August 23, 2023
Statement for the Record on Senate Small Business Committee Field Hearing Regarding Regulations and Small Business
Ranking Member Ernst, Members of the Committee, and distinguished witnesses, thank you for the opportunity to provide some brief comments related to this hearing’s topic. The views expressed here are my own and not those of the American Action Forum (AAF). There are three main points I would like to bring to the Committee’s attention:
- An examination of the most recent Small Business Administration (SBA) Office of Advocacy (Advocacy) report on agency compliance with the Regulatory Flexibility Act (RFA) reveals that, despite a 10-year peak in the level of input from Advocacy on RFA matters, agencies have yielded the lowest amount of cost savings for small businesses across that span – suggesting that agencies have an increasingly diminished regard for RFA proceedings.
- Anecdotal examples of this trend include a recent rulemaking from the Federal Trade Commission on automobile dealerships that includes a flawed overall economic analysis as well as a merely cursory look at the proposal’s small business impacts that belies how significant such effects could actually be.
- A lack of rigorous analysis of the appropriate data on the front-end likely has the run-on effect of impairing either the agencies’ or outside stakeholders’ ability to examine the rule’s post-hoc effects and conduct a proper retrospective review, such as that which is required under the RFA’s Section 610.
CONCERNING TREND OF AGENCY RFA COMPLIANCE
This past spring, the SBA Office of Advocacy (Advocacy) produced its annual “Report on the Regulatory Flexibility Act [RFA]” for Fiscal Year (FY) 2022. In this report, Advocacy notes how, through its interactions with agencies during the RFA process, its input resulted in $73.5 million in annual cost savings for small businesses. While such a figure may seem significant on its face, an examination of Advocacy RFA reports from the past decade reveals that this amounts to the lowest level of RFA savings across that time period. Most years involved savings in the billions of dollars, with the highest amount being $9.6 billion in FY 2014. Additionally, Advocacy has traditionally included the number of instances where its input likely produced some qualitative burden reduction. FY 2022 marked a low point for that metric as well.
What is perhaps most concerning about this trend, however, is that it appears agency intransigence may be its key driver. The level of cost savings derived from Advocacy input may be at its lowest in recent memory, but the amount of effort on Advocacy’s part has never been higher during that timeframe. Advocacy submitted 37 comments and convened 30 roundtables on agency compliance with the RFA – both marking the highest amount over the past decade for each category. The number of agency personnel that Advocacy trained in RFA process for FY 2022 (257) was runner-up to only the year before it (FY 2021). As such, agencies produced the lowest amount of savings despite Advocacy being as busy as ever over the past decade. There is clearly a disconnect here.
CAR DEALER RULE AS CASE STUDY
Beyond the overall, top-line trends, there are some notable examples in this FY 2022 Advocacy report that provide some anecdotal evidence of how lacking agency consideration of small business impacts can be in the rulemaking process. One of the more egregious examples is last year’s proposed “Motor Vehicle Dealers Trade Regulation Rule” from the Federal Trade Commission (FTC). Advocacy provided comment to the Commission on both the substance of the rulemaking as well as requesting that FTC extend the deadline of the proposal’s comment period to all for more meaningful input on the “49 questions that required extensive research by the industry.” As Advocacy notes, “The comment period closed without an extension.” FTC’s apparent treatment of the substantive considerations in this instance is perhaps even more worrisome.
The FTC automotive dealers rulemaking included an overall economic analysis that estimated benefits to outweigh costs by a roughly 30-to-1 ratio. An AAF examination found, however, that simple – and in some cases likely more realistic – adjustments to the assumptions underlying FTC’s calculations yielded a more even cost-benefit balance than that. In fact, AAF found that there is a potential scenario where costs exceed benefits. As such, the overall quality of FTC’s analysis remains questionable.
When one arrives at FTC’s “analysis” of the specific impacts on small entities, one finds two paragraphs largely summarizing the rulemaking’s requirements and qualitatively discussing how affected entities may respond. To its credit, the Commission recognizes that since “many” of the “46,525 franchise, new motor vehicle, and independent/used motor vehicle dealers” fit the description of small entities under the RFA, the rulemaking “will likely affect a substantial number of small entities.” The Commission demurs, however, on the question of whether such impacts will be significant for the purposes of the RFA.
Yet even a rudimentary analysis is easily calculable. If one takes the $1.4 billion total cost figure from the proposal at face value and divides it across those 46,525 dealerships, that yields a per-entity cost of roughly $29,000. If one takes the updated cost estimate from AAF’s analysis of approximately $5.6 billion ($5.1 billion in new disclosure costs plus $510 million from other aspects of the proposal) and divides that across the 46,525 dealerships, that yields a per-entity cost of more than $120,000. For context, according to Bureau of Labor Statistics data, an average automobile dealer employee makes roughly $60,600 per year.
The Commission’s inability or unwillingness to conduct even a modest analysis like this suggests that it does not take its duties under the RFA seriously. The trends discussed in the previous section also suggest that FTC is not an outlier.
THE LACK OF MEANINGFUL RETROSPECTIVE REVIEW
Finally, it is important to discuss the matter of retrospective review here as well. Retrospective review is an important component of the RFA. Under Section 610 of the RFA, agencies are required to regularly identify rules that have a “significant economic impact on a substantial number of small entities” and conduct a review of the rules’ viability and effectiveness “within 10 years” of the rules’ original promulgation. Yet here, too, it appears that the RFA’s effectiveness wanes.
In 2021, AAF examined “The Failed Promise of 610 Reviews” and found that A) the section’s requirements end up covering a small subsection of rulemakings overall and B) the number of rules that actually undergo meaningful retrospective review is considerably smaller. The report identified multiple potential reasons for this, including unclear definitions and terminology as well as a lack of consequences for agencies not following through on the 610 Review process. Furthermore, a 2022 report found that a lack of clear data – from a given rulemaking’s initial levels of analysis on through its implementation – also likely contributes to this paucity in retrospective review.
Retrospective review of regulatory requirements is hardly a novel or ideologically loaded proposition. From Section 610 of the RFA on through various presidential directives – such as President Obama’s Executive Order 13,563 and its ensuing implementation memoranda – it has been a well-tread policy concept. The difficulty, of course, comes in regularly and rigorously implementing it. Having clear definitions and requirements for agencies and a robust set of data for interested parties to pore over as a rule comes into effect are important considerations in this regard.
The RFA and Office of Advocacy exist, at least theoretically, to help give a greater voice to the concerns of small businesses in the regulatory process. Whether it be in an increasing lack of responsiveness to the federal government’s official small business advocate, sub-par regulatory analyses, or lackluster efforts to reexamine past rules, there are worrying signs that agencies are not taking the unique challenges facing small businesses as seriously as they should. One hopes that the efforts of this Committee will help alleviate some of these deficiencies.
Again, I appreciate the opportunity to provide some insight to the Committee on this important policy topic. Please feel free to contact me with any additional questions.
Director of Regulatory Policy
American Action Forum