Politics

Obama’s Cost-Benefit Revolution

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Tuesday, the president issued a new executive order on cost-benefit analysis and regulation. Already, the right has denounced it as a paean to collectivism and the left has declared that Obama has sold out to business groups. In fact, both sides are incorrect. The surprising reality is that cost-benefit analysis, as it will likely be practiced under the Obama administration, is not nearly as threatening as its detractors suggest. Then again, neither is it as revolutionary as its supporters like to imagine.

Long ago, cost-benefit analysis was a rallying cry for conservatives. It was brought to government by none other than Ronald Reagan, in Executive Order 12291 of 1981. Reagan was riding the wave of the deregulatory movement, which held that regulation of industry was excessive and stunted economic growth. His order stipulated that agencies should issue regulations only after finding that the benefits exceeded the costs.

Outraged liberals charged that cost-benefit analysis was a pretext to stifle regulation, and that it was arbitrary because of the difficulty of attaching dollar values to lives, environmental goods, and other regulatory benefits. Conservatives replied that cost-benefit analysis blocks bad regulations: Why would one support a regulation that produces higher costs than benefits? At the time, the alternative was regulation that seemed to reflect no more than the instincts of bureaucrats (or the agendas of interest groups), accompanied by impenetrable bureaucratese. The debate continued in this vein for decades, but over time, positions shifted. Some liberals came to see cost-benefit analysis as a good-government tool that promotes transparency and accountability, while some conservatives began to wonder whether it confers legitimacy on the New Deal state.

In that vein, President Clinton renewed Reagan’s executive order in 1993, albeit in slightly modified form. And for the last two years, observers have been wondering whether Obama would follow Clinton’s path: The president appointed some defenders of cost-benefit analysis to high administrative posts, such as Cass Sunstein, the head of the Office of Information and Regulatory Affairs, which oversees regulation. But he also hired critics of cost-benefit analysis and installed them in the EPA and other posts.

Now, the press has reported that Obama’s executive order, which explicitly renews Clinton’s, signals victory for business. But the executive order also provides plenty of wiggle room that can be exploited by pro-regulatory forces, as indeed did Clinton’s before it. Unlike Reagan’s original order, which simply asked agencies to perform cost-benefit analysis, Clinton’s allowed agencies also to take account of “equity.” Obama’s adds that agencies should take account of “human dignity” and “fairness,” values, it helpfully notes, that are “difficult or impossible to quantify.” This is problematic because quantification is the point of cost-benefit analysis. Cost-benefit analysis works in the first place only because it imposes mathematical discipline on agencies. They must supply evidence that a proposed regulation has certain benefits and costs, monetize those benefits and costs, and report a number. If the number is greater than zero, then the agency may regulate. If agencies can instead point to unquantifiable benefits such as the promotion of human dignity, they can do whatever they want, and the main selling point of cost-benefit analysisgovernment transparencyis eliminated.

These wiggle words might be sops to the left, or they might be licenses to agencies to regulate however they want to. Everything depends on how the executive order is implemented, as is so often the case in the law. Indeed, although Reagan, Bush Sr., Clinton, and Bush Jr., all operated under essentially the same cost-benefit executive order, Clinton’s regulatory agenda was more aggressive than that of the three Republican presidents. And academic research has shown that many of the cost-benefit analyses issued under all administrations were shoddy; in fact, there is little evidence that the introduction of cost-benefit analysis has improved the quality of regulations. The reason is that courts do not usually force agencies to comply with cost-benefit analyses, so unless the president steps in, the agency can do what it wants.

Which means that only President Obama can decide whether agencies will honestly conduct cost-benefit analysiseither by directly intervening in regulatory matters, or by putting his weight behind Sunstein and against the agency heads who often want to regulate more aggressively than cost-benefit analysis allows them to. Enforcing cost-benefit analysis, as opposed to merely announcing the policy, would require political capital that President Obama has so far shown little inclination to spend blocking overregulation.

Obama’s executive order builds on Clinton’s by requiring agencies to engage in “retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome.” This is indeed a good idea. It makes sense for agencies from time to time to revisit earlier regulations and modify them in light of recent information. However, commentators have too hastily assumed that this new requirement is pro-business. This is not necessarily the case. The word “insufficient” implies that old regulations may be strengthened rather than weakened.

Obama has been in office for two years, and during this period the Clinton executive order was in effect. The signs so far are encouraging but also mixed. Under Sunstein’s leadership, OIRA has issued increasingly high quality annual reports to Congress that lay out the monetary benefits and costs of regulations. At a minimum, these reports are a boon to scholars and watchdogs, who have never before had such easy access to so much information about agency action. Assuming that the numbers are reliable, the reports indicate that agencies, in aggregate, have done more good than harm. But they also reveal that for most rules, agencies refuse to estimate costs, benefits, or both, insisting that they are not quantifiable, so the picture is blurry. And some rules that fail cost-benefit analysis are issued anyway.

The most interesting regulatory effort so far has been a report issued by an interagency working group on the “social cost of carbon.” This report was issued with no press release or fanfare, but instead snuck out as an appendix to the Department of Energy’s regulation on Energy Conservation Standards for Small Electric Motors, a page turner if there ever was one. The report concludes that every metric ton of carbon emitted into the atmosphere causes $21.40 in damage to humanity. This figure must be applied by every agency, including the EPA, which is busily formulating regulations to address climate change. The figure reflects an impressive effort to bring together science and economics, so as to provide a rational basis for regulation, and ensure that the different agencies regulate in a consistent manner. However, in the end the $21.40 figure rests on guesswork about the regional effects of climate change and on the doubtful assumption that regulated industry in the United States will not migrate to unregulated countries like China. Science proves that carbon emissions cause global warming, which will cause tremendous harm to people around the world; but science has not reached the stage where the harm for Americans can be given a precise dollar value.

The lesson is a humbling one for supporters and critics of cost-benefit analysis alike. For political and policy reasons, the Obama administration is strongly committed to climate regulation. It will happen, whatever cost-benefit analysis might say. But cost-benefit analysis provides a framework for thinking about climate change, and once the government uses that framework, it opens itself to criticism and debate. In the long run, that might lead to somewhat higher-quality regulation than would otherwise occur. Snail’s-pace progress of this sort is sometimes all that one can expect.

Eric A. Posner is a professor at the University of Chicago Law School and author, with Adrian Vermeule, of The Executive Unbound: After The Madisonian Republic.

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