No Benefits Allowed? Mercatus Study on Federal Regulation and the States

by James Goodwin

April 08, 2016

Over the last few years, deregulatory advocates have pursued a well-trodden path for advancing their anti-safeguard agenda: Publish a large, glossy "study," replete with impressive mathiness, that purports to measure the impacts of regulation but in fact provides a highly skewed portrayal by consciously ignoring the many benefits that regulations provide. (For example, see here, here, and here.) Last week, the libertarian Mercatus Center did the latest trodding when it released a study that ranked all 50 states (and the District of Columbia) according to how "affected" they are by federal regulation. The usual gloss and mathiness were on full display, but as always, an indispensable guest was left off the invite list: regulatory benefits. 

So, how does the Mercatus Center come up with its rankings? It starts with its RegData dataset, which claims to measure total regulatory impact on the economy by – no joke – counting up the number of "restriction" words contained in the text of agency regulations. This includes words like "shall" or "must." Mercatus then uses these data to determine the extent of regulatory "burden" for a given industrial sector by cross-referencing these rules against the sectors they are likely to impact using the North American Industrial Classification System (NAICS). Apparently, Mercatus thinks this is more rigorous than simply counting pages in the Federal Register, as many other anti-regulatory outfits are content with doing. 

Despite the illusion of objectivity and analytical rigor that it projects, RegData suffers from some fundamental methodological problems that, when taken together, undermine its results. For one thing, not all shalls and musts are created equal. Yet, it seems that RegData treats a "shall file one page of paperwork per year" no differently from a "shall install pollution control equipment." To the extent that most regulatory shalls and musts look like the former as opposed to the latter, this increases the likelihood that RegData overestimates regulatory costs. 

Similarly, many restrictions in a rule might be conditional (Company A shall do X, but only if . . . .) or offered as a choice (Company A shall do X, shall do Y, or shall do Z). Again, it's not clear whether or how even the sophisticated programming of RegData can account for these circumstances. Conveniently, though, the failure to do so again leads to overestimates of regulatory costs. 

The final innovation that the new Mercatus study introduces is its FRASE Index (the federal regulation and state enterprise index). Using data regarding the industrial sectors that dominate each state's economy, the FRASE Index calculates a score for each state that purports to measure its relative federal regulatory burden as compared to the national average. 

Accordingly, any state with a FRASE Index score of 1 faces a regulatory burden that is in line with the country as a whole. A score of less than 1 indicates a lower relative burden, while a score of greater than 1 indicates higher relative burden. And lest you think otherwise, Mercatus does view these rankings through a pejorative lens, using the term "worst" to describe the states with higher scores, while states with lower scores earn the designation of "best." 

Cue the drumroll. According to this methodology, the state facing the "worst" federal regulatory burden is Louisiana. As the study explains, Louisiana earned this distinction by virtue of the large presence of certain highly regulated sectors, such as "chemical products manufacturing" and "oil and gas extraction." According to the study, Louisiana earns a FRASE Index score of 1.74, which "indicates that the impact of federal regulation on Louisiana industries was 74 percent higher than the impact on the nation overall." With numbers that precise, how can they be wrong? 

This data point about Louisiana is useful, though, as it helps illustrate why it is not just meaningless, but indeed misleading to measure regulatory costs without any corresponding effort to compare them to regulatory benefits. 

For starters, the high level of regulation in Louisiana – if it actually exists – simply reflects the fact that the industries that happen to dominate the state's economy happen to be highly polluting and pose significant threats to public health, worker safety, and the environment. Look at the 2010 BP oil spill off the coast of Louisiana, or consider the 2013 petrochemical plant explosion in Geismar that killed two workers and injured 73 more. Vigorous regulation and enforcement should prevent these and lesser incidents. 

It's nothing personal against Louisiana – the state doesn't have a target on its back as Mercatus would have you believe. To the contrary, by any sane examination, regulations work to Louisiana's unique benefit. Indeed, federal efforts to institute and implement these safeguards mean that Louisiana's citizens and its natural environment receive the greatest level of federal regulatory benefits as compared to other states. However, one searches Mercatus Center's new report in vain for any discussion of these positive impacts.

The study's blithe conclusion also implies that Louisiana's economy is, as an objective matter, heavily regulated. This claim would no doubt come as a great surprise to many of the state's residents, particularly those who live in its communities of color or low-income neighborhoods. To get a little perspective on this question, the Mercatus study authors could take a trip to the state's infamous "Cancer Alley." This area, which stretches from Baton Rouge to New Orleans, is home to perhaps the highest concentration of industrial facilities in the United States. 

The vast majority of the people who live in the fenceline communities adjacent to these facilities are poor and African American. The story these residents would have to tell is not one of excessive regulation. Instead, they would likely talk about the fear that comes from living in the shadow of hulking industrial plants, unaware of what effect it has on the water they drink and the air they breathe. Their fears are well-founded, too, as inadequate regulations and weak enforcement have conspired for years to allow these facilities to spew massive amounts of toxic air pollutants, including cancer-causing chemicals like benzene and formaldehyde. 

Finally, by ignoring benefits, the Mercatus Center study creates the false impression that more federal regulations are not needed to provide adequate protections for people and the environment in Louisiana. Take chemicals, for instance. According to the study's authors, the significant presence of "chemical products manufacturing" in the state was a large contributor to its high score. Yet, no one who knew anything or who cared about safety would seriously contend that any aspect of the chemicals industry is anywhere near adequately regulated in this country. 

The main federal law governing toxics regulation, the Toxic Substance Control Act (TSCA), is almost universally recognized as a highly inadequate statute. The Integrated Risk Information System (IRIS) program, the Environmental Protection Agency's (EPA) main tool for assessing the environmental and public health risks of commonly used chemicals, has become so broken that it has been on the Government Accountability Office's (GAO) "high risk list" since 2009. The GAO uses this designation to "call[] attention to agencies and program areas that are high risk due to their vulnerabilities to fraud, waste, abuse, and mismanagement, or are most in need of transformation." Even chemical storage lacks adequate safeguards, as the 2013 explosion in West, Texas, and the 2014 Elk River spill in West Virginia dramatically demonstrated. In the wake of the West disaster, the Obama administration launched a multi-agency initiative to strengthen those safeguards, and nearly three years later, those efforts have yet to bear any real fruit. 

With respect to Mercatus's risible methodology, the study screams "garbage in, garbage out."  And with respect to the study's larger message about regulation, the bottom line is this: As "high" as Louisiana's FRASE Index score is, it is not as high as it should be, and the people of the state would be much better off if the score was higher still. But because Mercatus bends over backwards to ignore even the most obvious regulatory benefits, none of that comes through.

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Also from James Goodwin

James Goodwin, J.D., M.P.P., is a Senior Policy Analyst with the Center for Progressive Reform. He joined CPR in May of 2008.

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