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COPYRIGHT 2002 University of Pennsylvania, Law School
For over two decades, federal agencies have been required to analyze the benefits and costs of significant regulatory actions and to show that the benefits justify the costs. But the regulatory state continues to suffer from significant problems, including poor priority-setting; unintended adverse side-effects, and, on occasion, high costs for low benefits. In many cases, agencies do not offer an adequate account of either costs or benefits, and hence the commitment to cost-benefit balancing is not implemented in practice. A major current task is to ensure a deeper and wider commitment to cost-benefit analysis, properly understood. We explain how this task might be accomplished and offer a proposed executive order that would move regulation in better directions. In the course of the discussion, we explore a number of pertinent issues, including the actual record of the last two decades, the precautionary principle, the value of "prompt letters," the role of distributional factors, and the need to incorporate independent agencies within the system of cost-benefit balancing.
INTRODUCTION
A. Processes and Problems
For over twenty years, the executive branch of the federal government has required regulatory agencies to assess the costs and benefits of regulation, and to attempt to ensure that the benefits outweigh, or justify, the costs. (1) At least in a formal sense, cost-benefit balancing is now the official creed of the executive branch, as demonstrated by a series of executive orders. (2) The point cuts across partisan divisions: President Clinton's approach differed somewhat from President Reagan's, but it shared the fundamental commitment to cost-benefit balancing. (3)
Notwithstanding this public commitment, national regulation has hardly come into compliance with the principles of cost-benefit balancing. (4) This overall pattern of imperfect compliance should raise many alarm bells, even for those who have real doubts about cost-benefit analysis and merely want more coherence and better priority-setting. The general record does show numerous successes, in the form of regulations that promise to deliver significant benefits at a relatively low price. (5) But in many cases, regulations seem to do more harm than good. (6) Indeed, a close look at federal regulatory policy shows a wide range of problems. Perhaps foremost among them is exceptionally poor priority-setting, with substantial resources sometimes going to small problems, and with little attention being paid to some serious problems. (7) There are also unnecessarily high costs, with $146 to $229 billion being attributable to compliance costs each year. (8)
We do not contend that an assessment of quantified costs and quantified benefits tells us everything that we need to know or that precise numbers are always possible. (9) But when the costs are high and the benefits low or nonexistent, something seems seriously amiss, especially because an absence of significant benefits signals a likely absence of significant savings in terms of health, safety, or the environment. Especially in a period in which economic growth and improved safety and health are among government's highest priorities, this is a major problem. And indeed, the recent reports of the Office of Management and Budget (OMB), designed to capture the costs and benefits of a wide range of regulations, reveal some disturbing numbers: the EPA's regulation for financial assurance for municipal solid waste landfills has monetized benefits of $0, but costs of $100 million, and this is expected for the next thirteen years; (10) for the next thirteen years, the Department of Labor's methylene chloride regulation will have annual costs of $100 million and annual benefits of $40 million; (11) the cost-benefit ratio for airbag depowering regulation seems bad, though there is uncertainty in the data. (12)
Consider Table 1, which lists some estimates of costs and benefits of recent regulations:
It might seem that existing executive orders would prevent or reduce outcomes of this kind, but apparently these orders have not had a large effect. (14) Indeed, there is some evidence that the existing orders have had little impact on what agencies actually do. (15)
This is no mere academic objection. Expensive regulation may well increase prices, reduce wages, and increase unemployment (and hence poverty). (16) Resources now being devoted to small or imaginary problems might be diverted instead to areas where, by all accounts, they could produce far more good. Cost-benefit analysis is not an effort to reduce all human goods to numbers, but to increase the likelihood that regulation will actually produce human goods. Precise numbers do not exist, but according to a suggestive study, better allocations of health expenditures could save, each year, 60,200 additional lives at no additional cost--and such allocations could maintain the current level of lives saved with $31.1 billion in annual savings. (17) We do not believe that cost-benefit analysis should be the exclusive basis for assessing regulation, but we do believe that it is an important tool, and that a movement toward improved balancing is likely to promote many social goals, including better health and increased longevity. (18) This somewhat abstract claim has been dramatized by repeated demonstrations that some regulations create significant substitute risks (19)--and that with cheaper, more effective tools, regulation could achieve its basic goals while saving billions of dollars. (20)
B. A Deeper and Wider Commitment to Cost-Benefit Analysis
How can regulation be moved in more sensible directions? This is a large question, and we will not attempt to answer it thoroughly here. But it seems to us that much of the answer lies in improved institutions, and, in particular, in institutional reforms that increase the role of cost-benefit analysis in regulatory policy as a way of drawing attention to the likely effects of alternative courses of action. Of course, statutory changes would be necessary in many cases. We emphasize two points here. First, the commitment to cost-benefit analysis has been far too superficial, and in some ways mostly symbolic; it should be deepened through efforts to strengthen its actual role. Second, the commitment to cost-benefit analysis has been far too narrow; it should be widened through efforts to incorporate independent regulatory commissions within its reach.
In this Article, we propose and explore a modest but potentially significant step toward greater depth and width: a new executive order on federal regulation, building on lessons derived from the experience of the last two decades. The proposed order, designed to replace or reform the current one, offers eight basic innovations over existing practice. Most of these address the issue of depth; the last point goes to the issue of width.
1. Promoting Compliance. Our proposal attempts to ensure that agencies will actually comply with the basic principles established in previous orders, in part by explicitly requiring agency compliance with OMB guidelines for regulatory analysis. This would be an extremely significant step, because OMB's guidelines have been widely ignored, (21) and because compliance with those guidelines would significantly increase rationality and coherence in the regulatory process.
2. "Prompting" Regulation. Our proposed order strengthens the role of the Office of Information and Regulatory Affairs (OIRA) and explicitly creates a mechanism by which OIRA might "prompt" regulation as well as constrain it. OIRA has issued a series of prompt letters under President Bush. (22) This is an important way to ensure that cost-benefit analysis will be used not simply to reduce and limit regulation, but also to spur regulation in those cases where it will do more good than harm. (23) By creating a mechanism for prompting regulation, our order moves cost-benefit analysis in the direction of service as a technical tool for improving regulation, rather than simply being a mechanism for reducing it.
3. Considering Substitute Risks and Not Regulating Trivial Problems. We include explicit requirements that, to the extent permitted by law, agencies (a) consider the substitute risks introduced by regulation and (b) do not attempt to regulate trivial or de minimis problems. These requirements build on some important developments within the federal courts, which have created default rules authorizing agencies to consider substitute risks and to make de minimis exceptions to regulatory requirements. (24) These default rules are mirrored in federal legislation, which often bars regulation of trivial risks, (25) and which also calls, in many places, for attention to substitute risks. (26)
4. Explaining Rationales for Action When Benefits Do Not Exceed Costs. We require that benefits should generally be expected to exceed costs, and ask agencies to provide a rationale for proceeding with any regulation that fails to pass a cost-benefit test (based on best quantifiable estimates). (27) Some statutes explicitly require agencies to act even if the benefits fall short of the costs. (28) There may also be cases in which an agency believes that it is worthwhile to proceed even though the quantifiable benefits do not exceed the quantifiable costs. Either way, we believe that accountability and transparency would be enhanced if the head of an agency were required to explain why a regulation is being adopted.
5. Making Underlying Analysis Available. For each significant regulatory action, we ask the appropriate agency to include an underlying analysis of the benefits and costs, so that interested parties inside and outside of the government can understand how the results were obtained, and perform their own analysis of the issue if they so choose. We believe that this requirement will also promote transparency and enhance accountability.
6. Formulating Regulatory Retrospective and Plan. We require each agency to create an annual regulatory retrospective and an annual regulatory plan. The retrospective should contain a general analysis of the costs and benefits of significant regulations; this analysis will facilitate OMB's statutory task of compiling an annual account for the executive branch as a whole. (29) The annual regulatory plan, following a similar requirement in the existing executive order, (30) would contain an account of what the agency aspires to do in the following year. The purpose of the regulatory plan is to ensure early, rather than last-minute, OIRA involvement in planning, and also to promote the involvement of high-level agency staff at an early stage.
7. Incorporating Independent Agencies. For the first time, we include the independent regulatory agencies, such as the Federal Trade Commission (FTC), Consumer Product Safety Commission (CPSC), and Federal Communications Commission (FCC), within the ambit of the order. This is a significant departure from existing practice. We believe that the innovation is justified because these agencies are engaged in important regulatory functions. The inclusion of independent agencies raises obvious legal issues, which we discuss below. (31)
8. Authorizing Judicial Review. We provide for limited judicial review of the documents and materials generated as a result of the order. The goal of this provision is to increase the likelihood that agencies will take the order's requirements seriously. It also authorizes the invalidation of arbitrary and capricious agency action, to the extent that the relevant materials are pertinent, as a matter of law, in a test of the legality of agency conduct.
We believe that a new executive order is probably the best way to move in the directions suggested by these ideas. There are, however, reasonable counterarguments. For well over a year, the Bush administration has been operating under an executive order issued by President Clinton, and there are real virtues in a situation in which regulatory oversight under a president from one party is done under a set of principles issued by another. It is important to give such oversight both the reality and the appearance of nonpartisanship. A possible approach would be to retain the Clinton order and to issue a supplemental order that embodies some of the proposals described here. In any case, many of the ideas in this Article might be promoted without a new order. Greater depth, for example, might well be achieved simply by a stronger effort, by OIRA, to ensure compliance with existing requirements (32) and, indeed, by an insistence on many of the proposals made here. (33) If a new executive order were not to be issued, considerable progress might well be made with these suggestions in mind. For those who lack enthusiasm for our recommendations, we hope that the discussion will nonetheless cast light on the actual performance of the federal government after twenty years of experience under a (nominal) commitment to cost-benefit analysis. (34) Indeed, some critics will be pleased to see the modest effects of cost-benefit requirements to date. (35)
This Article is organized as follows. Part I briefly outlines the development of executive orders on federal regulation. At the same time, it provides an account of what we mean by the still-controversial idea of cost-benefit balancing, and an exploration of the lessons from two decades of experience with executive orders on federal regulation. We emphasize here the extent to which the commitment to cost-benefit analysis has been, too much of the time, symbolic rather than real. Part II explains and defends our innovations. Part III explores the limits of reform via executive order, and offers an account of what else might be done. Following a brief conclusion, the Appendix contains the text of our proposed executive order.
I. CLARIFICATIONS AND PRELIMINARIES
A. What Is Cost-Benefit Analysis?
Before proceeding to the details, it is important to clarify our basic understanding of cost-benefit analysis. We mean to use the term in a modest, nonsectarian way, seeing cost-benefit analysis as a tool and a procedure, rather than as a rigid formula to govern outcomes. (36) Thus understood, cost-benefit analysis requires a full accounting of the consequences of an action, in both quantitative and qualitative terms. Officials should have this accounting before them when they make decisions.
We do not insist that regulators should be bound by the "bottomline" numbers; qualitative considerations, and a sense of distributive impacts (not themselves considered "benefits" in the analysis), are permitted to influence public officials. But if regulators are to proceed, they should be prepared to explain either how the benefits exceed the costs, or if they do not, why it is nonetheless worthwhile to go forward. When the benefits do not exceed the costs, it would make sense to adopt a presumption against proceeding--a presumption that might be rebutted by showing, for example, that children would be the principal beneficiaries of the regulation, or that poor people would be disproportionately benefited. We therefore understand cost-benefit analysis to require a certain procedure: A quantitative and qualitative accounting of the effects of regulation, together with a duty to explain the grounds for action unless the benefits exceed the costs. On this view, the antonym to regulation guided by cost-benefit analysis is regulation undertaken without anything like a clear sense of the likely consequences--or regulation that amounts to a stab in the dark. (37)
What are the arguments for cost-benefit analysis, so understood? We do not attempt to answer this question in detail; (38) but it is important to see the central points. The standard response is economic in character: Regulation should ordinarily promote social welfare, and while social welfare might be promoted by regulations that fail cost-benefit analysis, (39) cost-benefit analysis is an imperfect but useful and administrable proxy for the inquiry into the social welfare question. At the very least, it seems clear that regulation is unlikely to promote social welfare when its costs are very high and its benefits are very low--especially when we consider the fact that high costs are likely to be translated into some combination of higher prices, lower wages, and lower returns to capital. It is not necessary to think that government should be treated as some maximizing machine in order to conclude that officials should know the consequences of regulation before they act, and that they should be reluctant to issue regulations that promise to cost much and to deliver little.
Of course, it is possible that in practice, quantitative cost-benefit analysis will have excessive influence on government decisions, drowning out "soft variables." (40) Since the numbers are not all that matters, any such effect would be a point against cost-benefit analysis. But to date, the actual record does not support this concern. To take just one example, the EPA's decision to go forward with new controls on arsenic in drinking water was supported partly on the ground that nonquantifiable variables tipped the balance. (41) We will suggest that in appropriate cases, distributional considerations should also count. The risk that cost-benefit analysis will drown out relevant variables is not a reason to abandon the analysis, but to take steps to ensure against any such effect.
It is useful to compare cost-benefit analysis with the "precautionary principle," often invoked as a foundation for risk regulation and indeed as an alternative to cost-benefit analysis. (42) The precautionary principle asks government to prevent risks, even if they are quite speculative, on the ground that it is important to guard against large problems even if they might not come to fruition. Of course it is worthwhile to take some precautions against serious risks, even if the probability of their occurrence is well under 100%. We think, however, that the precautionary principle is an inadequate guide to action, simply because dangers often lie on both sides of the equation. (43) Consider the case of genetic modification of food, a process that does carry some risks: A failure to allow genetic modification might well result in many deaths, and a small probability of many more, simply because genetic modification might well deliver cheaper and healthier food. (44) Doesn't the precautionary principle require genetic modification of food at the same time that it prohibits it?
Or consider the question whether to ban the use of DDT. The precautionary principle might well seem to require the ban, because DDT imposes health risks for birds and mammals, including human beings. But the ban itself seems to be banned by the principle, because any such ban might lead to either unsafe or more expensive substitutes, and in either case the ban creates a (speculative) risk of serious harms. (45) Or consider an effort to introduce stringent regulation of arsenic in drinking water. It is possible to justify the regulation on the ground that low levels of arsenic might create substantial risks; but it is also possible to complain that the expensive regulation (costing, say, $200 million) itself creates a risk of mortality effects, a risk that would be forbidden by the precautionary principle. What should government do?
The precautionary principle, taken for all that it is worth, is frequently paralyzing: It stands as an obstacle to regulation and to nonregulation, and to everything in between. Of course speculative harms often deserve attention. But we think that too much of the time, the precautionary principle is merely a combination of rhetoric and myopia, having force only when people look at an essentially arbitrary part of the picture, rather than at the whole. A competent cost-benefit analysis takes good account of what is sensible in the precautionary principle, by asking regulators to attend to low-probability risks of significant harms. Cost-benefit analysis subsumes this risk, as it does all others, into the overall assessment of welfare effects of regulation. (46) Indeed, the most sensible understandings of the precautionary principle emphasize the need for an overall assessment, and insist on exploring all of the risks at stake, including low-probability, potentially catastrophic risks. (47)
A less familiar argument for cost-benefit analysis, growing out of our doubts about the precautionary principle, is cognitive in character. One goal of cost-benefit analysis is to overcome cognitive limitations by ensuring that people have a full, rather than limited, sense of what is at stake. (48) People often miss the systemic effects of risk regulation; (49) cost-benefit analysis is a way of putting those effects squarely on-screen. At the same time, cost-benefit analysis helps overcome the problems created by cognitive heuristics that can lead people to misunderstand the magnitude of risks, by allowing an accounting of the actual consequences of current hazards and of the effects of reducing them. (50) To the extent that people's emotions are getting the better of them, by producing massive concern about small risks (51) cost-benefit analysis should help put things in perspective, and at the same time might help to calm popular fears. And if people are indifferent to a risk that is actually quite large, cost-benefit analysis will help to stir them out of their torpor. The result should be to help with cognitive distortions and to produce sensible priority-setting.
There are democratic advantages as well. (52) Interest groups often manipulate policy in their preferred directions, sometimes by exaggerating risks, sometimes by minimizing them, and sometimes by mobilizing public sentiment in their preferred directions. An effort to produce a fair accounting of actual dangers should help to diminish the danger of interest-group manipulation. More generally, cost-benefit analysis should increase the likelihood that citizens generally, and officials in particular, will be informed of what is actually at stake. By itself, this is a large democratic gain.
Of course, interest groups will also try to manipulate the numbers in their preferred directions. Industry will tend to exaggerate the costs and minimize the risks. Public interest groups will do the opposite. A government that attempts to produce cost-benefit analysis will face a formidable task; it is possible that government will lack the information necessary to do this task well. But if there is a degree of accuracy, and if ranges are specified where there is uncertainty, cost-benefit analysis can be seen, not as some antidemocratic effort to tyrannize people with numbers, but instead as an indispensable tool of democratic self-government.
We can go further. Prospective estimates of both costs and benefits often turn out to be wrong. (53) This is not merely because of interest-group pressures. One reason is that officials lack the extensive information that would permit them to make accurate predictions; indeed, the informational demand on agencies is overwhelming, especially because technologies change over time. (54) An enduring problem for regulatory policy is the absence of precise information on the cost or benefit sides. This point should be taken, not as a criticism of cost-benefit analysis as such, but as a reason for continuous monitoring and updating. (55) Our emphasis on retrospective analysis and on prompt letters is intended to take account of the frequent inadequacy of prospective estimates.
There are numerous challenges to cost-benefit analysis as a regulatory tool. (56) We cannot discuss those challenges in this space. We suspect that many of them are rooted, at bottom, in pragmatic considerations--in a belief that in practice, cost-benefit analysis will be used as an obstacle to desirable regulation. According to some skeptics, the antonym of cost-benefit analysis is not the unguided stab in the dark, but regulatory protection itself. If this were so, the argument for cost-benefit analysis would be greatly weakened. But the evidence does not support this pessimistic prediction; (57) indeed, cost-benefit analysis has helped to spur regulation, not merely to stop it. (58) We believe that, in principle, cost-benefit analysis has a great deal of promise, and that when it has been used, it has often made things better rather than worse. (59) Of course, the case for cost-benefit analysis will depend, in large part, on what people do with it in the future.
B. History
Since 1980, all three branches of American government have shown increased interest in cost-benefit balancing. (60) Our emphasis here is on the actions of the executive branch, which has had a long-standing interest in cost-benefit balancing, an...
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