President Biden’s memorandum modernizing regulatory review addresses three key failings in the review process.
On January 20, just hours after being sworn into office, President Joe Biden signed a presidential memorandum on modernizing regulatory review. This document embraces continuity on important components of the administrative state but, more importantly, it provides a significant blueprint for much-needed reform.
On the continuity side, the memorandum indicates that the process of “reviewing significant executive branch regulatory actions … is largely governed by Executive Order 12,866” and it “reaffirms the basic principles set forth in that order.” Executive Order 12,866—which dates back to the first year of the Clinton Administration—has been in effect ever since, under administrations of both parties.
It requires that, except where prohibited by law, “the benefits of the intended regulation justify its costs.” It also establishes an institutional mechanism under which the Office of Information and Regulatory Affairs (OIRA) reviews drafts of proposed and final significant regulations to determine compliance with this requirement.
The Clinton order replaced a Reagan-era order, dating back to 1981, that contained similar requirements. As a result, for the last 40 years, the administrative state has operated under a presidentially imposed substantive requirement, involving the use of cost-benefit analysis, as well as an institutional mechanism to enforce this requirement, through OIRA’s review role. The new presidential memorandum leaves this structure unchanged.
But, at the same time, the memorandum is an ambitiously reformist document because it establishes a mechanism for addressing three important needs confronting the regulatory review process: restoring economic integrity, modernizing regulatory review, and promoting justice and equity.
Restoring economic integrity. The Biden memorandum calls for restoring economic integrity to regulatory analysis. Even though the Trump Administration kept Executive Order 12,866 in place, its regulatory conduct was wholly inconsistent with well-established principles of economic analysis. The Trump Administration applied analysis in a nakedly opportunistic manner that was designed to justify deregulation regardless of the consequences.
For the regulatory review process established in Executive Order 12866 to move forward in a rational manner that successfully addresses the serious national problems identified in the presidential memorandum—“a massive global pandemic; a major economic downturn; systemic racial inequality; and the undeniable reality and accelerating threat of climate change”—all the underbrush of the Trump Administration’s serious affronts to rationality must be cleared quickly. Otherwise, this underbrush will impose hurdles on the adoption of socially desirable policies.
The memorandum directs the head of the Office of Management and Budget (OMB) to identify ways to ensure that the regulatory review process “fully accounts for regulatory benefits that are difficult or impossible to quantify, and does not have harmful anti-regulatory or deregulatory effects.” As Michael Livermore and I explore in our recent book, concerns about the possible anti-regulatory consequences of cost-benefit analysis have been present since the Reagan era. But the widespread, brazen manipulation of the techniques for anti-regulatory ends was unique to the Trump Administration.
In some cases, the Trump Administration’s pernicious practices were the product of rulemaking, such as with the U.S. Environmental Protection Agency regulation on considering benefits and costs of clean air rules, which adopts an approach designed to obscure important regulatory benefits. Such rules will therefore need to be repealed through notice-and-comment rulemaking, unless they are disapproved in the coming months under the Congressional Review Act. More often, the Trump Administration’s bad economics was buried in the analysis of individual rules and will need to be ferreted out in a surgical manner so that it does not stand in the way of future beneficial actions.
Two examples illustrate the Trump Administration’s disregard for the established techniques of cost-benefit analysis, which had been employed in a consistent manner by prior administrations of both parties, going back to the Reagan Administration. In several proceedings, the Trump Administration attempted to justify deregulatory actions by excluding unquantified benefits, referring to those benefits as speculative, insignificant, and uncertain, and taking account of only benefits for which quantification techniques were available. A corollary of this approach, which defies logic, is to say that because agencies cannot estimate the probability of a terrorist attack, they should ignore the threat.
In other proceedings, the Trump Administration ignored the indirect benefits, or co-benefits of regulation, taking the indefensible position that the indirect consequences of regulation should be considered if they are negative (indirect costs) but ignored if they are positive (indirect benefits). And the Trump Administration added insult to injury by relying heavily on co-benefits to justify its most significant regulatory proceeding—the rollback of the greenhouse gas standards for vehicles—revealing another shocking inconsistency in its approach to the consideration of benefits: that co-benefits should be ignored when doing so helps justify deregulatory actions, but should be embraced when the opposite is the case.
Modernizing the review process. The Biden memorandum also calls for efforts to modernize the regulatory review process. Leaving aside the Trump Administration’s affronts to rationality, the techniques of cost-benefit analysis used under Executive Order 12,866 have not been updated in almost two decades. In particular, the guidance document instructing agencies on how to conduct their cost-benefit analyses, OMB Circular A-4, dates back to 2003, and has not been revised, even though the state of the economic literature has evolved significantly since that time. Most importantly, the discount rates used to evaluate future consequences no longer comport with current economic conditions. Their continued use has anti-regulatory effects, leading to an undervaluation of regulatory benefits, which tend to accrue in the future relative to regulatory costs, which generally are borne earlier.
The presidential memorandum tasks the OMB director with identifying ways “to modernize and improve the regulatory review process, including through revisions to OMB’s Circular A-4 … to ensure that the review process promotes policies that reflect new developments in scientific and economic understanding.”
With respect to discount rates, Circular A-4 calls for performing the analysis using rates of both 3 percent and 7 precent. In the 18 intervening years since the circular’s publication, the significant decrease in long-term interest rates has raised important questions about the continued validity of these rates. Notably, a January 2017 Council of Economic Advisers report suggested that lower discount rates would now be more appropriate. Moreover, there is now a robust economic literature, often associated with the work of Martin Weitzman, suggesting that cost-benefit analysis should use declining discount when the consequences accrue far into the future, as they do in the case of climate change.
Circular A-4 should also be modernized to reflect advances in the economics literature on internalities (benefits to consumers that they do not take into account while purchasing goods) and behavioral economics (the study of the psychological and cognitive factors affecting individual decisions), both of which have significant implications for the justification of energy efficiency rules and other regulatory measures. For example, opponents of regulation sometimes argue that because consumers get a financial benefit from purchasing more efficient vehicles or appliances, the imposition of regulatory standards is unnecessary. But these arguments overlook the market failures and cognitive biases that provide strong justifications for regulation.
Promoting justice and equity. Finally, and most importantly, the Biden memorandum calls for an accounting of justice and equity in regulatory review. The regulatory review process has long paid lip service to the need not only to account for a regulation’s aggregate benefits and costs, but also to consider the distribution of these regulatory impacts among different communities. But in practice, these exhortations have not amounted to much and have occupied little of the attention of either agencies in performing their analyses or of OIRA in discharging its review function. Relatedly, during the last two decades, OIRA has been criticized for having a mostly reactive posture—playing somewhat of a gatekeeping role after agencies propose regulations but not prompting agencies to undertake interventions that might yield significant social benefits, including actions that can improve distributional equity.
President Biden’s memorandum includes both substantive and procedural components to promote the values of justice and equity. On the substantive side, it calls on the OMB director to “propose procedures that take into account the distributional consequences of regulations, including as part of any quantitative or qualitative analysis of the costs and benefits of regulations, to ensure that regulatory initiatives appropriately benefit and do not inappropriately burden disadvantaged, vulnerable, or marginalized communities.”
Although prior executive orders have made reference to distribution and equity, they did not move the needle on these issues. For example, Executive Order 12,866 specified that, in selecting regulatory options that maximize net benefits, agencies should consider both “distributive impacts” and “equity.” More recently, Executive Order 13,563, issued by President Barack Obama, indicated that agencies “may consider (and discuss qualitatively) values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts.”
But despite these existing executive orders, distributional issues have never played a significant role in the regulatory review process. Moreover, Circular A-4 does not contain any actionable guidance on how distributional issues should be taken into account. As a result, regulatory initiatives may burden disadvantaged, vulnerable, or marginalized communities, or fail to provide sufficient benefits to such communities. The presidential memorandum provides an important opportunity for addressing a key shortcoming of agency regulatory analyses and OIRA review.
On the procedural side, the presidential memorandum directs OMB to “consider ways that OIRA can play a more proactive role in partnering with agencies to explore, promote, and undertake regulatory initiatives that are likely to yield significant benefits.” This command seeks to expand OIRA’s role beyond its traditional stance as a reactive player in the regulatory review process, under which it has merely pushed back against regulatory initiatives when the benefits do not “justify” the costs.
In the past, OIRA has not embraced its ability to prod agencies to undertake socially beneficial regulations and thereby act as a check against regulatory capture (with the exception of some prompt letters that OIRA issued during the George W. Bush Administration). The academic literature has criticized OIRA for failing to undertake such a proactive role.
An agency is likely to take socially justified regulatory action when the beneficiaries are powerful groups that understand how to move the agency’s levers. But such action is quite unlikely when the beneficiaries are instead disadvantaged, vulnerable, or marginalized communities with limited ability to shape agencies’ agendas. For this reason, the proactive approach for OIRA that the Biden memorandum encourages should be seen as an integral part of the Administration’s justice and equity mission.
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In summary, after four decades of a relatively stable approach to regulatory review—and four years of lip service to an approach that was not followed in practice—President Biden’s memorandum opens the doors to significant reform while keeping the core architecture of regulatory review in place. The reform undertaking will undoubtedly be difficult because several of the tasks—incorporating distributional consequences into the regulatory analysis, crafting an appropriate proactive role for OIRA, and updating discount rates—have been long recognized as vexing problems and have so far proven intractable. As a result, the Biden Administration will need to employ a combination of political will and analytical focus to deliver on the presidential memorandum’s promise.
This essay is part of a six-part series entitled Regulatory Review Reimagined.