OMB Draft Circular A4: Safeguarding Objective and Evidence-Based Principles for Regulatory Impact Analysis

Document ID: OMB-2022-0014-0001

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Summary

In this comment on OMB’s draft revisions to Circular A-4, GW Regulatory Studies Center Director Susan Dudley offers her perspective as both an academic and practitioner who has long been involved in regulatory impact analysis. She notes that the regulatory impact analysis required by President Clinton’s E.O. 12866 has proven durable across administrations with different policy objectives because it provides objective evidence regarding the efficiency of regulatory policies, which is an important consideration in developing regulations that increase well-being. The draft revisions contain some worthwhile updates; however, some aspects of the draft are not as well supported, and appear designed to steer analytical results to support this administration’s policy preferences, rather than present objective evidence and estimates to policy makers and the public. Dudley’s comments offer detailed recommendations for ensuring the final revised Circular is based on widely accepted practices, principles, and evidence to safeguard its value and durability going forward.

Outline of Sections

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I. The Remarkable Durability and Stability of Regulatory Impact Analysis

II. Role of Regulatory Impact Analysis

III. Need for Regulation

IV. Geographic Scope

V. Benefit-Cost Analysis

VI. Distributional Impacts

VII. Discount Rate

VIII. Treatment of Uncertainty

IX. Missing from Draft

X. Inconsistencies and Contradictions

XI. Conclusions and Recommendations (see below for content)

XII. References

Conclusions and Recommendations

The regulatory impact analysis required by President Clinton’s E.O. 12866 has a long history in the U.S. It is based on established economic principles and serves as a model for other developed countries (OECD 2008). Both Clinton’s principles and the detailed guidance for complying with them have proved durable across administrations with very different policy preferences because they offer objective evidence regarding the efficiency of regulatory policies.

Circular A-4 was last published almost 20 years ago, and OMB’s draft revisions contain some worthwhile updates. However, some aspects of the 2023 Draft are not as well supported as others. Supporters of the revisions see them as representing an “entirely new regulatory philosophy, one that is unwilling to sacrifice widely shared values like dignity and equity for brutal, cold, calculating efficiency” (Goodwin 2023).

Indeed, certain elements of the guidance appear designed to steer analytical results to support this administration’s policy preferences, rather than present objective evidence and estimates to policy makers and the public. For example,

• The draft reflects a mistrust of market forces and a willingness to intervene by providing agencies much more latitude in justifying when regulation is appropriate (III);
• While the draft puts more emphasis on equity impacts, it allows agencies not to reveal the distributional impacts of regulations by examining only global impacts (which would support more aggressive policies directed at climate change) (IV, X);
• It blurs the line between benefits and costs that are related to the regulation’s purpose and those that are not, allowing agencies to support more stringent regulation by adding benefits not directly associated with the statutory authority (V);
• It no longer requires agencies to present the costs of actions that agencies assert are non-discretionary, or to present the full costs and benefits of compliance (V);
• While the added guidance on distributional impacts is welcome, the section on weighting the impacts is a recipe for hiding normative factors that, by definition reduce efficiency in what should be a descriptive analysis (VI);
• The recommended discount rate appears biased to support actions that “impose short-term costs to obtain long-term benefits such as environmental and health improvements” (Howard et al. 2023) (VII);
• The guidance encourages agencies to override behavioral biases when doing so will lead to more intervention, but defer to them when it will not (VIII, X).

To the extent that the final Circular is perceived as not being objective and nonpartisan, this exercise will open the door for the next administration to write its own revisions to support its policy preferences. It will further polarize regulatory policy debates and reduce the value of, and trust in, evidence-based analysis. That may have ramifications for judicial decisions as well because BCA helps provide an “intelligible principle” that support agencies’ interpretations of sometimes vague statutory authority (Sunstein 2017; Mannix 2016).

To retain the integrity of regulatory impact analysis and OIRA’s role in providing a “dispassionate and analytical second opinion” (Obama 2009) on agency actions, the final Circular should:

1. Focus on economic efficiency and on presenting best estimates of likely benefits and costs. It should avoid incorporating more normative methods and factors in the BCA itself, and
   1. Direct agencies to examine benefits, costs, and transfers using a range of reasonable discount rates that reflect the academic literature and evidence over a longer time period (VII);
   2. Encourage transparent presentation of distributional effects without embedding weights in the BCA (VI);
   3. Assume risk neutrality and focus on presenting expected values of likely outcomes (VIII);
   4. Present domestic benefits alongside global estimates (IV); and
   5. Return to the “presumption against economic regulation” language that appeared in both the 1996 and 2003 guidelines (III).
2. Provide agencies less latitude in identifying the need for regulation, and direct them to demonstrate the significance of the problem identified, as specified in E.O. 12866.
   1. If relying on behavioral justifications, require agencies to provide situation-specific evidence that individuals behave irrationally (III).
   2. Return to the language of the 2003 Circular with respect to “showing that regulation at the federal level is the best way to solve the problem” (OMB 2003, 6), which provides more clarity regarding when federal vs. state and local regulations are appropriate (III).
3. When international impacts of regulation are likely to be an important factor in a decision, insist that agencies present domestic, as well as global impacts. Specifically, make the edits below (IV):

“When your primary analysis focuses on the global effects of the regulation, you should still it is generally appropriate to produce a separate supplementary analysis of the effects experienced by U.S. citizens and residents, unless you determine that such effects cannot be separated in a practical and reasonably accurate manner, or that the separate presentation of such effects would likely be misleading or confusing in light of the factors detailed above.

4. Encourage agencies to adopt a learning agenda when considering regulation to improve the available evidence for meaningful retrospective evaluation. Agencies should:
   1. Design rules with evaluation in mind (IX),
   2. Consider when gathering more information would be beneficial by focusing on assumptions to which outcomes are most sensitive (VIII),
   3. Consider opportunities for natural experiments, including by allowing state, local, and tribal governments to take the lead on regulations (IX).
5. Provide guidance on adapting risk assessment inputs for use in BCA, recognizing that they may not be compatible (IX).

Avoid needless complexity, recognizing that agencies have limited resources and expertise. This could include encouraging simpler analyses conducted earlier in the regulatory process (Carrigan & Shapiro 2016) that could engage public input and improve the evidence supporting successful outcomes. (X)