Regulators should go beyond cost-benefit analysis and evaluate the distributional impacts of regulations.
On his first day in office, President Joe Biden issued an executive memorandum, “Modernizing Regulatory Review,” instructing the director of the Office of Management and Budget (OMB) to “propose procedures that take into account the distributional consequences of regulations.” The memo has already been criticized by Mick Mulvaney, the first OMB director under President Donald J. Trump.
Any controversy over whether agencies should analyze distributional impacts ignores two things.
First, redistribution has always been a fundamental impact of agency regulations and is often an important purpose of regulatory policy. Second, agencies have been required to analyze various distributional impacts of regulation for decades, even if they have not always formally done so.
Typically, regulatory agencies’ consideration of distributional impacts has taken into account a regulation’s effect on a politically favored sector, rather than following a more comprehensive economic analysis that the Biden memorandum seems to call for agencies to undertake.
Executive branch agencies at present conduct cost-benefit analysis on their regulations as part of their regulatory impact analyses, which focus on the aggregate impacts of regulations and their contributions to economic efficiency. Such cost-benefit analysis has its roots in welfare economics, which considers whether overall welfare improves or decreases—not on who benefits or who bears the burden of government-imposed changes in the market. Increasing overall welfare is an important goal of government, so the efficiency focus of cost-benefit analysis is an appropriate, and even necessary, component of regulatory decision-making.
But public policy is and always has been about more than efficiency. And this is certainly true of regulatory policy.
An environmental regulation—in addition to correcting the market failure of externalities—reallocates welfare from firms, their workers, and their customers to people whose health improves through a cleaner environment. A homeland security regulation that requires tighter security at airports reallocates welfare from the taxpayers who finance city- and state-owned airports to airline customers through increased security when they fly—although customers must also pay for this benefit with longer wait times.
By answering questions of whether overall social welfare has increased, agencies have only focused on part of the questions about the policy implications of their actions. Presidents, their appointees, and the U.S. Congress also care about who benefits from regulation and who bears the costs. By merely totaling up costs and benefits, agencies only tell part of the story about regulations’ impacts.
The interest in the distributional impact of regulations is not new. Agencies have long been required by executive order to include the distributional consequences of their regulations in their regulatory impact analyses. But these requirements have always been loosely enforced, and academic work indicates that, as a result, agencies rarely detail these distributive effects in their analyses.
Laws have also focused on impacts of regulation on particular constituencies. The Regulatory Flexibility Act (RFA), for instance, requires agencies to analyze the impact of their regulatory efforts on small businesses. Congress passed this requirement in 1979 following concerns that small businesses were disproportionately bearing the costs of regulation. Although the RFA has achieved—at most—some limited success, it does show that analysis of distributional impacts has a long and bipartisan tradition.
One could imagine a requirement that agencies produce RFA-like requirements for different subsets of the population. Indeed, over the years, Congress has imposed such a requirement in piecemeal fashion as laws. Furthermore, executive orders have required analysis of impacts on state and local governments, the energy sector, and numerous other sectors.
John Graham, President George W. Bush’s administrator of the Office of Information and Regulatory Affairs, has suggested analyzing regulatory impacts by income quintile. The Biden memorandum is simply a more thorough manifestation of efforts over the years to single out particular constituencies and to determine how regulation helps or harms them.
Analyzing the distributional impact of regulation will be difficult. Such analysis may add time to the already lengthy regulatory process. Time considerations are at least part of the reason agencies have minimized their efforts in fulfilling the requirements for analysis of impacts on particular sectors.
But the difficulty of analyzing distributional impacts does not mean it is not worth doing. In fact, cost-benefit analysis itself was once considered unduly difficult or burdensome.
When regulators put in effort to analyze distributional impacts, this analysis will become easier to conduct over time. And given that regulation has, and will always have, redistributive effects, regulators should strive to ensure that analysis of the impact of regulation includes a more complete understanding of who those impacts help and hurt.
This essay is part of a six-part series entitled Regulatory Review Reimagined.