. Government Grows Faster Than the Economy

Chart 4. Federal Budget -- Spending 1995 - 2002

Chart 5. Regulatory Costs Compared to Farm Production Expenses

Chart 6. Ideas for 1996

Chart 7. Number of Pages in the Federal Register

Chart 8. A Bad Start: Clinton’s First Year Brings Unprecedented Level of Regulation

Chart 9. 1994 After-tax Budget for the Family of Four Contains $6,457 in Embedded Regulatory Costs

Chart 10. How to Get Out of the Federal Regulatory Juggernaut