Presidential resource support for IRCs and DRAs: a principal-agent explanation

Public Finance and Management, Spring, 2003 by Christopher G. Reddick

Abstract

This article examines whether Independent Regulatory Commissions (IRCs) received less presidential resource support (employment and outlays) than Dependent Regulatory Agencies (DRAs). The principal-agent theory was used to explain why DRAs fare better in the hands of presidents than IRCs in terms of resource allocation. It also examines whether there were differences in spending priorities between social and economic regulation. The database for this study was composed of 31 federal regulatory agencies, during the period between 1980 and 2000, broken down into social regulation and economic regulation. This study has used Feasible Generalized Least Squares (FGLS) pool time series cross sectional analysis on agency budget outlays and employment, along with several political and economic control variables. The findings indicated that IRCs received less resource support than DRAs, due to the uncertainty presidents face monitoring the performance of these agencies.

Introduction

Do United States regulatory agencies independent of the president receive less resource support than regulatory agencies in the executive branch? This article attempts to answer the question by examining employment and outlay growth of 31 federal regulatory agencies. We use the principal-agent theory as one explanation as to why presidents are less inclined to support IRCs compared with DRAs in the resource allocation process.

Why focus on resources when we want to determine the extent of support by the president for regulatory agencies? What makes resource support for independent regulatory commissions especially interesting is the fact that deficits have been growing steadily, especially during the 1980s and early 1990s, and the percent of the budget consumed by budgetary items like entitlement programs has skyrocketed. However, expenses incurred by regulatory agencies are generally for operating costs and salaries; in other words, most of their expenses are controllable (Hibbing, 1985). This makes the investigations of the political and economic impacts of regulatory resource support very responsive to political pressures.

The two main types of regulatory agencies are the Dependent Regulatory Agency (DRA) and the Independent Regulatory Commission (IRC). The DRAs are agencies charged with regulating economic activity, and are housed within an existing cabinet department or other executive structure. Examples here include the Agricultural Marketing Service (AMS) in the Department of Agriculture and the Food and Drug Administration (FDA) in Health and Human Services (See Table 1 in the Appendix).

The second type of regulatory structure is the IRCs (Table 1). These agencies possess major differences from the DRAs. First, IRCs have plural--not individual leadership; a collective decision-making process exists from the start. Second, board members or commissioners do not serve "at the pleasure of the president" as do cabinet secretaries and other political appointees. Presidential powers to remove them are sharply curtailed. Their terms of office are fixed and are often quite long. In addition, terms of office are staggered--that is, every year or every other year, only one member's term expires. Therefore, no president is able to bring about drastic shifts in policy by appointing several board members at once. The policy within the agency is not likely to change abruptly because of membership turnover. Third, each commission or board has an odd number of members, ranging from five to eleven, and decisions are reached by a majority vote. Finally, there must be a nearly even partisan balance among the members--a five-member board must be three to two (Republican or Democratic). The combined effect of these provisions is, or was historically intended to be, that these entities were better insulated from political manipulation than others in the executive branch. In particular, it was deemed centrally important to prevent presidential interference with regulatory processes and to make the regulators answerable to Congress.

The two main types of regulation examined in this article are economic and social. Economic regulation typically focuses on markets, rates, and the obligation to serve (e.g., Federal Communications Commission). The second type of regulation is social in nature and it looks at the conditions under which goods and services are produced and the physical characteristics of products manufactured (e.g., Food and Drug Administration). In this article, we examine social and economic regulation and the political and economic priorities of government over time. We try to discern the impact that regulation resource support has on both these categories of spending, comparing DRAs and IRCs, since invariably different administrations should presumably have varying influence on them.

First, this article examines the theory behind political independence of regulatory agencies. Second, we use the principal-agent theory as one explanation as to why presidents treat IRCs less favorably than DRAs in the resource allocation process. Third, we state the two hypotheses, models, and database used. Fourth, we present the method of pooled time series cross-section analysis. Following the methods section, we outline the results of the tests. The conclusion demonstrates the relationship between the results and the significance of this work.