Eight
Regulatory Decisionmaking:
Public and Private Standards in Action

Given these differences in regulatory philosophy, public and private standards-setting systems, even when they address the same general subject, seem somewhat like regulatory apples and oranges. Though similar in form and purpose, they are difficult to compare in substance. Economists and policy analysts, unfazed by this predicament, look to the bottom line. They compare the seemingly incomparable by thinking in terms of aggregate costs and benefits. This approach facilitates the normative comparison of outcomes, an important element in evaluating public and private standards, but it obscures the nature and workings of the decisionmaking process. The private sector almost never engages in cost-benefit analysis. In contrast, the public sector produces plenty of cost-benefit analysis—it is required to by law—but mandated analysis tends to provide rationalizations rather than bases for decisions. The task is further complicated, of course, by the uncertainties attendant to complex regulatory decisions.

This chapter examines the outcomes of public and private standards-setting and the nature of the underlying decisionmaking process, with the goal of evaluating the relative performance of the two systems. The cases partially confirm the conventional view that public standards are stricter than private ones and are sometimes prone to overzealousness. But there are contrary indications as well, suggesting that the private sector is more diverse than is commonly presumed. The private sector even exhibits surprising tendencies toward strictness on occasion. Un-

derstanding these patterns of behavior is critical to predicting how the private sector might act in the future. This chapter analyzes the cases in two ways: first, in terms of the tendencies of each sector in handling the uncertainties about regulatory costs and benefits; second, on the basis of overall reasonableness, making some important assumptions explained below. Both approaches suggest that private standards-setting is more diverse than is often imagined. Various explanations for this regulatory behavior are ventured in chapter 9.

Decision Rules and Routines

Within the constraint of regulatory philosophy there is considerable room for discretionary judgment. Given the inherent uncertainties in setting safety standards, however, it is unclear how standards-setters structure and exercise this discretion. In other words, what are the rules of evidence, formal and informal? Some version of cost-benefit analysis is the formal answer in the public sector, although agencies are often accused of circumventing the requirement. The mystery widens in the private sector, where cost-benefit analysis is almost never done. Private safety standards often precede any information on accidents or injuries. UL listed woodstoves for decades without the benefit of any injury estimates. So what does the private sector do instead? How does it actually make decisions? The cases suggest that heuristics and other standard operating procedures have evolved to simplify the resolution of these complex safety questions in the private sector.

One technique is to defer to "professional judgment" within certain constraints. In other words, so long as particular provisions do not cost too much, engineers are given free rein in making the decisions. This strategy requires only rough estimates of costs and not necessarily any formal assessment of benefits. It also results in a substantial amount of guesswork. UL prefers to call this "engineering judgment." Others use the phrase "educated guess," with the stress on educated . In either case, the implication is that guesses are guided by a combination of education, experience, and values. This explains both the importance of engineering ethics and the potential for unreasonably strict (but economically inexpensive) provisions in private standards. More costly and salient issues are not resolved so informally; they are subject to the political process described in the next chapter.

A related approach that also does not require extensive information about costs and benefits is to concentrate on ominous hazards such as

electrocution and amputation. As a staff engineer at NFPA put it: "I can tell you how to protect against a hazard. I can't tell you how likely it is to happen." With ominous hazards, the probabilities are unimportant. Participants in both public and private standards-setting express the sentiment that certain hazards are obviously worth regulating. "One case can give you the answer," explains a UL employee. "Somebody loses a finger, let's fix it. I don't need information on a thousand cases." A former CPSC employee agrees: "If the problem is really significant, like the amputation of fingers or hands in the snowblower, you don't have to do a cost-benefit analysis to say that a twenty dollar control is going to pay for itself."

"Through almost intuition you can come up with cost-benefit analysis," explains an NFPA employee, who boasts that this intuition resulted in the requirement for ground-fault circuit interrupters. These devices, added to the National Electric Code in 1975, automatically trip the circuitbreaker when there might otherwise be serious or fatal shock. The irony is that a subsequent cost-benefit analysis conducted by the National Bureau of Standards casts doubt on the wisdom of the standard, concluding that the cost per life saved could exceed $7 million.^[1]

Considering these tendencies in two dimensions—that is, separating estimates of cost from evaluations of benefits—suggests that there are different patterns of preference in the public and private sectors concerning whether and when to err on the side of safety. Four combinations of estimation errors are possible. Two of these patterns are suggestive of regulatory outcomes; the other two are ambiguous. A standards-setting system might tend to under estimate costs and over estimate benefits. Because both estimation errors favor regulation, the resulting standards, relative to other combinations of estimation errors, would tend to be the strictest, bordering on overly protective (see table 6). Public standards-writing is generally thought to have these characteristics. Conversely, a standards-setting system in which costs are over estimated and benefits under estimated would tend to be most lenient, with a danger of being too lax. That is the conventional wisdom about private standards-setting. The other combinations of estimation errors are ambiguous because the errors are in different directions.

Two caveats are necessary before carrying this analysis further. First, these descriptions are not meant to be pejorative. Overestimation, in this context, is not deliberate puffery, nor is underestimation intentionally deceptive. Rather, these terms describe tendencies that are akin to

legal rules of evidence—they encompass various presumptions and informal rules concerning the burden of proof and the resolution of scientific disputes under uncertainty. Second, the typology illuminates differences in the direction, not the magnitude, of these tendencies. Standards classified in any of the four quadrants might be socially desirable, depending on the magnitude of the errors. Even with this ambiguity, the observed tendencies in the two sectors are quite revealing.

Moving first to how costs are estimated in both sectors, it is widely assumed that private standards-setters err on the high side, while government generally errs on the low. Private organizations have first-hand knowledge of costs and are likely to be sensitive to them, erring in the direction of the industry's concerns about profitability. In contrast, government lacks this first-hand knowledge and is likely to discount industry estimates of costs for fear they have been exaggerated for strategic purposes. Government also has no direct interest in, and often little actual concern about, how regulations affect profitability.

This much of the conventional wisdom is largely supported by the case studies. Government probably underestimated costs in all four cases. OSHA's estimates of the costs of the grain elevator rule were widely criticized as being too low. The cost estimates in the other cases, although much closer to the industry consensus, involved various minor errors in the "low" direction. The CPSC used a low figure for testing costs in the woodstove proceeding. The FAA assumed that airlines would buy the most inexpensive smoke detectors and, more significant, did not even calculate the additional training costs of Halon.

As expected, a tendency to underestimate costs does not characterize the four private cases. What occurred instead, however, is not readily apparent from the record. Documentation is scant, and many participants obscure the issues because arguments "against safety" are considered either unsavory or impolitic.^[2] The one apparent exception is NFPA 408, where costs were never explicitly discussed. The standard was set practically without regard to cost. Nevertheless, it appears that the NFPA Agricultural Dusts committee tended to overestimate, not underestimate, the cost of safety measures. Members of the National Grain and Food Association surely did so in lobbying OSHA.^[3] Manufacturers generally agree that UL and AGA "understand" the cost of various proposals and do not tend to underestimate them.

The surprise is on the benefit side, where it is generally assumed that private standards-setters underestimate benefits while government overestimates them. This characterization appears to fit government. Estimates of benefits in the woodstove labeling case, for example, were wildly exaggerated. W. Kip Viscusi argues that the estimated benefits of the gas space heater standard were also exaggerated, although the mistake was probably not very large.^[4] There is good reason to believe that the FAA and OSHA overestimated benefits as well. The private sector, by contrast, did not behave as expected. In only one of the four cases did the private sector play down the benefits of taking additional safety precautions. Members of the NFPA committee for grain elevator safety seem resigned to the notion that few, if any, safety measures can affect the number of explosions. But in the three remaining cases, there was a marked tendency for the private sector to err on the "safe" side. This tendency varied by hazard but was unmistakable in overall terms. There is no substantive basis for believing that most aspects of UL 1482 have any real effect on woodstove safety. Similarly, the AGA/ANSI standard for gas space heaters is filled with requirements that have no obvious effect on safety. The same is true of the NFPA standard for aviation fire extinguishers. All available evidence suggests that the benefits of adding more Halon extinguishers and increasing the training procedures for personnel are likely to be very small. That was not the view of most NFPA committee members, however, who tacitly assumed that the benefits were worth the cost.

In short, government standards-setting was true to form, tending in all cases to the combination of errors that promotes overprotective regulation. By contrast, the private standards-setters were all over the map (see table 7). Only one of the four cases, grain elevators, falls into

the category where underprotective regulation is most likely. In two cases, the results were ambiguous. Although it appears that UL and AGA tend to err in the favor of industry when estimating the cost of safety measures, they also erred on the side of safety in estimating the benefits of various provisions for woodstoves and gas space heaters. Finally, one of the private standards, NFPA 408, falls into the quadrant dominated by government. Based on the available evidence, this standard probably errs farthest in the direction of overprotectiveness, mandating even more than the FAA in an area where the likely marginal benefits are, by any reasonable measure, minuscule. The unexpected diversity of private standards carries over to the normative evaluation of outcomes.

Measures of Overall Performance

Distinct regulatory philosophies confine and direct the task of setting standards. Overlapping but different decisionmaking rules characterize the private and public sectors. But outcomes are not as easily differentiated as the philosophies and operating procedures that produce them. There are four reasons why it is difficult to draw policy conclusions from regulatory philosophy alone. First, regulatory philosophy con-

strains but does not determine outcomes. It leaves plenty of room for discretionary decisions. While regulatory philosophy keeps UL from addressing the creosote problem, it leaves considerable latitude in setting other requirements in the standard. These discretionary decisions result in a variety of outcomes. UL 1482 is probably too strict on glass doors, but too lax on metal grates. Similarly, the stability requirements in ANSI Z21.11.2 are undoubtedly stringent, while the clothing ignition test is not.

Second, however distinct these philosophies, the universe of potential outcomes overlap. The public and private sectors are capable of producing very similar outcomes. The FAA and NFPA, acting practically in isolation of each other, developed several similar provisions for aviation fire safety. There were pockets of agreement in the other cases as well—areas where both sectors agreed on the content of particular provisions. The CPSC approved the basic technical and performance provisions in UL 1482 and most of those in Z21.11.2. OSHA did not quarrel with the NFPA provisions for fire safety in grain elevators.

Third, even when regulatory philosophies dictate distinct regulatory outcomes, the normative implications are unclear. The same regulatory philosophy can perform well in one circumstance and poorly in another. Paternalism led the CPSC to adopt a seemingly desirable standard for gas space heaters, but an ill-advised one for woodstoves. Similarly, refusing to make standards retroactive practically gutted NFPA 61B, but had little adverse effect on NFPA 408 or UL 1482. The only way to evaluate regulatory philosophies, then, is by examining outcomes and seeking to understand the conditions under which they perform best.

Finally, it is difficult to draw substantive conclusions about regulatory philosophy because it is multifaceted and signals sometimes conflict. Safety standards are usually polycentric in nature, raising an assortment of complex issues. Under these circumstances, the manifestations of regulatory philosophy are varied and sometimes contradictory. The engineering ethic, for example, helps explain UL's reluctance to address the creosote problem in woodstoves, but it also explains its more stringent structural requirements. In sum, regulatory philosophy shapes the standards-setting process in several important ways, but the normative implications of these differences cannot be stated in simple terms that clearly favor one form over the other.

What is needed, then, is a measure of overall performance to facilitate the comparison of public and private outcomes. Whether that is possible strikes at the heart of a long-standing debate about process

versus substance. Dispensing with pesky substantive issues, those disposed to the legal perspective turn exclusively to process (that perspective is examined in chapter 11). Those venturing substantive conclusions usually couch the analysis in terms of either strictness or reasonableness. Both concepts encompass important social considerations. Strictness generally refers to absolute benefits; reasonableness, to the relationship between benefits and costs. These frames of reference differ significantly, creating conflicting impressions of many standards. Public standards are usually considered stricter, but less reasonable, than private ones. That is, they probably generate more absolute benefits than private standards, but at a cost higher than many considered acceptable. By contrast, almost no one argues that private standards impose unreasonable costs. But reasonableness is thought to come at the expense of strictness. Obviously, these substantive measures should be merged in some manner. Standards should be compared through an aggregation of strictness and reasonableness.

In theory, cost-benefit analysis facilitates the task. But there are practical and philosophical objections to even the roughest forms of cost-benefit analysis. The dearth of reliable data, particularly on benefits, dims the potential for such analysis. Part of the problem is forecasting. Much depends on implementation. For example, OSHA's "action level" for grain elevator housekeeping will produce benefits if it is implemented through a reasonable inspection scheme. It will foster unreasonableness if implemented poorly. On a more philosophical level, cost-benefit analysis requires that monetary values be placed on life and limb, something both methodologically difficult and politically explosive. Cost-benefit analysis is out of the question for current evaluative purposes. The data necessary to support it are not available. Nothing remotely resembling cost-benefit analysis was undertaken by any of the private standards-setters. And the economic analyses conducted by OSHA, the CPSC, and the FAA are easily faulted for reasons elaborated in the case studies.

One way to evaluate outcomes directly despite the significant uncertainties about costs and benefits is to indulge in liberal evidentiary presumptions and seek only to separate the obviously bad outcomes from the possibly good ones. In those terms, a standard is within the "zone of reasonableness" if there is credible evidence that benefits are (1) nontrivial and (2) not significantly in excess of costs. This overly inclusive notion of "reasonableness" avoids the almost intractable disputes about the precise magnitude of uncertain benefits and costs. This approach also permits a surprising number of normative conclusions

about the cases. The results, based on the summary evaluation in the case studies, are summarized and explained below:

On the public side, two of the standards were clearly too strict. There was no evidence that the CPSC's woodstove labeling rule would result in any measurable benefits; and fire protection engineers agree that the FAA's standard for aviation fire safety is very unlikely to generate benefits in excess of cost. The other two public standards were well within the zone of reasonableness. The need for grain elevator regulation is supported by the evidence, and the OSHA standard, although it could be improved, is reasonable in several respects. The CPSC's standard for gas space heaters is probably the best of the bunch. It seems to be responsible for the widespread use of ODS technology, an inexpensive and effective method for dealing with a problem of uncertain dimensions. The private sector was also divided. Two of its standards were clearly undesirable, although one was too strict and the other too lax. The NFPA went even further overboard than the FAA on aviation safety. NFPA officials privately admit that these standards are not supportable in economic terms. The NFPA also missed the mark on grain elevators, adopting a standard that is so weak that it barely addresses the most serious problem: grain dust.

Two tentative conclusions can be drawn from this normative evaluation. First, neither sector is clearly better than the other. Both sectors appear as capable of failing as they are of succeeding, although the public sector seems more likely to be overly strict, while the private sector is more likely to be too lax. Nevertheless, private standards should not be rejected solely on the theory that they tend to be underprotective . Sometimes they are not. This analysis also suggests that there is no simple answer to the question whether the public or private approach is generally better. Private sector behavior is too varied. NFPA 408 and 61B are cases in point. Second, the cases suggest that particular issues can foster distinct patterns of regulatory behavior. It is

no coincidence that both the public and private standards for aviation fire safety seems "overly strict."

Both of these observations underscore the importance of understanding the reasons behind the observed results—the subject of the next chapter. Given the unusual nature of the "paired" case studies, however, it is appropriate to consider first whether these observations are intrinsic to overlapping standards. In other words, to what extent is the behavior of either sector affected by the activities of the other?

Accounting for Regulatory Overlap

As with most instances of overlapping standards, the private standard came first in all four cases. The most pertinent question, then, is whether the public sector tailored its behavior to the private standard. How the private sector responded to government intervention is also important, given widespread concern that public standards will "drive out" private ones.

In two of the cases, grain elevators and aviation fire safety, the public sector acted almost independently of the private sector. In neither instance was the public sector trying to influence the private. OSHA did not seriously pursue a strategy of trying to improve NFPA 61B, and the FAA did not even know about NFPA 408 until well into its own rulemaking proceedings. Therefore, the observations from those cases can safely be said to represent inherent traits, not ones unique to overlapping standards.

The most curious aspect of these cases concerns the private sector, which apparently did not alter its behavior in response to the threat of public intervention. The NFPA did not respond to the FAA, other than to send a brief letter to the public docket. Several committee members interviewed while the FAA regulation was in the proposal stage knew almost nothing about the regulation. In contrast, committee members considering revisions to NFPA 61B in July 1985 were acutely aware of the proposed OSHA rule. But they, too, took little action aimed at forestalling OSHA regulation. The committee seemed resigned to government regulation and was not willing to enact serious grain-dust controls in order to prevent it. This relatively independent behavior bolsters the conclusions already set forth about public and private standards-setting, but it does not necessarily bode well for public policy. The government's failure to exploit existing standards or to try to in-

fluence them seems wasteful. The FAA's actions certainly violated the OMB directive to consider existing private standards before adopting government ones.

Both cases involving the CPSC were interactive from the start. The agency acted with full knowledge of the relevant private standards, attempting in both cases to supplement them with beneficial government regulation. The private sector responded in both cases as well. To what extent does this interaction alter the conclusions about public and private behavior? It is impossible to know without somehow comparing this "interactive" behavior to cases in which there is no private standard. Some effects are obvious, however. The CPSC tailored its regulations to supplement private standards. Whether it would have proposed more comprehensive standards in the absence of private ones is uncertain, but the agency would have been hard pressed to justify the technical judgments contained in, say, UL 1482. A close examination of these cases suggests that the most significant effects of this interactive behavior went largely unnoticed. In the case of woodstoves, not only did UL alter its warning labels to placate the CPSC, but the percentage of certified woodstoves rose dramatically after the CPSC proposed its regulation. With gas space heaters, significant changes were made in ANSI Z21.11.2. The small porcelain bathroom heater was eliminated as a result of numerous improvements in structural requirements and performance standards. These changes in private standards should rightly be credited to government action, and conclusions about the private sector must be adjusted accordingly.

In sum, the CPSC cases suggest that the power of government to influence private standards is significant. Unfortunately, government's capacity for recognizing these improvements is apparently not as large. In neither case did the government clearly recognize the improvements in the private standards. Instead, driven by an enforcement ethic that was apparently unaffected by the private standards, government went ahead with regulations that produced minimal marginal benefits. The next chapter looks beyond these interactive effects to broader explanations of the differences in decisionmaking and performance.