Annual Cost-Benefit Report Gives Clues to Regulatory Changes

The Office of Management and Budget's (OMB) annual report to Congress on the costs and benefits of federal regulations provides clues to the changes the Obama administration will seek in the regulatory process. While the report includes some important changes to the way agencies might approach calculating the impacts of new rules, it does little to suggest that major changes to the central role OMB plays in the process are likely.

OMB's annual report to Congress is mandated by the Regulatory-Right-to-Know Act and summarizes regulatory agencies' estimates of the costs and benefits of regulations over ten years. The report is written by the staff of OMB's Office of Information and Regulatory Affairs (OIRA), the government office charged with overseeing federal regulatory activity; OIRA has issued the report annually since 1997.

The aggregate numbers in the annual reports are unreliable measures because of the wide range of assumptions and methodologies employed by agencies in measuring costs and benefits. Aggregating those estimates as OIRA does for these reports exacerbates that unreliability. Nevertheless, the reports consistently show that the benefits of regulations exceed the costs, especially for environmental regulations.

On Jan. 29, OIRA issued the latest report, entitled 2009 Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities. The 2009 report aggregates the estimated costs and benefits of major regulations over ten years and provides estimates for both annual and some program activity for fiscal year 2008, the last full fiscal year of the Bush administration.

The 2009 report is the first to be directed by President Obama's choice to lead OIRA, Cass Sunstein, an ardent supporter of cost-benefit analysis (CBA) and a critic of the effectiveness of the way agencies employ CBA. Changes to the approaches used by agencies are part of the recommendations for reforms mandated by the act. The report's value is in the chapter outlining these reforms and, if implemented, may represent significant improvements in the use of CBA in agency regulatory impact analyses, the formal analyses that accompany all major rules.

The first reform included in the report is using behavioral approaches to regulation. The emphasis on human behavior takes advantage of social science research that challenges the traditional assumptions of neoclassical economics – that humans make decisions based only on efficiency, rationality, and utility. The report recommends that agencies acknowledge that people are influenced by a range of factors other than strict rationality. Examples of behavioral approaches include disclosing information to consumers, such as information about nutrition, tire safety, and the level of pollution emissions, and the use of "opt-in" and "opt-out" rules to influence consumer choices. In the words of Sunstein, these types of solutions can "nudge" people's behavior.

The second recommendation is focused on improving regulatory impact analyses. "Regulation should be data-driven and evidence-based, and cost-benefit analysis can help to ensure a careful focus on evidence and a thorough consideration of alternative approaches," the report states. The emphasis on data and facts is consistent with Obama's call for agencies to restore scientific integrity to their decision making processes after years of politics superseding science. It is also consistent with Obama’s emphasis on using performance measurement as a means for determining which programs government should continue or discontinue.

Evidence-based analysis continues the trend toward increased quantification in regulatory analyses, but the report makes clear that not all variables can be quantified or monetized. It also recognizes that other analytical tools may be appropriate and seems to give agencies the flexibility to use them. Several times, the chapter includes declarations such as, "We continue to explore methods for handling the most difficult challenges posed by efforts to specify the likely effects of regulation."

More importantly, the report states that other considerations largely ignored by CBA (as currently used) should be part of agency calculations. "It is clear that a full accounting of the costs and benefits of rules must include, rather than neglect, the interests of future generations," the report states. The emphasis on future generations may presage a change in the use of discounting in regulatory impact analysis, an economic technique used in CBA that decreases the value of lives in the future.

"Nor does sensible regulation ignore distributional considerations. If regulation would impose serious costs on the least well-off, or deliver significant benefits to them, regulators should take that point into account in deciding how to proceed," according to the report. The emphasis on distributional considerations would also be a significant change in the way impact analyses are conducted by, for example, allowing agencies to place greater value on the impacts of rules on vulnerable or susceptible populations.

The third recommendation put forward by OIRA is "that regulatory impact analysis should be seen as a central part of open government." This recommendation is consistent with the president's emphasis on transparency and public participation in government. By making the assumptions and information accessible to the public and actively seeking new information in the course of designing regulations, "we can greatly improve our practices," the report states. "A general goal is to connect the interest in sound analysis with the focus on open government, in part by promoting public engagement and understanding of regulatory alternatives."

The reforms could provide agencies with greater latitude and discretion during the regulatory process and make that process more transparent. There is no indication in the report whether OIRA intends to modify or replace the existing directive to agencies on the use of CBA.

The report implies that OIRA will not change its approach to issues such as implementation of the data quality issues, peer review, and OIRA's review of agency guidance documents, leaving in place much of the power OIRA appropriated during the Bush administration.

Nor is there any indication that broader, more far-reaching changes to the regulatory process are coming despite the administration's call for comments from the public and from agencies about changes to the current regulatory executive order (E.O. 12866). Obama issued a memorandum to executive department heads and agencies on Jan. 30, 2009, calling for a revision to the principles guiding the federal regulatory process. OMB Watch recently called on the president to complete this process by issuing a revised executive order.

The annual report to Congress, the Analytical Perspectives section of the president's budget, and other signals from the administration now make it appear that Obama will not revise or replace the Clinton-era executive order, thus missing a major opportunity to rebuild the structure of federal rulemaking to make it more responsive to public problems.

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