President Trump’s Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs, has caused some confusion among the analysts, inside and outside federal agencies, who forecast the economic effects of regulations. Which effects should count as costs and which as benefits? It sounds like it should be an easy question, but it is not. Here are some wrinkles to consider.
Why isn’t Benefit-Cost Analysis sufficient? Why do we need additional constraints on rules?
In theory, a benevolent and all-knowing philosopher prince would need only benefit-cost analysis (BCA) to make decisions. In the real world, however, large organizations suffer from imperfect (and imperfectible) knowledge, conflicting incentives, and other pathologies that need to be managed. Consider the budget: The Army Corps of Engineers has been doing BCA for more than a century, yet no one seriously proposes that the Corps should have a blanket authorization to spend an unlimited amount of taxpayer money, as long as they think the benefits of their projects will exceed the costs. In addition to meeting a BCA test, the Corps must live within its budgeted means.
Through rulemaking, regulatory agencies have been expending real resources without a budget constraint. In such an environment, their incentive is to exaggerate the net benefits of regulation, and to commandeer a growing share of the private economy – effectively spending resources without limit. Something more is needed to constrain regulatory growth.
President Trump said during the campaign that there are too many regulations and that, collectively, they cost too much. But how many regulations are there? How much do they cost? We can acknowledge that these are difficult questions to answer, and still be confident in saying: too many, and too much. Like all of his recent predecessors, the President has asked agencies to do something about the overburden of existing regulations. Unlike his predecessors, he has told them that he is going to monitor their progress. He has told the Office of Management and Budget (OMB) to count regulatory actions and to measure their costs at the margin to see if agencies are making progress. The metrics may be crude, but they are needed.