Is U.S. regulation cost analysis reliable?

The cost benefit analysis done by the US government is the very best in the world. The bad news is, it still sucks.

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Answer from Stefan Osborne, Economist at Millennium Challenge Corporation:

When I worked at the International Trade Administration of the US Department of Commerce from 2006–2012, I participated in an inter-agency group of government officials lead by the Office of Information and Regulatory Affairs. The group’s job, basically, was for all the agencies to approve the major regulations coming out. My role, as the ITA representative, was to comment on the international competitiveness effects of US domestic regulations.

is-us-regulation-cost-analysis-reliable photo 1 A Senate Budget Committee staff member displays a copy of President Trump's Fiscal Year 2018 budget on Capitol Hill in Washington, U.S., May 23. Kevin Lamarque/Reuters

So basically it was my job to criticize other agencies’ cost benefit analysis for not considering competitiveness effects. Over those six years I became intimately familiar with how our government conducts cost benefit analysis.

So, first, the good news - the cost benefit analysis done by the US government is the very best in the world. The bad news is, it still sucks. We have all the mechanisms in place for effective CBA except for one crucial thing - the CBA is performed by the agency promulgating the legislation. In every single agency I have seen examples of legitimate CBA results being vetoed because they contradicted the agency’s mission. The EPA’s primary mission is to protect the environment, so anytime an economist at EPA came up with an estimate of compliance costs that made EPA leadership uncomfortable, it got shouted down by the lawyers.

For example, once upon a time (i.e. this is a story I heard from office scuttlebutt) a chief economist asked his staff to come up with a methodology to estimate the costs of California complying with the Ozone (O3) Air Quality Standards | US EPA. Ozone is a chemical precursor to smog that results from chemical reactions in the air between sun rays and pollutants from fossil fuels consumption. In California, because of ozone coming across the ocean from China, and because of California’s peculiar geographical properties, you could basically take every single car off the road and still not be in compliance with current NAAQS-Ozone standards. So the EPA’s economics office estimated that cranking down all economic activity in California enough to comply with the current standard would cost something on the order of a trillion dollars. According to the scuttlebutt, the chief economist was consequently fired! It’s certainly the case that the EPA economists I interacted with were, while wildly competent, also understandably meek.

I also found it somewhat suspicious and convenient that the epidemiological research required to establish the relationship between exposure to pollutants from breathing them in and their consequent presence in the blood stream was missing for certain very expensive rules (like Lead (Pb) Air Quality Standards | US EPA). Here is an agency with a multi million dollar research budget promulgating rules that cost companies billions of dollars a year and you won’t fund the research necessary to do your CBA properly?

So my answer to your question is, economists are the hens being guarded by the rule-promulgating foxes. Despite all of the economists being very competent indeed, they are not permitted to be very aggressive in their criticism of their own agency’s rules, and that’s a real problem.

Back in 2008, the Republicans were searching for a solution to this and I suggested they create an independent agency of cost benefit analysis, similar to the CBO or the USITC, that would perform a quasi-independent analysis of the various rules being promulgated by the executive branch, and have the authority to submit comments to the record, like the Small Business Administration can. It’s basically the only solution that will work, and I believe the OIRA head at the time, Susan Dudley, proposed something close to it. The problem is it would require spending taxpayer money to create a new agency, and the Republicans back then wouldn’t even consider it. Maybe Trump, with his willingness to break from Republican tradition, might be willing to give it a shot.

How effective is cost benefit analysis of US regulations? originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world. You can follow Quora on Twitter, Facebook, and Google+. More questions:

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