Rethinking the Progressive Agenda: The Reform of the American Regulatory State.

• Author: Farber, Daniel A.

The Reagan presidency was a watershed in the history of American government. For the first time since Hoover, a president was actively hostile to the modern administrative state, elected on a platform of "less government." Today, the call for reduced government seems less compelling; we have rediscovered the existence of pressing social problems that seem to require a government response. Yet the Reagan-era critique has destroyed liberal complacency about government's ability to solve social problems. As Bill Clinton says on the jacket of Reinventing Government, even the administrative state's supporters now believe that "[t]hose of us who want to revitalize government in the 1990s are going to have to reinvent it."

Reinventing Government and Rethinking the Progressive Agenda are efforts to move beyond the Reagan era without returning to discredited visions of government. Both could be considered neoliberal: they propose major reforms rather than defending the pre-Reagan administrative state. Many of their proposals adapt "conservative" ideas - cost-benefit analysis, competition, privatization - to serve the liberal goals of increased government effectiveness and efficiency. Ultimately, neither book truly provides what Clinton calls a "blueprint" for reinventing the administrative state. Nevertheless, they do contain provocative new ideas for improving the operation of government.

Both books discuss an enormous range of government policies. Instead of attempting to match their sweep, this review will use environmental regulation as the context for exploring their ideas. First, however, a brief overview of both books is in order.

Of the two books, Reinventing Government is the less conventionally academic. Its authors, David Osborne(1) and Ted Gaebler,(2) provide the same kind of breezy management advice found in books like In Search of Excellence.(3) Trying to bring Japanese business methods to bear on American governmental institutions, they advocate replacing rigid hierarchies with more entrepreneurial, team-oriented management. The book features relatively few footnotes and statistics. Instead, Osborne and Gaebler present a series of inspiring stories about innovative officials who transformed moribund programs into successful operations. Often, these officials began by trying to identify their organization's "customers," determining the customers' needs, and then insisting that the organization find a way to meet those needs. The stories are probably oversimplified,(4) but they do communicate the novel idea that government can be exciting and creative.(5)

Rethinking the Progressive Agenda, by Susan Rose-Ackerman,(6) is a more traditional work of scholarship. Professor Rose-Ackerman's impressive knowledge of regulatory policy and economic theory animate her commentary on the problems

of the modern administrative state. She offers thoughtful observations about topics ranging from the Takings Clause(7) to funding mechanisms for government services.(8) She devotes much of her attention to improving the rationality of government decisionmaking; she proposes increased use of cost-benefit analysis and more vigorous judicial review (p. 191). But other important parts of her book (like Osborne and Gaebler's) focus on the design of implementation mechanisms.(9)

These aspects of Rose-Ackerman's work exemplify two rather different approaches to improving public administration. Part I of this review discusses the older of the two approaches, which Rose-Ackerman calls policy analysis. This approach calls for greater use of economic analysis in making substantive decisions, with judicial review furnishing quality control on the technical aspects of decisionmaking. The organizational form corresponding to this model of decisionmaking is the conventional hierarchy, of the kind Osborne and Gaebler condemn, in which information flows to the top and decisions flow back down. Part II turns to a newer approach, which focuses on the design of implementation mechanisms; here, the paradigm is probably the marketable pollution permit. Part II explores how better mechanism design, of the kind both Rose-Ackerman and Osborne and Gaebler advocate, might be used to improve environmental law.

While marketable permits are promising, we need to consider other ways to decentralize regulation. Although neither book addresses other possible methods of environmental protection, their themes inspire a search for new possibilities. One option is delegating more discretion over permits to the states while using modern methods of statistical quality control to improve the state's performance. Another option is a form of "result driven" delegation, in which selected states would contract out of the normal regulatory regime, guaranteeing in return to achieve specified, measurable improvements in environmental quality. An improved regulatory process also might well involve less judicial oversight.

1. The "Old" Policy Analysis: Formalized

   Decisionmaking

   As part of her program to improve administrative rationality, Professor Rose-Ackerman recommends expanded agency reliance on cost-benefit analysis in promulgating regulations (pp. 33-34, 37, 39). As she recognizes, regulatory schemes often lack firm statutory bases for cost-benefit analysis. In the environmental area, for example, few statutes require regulators to perform cost-benefit analysis. Nevertheless, Rose-Ackerman argues that, in the absence of specific language prohibiting the use of cost-benefit analysis, courts should require agencies to engage in "net benefit maximization" (which is just another name for cost-benefit analysis).

   Rose-Ackerman's enthusiasm for cost-benefit analysis is strong enough to overcome highly unfavorable statutory language. For example, she criticizes the Supreme Court for failing to require cost-benefit analysis for OSHA toxics regulations (pp. 93-94), yet the statute clearly precludes her proposed result. The Act mandates that OSHA choose the standard that "most adequately assures, to the extent feasible ... that no employee will suffer material impairment of health."(10) Rose-Ackerman's effort to expand cost-benefit analysis is thus somewhat dubious as a matter of statutory interpretation.(11) Moreover, as we will see, cost-benefit analysis is not really capable of playing the decisive role she desires for it.

   1. The Practical Limits of Cost-Benefit Analysis

      As Rose-Ackerman explains, cost-benefit analysis came to Washington with Bob McNamara and his "Whiz Kids" at the Defense Department (p. 15). Since then, the executive branch has increasingly applied cost-benefit analysis in policymaking. President Reagan's famous Executive Order 12,291, issued in 1981, requires agencies issuing "major rules" to conduct a cost-benefit analysis to ensure that the benefits of a proposed regulation outweigh its Costs.(12) Executive Order 12,291 effectively provides a cost-benefit overlay for all major federal regulatory actions.(13) The renewed emphasis on cost-benefit analysis found its administrative incarnation in the increasingly powerful supervisory role of the Office of Management and Budget (OMB) over EPA and other agencies.

      More recently, George Bush imposed a ninety-day moratorium on new regulations. Agencies were instructed to review existing regulations during the moratorium and to ensure compliance with the following standards (among others):

      (a) The expected benefits to society of any regulation should clearly outweigh the expected costs it imposes on society.

      (b) Regulations should be fashioned to maximize net benefits to society.(14)

      The Bush order seemed on its face directly responsive to Rose-Ackerman's demand for "net benefit" analysis.

      Although a heated philosophical debate has raged about whether cost-benefit analysis should dictate regulatory policy,(15) the debaters seem to have overlooked a more basic point. Experience shows that, in the most interesting, controversial cases, cost-benefit analysis could not dictate an answer even if we wanted it to do so. Except in extreme cases, the result of a cost-benefit analysis often turns on a series of discretionary judgments; competent, reasonable analysts can come up with quite different but equally defensible answers. Toxic substance control, now the subject of a large and rapidly growing body of federal regulation, exemplifies the difficulties encountered by honest cost-benefit analysts. Several steps in the process are particularly imprecise.

      Valuation is a key step in conducting a cost-benefit analysis,(16) which requires that future benefits be expressed in monetary terms. For goods freely traded on the market, determining monetary value is straightforward. For "nonmarket goods" like human life (or the inherent value people place on the existence of other species), however, assignment of a monetary value is much more controversial. Much of today's regulation involves nonmonetary benefits and therefore raises precisely these valuation problems. For instance, federal agencies have imputed values to human life ranging from $70,000 to $132 million. 17 Even apart from the difficulty of placing a dollar value on life, overall reductions in the levels of human mortality may not fully capture the benefits of toxics regulation. Other characteristics of risks, such as clustering of victims, may also matter. I Moreover, regulations may have important incidental benefits, which may resist quantification even more stubbornly. The policy analyst tends to ignore these "soft variables,"19 precluding a truly complete analysis.

      After monetization of the benefits, the next problem is setting the discount rate, so as to factor in the delay in receiving the benefits. Placing a value on human life or some other "intangible" is hard enough, but additional complexities arise when the benefits of a regulation will not occur for many years. For example, because government regulation of carcinogens cannot be expected to...