DISTRIBUTIONAL CONSEQUENCES AND REGULATORY ANALYSIS.

• Author: Revesz, Richard L.

1. Introduction 54 II. The Legal Landscape on Distribution 58 A. Governing Documents 1. Distributional Analysis Under President Clinton 59 2. Circular A-4 60 3. Distributional Analysis Under President Obama 61 B. Empirical Assessments 62 1. Academic Literature 62 2. Major Environmental Regulations 64 III. Lack of a Methodological Consensus 68 A. A Meta-Analysis 69 B. Unit of Analysis 70 C. Race and Ethnicity 73 D. Socioeconomic Status 76 E. Civic Engagement 78 F. Defining Disproportionate Impact 80 IV. Standardization 82 A. Unit of Analysis 83 B. Race and Ethnicity 86 C. Socioeconomic Status 88 V. The Way Forward 90 A. Consideration of Alternatives B. Relationship Between Distributional Analysis and Cost- Benefit Analysis 93 C. Preferable Distributional Consequences as an Unquantified Benefit 96 VI. Conclusion 98 I. INTRODUCTION

   Cost-benefit analysis has been a significant component of the regulatory state since the 1980s. (1) First, President Reagan in Executive Order 12291 (2) and then President Clinton in Executive Order 12866, (3) prescribed that administrative agencies in the Executive Branch should undertake distributional analysis as part of their justification for promulgating significant regulations. The Office of Information and Regulatory Affairs (OIRA) was directed to oversee this review process and, in particular, to review the manner in which agencies conducted their cost-benefit analyses of individual rules. (4)

   Cost-benefit analysis focuses only on aggregate costs and aggregate benefits. It does not take account of who bears these costs and benefits. For example, a regulation reducing the emissions of an air pollutant could be cost-benefit justified if its benefits outweigh its costs, (5) even if all the emissions reductions benefit a high-income, white neighborhood and all the costs are borne by a low-income, minority neighborhood.

   To address troubling distributional consequences of this sort, both the Clinton order and Executive Order 13563, promulgated by President Obama, instruct agencies to consider (and OIRA to review) "distributive impacts" and "equity," alongside the cost-benefit analysis when evaluating potential regulations. (6) And, relatedly, both Presidents Clinton and Obama promulgated separate executive orders to address concerns about environmental justice--the disproportionate impact of pollution on disadvantaged communities. (7)

   The intentions expressed in these presidential pronouncements were undoubtedly well-meaning ones. Nonetheless, these efforts have so far failed to move the needle. (8) Indeed, the efforts to make distributional analysis a meaningful component of the evaluation of regulation, (9) or, for that matter, even a non-trivial component, cannot be regarded as anything other than a failure.

   As a result, on the first day of his administration, President Biden promulgated a President Memorandum on Modernizing Regulatory Review, which directs the Office of Management and Budget (OMB), among other tasks, to "propose procedures that take into account the distributional consequences of regulations ... to ensure that regulatory initiatives appropriately benefit and do not inappropriately burden disadvantaged, vulnerable, or marginalized communities." (10) On this score, the language of President Biden's memorandum is not meaningfully different from the language of the pronouncements of Presidents Clinton and Obama. This similarity raises an obvious question: What would it take for the Biden effort to succeed where the Clinton and Obama efforts failed?

   This Article seeks to answer that question and to set the groundwork for the Biden administration's next steps on this important matter. This Article makes two core claims. First, for distributional analysis to become a significant part of the regulatory landscape, it will be necessary for agencies to have detailed guidance on how to standardize the manner in which such analysis is conducted. Unlike the case of cost-benefit, which is an established discipline with generally accepted professional norms, (11) there is currently no consensus on how distributional analysis should be conducted. Different studies employ significantly different methodologies, and, as a result, distributional analyses are not comparable across regulations; it is therefore not possible for agencies to determine in an objective way when particular consequences should raise concern. For the Biden effort to succeed, agencies will need to be provided with detailed guidance in a revision to Circular A-4, the document that instructs agencies on how to conduct regulatory impact analyses. (12) Currently, Circular A-4, which dates back to the George W. Bush administration, deals with distributional issues in a perfunctory and unhelpful manner. We set forth some principles that should guide the needed standardization but explain why a robust stakeholder process will be necessary to give this process legitimacy.

   This Article's second core claim is conceptually more straightforward. The analysis of alternatives is a central element of regulatory impact analysis, and Circular A-4 gives agencies detailed guidance on how to conduct it. Agencies typically follow the command for cost-benefit analyses. In contrast, they have routinely ignored it, under administrations of both parties over a quarter of a century, for distributional analysis, for which it is no less relevant. (13) And OIRA, which is charged with reviewing the regulatory impact analyses conducted by agencies, has never called them to task for this failure. If agencies do not analyze the distributional consequences of different regulatory alternatives, they will never be in a position to face the key issue that needs to be addressed for distributional analysis to be meaningful: When are the better distributional consequences of one alternative sufficient to overcome another alternative's higher net benefits?

   This Article is organized as follows. Part II discusses pronouncements of Presidents Clinton and Obama that made distributional considerations--and related concerns involving environmental justice--relevant to regulatory review analysis and shows how the formal requirements were never implemented in a meaningful manner. Most strikingly, Part II shows how in the major environmental regulations promulgated by the Obama administration, distributional consequences were considered only in a tautological way devoid of any substantive content.

   Part III reviews an important set of environmental justice studies. It shows that there is no consensus on the major methodological elements that need to be evaluated to determine whether policies have disproportionate effects on particular groups. Instead, different studies use significantly different approaches without providing much explanation for the various choices. As a result, there is a risk that the methodologies will be manipulated to reach a predetermined result.

   Part IV then argues for the importance of standardizing the methodologies and provides suggestions on how that might be done. Additionally, it stresses the importance of stakeholder input into this process. The approach to standardization that will emerge from this process should be reflected in revisions to Circular A-4 to provide agencies with the guidance they have lacked until now.

   Lastly, Part V deals with three key decisions that the Biden administration will need to make, beyond standardization, to turn the goals embodied in its presidential memorandum into a reality. First, OIRA needs to provide robust policing of the requirement, already expressed in Circular A-4 but so far honored only in the breach, that agencies analyze the distributional consequences of different regulatory alternatives, at least for the alternatives analyzed as part of their cost-benefit analyses. Second, Part V argues that distributional analysis should be conducted alongside a traditional cost-benefit analysis instead of being incorporated into a social welfare function through the assignment of distributional weights. Third, Part V explains how the better distributional consequences of one alternative can be traded off against the higher net benefits of a different alternative.

2. THE LEGAL LANDSCAPE ON DISTRIBUTION

   In 1981, President Reagan signed Executive Order 12291, (14) which set up the centralized review of agency regulations performed by OIRA. (15) It also required agencies to perform a cost-benefit analysis of any significant regulation. (16) The purpose of cost-benefit analysis is to ensure that all regulatory actions create "potential benefits to society [that] outweigh the potential costs to society." (17) Cost-benefit analysis rests upon the economic principle of Kaldor-Hicks efficiency: the agency weighs the benefits against the costs, without any consideration of who pays the costs nor who receives the benefits. In other words, this approach takes no account of distributional consequences. (18)

   Despite the negative reception Executive Order 12291 received from regulatory advocates, (19) President Clinton retained the framework from the Reagan order in his own Executive Order 12866, which similarly requires agencies to conduct cost-benefit analyses of "significant" regulations and submit them to OIRA for review. (20) There are, however, important differences. For example, the language regarding costs in the Clinton order replaced a requirement that benefits should "outweigh" with an instruction that benefits should "justify" the costs. (21) The Clinton order also addressed concerns that OIRA review placed too much focus on quantifiable costs and benefits by directing agencies to consider measures "that are difficult to quantify, but nevertheless essential to consider." (22) Executive Order 12866 cemented cost-benefit analysis as a key feature of the administrative state. (23) Since then, it has become the blueprint used throughout the five subsequent presidential administrations of...