An article by John Coates IV on the Yale Law Journal calls into question the efforts to impose judicially reviewed, quantified Cost-Benefit Analysis (CBA) on independent financial agencies in the context of the sweeping regulatory change triggered by the housing and financial crises of 2008 in the US. Case studies of six rules reveal that reliable quantified CBA remains unfeasible in the short time since it is simply expert judgement in numerical disguise. As a result, judicial review of quantified CBA of financial regulation is not likely to generate benefits (transparency and regulatory quality) that exceed its costs (regulatory delay, camouflage, partisanship, waste of resources).
Eric A. Posner and E. Glen Weyl respond to Coates’ objections as well as to similar arguments raised by Jeffrey Gordon in a recent paper which is part of a special issue on cost-benefit analysis of financial regulation published by The Journal of Legal Studies in June 2014. Posner and Weyl point out that financial regulations are ideal for CBA as they generate vast amount of data and because most of the relevant valutations are monetary in nature. Further, they survey alternatives to CBA highlighting that none of them is a normatively defensible alternative to CBA. Finally, they acknowledge that judges are not likely to be sophisticated consumers of CBA as pointed out not only by Coates but also by Krauss and Raso in a paper published on the Yale Journal on Regulation in 2013. They therefore argue for further development of institutional support for CBA in the executive branch. This would limit judicial review just to ensure that regulators take advantage of the institutional support for CBA.
Another challenge to the argument emphasizing the problem of insufficient knowledge for CBA of financial regulations is offered by Cass Sunstein who explores breakeven analysis as a means of testing whether a particular measure would improve social welfare. This method of comparing costs and benefits is fully available to financial regulators and it is helpful when agencies face serious gaps in knowledge. Importantly, Sunstein concurs with Coates that current statutory attempts to amplify judicial review of CBA are unlikely to improve CBA significantly.
A comment on Coates’ article by Bruce R. Kraus defends the thesis that change is occurring at the SEC where the use of home-grown economic data and analysis has increased after the establishment of the Division of Economic and Risk Analysis (DERA). Kraus and Coates seem to agree on what agencies ought to be trying to do. Simply stated, economists such as those working at the DERA should make whatever positive contributions they can do to regulatory analysis, up to the limits of their data, and policymakers should take economic analysis into account.
Finally, in his reply to Posner and Weyl, Sunstein, and Kraus, Coates limits the discussion to a few points. First, all the authors agree on the significant challenges faced by efforts to quantify costs and benefits of financial regulations. Second, all the authors exhibit skepticism about court review of quantified CBA. As far as breakeven analysis is concerned, Coates argues that, in some cases, agencies may know so little that they cannot even use this less demanding method. Further, unlike Posner and Weyl, he does not hold economics reliable as a base for CBA of financial regulation because of the non-stationary properties of economic theory. Finally, in his reply to Kraus Coates points out that the efforts to quantify at the SEC are still not capable to accomplish what many analysts present as the goal of CBA: to discipline regulatory choices by generating precise estimates of costs and benefits of regulation.
(Fabrizio Di Mascio)