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Death by Regulation
There are certain universal truths widely recognized by careful observers of the Washington scene. First, politicians want to "do something positive This wish exists regardless of whether there is any real need to do anything at all, and to question the need for action is anathema. Responses to Love Canal, Chilean grapes, and Mar indicate how often government safety programs are launched, not on the basis of science, but on sensationalism.
Second, an important asymmetry exists between action and inaction. There are risks associated with an agency's decision to act, and there are risks associated with a decision not to act. The latter, however, are usually much more visible than the former. For example, a program to improve automobile side impact protection will also increase the retention rate for older, less safe cars by making new vehicles more costly But consider how much easier it is for a journalist to focus on the first story rather than the second-the photographs of crumpled cars, the videotapes of crash tests, the interviews with victims' families. By comparison, how would one even begin to identify the accidents that result from the price effect of a new standard? In short, one photographable injury outweighs a thousand unphotographed fatalities.
Finally, there is political power. All government agencies like it. They will often act to increase it, and they will rarely turn it down-even when increased political power comes at the direct expense of the public safety the agency is charged with promoting.
Frequently these factors result in safety measures that are ineffective and overpriced-attributes that are no surprise in government programs. Occasionally, however, the results are inadvertently lethal. And sometimes programs are not only lethal, but their nature is deliberately concealed by the administering agency. These latter two outcomes comprise what I call death by regulation. Death by regulation should be a sobering counterweight to the notion that, when it comes to public safety, less-than-ideal markets are a sufficient condition for government involvement. Unfortunately, death by regulation is alive and well in Washington today.
Safer Drugs, Fewer Drugs
The Food and Drug Administration's drug approval process is the foremost example of asymmetrical political risk. There are two types of errors the FDA can make in reviewing a new drug application: it can approve a drug that turns out to have unexpectedly adverse side effects, or it can delay or deny a beneficial drug. From a public health standpoint, both of these errors can be equally deadly but from a political standpoint, they are worlds apart.
Incorrectly approving a drug can produce highly visible victims, highly emotional news stories, and heated congressional hearings. The paradigmatic example is thalidomide, a sedative introduced in several countries (not including the United States) before being linked to severe fetal deformities in 1961.
Incorrectly delaying a drug, on the other hand, will produce invisible victims and little more. The FDA's ten-year delay in approving beta-blockers (from 1967 to 1976), for example, was probably responsible for upwards of ten thousand deaths-a toll as huge as it is unappreciated.
Not surprisingly the FDA's fundamental approach to drug approval is designed to reduce the likelihood of the first type of error while paying little attention to the second. The well-documented result of this excessive caution is drug lag-the frequent unavailability of major new drugs in this country long after they have been approved elsewhere. Despite numerous reform efforts by the FDA over the past decade, this phenomenon continues unabated.
The FDA's overcaution is reinforced by a similar bias in Congress. One former FDA commissioner asserted: "In all of FDA's history I am unable to find a single instance where a Congressional committee investigated the failure of FDA to approve a new drug. But, the times when hearings have been held to criticize our approval of new drugs have been so frequent that we aren't able to count them... The message to FDA staff could not be clearer. Whenever a controversy over a new drug is resolved by its approval, the Agency and the individuals involved likely will be investigated. Whenever such a drug is disapproved, no inquiry will be made. The Congressional pressure for our negative action on new drug applications is, therefore, intense. And it seems to be increasing."
This same asymmetry appears in media coverage of the agency. Every FDA announcement of a major new drug approval should raise an obvious question: If this drug is going to start saving lives tomorrow, how many people died yesterday waiting for the agency to act? But the question is hardly ever asked, much less answered. Finding the victims of the drug's side effects is far easier than identifying the victims of its unavailability.
Can the FDA be reformed? Probably not in any fundamental sense. The AIDS crisis has produced some incremental changes because it is the first time that drug lag's potential victims have organized themselves into a powerful political constituency. But it may also be the last time, and it is still unclear whether the AIDS-inspired reforms, such as liberalized distribution of drugs before full approval and more lenient standards for test data, will be significantly utilized. (See the article by Joanna Siegel and Marc Roberts.)
The ultimate issue continues to be one of asymmetry in public perception and in institutional incentives. When the agency approves a new drug, it could easily compute the therapeutic benefits that were lost to the public during the approval process. This loss is a major cost of the FDA's approval process; quantifying (let alone minimizing) it is central to any attempt to truly protect public health. Absent some major shift in public recognition of this fact, deadly overcaution will continue to be the FDA's dominating inclination.
Air Safety versus Highway Deaths
Mandatory airline child seats represent another issue that is fueled by the political asymmetry of risks-in this case one death in a publicized airplane crash outweighs a hundred anonymous highway fatalities. Under current Federal Aviation Authority regulations, children under two may ride on their parents' laps. As a result, airlines allow these children to fly free. In the United Airlines Sioux City crash in July 1989, however, two lap-held children were torn from their parents' grasp at impact; one of them died, as did 111 other passengers. Because a child restraint seat could have saved the child's life, a push for mandatory airline child seats has begun.
Mandatory child seats would mean that families flying with young children would have to purchase tickets for children who had been flying at no charge. Faced with substantially increased costs, some of these families would undoubtedly shift at least some of their air travel to highways, where fatality and injury risks are far higher. Thus, mandatory child seat requirements would not only increase the costs to consumers traveling by air by several hundred million dollars annually, but would also result in a net loss of life.
Politically, a child's death in a major airline crash counts far more than a highway fatality. The former is national news, while the latter is a back-page story in a local paper. Within months of the Sioux City crash, the FAA faced both petitions and congressional proposals to require child seats on planes.
As of this writing, the FAA has made no final decision, but it has opposed congressional legislative efforts on safety grounds. This position is encouraging, but it also appears to be at least partly fortuitous. The FAA's request for public comment did not initially raise the highway fatality issue. Fortunately several academic researchers did consider the impact of higher air travel costs on highway travel, and the FAA incorporated their findings, presented at a congressional hearing, in its analysis. But the FAA's attempt to consider the total impact on safety drew fire from the National Transportation Safety Board. NTTSB Vice Chairman Susan M. Coughlin argued that the FAA was out of bounds. She testified: "We are confusing the issues when we start comparing aviation safety to highway safety. The FAA [is] responsible for aviation safety. There is no one who is making the argument that we are not safer buckled in and restrained in those seats during the critical phases of flight. So I have a hard time accepting the intertwining of those issues. Even if it were to drive more people to the highway what we are dealing with here today is aviation safety and the right thing to do is to require all occupants to be restrained."
Lest anyone be distracted by the broader issue of overall safety, Rep. Jim Lightfoot, sponsor of the congressional bill, quickly dismissed the FAA spokesman: "I would only say that if your assumptions are correct, and my baby is the one baby that dies, I don't give a damn about your assumptions7 Although this may be an understandable emotional response to a tragedy, it is a disastrous basis for policy.
A Safety Agency Becomes a Killer
Finally, in auto fuel economy standards we find an instance of a safety agency's concealing the lethal effects of its own activities. Before the 1975 enactment of the Corporate Average Fuel Economy (CAFE) program, the National Highway Traffic Safety Administration's major responsibilities were to issue motor vehicle safety standards, to order recalls, and to assist state highway safety programs. In this area NHTSA is generally credited with improving new car safety although there is disagreement about the magnitude of this improvement, and the agency has made some major blunders. For example, NHTSA's passive restraint requirement was accompanied by several attempts to conceal unfavorable air bag data, and its promotion of air bags as obviating the need for seat belts was characterized as misleading" by a federal court.
CAFE gave NHTSA a degree of power over the automobile industry that the agency never before possessed. CAFE essentially requires that each automaker's yearly output meet a specified minimum average fuel economy standard, now set at 27.5 miles per gallon. To the extent that this standard differs from manufacturers' assessments of market demand for fuel economy, it is an important factor in product design, manufacturing, and marketing decisions and even in plant location. CAFE often requires full-line producers such as General Motors and Ford to engage in massive juggling acts to comply with the standard because their large-car sales often imperil their compliance with CAFE.
Downsizing is one of the most powerful tools for improving auto fuel efficiency According to NHTSA, "each 10 percent reduction in weight improves the fuel economy of a new vehicle design by approximately 8 percent:' The doubling of new-ear fuel efficiency that occurred from 1975 to 1985 was due in large part to the 1,000-pound reduction in average new car weight during the period.
But large cars are generally more crashworthy than small cars owing to their heavier construction, their greater crush space to absorb collision forces, and their larger occupant space. The occupant death rate in the smallest cars on the road is more than twice that of the largest cars. This relationship between vehicle size and occupant safety holds true in single-vehicle accidents as well as in multivehicle collisions, and it is supported by a wide range of studies. Thus, although CAFE has increased NHTSA's jurisdiction, it has also threatened NHTSA's safety accomplishments.
NHTSA could have admitted that CAFE exacts a toll in increased traffic deaths and injuries and then attempted to achieve some balance between conservation and safety in setting CAFE standards. Such an approach would certainly be advantageous from the standpoint of informed decision-making and public awareness of the true price of its fuel conservation measures.
Institutionally however, such an approach is difficult. No agency and particularly not one whose middle name is safety, wants to admit that one of its programs kills people. Thus, in administering CAFE, NHTSA's course has been to acknowledge possible safety problems in the abstract while denying their existence in any one particular model year. Each time the safety issue arises, NHTSA exonerates the particular standard in question and announces that the matter is best left for future consideration.
In a report to Congress in 1974-before CAFE'S enactment-the agency examined this very safety issue, however. At the time NHTSA characterized the size-safety relationship as "well known" and stated that "[a] sustained or increased shift to more fuel economical cars, without a concurrent upgrading of their crashworthiness or increased utilization of effective passenger restraints, will result in a rise in the serious injury and death rate on the highway."
But NHTSA began to backtrack from this position after CAFE was enacted. By 1977, when the agency issued CAFE standards for model years 1981 to 1984, its view of the size-safety relationship had become far more equivocal than earlier. NHTSA argued that crashworthiness was not dependent on size in single-vehicle accidents. As for multivehicle crashes, NHTSA claimed that the adverse effect of downsizing was only temporary, and that it would "apparently be offset by the reduction in the range of passenger automobile weights which is projected to occur as the larger automobiles are downsized:' NHTSA also claimed that smaller cars were less accident-prone and that large cars were more dangerous to other cars and to pedestrians.
While NHTSA was obfuscating the size-safety issue in the context of CAFE, however, it took a totally different position when it came to safety standards. In a 1980 study NHTSA stated that "[s]afety standards have saved more than 64,000 lives since 1968, but these gains are being outweighed by the shift to smaller cars:' In a similar publication in 1981 it noted: "The traffic safety problem will become even more serious during the ......... One of the most worrisome problems is the changing vehicle mix and the general downsizing of all passenger cars and light trucks. With these smaller and lighter vehicles joining an increasing number of heavy trucks and older, heavier cars already on the road, the risk of death and serious injury will increase markedly:' The more NHTSA could portray the small-car trend as a safety hazard, the better its case for issuing more safety standards. And if this posed a problem for the agency when it came to CAFE, that was nothing that a little creative writing could not solve.
In 1985 the president's Council of Economic Advisers raised the safety issue as a justification for reducing the 1986 model year CAFE standard below the 26.0 miles per gallon proposed by NHTSA. The CEA noted that NHTSXs proposed standard had not even mentioned the safety issue posed by CAFE. According to the CEA, "NHTSA's failure to consider the adverse safety consequences of its decision can only mean that its proposed 26.0 mpg standard is set higher than it would be if safety factors were taken into account."
NHTSA responded by denying the existence of any real size-safety relationship. The agency noted that occupant deaths had dropped in recent years despite downsizing: "Passenger car occupant deaths have in fact dropped from 28,200 in 1978 to 23,500 in 1984, a 17 percent decline. This occurred during a time when the average new car's weight was reduced by 1,000 pounds:" Another NHTSA document of the period stated that "deaths per VMT [vehicle miles of travel] have dropped nearly 20 percent:"
Appealing as that argument sounds, for anyone familiar with traffic death rates it is an obvious piece of statistical legerdemain. The car occupant death rate has been dropping not only since 1978, but for the past fifty years. In all likelihood it would have dropped even more in recent years but for downsizing. Using NHTSA's logic, one could just as well argue that AIDS is not a health hazard because since it first appeared in the United States in 1981, average life expectancy has increased by about nine months. Then again, life expectancy has been increasing since colonial times.
In subsequent CAFE rulemakings the safety issue was raised by a broadening array of groups, including the Insurance Institute for Highway Safety the Competitive Enterprise Institute, and the National Safety Council. A 1988 study by Brookings senior economist Robert W Crandall and Harvard public health professor John D. Graham found that cars produced under a 27.5 miles per gallon standard would experience a 14 to 27 percent increase in occupant deaths-2,200 to 3,900 additional fatalities per model year fleet. NHTSA rejected the study as methodologically flawed.
NHTSA's treatment of the CAFE-safety issue became increasingly strained. For example, in 1986 NHTSA argued that crash test results from its New Car Assessment Program (NCAP) showed that small and large cars were equally crashworthy. In the agency's words, the program "demonstrates that in crashes with cars of equal weight, small cars can provide equivalent protection as do large cars when they crash into other large cars... . [A] number of small cars.., have exhibited good occupant crashworthiness in NCAP testing!' But NHTSA's interpretation of these test results was directly contradicted by the program's actual report, whose cover sheet carries the following warning: "Large cars usually offer more protection in a crash than small cars. These test results are only useful for comparing the performance of cars in the same size class!"
Although after fourteen years of CAFE the agency has yet to find cause for concern over the safety effects of even one CAFE standard, NHTSA has taken one significant step in 1990 by raising the safety issue as a reason for opposing congressional proposals to boost CAFE to 40 miles per gallon. At a September 1990 press conference, the agency released new reports demonstrating the applicability of the size-safety relationship to single-vehicle accidents, and NHTSA Administrator Jerry Curry characterized one bill as "a killer" that "exchange[s] body bags for oil barrels!' Ironically, both Curry and Transportation Secretary Samuel Skinner emphasized that their new safety-size studies were consistent with the earlier Crandall-Graham study NHTSA has not changed its position on the innocence of its existing CAFE program, however. The agency's criticism of the 40 miles per gallon bill is carefully worded to avoid any admission that current standards reduce safety.
Finally, NHTSA proved prescient with its 1980 prediction that the benefits of its safety standards were being wiped out by the shift to small cars. The protection offered by an air bag, for example, has been estimated to be equivalent to approximately 400 pounds of increased car mass. The Crandall-Graham study concludes that, absent the 27.5 miles per gallon CAFE standard, average new car weight would be 500 pounds higher. In effect, the current CAFE program has more than offset the safety benefits of air bags. Having paid the cost of new safety standards, the public is left with downsized cars that offer little if any net safety gains, and NHTSA continues to claim credit for saving both gasoline and lives.
Reform, Recidivism, or Incorrigibility?
These are discouraging tales. Occasional hopeful signs can be undone by a new agency head or wiped out by a new administration. The intractable nature of the problem stems not from the fact that agencies err (we all do), but from the inherent lack of correcting mechanisms in centralized decision making. Couple this with the asymmetry of political risks, and it is surprising that matters are not worse.
It would be one thing if agencies only advised. We could view them as elderly kinfolk fixated on safety, who dependably remind us to wear our galoshes but rarely tell us when to remove them. As long as we understood that they only gave us one side of the story we would not be badly misled. Agencies not only overadvise, however; they overregulate. And as these stories demonstrate, sometimes agencies even regulate against safety.
What can be done? Certainly the asymmetry can be minimized by making less visible risks more prominent. Suppose that the FDA accompanied every drug approval announcement with a public estimate of the therapeutic loss caused by its review process. Pressures to reduce those losses would introduce new competing agency incentives. Whether they could ultimately triumph over various forms of administrative gamesmanship is an open question.
Public health and safety are often viewed as representing one of the strongest cases for government regulation. Many who trust competition to give them low prices and wide variety are less sure of market results when it comes to product safety But death by regulation, whether unintentional or deliberate, is the relatively unknown opposite side of that coin. Its recognition as an aspect of government regulation would be a significant step forward in civic education.
Sam Kazman
Competitive Enterprise Institute
Timely Accounting and Budgeting for Deposit-Insurance Losses
In the Watergate scandal the public sought the answer to two key questions: What did the president know and when did he know it? In the deposit insurance mess the parallel concerns are: How much have the federal insurance funds lost and when did they lose it? In both cases the ultimate issue for taxpayers is to determine which public officials they should blame both for distressing breaches of the public trust and for subsequent acts of coverup.
Perverse Incentives in Deposit Insurance Accounting
An institution is economically insolvent when, without an implicit or explicit contribution from outside sources, it can no longer cover its obligations as they accrue or become due. Whether an insurance fund is insolvent is determined by the algebraic sign of the fund's net reserve position- whether the difference between the value of the insurer's implicit and explicit corporate reserves and the expected value of insured parties' current and future claims for payment from these resources is positive or negative.
Public debate about the time path of deposit insurance finances is polluted by the misleading accounting system federal authorities have used to measure each fund's income, expenditures, liabilities, and net reserves. This system accounts and budgets explicitly for cash flows as they occur, not as the obligations are accrued. The opportunity to delay obligating funds to cover accruing losses gives officials discretion to report the value of accumulating financial commitments inaccurately and to leave the value of unackowledged contingent liabilities unfunded until specific payments actually need to be made. Because the obligations of each deposit insurer are backed by the full faith and credit of the U.S. Treasury these unfunded (or off-budget) obligations are financed implicitly by federal taxpayers.
Letting deposit insurance managers delay for long periods of time the accounting recognition of economic costs that their enterprise is currently accruing is poor public policy. As I pointed out in The S&L Insurance Mess, such a policy avoids timely accountability for policy mistakes and compounds the financial obligations that accumulating deposit institution weakness ultimately transfers to federal taxpayers. A rosy picture of fund finances aggravates system losses because it stifles pressure that taxpayers would otherwise exert on regulators to force decapitalized "zombie" institutions to resolve incipient insolvencies promptly Moreover, such a picture helps lobbyists for insured institutions sidetrack various structural reforms that would shift the burden for financing accumulating fund losses back onto the industry.
Methods Used to Mask the Deterioration of FSLIC and BIF
Until the size of the roughly $180 billion insolvency of the Federal Savings and Loan Insurance Corporation (FSLIC) began to be acknowledged in 1988 and 1989, FSLIC's capital shortage was disguised by massively under reserving for its anticipatable losses and pretending that its visible funding imbalance was only a temporary one. Until very late in the 1980s, thrift industry spokespersons proudly proclaimed that taxpayers had yet to "lose a nickel" in the federal deposit insurance system.
Today, FDIC officials and bankers are offering similarly exaggerated claims of taxpayer safe harbor from unpaid damages accumulating in the counterpart insurance fund for banks that is operated by the Federal Deposit Insurance Corporation (FDIC). Although my own analysis as well as Office of Management and Budget efforts suggest that at year end 1990 the Bank Insurance Fund was at least $40 billion under water, the FDIC accounting system initially assigned the Bank Insurance Fund a positive $8.4 billion in net reserves. In its audit of the FDIC for that date, the General Accounting Office opined that the fund's reported net-reserve position was overstated, but only by about $4 billion.
In an August 5,1991, letter a prominent banker pointedly stated the prototypical industry perspective on the Bank Insurance Fund's condition. He admonished the editor of the American Banker that, "of all publications," his newspaper "should be acutely aware that the BNE 'debacle' [i.e., the Bank Insurance Fund's estimated $2.5 billion loss in the Bank of New England], like all failures of FDIC insured banks, was financed not by taxpayers but out of the assessments paid by all insured banks. Taxpayers have not had to shoulder the burden. Most bankers want it to remain that way."
The banker's argument wove a chain of partial accounting truths into a gigantic economic falsehood. Yes, BNE and other Bank Insurance Fund cash-flow losses have so far been charged formally against assessments that banks previously paid into the fund. Yes, taxpayers have not yet explicitly been asked to recapitalize the fund. Yes, bank lobbyists have worked hard with Congress and the Treasury to prevent the Bank Insurance Fund from making direct use of taxpayer resources.
Nevertheless, to clarify the economic untruth lurking behind the accounting smoke screen, we have only to view taxpayers as having given the FDIC an unlimited right to put its expenditures on a credit card for whose use taxpayers remain responsible. Putting losses on this card allows the FDIC to conserve its cash and thereby to meet a technical condition of cash-flow solvency. The extent of the credit support taxpayers are providing the FDIC remains unknown to them because the FDIC is free to account for its contingent liabilities as incompletely as its managers can persuade the General Accounting Office to accept. As long as the FDIC is not made to show taxpayers more than a few of its outstanding credit slips and creditors of troubled banks do not demand that the Bank Insurance Fund's accumulating bill be paid, taxpayers need not actually be asked to cough up any cash.
Accounting for Accountability
The missing ingredient in the largely palliative financial reform bills that wended their way through Congress in 1991 is the requirement that elected and appointed officials be more accountable for deposit insurance losses as they accrue. Cash budgeting for deposit insurance has proven to be a recipe for disaster. By suppressing timely warnings of fund weakness, this information and budgeting system rationalized the repeated acts of regulatory gambling that fed the burgeoning FSLIC debacle. In recognition of that, the Omnibus Budget Reconciliation Act of 1990 required the Office of Management and Budget (0MB) and the Congressional Budget Office (CBO) each to study options for improving the accounting and budgeting for federal deposit insurance programs.
In reaffirming the essential adequacy of the current reporting and budgeting system, past FDIC and FSLIC studies of those options have been colored by bureaucratic and managerial self-interest. The CBO and 0MB reports, which represent the first official documents to analyze the information problem wholly from the taxpayer~ point of view, convincingly demonstrate that better ways to estimate deposit insurance costs are available. Those reports importantly shift and enrich the deposit insurance debate. They frankly acknowledge the role of public-service incentive defects in the growth of the deposit insurance mess. In particular, the OMB report bluntly characterizes the bill taxpayers are getting for deposit insurance today as largely the cost of past forbearance.
Most important, the two reports courageously put the weight of the OMB and the CBO behind the industry-opposed and regulator-denigrated "academic" view that we can measure the extent to which a taxpayer-backed deposit insurance fund cannot reasonably finance itself from premium income and that we can feed such measures into a system of budget constraint to provide effective cost control. In this respect the two studies are highly complementary As shown in Table 1, both analyze estimates of projected net cash outlays for deposit insurance over the recent past and near future. Each discusses the pros and cons of better ways of incorporating this information into the federal budgetary process. They also describe ways in which bank call reports could be improved and reinsurance markets could be used to develop more meaningful cost data.
The two reports agree about the advantages and disadvantages of integrating accrual accounting information into the federal budgeting process. The principal advantage lies in creating a dependable early-warning system. If accrual costs are incorporated fully into the primary budget, authorities would be forced to finance explicitly the extent to which premium income and other additions to reserves fail to render each deposit insurance fund self-sustaining. The principal difficulties are technical and political: the problem of establishing the reliability of particular ways of estimating a fund's net reserve position. Those technical issues are addressed and resolved in the OMB report.
The CBO Report
The CBO report, Budgetary Treatment of Deposit Insurance: A Framework for Reform, may be described as a treatise in applied budgeting theory The report carefully reviews the advantages and difficulties of adopting each of a series of bureaucratically more restrictive budgeting mechanisms for acknowledging and funding accruing deposit insurance costs. Neither report explicitly mentions the incentive conflicts a sitting Congress and president face in jettisoning the current system. Nevertheless, the recognition that elected politicians value the option of shifting responsibility for emerging problems to their successors' watch importantly shapes the logical flow of the CBO document. In emphasizing that every budgeting alternative is a potential improvement, the CBO report's authors raise "a series of questions that only the Congress-as policy-maker-can answer."
Both reports call for accrual estimates of deposit insurance costs to be officially produced and publicized at least as "supplementary" budget information. Without trying to force Congress' hand, both build a logical case for going beyond this to plug the information into the federal budget in some formal way.
The OMB Report
The OMB report, Budgeting for Federal Deposit Insurance, begins by explicitly adopting an economist's definition of what constitutes the annual cost of deposit insurance: "Gross cost equals: (1) the present value (at year end or at closure during the year) of the resolution costs of firms with negative net worth at the end of the year or at closure, minus (2) the present value (at the beginning of the year) of resolution costs previously estimated for firms that had negative net worth at the beginning of the year. Net worth, as used here, is the net present value of all projected income and expenses. Note that this difference would include the resolution costs of firms that had positive net worth at the beginning of the year but that became insolvent during the year-as well as the incremental costs for deeper insolvency for insolvent firms that continue operating. Both calculations of resolution costs would include a factor for additional loss of asset values in transfer of ownership and for carrying cost during resolution. Net cost equals gross cost less premiums paid during the year. Administrative costs not allocated to case resolutions would be recorded on a cash basis. The definition of gross costs is essentially the amount of premium that would have to be paid to cover the full incremental cost of providing insurance during the specified year. This parallels other definitions of Federal outlays. If this measure were substituted for cash disbursements as the measure of deposit insurance outlays, as has been done for loan guarantees, costs would be 'recognized' much sooner than under the current definition of outlays."
The distinguishing feature of the report lies in carefully developing illustrative calculations of that cost for the Bank Insurance Fund and FSLIC. 0MB calculations employ and compare estimates obtained from two alternative methods of measuring costs: discounting a fund's potential cash flows and applying option pricing techniques. The authors recommend that, beginning with the 1993 budget, accrued liabilities should be acknowledged in the budget document and recorded in condition reports filed by each deposit insurance fund. They further recommend that the reliability of each set of estimates be improved to prepare for the possibility of integrating such cost figures into the budget process in "two or three years:' They emphasize that in the interim resources ought to be allocated to refining both estimation models and adapting bank call reports to produce more detailed information on the maturity and yield structures of bank assets and liabilities.
A Summary Perspective: The Uselessness of Blind Watchdogs
Watchdog institutions cannot adequately monitor government efforts to manage obligations whose value is not itself appropriately measured. The smoke and mirrors of deposit insurance accounting kept the press from reporting deposit insurance losses until long after the red ink had been spilled and given taxpayer balance sheets a good soaking. Even now, news reports on the evolving mess remain misfocused. Sporadic threats of concentrated loss to the depositors and stockholders of individual deposit institutions are treated as a more important story than the continual threat of diffuse loss that taxpayers face. Similarly, the press failed to identify the critical flaw in the Bush administration's 1991 deposit insurance reform bill, which is that it preserves regulatory options to cover up and forbear that have been consistently misused in the past. Although each twist and turn that overrated bill encountered in Congress was headline financial news, the implications of CBO and OMB espousals of vital accounting and budget reforms have received virtually no media attention at all.
Edward J. Kane Ohio
State University
The Search for Affordable Housing
A special housing panel report released last summer, Not in My Back Yard: Removing Barriers to Affordable Housing, could prompt fundamental changes in the way America builds cities if the federal government acts on the thirty-one recommendations contained therein.
Not in My Back Yard, or the NIMBY report, summarizes the work of the Affordable Housing Commission. The commission was charged with assessing federal, state, and local regulations governing construction and rehabilitation. Its resulting report recommends ways to reduce the barriers to affordable housing raised by those regulations. Accordingly the report of the commission spotlights issues that have not before taken center stage in the national political debates concerning housing: exclusionary zoning, excessive building codes, rent control, and even federal provisions such as environmental regulations and the Davis-Bacon Act. The report cites evidence that the cost of new housing may be increased by as much as 20 to 35 percent in some areas as a result of excessive regulation.
Although written by an independent panel, the report reflects the personality of Housing and Urban Development Secretary Jack Kemp. It argues idealistically on the side of those who are priced out of the housing market. At the same time, the report avoids the temptation to offer a one-size-fits-all federal solution. Rather it seeks to address a national problem through remedies at the state and local levels and through regulatory relief, not federal spending.
The commission does seek to "jump start" the state and local review of housing regulations, however. In one of its most controversial recommendations, the NIMBY report evokes the activism of groups that once called for HUD to cut off monies from cities that fail to enforce fair housing policies. The commission suggests that HUD housing assistance should be conditioned on the existence of state and local initiatives to remove unnecessary barriers. Although the 1990 National Affordable Housing Act specifically forbids such actions, the NIMBY report recommends that Congress revise the statute to allow HUD to deny federal funds to cities that foster discriminatory land-use practices.
The report seems to have caught many housing policy organizations off guard. For example, Barry Zigas of the Low Income Housing Coalition reacted sarcastically to the initial release of the NIMBY report, saying that it might be of interest to realtors but would do nothing to help poor people. It is hard to believe that Zigas was aware at the time that the commission had recommended permanent extension of the low-income housing tax credit in exchange for legislative authority to compel cities to adopt strategies to remove barriers.
Such features of the NIMBY report clearly announce the interest of both Kemp and the Bush administration in striking compromises with housing advocacy groups. The NIMBY report signals the administration's willingness to allow budget increases for the sake of bringing about fundamental change.
Secretary Kemp's objective is to increase the attention paid to the role played by the complex web of local, state, and federal regulations that unnecessarily force up the cost of housing. He wants the dialogue on housing policy to encompass not just budgetary issues but the many other factors that affect the overall supply and distribution of housing.
If taken seriously, the NIMBY report and eventually the measures it proposes could make HUD a kind of Pied Piper for land-use and housing reform. Instead of being the federal agency that builds housing for the country (a dubious enterprise to be sure), HUD might be regarded as the place to look for leadership. In a country that gives its states broad latitude in regulating land use, wide variations in local policy can and do occur. And much policy is unfair, especially to low-income families.
Many of the NIMBY report's recommendations relate to the commission's seeming irritation with petty local requirements-the disconcerting trend toward bureaucratization, even at the municipal level: more forms, more permits, more inspections, more waiting, higher housing costs. Other policies criticized by the report, such as a rent control, are the product of misguided attempts to help the aged and infirm. Even many liberals who once defended rent control now understand that it actually undermines the housing stock, and policymakers in several cities are looking for ways to change rent control. The NIMBY report has some good ideas here, and it opens the door to more suggestions.
The report properly takes on excessive environmental rules, including the maze of overlapping local, state, and federal regulatory responsibilities and the often unnecessary delays caused by environmental impact statements. It also reflects the Bush administration's concern about the increasingly inclusive definition of wetlands. But to its credit, the NIMBY report does not take an ideological position in the wetlands debate. The commission identifies the costs of an expanding wetlands program and of increasingly aggressive enforcement of the Endangered Species Act in terms of lost housing opportunities. The report then suggests that ways should be found for developers to comply with national environmental policies without being forced to engage in excessive, time-consuming regulatory proceedings that drive up costs.
The component of the report that should not apart from the others in terms of moral and policy leadership, however, is its broadside against exclusionary land-use regulation. Commission member Anthony Downs of the Brookings Institution described the evils of exclusionary zoning over twenty years ago. According to Downs and others, overly restrictive land-use regulations are insidious tools of discrimination, dressed up as good planning. Here the commission takes on a force no less formidable than the vast and amorphous hypocrisy of the middle class.
Indeed, why is it that exclusionary zoning has never become a cause célèbre for compassionate, reform-minded liberals? The NIMBY report could have huge implications in this regard; it could become a rallying cry for one political party or a coup for bipartisanship. On one level the NIMBY report is aimed at those who pity the homeless and demand more federal spending on public housing but would not want a high-rise apartment building in their neighborhoods. On another level NIMBY is a straightforward appeal to all sides to question why it is becoming more difficult to realize the American dream.
The NIMBY report is strong on suggested responses to the many problems it identifies. Beyond legislative remedies, which depend on congressional action, it recommends practical measures, such as development of new model state land-use and building codes. It proposes experimentation. It envisions federal incentives for local innovation. It welcomes debate of issues and talks of the need for educating the public on matters that usually are brushed over as routine local planning decisions. It is refreshing to see a housing policy commission recommend less regulation rather than more.
Finally, the NIMBY report is bold enough to suggest that the federal government push for judicial review of state and local land-use rules that reduce the supply of affordable housing. The commission stops short of challenging Village of Euclid v. Ambler Realty Co., the Supreme Court decision that authorized states to regulate land use through zoning. But then, why not? The NIMBY report's account of the case reveals that when the Court sanctioned zoning in 1926, the justices believed that segregating the community at least by income groups if not by race, was a legitimate exercise of state police powers.
The NIMBY report suggests that cities should be urged or coerced to adopt codes that would make zoning a kinder and gentler process. But if zoning law is based on principles that we recognize today as patently discriminatory should not its legitimacy at least be tested by modem legal standards?
This is a question that bedevils planners. In a recent article in Planning, Charles M. Haar and Jerold S. Kayden noted: "Suburban communities have employed zoning requirements to lock the doors on city residents. Too often, local ordinances still employ large lot and minimum floor space requirements as mechanisms for exclusion of low-income and minority families striving to leave the city, locate near job opportunities, and enjoy the good life." Haar and Kayden go on, however: "Zoning is here to stay, as firmly entrenched a part of the landscape as the buildings it regulates. In the final analysis, its future success or failure will depend not so much on modifications to the technique itself, but upon its application by those who write and administer its provisions, and the willingness of the public to oversee those officials!"
Not all planning critics are so trusting of planners and the goodwill of suburban decisionmaking bodies. Norman Williams, Jr., author of the six-volume seminal work, American Land Planning Law, has been in the vanguard of those who view zoning as a fundamentally flawed concept. In one of his many critiques of zoning he wrote: "I am not referring to a change that will give everything a new label but keep the same tool. I am talking about a new set of controls. We are now quite clearly in a period of major transition, both in planning policy and in the law of land use, from which a new set of controls may develop."
The thought of life without zoning may seem like a return to the Dark Ages. But consider the work of Bernard Siegan and the experience of Houston, Texas, which until recently was the only major American city without a zoning ordinance. Siegan found that even without zoning, land-use patterns in Houston developed more or less the same way they do in cities with zoning. Commercial enterprises bid for space along the major thoroughfares and housing generally arranged itself on secondary streets. But unlike most cities, Houston permitted anomalies such as the corner grocery store, and the mixed uses often benefitted both the entrepreneur and the neighborhood.
Part of the intellectual underpinning of urban planning itself has been that land uses must be neatly separated by zoning to promote harmony. To do otherwise would be to invite confusion. Professional planners, in short, are wed to zoning just as astrologers are wed to stargazing. Today, however, even planners understand that an intermingling of land uses can be part of the vitality of cities and will not lead to their ruin. That is why cities now have more sophisticated zoning techniques, such as the "planned unit development:' which permits combinations of commercial and residential uses-provided they have the benediction of a planner.
In a way urban development has come full circle. But determination of how property is used now is in the hands of a political bureaucracy rather than the marketplace. The losers in this process are those who lack the resources or guile to master the regulatory maze created by modem planning and zoning.
Anyone who buys property and hopes to alter its use is considered, almost by definition, to be in violation of a land-use plan. No matter how benign the change or how constructive the use, an owner is likely to run into a series of time-consuming and costly technicalities. And even when those hurdles have been cleared, the process may yet hold the owner up to neighborhood-level scrutiny He may need to justify any proposed changes to a local board that worries about totally subjective matters.
Zoning and the related array of subdivision regulations have become a system that in every way assumes the newcomer to be an intruder. And when the intruder is a developer, any decision to exclude can be justified as an action needed to protect the community from the forces of greed. Whether through amendments to state and local codes or through yet unidentified new policies, the guilty-until-proven-innocent approach to planning should be reversed.
Without coming out and saying it, the NIMBY report yearns for a return to the time when people worked out those matters among themselves without the need for an adversarial process. It was a mode of community building that served America well through most of its history. Given a measure of old-fashioned tolerance, it is possible to protect neighbors against true externalities (such as storm-water runoff) resulting from development, while giving the individual the right to do more or less what he wants with his own land. It is not always possible to assure one set of homeowners ever-appreciating property values without putting up a barrier to others.
The Bush administration should use the good start offered by the NJMBY report as a springboard for a long-term and even more ambitious campaign to make housing more accessible to Americans. The goal should be to identify new approaches to development that let the free market do more of the work of sorting outland uses and housing opportunities.
Dick Cowden
American Association of Enterprise Zones
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