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					The ( Cotton) Dust Settles                          and places of employment." The petitioners as-
                                                    serted that this language establishes a cost-
In the Cotton Dust case (American Textile Man-      benefit requirement-a plausible assertion,
ufacturers Institute v. Donovan), decided June      though it is unusual (and sloppy) but not un-
17, the Supreme Court finally reached and set-      heard-of to impose major substantive require-
tled the question whether OSHA's standard on        ments in a definitional section. On the other
the use of toxic materials in the workplace must    hand, a substantive section of the law, specifi-
be supported by cost-benefit analysis. That is-     cally applicable only to toxic materials and
sue had been presented but avoided in the           harmful physical agents, requires each stand-
Benzene case (Industrial Union Department,          ard in that area to be one that "most adequately
AFL-CIO v. American Petroleum Institute), de-       assures, to the extent feasible, ... that no em-
cided the previous term. As noted in the pages      ployee will suffer material impairment of
of Regulation a year ago, the breakdown of the      health." The crucial phrase "to the extent feasi-
justices' opinions in that case did not augur       ble" is hardly the language of cost-benefit analy-
well for cost-benefit analysis (see Antonin         sis: something may be feasible but exceedingly
Scalia, "The Benzene Case," July/August 1980).      unwise. On the face of it, any inconsistency be-
That augury proved correct. The only justice        tween the two provisions (assuming that the
who had expressed support for a cost-benefit        first imposes a cost-benefit requirement) would
requirement in Benzene, Justice Powell, did         seem quite reasonably resolvable by concluding
not participate in Cotton Dust, while the four      that Congress wanted to depart from analysis-
justices who had expressed opposition to such       as-usual, and to impose a particularly rigorous
a requirement (Brennan, Marshall, Blackmun,         requirement, when toxic substances were in-
and White) held firm and acquired a fifth jus-      volved. Unless the legislative history suggested
tice who had not reached that issue in the          otherwise, that is surely what one would nor-
earlier case (Stevens). In the final showdown       mally conclude. And the legislative history did
not a single vote was cast in favor of cost-bene-   not suggest otherwise; but rather displayed a
fit analysis. The three dissenters went off on      clear congressional agreement to disagree as to
other grounds, Justice Stewart finding that the     what in the world the phrase "to the extent
rulemaking record did not contain the "sub-         feasible" might mean. It is hard to refute the
stantial evidence" required to support the par-     majority's conclusion that the statute does not
ticular standard OSHA had adopted, and Jus-         require cost-benefit analysis in this field.
tice Rehnquist, joined by Chief Justice Burger,           The Rehnquist dissent focuses upon the
maintaining (as he had in Benzene) that the         fact that if the phrase "to the extent feasible"
statute provided "no meaningful guidance to         does not suggest cost-benefit analysis, it also
 those who will administer the law," and was        does not suggest much else of any precise con-
 thus an unconstitutional delegation of legisla-    tent. "[T]hose words mean nothing at all. They
 tive authority.                                    are a `legislative mirage, appearing to some
      The basic elements of the controversy were    members [of Congress] but not to others, and
 straightforward enough. The definitional sec-      assuming any form desired by the beholder.'"
tion of the statute states that the term "occupa-   Moreover, Rehnquist discerns method in the
 tional safety and health standard" as used in      meaninglessness.
 the legislation means a standard imposing re-         The words "to the extent feasible" were
 quirements "reasonably necessary or appropri-         used to mask a fundamental policy disa-
 ate to provide safe or healthful employment           greement in Congress. I have no doubt that
4   AEI JOURNAL ON GOVERNMENT AND SOCIETY
                                                                 PERSPECTIVES ON CURRENT DEVELOPMENTS

  if Congress had been required to choose            could enlist greater support for this less ambi-
  whether to mandate, permit, or prohibit            tious proposition.
  the Secretary from engaging in a cost-                  As it turns out, the Cotton Dust case was a
  benefit analysis, there would have been no         battle that the proponents of cost-benefit analy-
  bill for the President to sign.                    sis would have done better to avoid. The suit
      Rehnquist's observations are probably cor-     was initially brought, of course, against a Car-
rect. But one wonders whether they lead to his       ter administration Labor Department that had
conclusion that there has been an unlawful           no inclination to apply cost-benefit analysis and
delegation of legislative authority. Do they not     would do so only under the compulsion that
rather lead to the conclusion that there has         the law required it. After January 20 (the case
been no legislation at all? The doctrine of un-      was argued, ironically enough, on January 21),
constitutional delegation-as a principle en-         with a new administration sympathetic to cost-
forceable by the courts-has its difficulties,        benefit analysis and predisposed to reconsider
inviting the courts to make judgments on prac-       the cotton-dust standard on that basis, the cru-
ticability, necessity, and other prudential mat-     cial issue became the quite different question
ters well beyond their ken. Perhaps for that         whether the law merely permitted it. But in
reason, the doctrine has been applied to invali-     resolving the former, alas, the Court might sug-
date delegation to the executive only twice, in      gest a negative response to the latter as well.
the early days of the New Deal. But might there      Thus, after the Cotton Dust case had already
not be room for another, more limited (and           been argued, the new Labor Department took
thus more serviceable) doctrine which we             the extraordinary step of requesting the Court
might call-for want of a better phrase-the           to vacate the judgment of the lower court
doctrine of illusory legislation?                    (which had upheld the agency) and send the
     Suppose the Congress passes, and the Pres-      matter back to OSHA for "further considera-
ident signs, a bill saying, "The secretary of la-    tion and development." A similar disposition
bor may do blzzt." And suppose, further, that        was urged by the corporate petitioners-so
the legislative history displays 100 senatorial      that the only parties eager to have the Court
and 435 representative understandings of what        proceed with the business at hand were the la-
"blzzt" might mean. Only a man from Mars or          bor unions who were the government's (at this
a lawyer could conceivably conclude that by          stage unwelcome) allies.
this provision Congress has made an "unlawful             The Court proceeded anyway, and in the
delegation of authority" to the secretary. Sure-     majority opinion the Labor Department's worst
ly, to be frank about the matter, Congress has       fears were realized. Rehnquist's dissent bravely
issued no legislative command at all-any             asserts that "as I read the Court's opinion,"
more than the President issues an executive di-      it "concludes that, at least as to the 'Cotton
rective when he sneezes. Even if the doctrine of     Dust Standard,' the Act does not require the
unconstitutional delegation is left, as far as the   Secretary to engage in a cost-benefit analysis,
courts are concerned, to lie in the desuetude it     which suggests of course, that the Act permits
has enjoyed since its last Supreme Court appli-      the Secretary to undertake such an analysis if
cation in 1935, might there not be room for a        he so chooses." With respect, it suggests no such
more modest doctrine which affirms the logical,      thing-and a fairer characterization of the ma-
noble, and yet entirely democratic proposition       jority opinion is that the act does not require
that when Congress says nothing, nothing oc-         cost-benefit analysis precisely because it for-
curs? Let it be so that when Congress says,          bids it. (The majority opinion expresses its dis-
"The secretary may enact such standards in           agreement with Rehnquist's description-with
this area as tickle his fancy," the courts will      admirable subtlety and economy of style-by
not interfere; but when Congress says, "The          stating in a footnote, almost in passing, that
secretary may do blzzt," the courts will not         "[e]ven had Justice Rehnquist correctly char-
permit any results to ensue. At least when it is     acterized the Court's opinion" the consequences
clear, as in the OSHA legislation, that a pro-       he asserted would not follow.)
vision has no meaning and that Congress knew              One may be thankful that Stewart, who
it had no meaning, the provision should simply       has recently announced his retirement, was not
have no legislative effect. Perhaps Rehnquist        one of the five majority justices in the Cotton

                                                                          REGULATION, JULY/AUGUST   1981   5
PERSPECTIVES ON CURRENT DEVELOPMENTS

Dust case. We may thus be spared the further          tration's revised calculation of what is "feasi-
prolongation of false hopes that cost-benefit         ble" by way of cotton-dust standards will be set
analysis will come to OSHA's toxic material           aside by a moderately (but not grossly) un-
standards. It always was a poor argument-and          deferential D.C. circuit, and that erroneous
got only one vote in two cases.                       result affirmed by a Supreme Court which is
     That having been said, it is also appropri-      appropriately deferential to such lack of appro-
ate to dash some cold water on the excessive          priate deference. Ole!
jubilation of regulation-prone commentators
who have ballyhooed the case as a major defeat
for cost-benefit analysis in general. It is no such
thing. It applies only to the distinctive statu-      Lifting Burdens at the Margin
tory language governing OSHA standards-and,
indeed, not even all OSHA standards but only      Unlike deregulation in other areas, financial
those pertaining to toxic materials or harmful    deregulation has not been the outcome of a
physical agents. In fact, it is something of a    deliberate political effort, either by the indus-
victory for cost-benefit analysis in general,     try or by outside reformers. Instead it has
since even the majority justices were willing to  mostly emerged as an unavoidable consequence
acknowledge that the definitional provision       of institutional and technological advances
quoted earlier, applicable to all OSHA rule-      ( money market funds, electronic funds trans-
making not otherwise constrained, "might be       fer). These have rendered old regulatory bar-
construed to contemplate some balancing of        riers meaningless, eroding the competitive po-
the costs and benefits of a standard."            sition of some firms and eventually leading to
     Moreover, it should not be thought that      a crisis that has made reform necessary. Now
the Reagan administration has no maneuvering      the Federal Reserve Board is thinking of relax-
room even with respect to toxic-substance         ing another set of financial rules that, while
standards. For even though "feasibility" rather   having provoked no crisis, no longer appears to
than "cost-effectiveness" is the governing cri-   address the realities of the marketplace: mar-
terion, God (as well as Rehnquist) knows there    gin requirements, which specify the portion of
is a good deal of stretch in that concept, and    a securities purchase that can be financed by
the initial call is for the agency rather than theborrowing from brokers or other lenders.
courts. So under its new direction, OSHA may           When Congress ordered the Federal Re-
well revise the cotton-dust standards, American   serve to set margin requirements in 1934, mem-
Petroleum Institute v. Donovan notwithstand-      ories of the 1929 stock market crash were still
ing.                                              fresh. It was believed that the practice of trad-
     If such revision occurs, then-for aficiona- ing on margins as high as 90 percent had fed
dos of the bullfight of administrative law liti- both the boom and the subsequent bust, first
gation-one of the most interesting of passes by expanding the pool of capital for stock
may ensue. The reviewing court (which in fu- speculation during the boom, and then by forc-
ture cotton-dust challenges is likely to be the ing margin traders to sell in falling markets as
D.C. circuit, as it was in this one) is supposed, the decline in the value of their holdings trig-
according to the Administrative Procedure Act, gered a margin call. Curbs on the credit that
to give deference to the agency's judgment; but lenders could extend to stock buyers would
on appeal from the reviewing court, the Su- restrain this "pyramiding" process, it was
preme Court is supposed, according to its own thought, reducing the volatility of stock prices.
opinions, to give deference to the reviewing Paternalistic motives were also at work: mar-
court's judgment, upsetting it "only in what gin limits would keep investors from taking on
ought to be the rare instance when the stand- more risk than would be good for them.
ard [of review] appears to have been misap-            Whatever the merit of these arguments at
prehended or grossly misapplied." (This pas- the time, changes in securities markets since
sage was pointedly quoted by the majority in then have made the rules look increasingly
the present case.) If this transfer from hand to archaic. To begin with, now the stock exchanges
hand of the cloak of persuasion is skillfully ex- not only set their own margin requirements,
ecuted, it may well be that the Reagan adminis- but also have "investor suitability" rules to

6   AEI JOURNAL ON GOVERNMENT AND SOCIETY
                                                                        PERSPECTIVES ON CURRENT DEVELOPMENTS

                                          Who would sue to keep it there?    lawyers view his attempts as
In Brief-.                             None other than the very Aqua
                                       Slide 'n Dive Corp. which chal-
                                       lenged the original regulation in
                                                                             threats to the market for legal
                                                                             services."
                                                                                Like many Latin American re-
        Taking a Dive at the           court. Aqua Slide 'n Dive had in      formers before him, Beltrao con-
CPSC. "The King of France, with        fact petitioned CPSC to adopt a       siders the evils he is fighting to be
forty thousand men/Marched up          rule in the first place, and later    a legacy of the colonial past. "Bra-
the hill, and then marched down        objected only to the warning la-      zil is a country that was born regu-
again." The Federal Trade Com-         bel and installation requirements     lated, since even before it was dis-
mission did something similar in       which were struck down by the         covered and settled there were of-
its five-year-long proceeding on       court. The design features of the     ficial documents on how it was to
over-the-counter drug advertising      rule conformed with Aqua Slide        be governed," he explains. Among
(see Bruce Yandle, "The Cost of        'n Dive's production molds, says      the "vices and habits inherited
Getting Nowhere at the FTC," p.        Commissioner David Pittle, and        from the colonial past," he says,
43). But pity the poor Consumer        "as a direct consequence   ... the    are "an exaggerated centralization
Product Safety Commission,             few small competitors, whose          of decisions" which "deludes itself
which, having paid to march up         molds did not conform, were driv-     into trying to impose uniform so-
the hill, now cannot afford to         en from the field, creating a com-    lutions on an enormous country
march back down again.                 plete monopoly for the leading        that is rich in local peculiarities;
   CPSC would like to revoke its       manufacturer." The number of          an adherence to formalism which
1976 rule on swimming pool             known manufacturers of pool           grants more importance to a docu-
slides. An appeals court struck        slides has fallen from seven to       ment than to a fact; and finally,
down two major sections of that        one under the standard.               a morbid presumption of distrust,
regulation in the landmark 1978                                              the trademark of most of the laws,
Aqua Slide 'n Dive decision (see       Fighting the Legacy of Colonial-      regulations and norms of public
Perspectives, Regulation, May/         ism. Among the most popular fig-      administration in Brazil."
June 1978), and the rest of the rule   ures in Brazilian politics is Helio
was of little benefit by itself in     Beltrao, who holds the office of      It's All Downhill from Here. A re-
the commission's view. But get-        "extraordinary minister for de-       sort near Echo Summit, Califor-
ting rid of a rule once adopted        bureaucratization." Beltrao has       nia, has been required to make the
was no easy matter, the commis-        launched a crusade against paper-     rest rooms of its new lodge wheel-
sion found. It would take two to       work that has already wiped out       chair-accessible. The crush of han-
three years of staff time, probably    more than 400 million documents       dicapped vacationers is expected
costing more than $100,000, if (as     once required by the government,      to be deterred somewhat by the
seemed likely) the revocation was      and has issued a hundred edicts       fact that the resort itself, Sierra
challenged in court. That, said        aimed at cutting red tape in vari-    Ski Ranch, is accessible only on
Commissioner Stuart Statler,           ous ways. His efforts seem to         skis. As far as is known, no
would "throw good money after          have struck a deep chord among        thought is yet being given to mak-
bad." So the rule remains on the       ordinary Brazilians, although the     ing the slopes wheelchair-acces-
books.                                 magazine V isao notes that "some      sible.


screen out investors who cannot afford to risk           ers, in other words, have moved to another
their money. Thus the Federal Reserve rules              table.
may simply be accomplishing coercively (at                    Margin trading is a far less important fac-
some additional expense) what would in any               tor  in securities markets than it was in the
event be accomplished voluntarily. Moreover,              1920s. Only 4 percent of the total value of the
there is some reason to doubt whether anything           shares on the New York Stock Exchange is held
of importance is accomplished. The general ex-           in margin accounts, and only around 10 percent
pansion of credit and property ownership has             of all NYSE trading is done by margin account
reduced the effectiveness of margin require-             customers. (The latter figure is higher than the
ments as a paternalistic protection for the im-          former because margin investors are highly
provident. Investors who wish to purchase                active traders compared to others.) Some of
stock on borrowed funds can now often borrow             the decline in margin holdings may possibly be
elsewhere, using holdings other than stock as            a result of high interest rates, and thus is pre-
collateral. As for securing the stability of the         sumably temporary. To a large extent, though,
market, those high-risk traders who formerly             it reflects the massive entry into the market of
would have borrowed on margin now can and                institutional investors like insurance compa-
do achieve the same effect by buying and selling         nies and pension funds, which do little or no
in the new stock options market. The high roll-          margin borrowing, and the more recent use of

                                                                                REGULATION, JULY/AUGUST 1981   7
PERSPECTIVES ON CURRENT DEVELOPMENTS




                           w




             "There's no cause for panic, Mrs. Munson, but, frankly, there are certain
                                indicators that cannot be ignored."

options as a substitute for highly leveraged         tightened. Any adjustment should take place
stock transactions.                                  immediately, since general knowledge of the
     It should come as no surprise, therefore,       change should allow all investors to discount
that empirical studies have found margin rules       its effects fully. According to studies by J. A.
to have little or no effect on either the level or   Largay III and R. R. West (1973) and R. C.
the volatility of stock prices. If margin rules      Grube, 0. M. Joy, and D. B. Panton (1979), in-
are a significant constraint on investors, one       creases in margin requirements were accom-
would expect stock prices to rise when margin        panied by average declines of one-half of 1
rules were relaxed and fall when they were           percent in stock prices the next day, not a sta-
$ AEI JOURNAL ON GOVERNMENT    AND SOCIETY
                                                                                 PERSPECTIVES ON CURRENT DEVELOPMENTS

 tistically significant figure. Decreases in mar- away with long-standing financial barriers. It
gin requirements were accompanied by stock would also be a sign that deregulation in the
 price increases of just over 1 percent, which is financial area can advance beyond mere hap-
 statistically significant but small. (The asym- hazard response to successive crises to include
metry between the two results remains unex- voluntary and uncoerced acts.
plained. )
       Similarly, in a study of stock price vola-
tility, R. R. Officer concluded that, if changes
in the level of industrial production are allowed Regulation and the 1982 Budget
for, a change in margin requirements in one
year is not accompanied by any increase or de- In the debate over the Reagan administration's
crease in the volatility of stock prices during 1982 budget, the proposed cuts in funding for
the next year. One could argue, in response to regulatory agencies were among the most con-
Officer's finding, that margin regulation might troversial items. The budget and staff reduc-
be helpful mostly in episodes of panic or mar- tions for the Federal Trade Commission, Con-
ket instability, which might not coincide with sumer Product Safety Commission, and similar
the changes in the level of margin requirements agencies seemed designed not merely to save
that Officer examined.                                    money, but to alter the fundamentals of policy.
      It is also possible that the relative unim- To some Reagan partisans, the 1982 budget was
portance of margin trading in today's market a bold stroke to check overregulation at its
is itself due to the restraining influence of the source; to some opponents, it was an attempt
Federal Reserve regulations. The way to test the to subvert the mission Congress intended for
latter assertion, of course, would be to lift the the agencies and frustrate the enforcement of
requirements while holding open the possibility the laws.
of reimposing them if margin credit began to                     A look at the actual figures for budget and
swell   substantially. Although it seems unlikely staffing, however, suggests that both hopes and
that the Federal Reserve Board will adopt that fears may have been exaggerated. As the table
course, it might consider lifting the require- below indicates, the 1982 Reagan budget cuts
ments in stages, with each stage announced regulatory funding by only 4 percent in real
well in advance in order to give
markets plenty of warning. A third                    GROWTH OF FIFTY-SEVEN! IREGULATORY AGENCIES
course , embodied in a set of pro-                                  Selected Fiscal Years, 1972-82
posals prepared by the Federal Re-                                                                               1982     1982
                                                                                                            1981 (Carter (Reagan
serve Bank of New York and re- Area                                          1972      1979
cently put out for comment by the                                                   EXPENDITURES ($ billions)
board, is to remove only the most SOCIAL REGULATION
burdensome and least useful parts Consumer Safety & Health                   $ .9
of the regulations.                     Job Safety & Other
                                          Working Conditions
      While it is not easy to com- Energy & the Environment                  $ .1           .6
                                                                             $ .5         1.5
pute the costs that margin require-                                          $1.6         4.6       5.6
ments impose there is reason to ECONOMIC REGULATION
believe they come to a substantial Finance & Banking                         $ .1           .3
total-including the costs of ad- Other Industry-Specific                     $ .2           .3
ministration for all concerned, the General Business                         $ .1           .3                      .4
                                                                                            .9      1.0
costs to government and private
parties of enforcement and legal TOTAL                                       $2.0         5.5
defense, and, last but not least, the TOTAL IN 1970 DOLLARS*                 $1.8         3.1

costs to investors of circumventing         PERMANENT FULL-TIME POSITIONS (thousands)
the regulations or of holding less SOCIAL REGULATION                         35.7       63.4      64.1      63.2 64.3     61.0
preferred portfolios. A decision by ECONOMIC REGULATION 18.7 24.0 24.1 23.1 24.5 22.7
                                                                             54.4       87.4      88.2      86.4 88.8     83.7
the board to relax the rules would TOTAL
                                        *Adjusted by GNP deflator (actual and, for 1982, estimated in budget).
take the federal government one Sources: 1972-80 and 1982 Carter budget, Center for the Study of American Business; 1981
step further in the process of doing and 1982 Reagan budget, preliminary figures compiled by Regulation.
                                                                                           REGULATION, JULY/AUGUST 1981      9
PERSPECTIVES ON CURRENT DEVELOPMENTS

terms, both from estimated 1981              CHANGE IN EMPLOYMENT FOR TWENTY-EIGHT REGULATORY AGENCIES
levels and from the Carter admin-                                                                                          Percent
                                                                                                    Permanent
istration's planned 1982 levels. It                                                            Full-Time Positions
                                                                                                                          Increase
cuts staffing ceilings by 3 percent                                                                                      (Decrease)
                                         Agency                                         1980          1981
from estimated 1981 ceilings and         Consumer Product
by 6 percent from planned Carter           Safety Commission                             871
administration ceilings.                 Food and Drug Administration                  7,419         7,365
                                         Antitrust Division                              939           939
     The summary figures shown           Federal Railroad Administration                 484           431
 here are taken from the annual          National Highway traffic
 roundup of regulatory agency              Safety Administration                         874
                                         Bureau of Alcohol,
budgets and staffs prepared by the         Tobacco, and Firearms                       3,900
 Center for the Study of American             TOTAL, Consumer Safety &
 Business at Washington University                     Health                         14,487
 in St. Louis, supplemented with
                                         Mine Safety & Health
preliminary staffing data compiled            Administration                           3,857
by this magazine. The figures do         Occupational Safety      &   Health
not take into account congression-        Administration                               3,015
                                         Equal Employment
al action on the budget.                   Opportunity Commission                      3,433
     Among major agencies, the           National Labor Relations Board                3,157         2,880
steepest cuts are slated at the De-        TOTAL, Job Safety & Other
partment of Energy's Economic                      Working Conditions                 13,462
Regulatory Administration, which         Economic Regulatory
used to regulate oil prices (a 74          Administration                              2,161
percent cut, from $144 million in        Office of Surface Mining,
                                            Reclamation, and Enforcement                 759
fiscal 1981 to $37 million); the De-     Environmental Protection
                                                                                                                              1



partment of the Interior's Office of       Agency                                    10,678
Surface Mining (28 percent, from         Nuclear Regulatory Commission                 3,041        3,300                     9
                                           TOTAL, Energy & the
$156 million to $113 million); and                  Environment                      16,639
the CPSC (24 percent, from $42
million to $32 million). These three     Comptroller of the Currency                   3,331         3,153
                                         Federal Deposit Insurance
agencies account for about half of         Corporation                                 3,691                                  3
the 4 percent real reduction in          Federal Home Loan Bank Board                  1,388         1,435                    5
overall regulatory spending.             National Credit Union
                                           Administration                                650
Others, like the FTC and the Se-
                                           TOTAL, Finance & Banking                    9,060        9,047
curities and Exchange Commis-
sion, got increases in absolute          Civil Aeronautics Board                         743          650
                                         Commodity Futures Trading
terms, though not enough to keep            Commission                                   550
up with expected inflation. But          Federal Communications
some of the agencies most roundly           Commission                                 2,153
                                         Federal Energy
criticized by candidate Reagan be-          Regulatory Commission                      1,605                                  8
fore the election emerged with real      Federal Maritime Commission                    361           312
increases: the Occupational Safety       Interstate Commerce
                                            Commission                                 1,940
and Health Administration, up 9
                                              TOTAL,   Industry-Specific
percent; the Environmental Pro-                        Regulation                      7,352
tection Agency, up 12 percent; and
the National Highway Traffic Safe-       Patent & Trademark Office                     2,734        2,834                     8
                                         Federal Election Commission                    251           235
ty Administration, up 28 percent.        Federal Trade Commission                      1,665        1,564
     Another way of looking at the       Securities & Exchange
                                           Commission                                 2,100
Reagan total for regulatory agen-
                                              TOTAL, General Business                  6,750        6,572
cies is chronologically. It rolls
                                         TOTAL, TWENTY-EIGHT AGENCIES                67,750        66,126
back only about two years of real
growth in agency budgets, leaving        Source: 1980 figures from the Center for the Study of American Business;   1981 figures and
them below 1980 and 1981 levels          preliminary estimates of 1982 figures compiled by Regulation.


10   AEI JOURNAL ON GOVERNMENT AND SOCIETY
                                                                  PERSPECTIVES ON CURRENT DEVELOPMENTS

 but ahead of 1979 and all earlier years. The        formation Act, the financial disclosure and
 1982 budget is about 60 percent higher than         conflict-of-interest rules, and so forth; but it
 that of 1972, and nearly 300 percent higher than    comes from politicians and business people
 that of 1970.                                       who deal with the laws daily, not from regula-
      If history is any guide, moreover, the new     tory reformers.
 Set of budget figures will rise during the course        One reason may be that it is impossible to
of the year. The 1980 budget for regulatory          gather reliable data on "under-the-table" trans-
agencies was first estimated at $6.0 billion; it     actions or the effects of secrecy. Another may
eventually amounted to $6.5 billion. The 1981        be that economic theory is not well-equipped
budget, similarly, rose from a preliminary fore-     to analyze clandestine goings-on. Whatever the
cast of $6.9 billion to a current estimate of $7.2   cause, both supporters and opponents of the
billion. If the 1982 budget experiences similar      newer ethics and openness laws have little more
overruns, real agency spending may end up in-        than anecdotal evidence on their actual effects,
creasing after all.                                  with nothing in the way of a cost-benefit analy-
      Staffing levels showed a similar modest de-    sis in sight.
crease. AS with the budget, the sharpest cut              The Foreign Corrupt Practices Act of 1977
came in energy price regulation, which lost          is an example of both the sweeping economic
1,300 employees, accounting for half of the total    impact of ethics laws and the difficulty of as-
shrinkage in the regulatory work force. Other        sessing their unintended effects. The act has a
agencies had an average manpower decline of          much broader scope than its name implies: in
about 1 % percent-an unprecedented event in          the manner of Voltaire's Holy Roman Empire
recent times, but hardly the Incredible Man-         and Churchill's Lord Privy Seal, its domain in-
ning Shrink. The table below lists figures for       cludes matters that are neither foreign, nor
selected agencies.                                   corrupt, nor practices. (In particular, it regu-
     It should be kept in mind that agencies         lates the accounting concepts companies must
sometimes operate below their staffing ceilings.     use within the United States, in order to force
Another factor at work is the desire to replace      corporate managements to centralize the con-
federal employees with outside contractors.          trol of their far-flung subsidiaries.) And while
Thus the actual effect of staffing cutbacks may      there is some agreement that the act has suc-
be more or less than the official figures imply.     ceeded in reducing bribery at the cost of lost
     Stable or increasing budgets do not neces-      sales and high record-keeping burdens for U.S.
sarily mean business as usual among the regu-        business, the magnitude of either costs or bene-
lators. The Nuclear Regulatory Commission's          fits is largely a matter of guesswork.
budget and staff increases were reportedly in-             At the moment the controversy over the
tended to speed up regulatory approval pro-          act is in fact mainly a battle of "horror stories."
cedures, for example, and elsewhere in the bu-       Proponents of the law point to over 300 cases
reaucracy resources are being shifted to eco-        of questionable payments reported by U.S.
nomic analysis from more traditional func-           companies during the years before the act was
tions. It is still not clear whether the adminis-    passed, including scandals that shook the gov-
tration will eventually change the fundamental       ernments of Italy, Belgium, the Netherlands,
approaches of the various regulatory agencies.       and Honduras and toppled the Tanaka govern-
But whatever its overall substantive policy          ment in Japan. Critics, including the U.S. Cham-
proves to be, its budgetary policy on regulation     ber of Commerce, have assembled numerous
appears to be one of thoroughgoing gradualism.       case histories of how innocent U.S. firms have
                                                     lost sales and competitive positions overseas
                                                     because of uncertain or inflexible provisions of
                                                     the law. A General Accounting Office survey of
Overseas Ethics, Four Years Later                    250 randomly chosen companies indicates that
                                                     such dissatisfaction is widespread in the busi-
Economists have thus far paid scant attention        ness community.
to the wave of good-government and ethical                 The major reason is the accounting provi-
regulations enacted in the 1970s. There is, in-      sions of the law, which are binding on firms
deed, growing criticism of the Freedom of In-        whether or not they do overseas business, and
                                                                         REGULATION, JULY/AUGUST 1981   11
PERSPECTIVES ON CURRENT DEVELOPMENTS

 which are enforced by sanctions almost as              risk of double punishment (under the laws of
 tough as those of the law's anti-bribery provi-        two sovereigns), the difficulty of subpoenaing
 sions. Both carry a maximum penalty of five           witnesses, and the impossibility of providing
 years in prison. The bribery penalties apply ir-       trial in the area where the crime was com-
 respective of whether it was the firm or the for-     mitted. Previous criminal laws of this type had
 eign official that initiated the suggestion of pay-   sought to keep Americans abroad from harming
 ment. The act's legislative history does indicate,    Americans back at home through such prac-
 though, that payments extorted by threats of          tices as ocean dumping beyond the three-mile
 damage will not be considered bribes, and that        limit and price-fixing that affected U.S. buyers
 "grease payments" (fees to expedite the han-          and sellers. This limited international friction
 dling of claims to which a firm is legally en-        by providing an easily understood rationale for
 titled) will be allowed. In this and other areas      U.S. legislative involvement. The harm to U.S.
 the law has proved ambiguous, however, and            interests that the Foreign Corrupt Practices Act
 the criminal penalties cause executives to shy        seeks to prevent is less direct: official embar-
 away from borderline actions.                         rassment, a lowered national reputation for
      The "chilling effect" of such ambiguity,         honest dealings, and political damage to our
 along with the act's heavy record-keeping bur-        allies. As a generalized attempt to keep Ameri-
 den, is enough to harm U.S. competitiveness           cans on their best ethical behavior abroad,
even in world markets where bribery is not             however, the act remains an anomaly. It is still
prevalent, business spokesmen have alleged.            not against federal law for an American to rob
Where bribery is endemic, the law has required         a bank overseas-but it is illegal to pay off an
U.S. business to withdraw, leaving the field to        official to obtain a pushcart license.
the Europeans and Japanese. No other country                 There has been only one successful prose-
has a law like ours.                                   cution under the act, of a small firm that dis-
      The requirement that internal corporate          tributes the postage stamps of the Cook
control procedures maintain the accountability         Islands. This indicates, depending on one's
of foreign subsidiaries-in other words, that           point of view, that the law (a) has cut bribery
there be a strong centralized chain of command         substantially, (b) has not been earnestly en-
within the corporation-raises another con-             forced, or (c) has proven inherently unenforce-
cern. It is commonly observed that, in bureauc-        able. There is some evidence for each of these
racy and red tape, the modern corporation is           views. The General Accounting Office survey of
not that different from the modern government.          companies found that the law had "greatly
What is less commonly observed is the role              affected" internal corporate codes of conduct,
regulation plays in producing such bureauc-             and that 75 percent of the companies surveyed
racy. Federal contract procedures that bar an          had revamped their internal accounting con-
entire firm from doing business with the gov-          trols. The agencies that share enforcement of
ernment if one of its divisions misbehaves,             the act have spent more time on the exegesis of
various rules that hold firms liable for the           its many ambiguities than on prosecuting cases.
actions of their employees and even their cus-         And it is probable that some bribery has just
tomers, company-wide hiring quotas-all these           been driven further underground, never to be
encourage centralized and rule-bound manage-           discovered.
ment. The Foreign Corrupt Practices Act goes                 Enforcement is split between the Securities
very far in this respect, even making U.S. firms       and Exchange Commission, which enforces the
liable for the behavior of overseas joint ven-         civil provisions of the law on all SEC regis-
tures in which they have only a minority inter-        trants, and the Justice Department, which cov-
est. The act also holds management responsible         ers companies not registered with the SEC and
if it had "reason to know" of a subordinate's          enforces all of the law's criminal penalties,
corrupt act, a stricter standard than applies in       including those for accounting provisions. Both
the law on domestic bribery.                           agencies have been criticized by business for
      There are only a handful of statutes that        inadequate guidance concerning the act's gray
control what Americans can do, or allow their          areas. The Justice Department has made at
agents to do, abroad. Extraterritoriality, as it       least some efforts to offer guidance; the SEC,
is called, raises numerous problems such as the                                (Continues on page 59)

12 AEI JOURNAL ON GOVERNMENT   AND SOCIETY
 quandary: it must reconcile its mandate to look            Overseas Ethics, Four Years Later
 only at what is necessary to protect health with               (Continued from page 12)
 the realization that for carcinogens only a zero
 emissions level is thought to be entirely with-     on the other hand, has objected to publishing
 out risk.                                           interpretations and guidelines, and has only
      Turning to OSHA, the author notes that         reluctantly and temporarily agreed not to pros-
 the language, legislative history, and judicial     ecute firms that follow the official Justice guide-
 interpretation of the Occupational Safety and       lines. Even if the two agencies cooperate, SEC
 Health Act over the years all point to an obli-     registrants will likely face different enforce-
 gation to protect sensitive populations, even       ment rules than nonregistrants.
 though the act makes no specific reference to            For all of the above reasons, work is pro-
 the issue. This has led to controversy in the de-   ceeding on Capitol Hill to revise some of the
velopment of OSHA standards for cotton dust          statute's more controversial provisions. Sena-
and lead. Nevertheless, OSHA's dilemma is            tor John Chafee (Republican, Rhode Island)
much less acute than EPA's because OSHA's            has introduced 5.708, which would add a "ma-
authority is statutorily limited by the require-     teriality" requirement to the accounting sec-
ment that its standards be feasible. Congress        tion, eliminate the "reason to know" standard
has thus implicitly recognized that it may not       of responsibility for an agent's acts, require in-
be technologically or economically feasible to       creased compliance guidance by the Justice De-
protect all workers from all risk. In both the       partment, and transfer civil jurisdiction over
cotton dust and lead standard, the author says,      the bribery provisions from the SEC to Justice.
OSHA accordingly attempted to set exposure           Chafee's bill would also legalize payments that
levels as low as was feasible, acknowledging         were legal in the country in which they were
that many workers in the most sensitive group        made. The Reagan administration has gone
would still not be protected.                        further, urging full repeal of the accounting
      Of course, as Friedman points out, feasi-      provisions and the SEC's enforcement role.
bility itself is not a hard-and-fast concept, but    Knowing falsification of accounting records to
will depend to some extent on an evaluation of       facilitate corruption would remain illegal under
the health risks involved in any given case. At      both the proposals.
some point in the standard-setting process, it            As one possible way of restoring their com-
might not be considered "feasible" to achieve        petitiveness, many businesses have called for
an insignificant incremental health benefit,         an international antibribery pact. Negotiations
however measured, in light of the costs to be        have been proceeding for years in the United
imposed. It is the courts that have had to           Nations on this subject, with agreement no-
wrestle, so far, with what "feasibility" means in    where in sight. (See Readings, p. 50.) The seven
the context of particular regulations.               industrialized countries that met at the 1980
      One other course of action, open to OSHA       Venice economic summit agreed to work to-
but not to EPA, is to allow employers to moni-       ward a multilateral pact of their own, but again
tor workers and remove susceptible individuals       there is no prospect that it will ever be com-
from the site of the hazard when their vulner-       pleted.
ability becomes apparent. Although such medi-             Some proponents of the act assert that
cal surveillance may not be of use in the case       retaining it will give the United States a con-
of carcinogens, it is an important tool in both      sistent position when it argues for an inter-
the cotton dust and lead cases, Friedman says.       national pact; some opponents fear that the
      The author concludes that as our tech-         other industrialized nations will find it worth
niques for identifying ever more sensitive pop-      their while to perpetuate their current competi-
ulations become more refined, the concepts of        tive advantage by stalling at the talks. One
thresholds and margins of safety become in-          might wonder whether American business's
creasingly "archaic." The result will be to call     current enthusiasm for an international pact,
into question, in more and more regulatory de-       if indeed it does arise entirely from competitive
cisions, society's ability and willingness to pro-   motives, would evaporate if this country were
vide environments that protect such groups.          to repeal its law.


                                                                         REGULATION, JULY/AUGUST 1981   59

				
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Description: The Cotton Dust Settles