A new executive order for improving federal regulation? Deeper and wider cost-benefit analysis.

Author:Hahn, Robert W.

For over two decades, federal agencies have been required to analyze the benefits and costs of significant regulatory actions and to show that the benefits justify the costs. But the regulatory state continues to suffer from significant problems, including poor priority-setting; unintended adverse side-effects, and, on occasion, high costs for low benefits. In many cases, agencies do not offer an adequate account of either costs or benefits, and hence the commitment to cost-benefit balancing is not implemented in practice. A major current task is to ensure a deeper and wider commitment to cost-benefit analysis, properly understood. We explain how this task might be accomplished and offer a proposed executive order that would move regulation in better directions. In the course of the discussion, we explore a number of pertinent issues, including the actual record of the last two decades, the precautionary principle, the value of "prompt letters," the role of distributional factors, and the need to incorporate independent agencies within the system of cost-benefit balancing.


  1. Processes and Problems

    For over twenty years, the executive branch of the federal government has required regulatory agencies to assess the costs and benefits of regulation, and to attempt to ensure that the benefits outweigh, or justify, the costs. (1) At least in a formal sense, cost-benefit balancing is now the official creed of the executive branch, as demonstrated by a series of executive orders. (2) The point cuts across partisan divisions: President Clinton's approach differed somewhat from President Reagan's, but it shared the fundamental commitment to cost-benefit balancing. (3)

    Notwithstanding this public commitment, national regulation has hardly come into compliance with the principles of cost-benefit balancing. (4) This overall pattern of imperfect compliance should raise many alarm bells, even for those who have real doubts about cost-benefit analysis and merely want more coherence and better priority-setting. The general record does show numerous successes, in the form of regulations that promise to deliver significant benefits at a relatively low price. (5) But in many cases, regulations seem to do more harm than good. (6) Indeed, a close look at federal regulatory policy shows a wide range of problems. Perhaps foremost among them is exceptionally poor priority-setting, with substantial resources sometimes going to small problems, and with little attention being paid to some serious problems. (7) There are also unnecessarily high costs, with $146 to $229 billion being attributable to compliance costs each year. (8)

    We do not contend that an assessment of quantified costs and quantified benefits tells us everything that we need to know or that precise numbers are always possible. (9) But when the costs are high and the benefits low or nonexistent, something seems seriously amiss, especially because an absence of significant benefits signals a likely absence of significant savings in terms of health, safety, or the environment. Especially in a period in which economic growth and improved safety and health are among government's highest priorities, this is a major problem. And indeed, the recent reports of the Office of Management and Budget (OMB), designed to capture the costs and benefits of a wide range of regulations, reveal some disturbing numbers: the EPA's regulation for financial assurance for municipal solid waste landfills has monetized benefits of $0, but costs of $100 million, and this is expected for the next thirteen years; (10) for the next thirteen years, the Department of Labor's methylene chloride regulation will have annual costs of $100 million and annual benefits of $40 million; (11) the cost-benefit ratio for airbag depowering regulation seems bad, though there is uncertainty in the data. (12)

    Consider Table 1, which lists some estimates of costs and benefits of recent regulations:

    It might seem that existing executive orders would prevent or reduce outcomes of this kind, but apparently these orders have not had a large effect. (14) Indeed, there is some evidence that the existing orders have had little impact on what agencies actually do. (15)

    This is no mere academic objection. Expensive regulation may well increase prices, reduce wages, and increase unemployment (and hence poverty). (16) Resources now being devoted to small or imaginary problems might be diverted instead to areas where, by all accounts, they could produce far more good. Cost-benefit analysis is not an effort to reduce all human goods to numbers, but to increase the likelihood that regulation will actually produce human goods. Precise numbers do not exist, but according to a suggestive study, better allocations of health expenditures could save, each year, 60,200 additional lives at no additional cost--and such allocations could maintain the current level of lives saved with $31.1 billion in annual savings. (17) We do not believe that cost-benefit analysis should be the exclusive basis for assessing regulation, but we do believe that it is an important tool, and that a movement toward improved balancing is likely to promote many social goals, including better health and increased longevity. (18) This somewhat abstract claim has been dramatized by repeated demonstrations that some regulations create significant substitute risks (19)--and that with cheaper, more effective tools, regulation could achieve its basic goals while saving billions of dollars. (20)

  2. A Deeper and Wider Commitment to Cost-Benefit Analysis

    How can regulation be moved in more sensible directions? This is a large question, and we will not attempt to answer it thoroughly here. But it seems to us that much of the answer lies in improved institutions, and, in particular, in institutional reforms that increase the role of cost-benefit analysis in regulatory policy as a way of drawing attention to the likely effects of alternative courses of action. Of course, statutory changes would be necessary in many cases. We emphasize two points here. First, the commitment to cost-benefit analysis has been far too superficial, and in some ways mostly symbolic; it should be deepened through efforts to strengthen its actual role. Second, the commitment to cost-benefit analysis has been far too narrow; it should be widened through efforts to incorporate independent regulatory commissions within its reach.

    In this Article, we propose and explore a modest but potentially significant step toward greater depth and width: a new executive order on federal regulation, building on lessons derived from the experience of the last two decades. The proposed order, designed to replace or reform the current one, offers eight basic innovations over existing practice. Most of these address the issue of depth; the last point goes to the issue of width.

    1. Promoting Compliance. Our proposal attempts to ensure that agencies will actually comply with the basic principles established in previous orders, in part by explicitly requiring agency compliance with OMB guidelines for regulatory analysis. This would be an extremely significant step, because OMB's guidelines have been widely ignored, (21) and because compliance with those guidelines would significantly increase rationality and coherence in the regulatory process.

    2. "Prompting" Regulation. Our proposed order strengthens the role of the Office of Information and Regulatory Affairs (OIRA) and explicitly creates a mechanism by which OIRA might "prompt" regulation as well as constrain it. OIRA has issued a series of prompt letters under President Bush. (22) This is an important way to ensure that cost-benefit analysis will be used not simply to reduce and limit regulation, but also to spur regulation in those cases where it will do more good than harm. (23) By creating a mechanism for prompting regulation, our order moves cost-benefit analysis in the direction of service as a technical tool for improving regulation, rather than simply being a mechanism for reducing it.

    3. Considering Substitute Risks and Not Regulating Trivial Problems. We include explicit requirements that, to the extent permitted by law, agencies (a) consider the substitute risks introduced by regulation and (b) do not attempt to regulate trivial or de minimis problems. These requirements build on some important developments within the federal courts, which have created default rules authorizing agencies to consider substitute risks and to make de minimis exceptions to regulatory requirements. (24) These default rules are mirrored in federal legislation, which often bars regulation of trivial risks, (25) and which also calls, in many places, for attention to substitute risks. (26)

    4. Explaining Rationales for Action When Benefits Do Not Exceed Costs. We require that benefits should generally be expected to exceed costs, and ask agencies to provide a rationale for proceeding with any regulation that fails to pass a cost-benefit test (based on best quantifiable estimates). (27) Some statutes explicitly require agencies to act even if the benefits fall short of the costs. (28) There may also be cases in which an agency believes that it is worthwhile to proceed even though the quantifiable benefits do not exceed the quantifiable costs. Either way, we believe that accountability and transparency would be enhanced if the head of an agency were required to explain why a regulation is being adopted.

    5. Making Underlying Analysis Available. For each significant regulatory action, we ask the appropriate agency to include an underlying analysis of the benefits and costs, so that interested parties inside and outside of the government can understand how the results were obtained, and perform their own analysis of the issue if they so choose. We believe that this requirement will also promote transparency and enhance accountability.

    6. Formulating Regulatory Retrospective...

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