Benefit-Cost Analysis Should Promote Rational Decisionmaking

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Recent executive orders undermine the longstanding belief in benefit-cost analysis.

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If you are reading this essay, you probably do not need to be persuaded of the merits of benefit-cost analysis. But it may nonetheless be useful to remember the extended history of this approach to rational decision-making to better evaluate what may or may not be happening now under the Trump Administration.

Use of benefit-cost analysis in rulemaking is often traced back to Presidents Richard Nixon, Gerald Ford, and Jimmy Carter, who each had an embryonic form of centralized review that used economic analysis for evaluating regulatory proposals. The election of President Ronald Reagan, who issued Executive Order 12,291 within a month of his inauguration, brought a dramatic change in the role of benefit-cost analysis in regulatory development. The order not only established systematic centralized review for all regulatory actions by executive branch agencies, but it also specified that draft regulatory actions would not be issued unless their potential benefits to society would outweigh the potential costs to society and that the regulatory options agencies selected would maximize net benefits to society.

So it continued for the 12 years under Presidents Reagan and George H.W. Bush. Yet this step was not met with a unanimous, enthusiastic embrace of benefit-cost analysis.  Indeed, in the late 1980s and early 1990s, there was substantial unease and often strident criticism of it. For many officials and observers, benefit-cost analysis was viewed as a tool—that is, an insidiously designed device—for deregulation. It appeared to critics to demand an inherently unequal equation, with costs being so much more easily quantifiable than benefits, and to foster an unaccountable, opaque process that displaced the decisionmaking of the regulatory agencies to which Congress had delegated decision-making authority. The Office of Information and Regulatory Affairs (OIRA) process was sometimes portrayed as a “big black hole.”

With the election of President William Clinton, many observers thought he would revoke the “dreaded” Executive Order 12,291, scrap the whole system, and disband OIRA. But, in fact, had centralized review and the use of economic analysis not existed, it would have had to be invented. The virtues of analysis—as robust as needed, commensurate with the significance of the decision being made—are, to me, self-evident: the regulator must think through, with all available data and in a systematic and disciplined way, all the intended and unintended consequences of a proposed rule. An end product that reflects such informed consideration will necessarily be better than one that does not.

The vices, or more accurately the limitations, of the original construct could be—and I think were—addressed by President Clinton’s Executive Order 12,866. Although that executive order retained the essential analytical framework of benefit-cost analysis and the net-benefit-to-society test, it emphasized that benefits and costs that cannot be quantified are nonetheless essential to consider. The term “outweigh,” which suggests more precision than might exist, was replaced with “justify”—that is, benefits should justify the costs of a new regulation. In addition, the Clinton order emphasized that the agencies were the repositories of the substantive expertise, a point that is repeated twice in the opening paragraphs. The order also limited review to “significant” regulatory actions and it incorporated various provisions for transparency and accountability—less than a black hole.

Is Executive Order 12,866 perfect? No, not much is. But it has withstood the test of time. President George W. Bush amended some procedural provisions of President Clinton’s order, but he left in place the fundamental notion of benefit-cost analysis as the framework for regulatory decision-making. So too, President Barack Obama added some provisions in his own executive order but, again, maintained and even reinforced the basic principles.

Now, we have President Donald J. Trump. What is his stance and what is he likely to do?

The closest analogue for President Trump appears to be President Reagan. On the campaign trail, Reagan, like Trump, criticized regulations and promised to reduce regulatory burdens. And President Reagan, like President Trump, issued several executive orders regarding regulations within the first few months of his presidency. But even though there are similarities between the two, there are also significant differences that are troubling for present purposes.

The most obvious difference stems from their executive orders. President Reagan’s order was based on textbook economic principles—the use of benefit-cost analysis to support rational decision-making. President Trump’s Executive Order 13,771—calling for agencies to rescind two existing regulations of comparable costs for every new regulation they issue—mentions “costs” 17 times and never mentions “benefits,” and it does not appear to be based on any principle other than eliminating regulations, no matter if the net benefits to society of the condemned regulations are significant.

In the same vein, President Trump’s Executive Order 13,777, directing agencies to identify regulations as candidates for elimination, is similar to President Reagan’s  establishment of a “Presidential Task Force on Regulatory Relief.” But whereas the real work of the Task Force was to be done by OIRA—which is governed largely by economic principles—it appears that the deregulation effort in the Trump Administration has been pushed back to the rulemaking agencies themselves, which are left to make decisions to “deregulate” based on who knows what. If we are to believe some of the stories we hear, the agencies are basing their decisions not on economic principles but rather on what the regulated entities find the most objectionable or irritating.

Although I have often expressed great confidence in the analytical work of OIRA (as I do here), it bears noting that there have been several recent developments that raise red flags for the integrity of benefit-cost analysis and centralized review in this Administration.

The U.S. Department of Labor recently issued a notice of proposed rulemaking seeking to rescind an Obama-era rule pertaining to how customers’ tips are pooled and distributed among employees and employers. The proposal reportedly did not include an unfavorable internal analysis showing that the proposed rescission could cost workers billions of dollars.

Several months earlier, when the U.S. Environmental Protection Agency announced its intention to repeal the Clean Power Plan, the agency adjusted the discount rate and the treatment of energy savings to reduce the estimated costs of repealing the rule and ignored some of the Plan’s well-documented health benefits to justify the repeal on cost-benefit grounds.

Both of these episodes are troubling for similar reasons: they undermine faith in the methodology of benefit-cost analysis and lend credence to those who say that it is simply a tool that can be manipulated to justify whatever the policy makers decide. These two examples may well be outliers, but it has yet to be determined how benefit-cost analysis will fare in this Administration.

Sally Katzen

Sally Katzen is a professor at the NYU School of Law and served as administrator of the Office of Information and Regulatory Affairs under the Clinton Administration.

This essay is part of an eight-part series, entitled New Developments in Regulatory Benefit-Cost Analysis.