Escaping the "Smoke and Mirrors" in Benefit Cost Analysis

July 2, 2015


The use of Benefit Cost Analysis (BCA) provides information about the benefits and costs that consumers and businesses will bear as result of a public intervention, which in theory will allow an efficient allocation of resources and ensure that such interventions improve social welfare. Quantifying and monetizing a rule’s effects as part of the Regulatory Impact Assessment has become a key element in the decision making process of the federal government. The use of BCA has been endorsed by both political parties as a tool to constrain agency discretion, ensuring that agencies’ rules maximize net benefits to society. However, regulatory analysis and implementation is far from perfect, and a number of potential regulatory reforms have recently gained traction.

Expert panel weighs in

On June 18, five experts—C. Boyden Gray, Michael Livermore, Richard Morgenstern, Eugene Scalia, and Susan Dudley—shared their views on the proper scope of BCA, how to improve this tool, and the role that Congress and the Courts should play in the rulemaking process. This commentary presents the proposals and challenges identified in the panel “Costs and Benefits vs. Smoke and Mirrors” of the Federalist Society’s Third Annual Executive Branch Review Conference.

The panel highlighted some weaknesses in the use of BCA by the federal government:

  • BCA is not conducted consistently because of limits imposed by the authorizing statutes. Authorizing legislation is often silent on, and sometimes prohibits BCA.
  • Executive orders requiring BCA and executive review have not applied to independent regulatory agencies. Even though there is agreement on the importance of BCA as a tool to ensure that decisions are justified, independent agencies are not subject systematically to its use. During the panel, Eugene Scalia presented some financial regulatory cases, highlighting that the statutory duty to consider economic impacts and enforcement by the Courts actually improved decision making within this market. Panelists agreed that there is no good reason why independent agencies, including most financial regulatory agencies, do not have to conduct the same analysis as executive branch agencies.
  • Agency compliance with Executive Orders, such as those that establish the requirements for agencies to conduct BCA when proposing major rules, is not subject to judicial review.
  • Conducting good regulatory analysis is challenging, and some costs and benefits are difficult to quantify. Boyden Gray expressed concern that agencies inappropriately claim co-benefits or conduct unbalanced analysis, and noted that having a “limiting principle” and judicial review would offer a counterweight for these difficulties.
  • The panelists presented and discussed various solutions to the identified problems, which shed light on potential reforms.

Checks and balances

Codifying the requirements established in the “better regulation” Executive Orders would address some of these concerns and institutionalize better benefit-cost analysis. Richard Morgenstern’s research suggests that even though presidents of both parties have endorsed these requirements for decades without major changes, some differences between parties are evident in the focus of the application of BCA. A good example of these differences is the emphasis on the different economic impacts of regulation, with Republicans focusing more on the cost trade-offs and Democrats focusing more on the benefits of rules. However, beyond the differences that may exist in the application of BCA, codification would be a signal of approval and institutionalization of the use of technical tools in the regulatory process. Furthermore, Congress, through statute could require independent agencies to follow BCA requirements, improving their regulatory process and establishing technical guidance for their decisions. Also, the panel emphasized the potential of judicial review to provide additional checks on agencies’ decisions and actions, improving the regulatory process.1

Encouraging evidence-based decision making

Establishing the correct incentives is necessary to nurture a culture of evidence-based decision making throughout the rulemaking process. On one hand, the role of OIRA as an oversight body provides a quality check through its outside review of agency actions. As mentioned by Michael Livermore, besides the well-known advantages of overseeing regulatory policy, OIRA has a role as moderator and a potential influence over agency discretion inside the President’s sphere. Increasing the reach of its review to other regulators would multiply the positive effects identified above. Panelists also thought providing incentives for ex-post review is necessary. Retrospective review is of central importance to assessing the effectiveness of past interventions. An outsider in charge of retrospective reviews could ensure independence of results and generate trust among society. Providing an independent entity responsibility for overseeing retrospective review efforts could generate such incentives.

It is necessary to strengthen BCA as a tool for informed decision making in the federal government by providing clearer key elements and incentives for a sound economic analysis. Discussions like the one on June 18 provide different valuable perspectives on practices and reforms that affect the rulemaking process. Escaping the "Smoke and Mirrors" in Benefit Cost Analysis is possible.

1Congress is currently working on bills to tackle some of these issues.

See also: The Federalist Society, Costs and Benefits vs. Smoke and Mirrors - Audio/Video, June 18, 2015