Reforming Circular A-4.

• Author: Graham, John D.

Even though we are now more than a year into his administration, too little is known about President Biden's regulatory-reform agenda to make confident predictions about lasting change. However, one Biden instruction that could have a profound effect is the promised redo of the Office of Management and Budget's (OMB) Circular A-4, an obscure technical guidance document that governs the practice of cost-benefit analysis (CBA) at regulatory agencies. It has not been updated since 2003 and is ripe for expert review, public comment, and refinement.

This initiative can build on a significant revision of the Environmental Protection Agency's economic guidelines that was reviewed by a special committee of the EPA Science Advisory Board (SAB) in 2020. Here are some of the key issues that the OMB initiative might consider:

Retrospective analysis/ The current Circular is aimed primarily at informing ex ante CBA, conducted before an agency proposes and finalizes a new regulation. More guidance is needed on how to apply CBA to an existing regulation, as there is bipartisan consensus that more retrospective evaluation of regulation should occur.

Discount rate / When the benefits and costs of regulations occur in different time frames, they cannot be compared properly without a time-preference adjustment. The current Circular recommends use of annual discount rates of 3% and 7% for future benefits and costs. The OMB tends to prefer 7% while agencies tend to prefer 3%, but standard practice is to present results using both rates.

The case for discounting is as sound today as it was in 2003, but the specific rates OMB is recommending merit reconsideration based on the best available evidence. The question of intergenerational discounting also should be reconsidered, especially given the prominence of the climate change issue, but the opportunity cost of displaced capital investments is relevant regardless of whether a regulation has intergenerational or intragenerational benefits.

Valuation of public health effects / The current Circular does not compel use of specific willingness-to-pay values for prevention of injury, illness, and premature death. Because the agencies have been slow to update their values over time, OMB should look carefully at current practices and make appropriate instructions. Agencies continue to make the dubious assumption that willingness-to-pay values for health effects do not vary among consumers or by regulatory context.

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