Document ID: OMB-2022-0014-0001
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Further recommended reading: The Discounting Dilemma
Introduction
The Office of Information and Regulatory Affairs has long provided an expert review of agencies’ regulatory analyses, helping the president ensure that the laws are faithfully executed, helping Congress and the courts to understand the consequences of administrative actions, and providing transparency and accountability to the public. I have argued elsewhere that benefit-cost analysis should be viewed as a check on administrative discretion – a means of ensuring that agencies, as agents rather than principals, are not exceeding their mandate. When the 2023 draft Circular A-4 is compared to the 2003 version, it is clear that the goal of the revision is to give greater freedom to regulatory agencies to produce regulatory analyses that portray their regulations in a favorable light. There is nothing wrong with that, if the analyses can be supported by economic theory and evidence.
Some of the proposed revisions are troubling, however, such as the very low discount rate and the vanishingly small treatment of the shadow price of capital. When agencies are spending other people’s money through regulatory mandates, the draft effectively sets a “hurdle rate of return” on capital of less than two percent – less than the same agency would be required to demonstrate if it were spending money from the Treasury. Moreover, the use appropriated funds carries an obligation to cover the “excess burden of taxation.” Regulation, too, imposes excess burdens, but they are far more variable, and typically far larger, than the official 25 percent that OMB applies to appropriated funds. Ideally, such costly inefficiencies should be explained in the regulatory analysis, but the draft circular seems to allow agencies to assume them away. Taken as a whole, the thrust of the proposed revisions will not only make OIRA review less effective; it will also undermine the hundreds of economists in the agencies who strive to make an honest accounting of the costs and benefits of agency actions.
The most problematic revision, in my view, is the proposal to allow welfare “weighting” in regulatory analyses. This will hardly advance the cause of giving the public confidence in our regulations, and will strike many as deeply unfair. But I want to focus on its efficiency consequences – not because I value efficiency above fairness, but because the efficiency losses threaten to swamp everything else.
Outline of Sections
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I. Weighting's For Godot!
II. Oates' Duality – A Tax Is a Tax, Unless It's a Transfer
III. Tullock's Rectangle – A Transfer Is a Transfer, Until It's a Cost
IV. Weidenbaum's Dichotomy – Economic and Social Regulation
V. The Constrained Ratio – And the Advantage of Revenue Neutrality
VI. The Rational Regulator
VII. Conclusion (see content below)
VIII. Attached Working Paper: Comparing a Rebated Carbon Tax with a Compensated Carbon Tax, and Revisiting the Distinction Between Economic and Social Regulation. Brian F. Mannix, 2019.
Conclusion
But what about . . . ? Regulation is nothing, if not complicated. There are countless extensions, variations, and exceptions to the economic framework described herein, and whole areas where it does not apply. But the foundation of our system of health, safety, and environmental regulation is mostly built on ratio constraints, contingent requirements, and other rules of general applicability. This is the type of rule that Congress has been comfortable delegating to the Executive, since it can be usefully shaped by benefit-cost analysis and other types of technical expertise, even while avoiding large economic transfers, and the rent-seeking and agency capture that such transfers encourage.
In contrast, Congress has often gone to great lengths – sometimes even unconstitutional lengths – to avoid handing the Executive discretionary power to effect large economic transfers.
To handle economic regulation, where economic transfers are unavoidable, it has usually created multi-headed regulatory commissions, often with a requirement for bipartisan membership. The dismal history of economic regulation is a cautionary tale that HSE regulators should heed.
It is a dangerous mistake to graft “weights” onto benefit-cost analysis. Such an initiative would convert the plowshares of health, safety, and environmental regulations into swords that can be used to confer favors on friends and to smite opponents. In the end, however, it will do no one any favors, as we all reap the bitter harvest of rampant rent-seeking.
