Research Note. Evolution of Benefit-Cost Analysis in US regulatory policy

Research note by Thomas D. Hopkins

Applying benefit-cost analysis in the White House regulatory oversight process served as a basic mission of the Council on Wage and Price Stability (CWPS) during its seven-year lifespan (1974–1981). The Journal on Benefit Cost Analysis September 2015 paper by Hopkins and Stanley reviews that CWPS experience, which involved filing comments in over 300 proceedings at more than 25 federal regulatory agencies. The paper draws on those CWPS public comments (filings), identifying persistent and pervasive deficiencies in the economic analysis regulators then and now often use as support for new regulation. CWPS filings fostered greater acceptance of benefit-cost analysis in regulatory decisions; such analysis is now required by executive order (EO).

President Ford in 1974 signed the CWPS Act, creating a new unit within the White House, charged, among other things, to intervene directly in specific rulemakings of all federal agencies. The basic thrust of CWPS filings was a straightforward application of microeconomics. CWPS was guided by its statute and by a succession of EOs each president issued outlining criteria that regulations and their analyses should reflect. Most CWPS filings have been preserved by the Mercatus Center at George Mason University; the paper draws on these documents, identifying elements that may have continuing relevance to current regulatory activity.

When Reagan took office in 1981, the newly created Office of Information and Regulatory Affairs (OIRA), located within the Office of Management and Budget, became the new home of the CWPS regulatory economists and their oversight activity. White House over-sight henceforth operated through OIRA enforcement of new EOs that preserved and extended the economic analysis advocacy of earlier EOs.

A summative 1981 CWPS report stressed that regulators frequently neglect to ask whether a significant problem exists in the marketplace that deserves policymakers’ attention. This indeed should be characterized as the “first principle” of regulatory policy, and eventually, in 1993, Clinton’s EO 12866 did so declare.  Unless some strong impediment exists that prevents normal functioning of reasonably competitive markets, CWPS contended, regulatory intervention in these markets can only misallocate resources and decrease consumer welfare.

CWPS had noted that while few if any markets achieve ideal competitive performance, very few, if any, regulations can fully achieve their intended outcomes. Since even imperfect markets often produce satisfactory economic results, and since their deficiencies are more likely to be self-correcting than those of government regulation, the burden of proof should be on the regulator to show that there is sufficient market failure to necessitate regulation and that the chosen regulatory action can be expected to yield a better outcome than the improperly functioning market.

The needed economic analysis should clarify effects that a regulation will have on all those affected. This is necessary to allow both informed comment from the public and sensible decisions by the regulators. While economists of all stripes find this approach perfectly reasonable, and EOs issued by all presidents since Ford have been supportive, much resistance was encountered at the outset and continues to the present.

CWPS’s continuous encouragement of benefit-cost analysis was evident in most of its filings.  In 1978, CWPS noted that even if the benefits outweigh the costs of a particular proposal, that plan should not necessarily be implemented. Whatever approach would yield the greatest excess of benefits over costs should be chosen.

CWPS’s use of benefit-cost analysis reflected a rather expansive interpretation of the EOs under which it operated, two from Ford and two from Carter. Yet eventually the language of EOs caught up with the approach CWPS had advocated in its filings. Benefit-cost analysis was endorsed explicitly for the first time in Reagan’s 1981 EO 12291, signed just as the CWPS regulatory oversight function and economists were moving into OIRA, and again in Clinton’s EO 12866, which remains in effect today.

In the years since 1976, thanks largely to the EOs noted above, executive branch regulatory agencies have provided – for major new regulations proposed – economic analyses that contain at least certain elements of benefit-cost analysis. Yet most agency analyses remain deficient in important ways, just as CWPS filings documented, lessening their value for guiding regulatory improvement. Several examples are discussed, and the paper tracks developments from 1978 to 2015 in one particular area:  Department of Transportation regulation of allowable hours of driving by truck drivers.  Some of the conundrums presented by this 37-year series of rulemakings: What reason exists to think that truck drivers and their employers lack incentive to reduce fatigue risks? What market failure exists here? And if the truck accident record is steadily improving, as the agency acknowledges, what is the motivation for new regulation?

Presidents from Ford to Obama have issued EOs that call for better review of proposed regulations, and OIRA has made numerous efforts in the post-CWPS era to encourage regulators to improve the quality of their analyses. Progress has occurred, albeit unevenly, and analyses with many impressive attributes can be found.  Yet it is also not difficult to find recent instances of regulatory decision-making that reflect the same weaknesses that CWPS highlighted decades earlier.

Even when regulators now do provide credible estimates of net benefits of options considered, the “first principle” is still overlooked.  Many costly new regulations in recent years rest their claims of positive net benefits on forecasts that compliance will return substantial private benefits to purchasers. No clear market failure is apparent. Without market failure, there is good reason to believe that individuals could make their own decisions quite sensibly. That surely is the case with energy efficiency standards, where “paternalistic benevolence” is passing muster with OIRA reviewers.  A return to first principles of benefit-cost analysis is overdue in the oversight process.

The issues observed by CWPS starting in 1974 have been revisited repeatedly, with much the same findings. Moreover, many regulations that came in for heaviest CWPS criticism are still very much in the forefront of regulatory debate today. Perhaps the basic lesson is that a more independent and economic-efficiency-driven review mechanism would be constructive. Independent peer review with public access is missing from the current system of regulatory oversight, and it could be a significant step forward, one that would be made appreciably easier were congressional support to be gained. Until and unless this proves feasible, the U.S. regulatory system will continue to fall well short of achieving available efficiency gains.

 

Hopkins

 

Hopkins, Professor Emeritus of Economics, Rochester Institute of Technology, was Acting Director of the Council on Wage and Price Stability in 1981; he was on CWPS staff 1975-81 and Deputy Administrator, Office of Information and Regulatory Affairs, Office of Management and Budget, 1981-84.  Ph.D. Economics, Yale University; BA, Oberlin College.