Every spring the Office of Management and Budget releases the president’s proposed budget for the upcoming fiscal year. While Congress invites senior administration figures to testify before various committees, and the media pore through the document to elucidate the administration’s priorities, by the end of a week everyone agrees that most of what’s in the budget has little chance of becoming enacted. Afterwards, Congress goes through the motions of passing a budget of its own, with scant regard to what the White House has proposed.
At the same time it releases the budget, OMB produces another document, one that’s a manifestation of the management half of its portfolio: The Report to Congress on the Benefits and Costs of Federal Regulations. While it garners much less attention than the president’s budget, the cost-benefit report deserves much closer scrutiny—because it perennially misrepresents the activities of the regulatory agencies as being above reproach.
Since Ronald Reagan was in office all presidents have had an executive order in place mandating that “economically significant” regulations issued by executive agencies (i.e., those with an economic impact in excess of $100 million) be subject to a formal cost-benefit analysis showing that the benefits outweigh the costs.
The OMB report compiling these costs and benefits—which was begun by the previous administration—is in essence a league table that compiles the costs and benefits of a variety of regulations formally issued during the previous year. Every edition has reported that all is well with our regulatory world, with the benefits accruing to society from our government’s regulatory activities far outweighing the costs imposed.
The problem is that the report is of little use in discerning whether this is, in fact, the truth. First, and most important, the report includes only a few regulations. While 3,700 regulations were issued in fiscal year 2012, with 80 of them being categorized as “major,” only 14 regulations were included in OMB’s analysis.
It is, of course, the case that the costs and benefits of some regulations (think of the one issued in late 2001 to strengthen the doors to airline cockpits) can’t be quantified. Also, as it currently stands, some entities that issue regulations don’t bother, and are not required, to do cost-benefit analyses, and most regulations considered to be “non-major” never have their costs and benefits measured. Still, OMB is cherry-picking less than 1 percent of regulations issued in 2012 to present in its report.
Another problem is that the various executive branch agencies aren’t all that good at measuring costs and benefits. When EPA tasks its economists to do a cost-benefit analysis on a regulation, it expects them to deliver an analysis that supports the regulation, and their economists have every incentive in the world to deliver the desired answer. The idea that an agency’s economists would get in the way of its regulators is laughable: Any economist worth his salt can torture data until they justify whatever the agency wants to do.
One example: An important part of measuring the benefits of many regulations is the value of a life saved. If a new regulation were to save 10 lives a year, how should we value this gain? Economists have come up with several different ways to assess the value that people implicitly place on their lives: For instance, there are numerous studies that estimate the value of a “statistical life” by observing how much money people demand to take a slightly more dangerous job, or how much they are willing to pay for a safer bike helmet, or on safety accessories for a car.
About a decade ago two enterprising economists, Janusz Mrozek and Karen Taylor, compiled a comprehensive list of studies that tried to measure the value of a statistical life (VSL) and did a meta-analysis to see if they could reach a broad conclusion on the topic. The representative number they arrived at was $2.5 million, which happened to be much lower than what EPA used in its cost-benefit calculations. Adopting the lower figure would dramatically reduce the benefits for most EPA regulations, which would mean that fewer potential regulations could pass a cost-benefit test.
Rather than adjust its figure downward to reflect the state-of-the-art research (which EPA financed, incidentally), the agency responded to the widely heralded study by announcing that it would perform its own meta-analysis. A few months later the agency held a meeting to discuss its initial findings and invited nearly every economist who had published on the subject. While the research was not yet complete, EPA said it expected its VSL estimate would be three times higher than the Mrozek and Taylor figure—and almost precisely the figure EPA was already using. The pronouncement was met with mocking laughter from the audience, but EPA never budged. It didn’t have to.
Finally, the very practice of constructing a league table is a dubious exercise. There is no reason to aggregate the various costs and benefits for regulations—especially when the final number reflects only a small proportion of regulations, none of which had costs and benefits measured particularly well. With this much discretion, OMB can always declare that the combined benefits for its chosen set of regulations outweigh their aggregate costs for a given year. If, by some bureaucratic accident, OMB did not get this result, no one would insist that the government eliminate the new regulations. Critics would merely insist we reexamine the various regulations in the analysis.
And if there were one regulation with huge estimated benefits and low costs outweighing a number of smaller regulations that fail any cost-benefit test, we would still be dissatisfied with the government’s regulatory activities, even if the net aggregate benefits were high.
Fixing the annual report so that it produces something informative is straightforward, although it would take the agencies a bit of work, which would pay off in the long run for all involved. First, all agencies should be subject to cost-benefit analyses for their major regulations. The notion that independent agencies like the SEC, FCC, or the new Consumer Financial Protection Bureau should be above such accountability is absurd and should be fixed at once. The Administrative Conference of the United States, an independent agency in its own right, strongly recommends comprehensive analyses for all agencies.
Second, the agencies themselves should not be the ones determining whether a rule exceeds the $100 million threshold to merit a cost-benefit test, or whether it passes the test, for that matter. The solution to this is simple: OMB should use some of the agency budgets devoted to economic analysis to create an entity outside of their purview solely dedicated to doing cost-benefit analyses. In essence, the entity would do for regulations what CBO does when measuring the revenue impact of legislative proposals.
A relatively impartial government entity performing cost-benefit analyses would turn the annual report into something that allows the public to have a more complete picture of how well the government is doing at regulating the economy.
For an administration that likes to advertise itself as the most transparent in history, it’s a logical step to take.
Ike Brannon is president of Capital Policy Analytics, a consulting firm in Washington, D.C. Sam Batkins is director of regulatory studies at the American Action Forum.