Regulatory Benefit-Cost Analysis--Advice for a New Presidential Term

Originally published by the Society for Benefit-Cost Analysis

February 25, 2021

View this Essay (benefitcostanalysis.org)


In January, SBCA organized its first panel as an affiliate society for the Allied Social Sciences Association/American Economic Association annual meetings.1 The session, titled “Regulatory Benefit-Cost Analysis -- Advice for a New Presidential Term,” featured a panel dispensing advice to the incoming administration on improving and expanding the use of benefit-cost analysis.2

SBCA Vice President Glenn Blomquist chaired the panel discussion that included three former SBCA presidents (Susan Dudley, Don Kenkel, and Clark Nardinelli) as well as Professors Michael Greenstone and Howard Shelanski. Dudley (the George Washington University) and Shelanski (Georgetown University) served as administrators of the Office of Information and Regulatory Affairs (OIRA) in the Bush and Obama administrations. Kenkel (Cornell University) and Greenstone (University of Chicago) served on the staff of the Council of Economic Advisors in the Trump and Obama administrations. Nardinelli served as the Senior Economist at the Food and Drug Administration.

All panelists stressed the value of regulatory benefit-cost analysis (BCA) and centralized review in developing regulations. Dudley reviewed the history and evolution of regulatory analysis and oversight in the U.S. (based on a recent article in the Journal of Benefit-Cost Analysis) and Greenstone referred to OIRA and the regulatory process as “jewels” in the US crown. Panelists acknowledged that the Biden administration is facing some pressure to reduce the role of BCA in agency analysis and OIRA review, but strongly argued for strengthening it instead. Under the umbrella of their agreement on the value of BCA and centralized review by OIRA as embodied in Executive Order 12866, panelists provided multiple suggestions for extending and improving BCA. 

They agreed that E.O. 12866 or its equivalent should be extended to the independent regulatory agencies. Panelists also agreed that the distribution of benefits and costs be given more attention in regulatory impact analyses. A discussion of who bears the costs and who enjoys the benefits should accompany all analyses. 

Nardinelli reminded attendees that agencies write regulations under authority delegated from the legislative branch, and that one of the arguments for such delegation is that agencies have knowledge and technical expertise that elected officials lack. Ex-ante regulatory BCA is therefore an essential component of rulemaking because it transparently supports expertise while providing elected officials and the public a way to hold the experts accountable. Thus, he and other panelists stressed the importance of BCA as a tool for designing regulations, an organic component of the regulatory development process, not something prepared to justify a regulatory approach already selected. During the development of a regulation, alternative approaches and provisions should all be subjected to a BCA, with the results presented in the final Regulatory Impact Analysis. 

Shelanski, a lawyer as well as an economist, reinforced the point that regulatory BCA and OIRA review of regulations help ensure a robust legal record supporting regulatory decisions. In an era when judicial doctrines calling for deference to administrative agencies are eroding, he expects more scrutiny of the administrative record supporting rulemaking to judge whether agencies deserve such deference. Kenkel made clear that requirements for regulatory analysis do not displace the decision maker; rather, they provide essential input to regulatory decisions. 

Dudley encouraged the new administration to pursue “regulatory humility,” something she said is consistent with EO 12866 and requires an appreciation of the role that market forces, competition, and voluntary interactions have in supporting well-being in a dynamic, innovative, and flourishing society. Regulatory humility recognizes the importance of analysis and learning because even the smartest regulators with the most altruistic motives may not have the information needed to achieve their goals without generating unintended consequences that undermine the desired outcomes, cause other negative effects, or both.

Consistent with this concept, panelists offered several specific recommendations:

Panelists advised the new administration to learn from the regulatory practices of the Trump administration and gave some examples.  Continued removal of sludge and drudge regulations have been the focus of deregulatory efforts here and in other countries and can improve regulatory outcomes. Dudley suggested Biden might retain Trump’s EO 13777, which established teams in each agency to review the stock of existing regulations. Shelanski agreed, joking “even the devil can quote scripture.”3 Recent waivers of regulations due to the Covid-19 pandemic may provide natural experiments that allow agencies and researchers to evaluate their effectiveness at achieving goals. Agencies could take advantage of expanding technology options to engage the public earlier in the regulatory process through advanced notices of proposed rulemaking and request comments on supporting documents, data, models, or analyses well before preferred regulatory approaches have been determined. 

Greenstone argued that the riskless discount rate recommended in OMB Circular A-4 (2003) should be reduced to 2% or less based on a lower real rate of return on government debt observed since 2003.4

Greenstone also recommended that the Social Cost of Carbon (SCC) be reinstated immediately in BCA of environmental and energy regulations. Other panelists agreed that a common value for the SCC was necessary to ensure consistency across agency analyses and to provide decision makers and the public information on the most cost-effective policies to address climate change.5

The form a regulation takes can have significant impacts on innovation and productivity, with regulations that rely on economic incentives and information provision being superior to those based on command and control. If the Biden administration is to achieve its ambitious regulatory agenda without damaging economic growth and productivity, it must use regulatory forms that don’t discourage innovation, entrepreneurship, and creativity. 

While ex-ante BCA has long history, panelists all encouraged the federal government to invest more in improving retrospective BCA. Ex-post evaluation will not only be important in determining whether regulations are excessively costly or ineffective but will lead to better ex-ante BCA by testing and improving the assumptions relied on before regulations are issued. Greenstone emphasized a “virtuous cycle” of evaluation—including a commitment to testing assumptions to which projections might be particularly sensitive and creating a public ecosystem of data that academics and others could analyze. Kenkel emphasized the importance of BCA for ex-post review as well as ex-ante, and for deregulatory initiatives as well as regulatory. Economists have the tools to evaluate regulations once they are in effect (e.g., difference-in-difference, natural experiments, regression discontinuity) and should use these tools to contribute to learning.


Footnotes:

SBCA met the ASSA’s criteria for participation this year, as an open membership organization with a purpose in economics and at least 300 members, as well as governance conditions.
The journal of the SBCA, the Journal of Benefit Cost Analysis, regularly presents research relevant to the recommendations presented here as well as applications of benefit cost analysis to regulatory concerns for policymakers around the world.
President Biden revoked EO 13777 on January 20, 2021.
Following OMB, Greenstone used the average yield on 10-year Treasury notes adjusted for inflation to approximate the rate that the average saver uses to discount future consumption.
President Biden established an interagency working group to develop a SCC on January 20, 2021.