Is Regulation Good for You?

By Hahn, Robert W.; Malik, Rohit | Harvard Journal of Law & Public Policy, Summer 2004 | Go to article overview

Is Regulation Good for You?


Hahn, Robert W., Malik, Rohit, Harvard Journal of Law & Public Policy


Will all federal regulations soon pass a benefit-cost test? If the OMB's 2003 report is any indicator, the answer may be yes-at least for some categories of regulations. Applying the midpoint of OMB's estimates for quantified costs and benefits of agency rules, we find that 100 percent of regulations studied would pass a benefit-cost test Jot several agencies, and about 80 percent would pass for all agencies considered. Moreover, these regulations would confer at least $100 billion annually in net benefits, again using OMB's numbers. Sound too good to be true? That's probably because it is.

We argue that OMB's numbers are plausible, given the methodology that OMB uses. Whether they are reasonable is less clear. Some work by economists on related sets of regulations suggests that the percentage could be lower. A survey of experts in the field also casts doubt on the estimates of the number of regulations that would pass a benefit-cost test derived from OMB's report. The experts also suggest, in line with academic research, that there is considerable room .for improvement in regulations that pass a benefit-cost test. We, conclude with several suggestions for improving the regulatory process.

I. INTRODUCTION

The Office of Management and Budget (OMB) recently issued its sixth report on the costs and benefits of regulation. Normally not for prime time, this report made the front page of the Washington Post. (1) The punch line was that the benefits of clean air regulations "during the past decade were five to seven times greater in economic terms than were the costs of complying with the rules." (2)

Will almost all federal regulations soon pass a benefit-cost test? If the OMB's 2003 report (3) is any indicator, the answer may be yes. Using OMB's numbers, we find that 100% of regulations already pass a benefit-cost test for several agencies. (4) Furthermore, the aggregate net benefits of regulation could be substantial. For example, the OMB 2003 Report estimates that for the ten year period from October 1, 1992, to September 30, 2002, the estimated total annual quantified benefits for major federal rules were between $146 billion and $230 billion, and the total annual quantified costs ranged from $36 billion to $42 billion. (5) That yields a minimum of over $100 billion annually in aggregate net benefits.

In this paper, we examine the OMB's numbers in detail to assess their plausibility and implications. Part II summarizes data on the fraction of regulations that pass a benefit-cost test, using OMB's data as a starting point. Part III examines whether OMB's numbers are reasonable. We conclude that OMB's numbers are plausible, given the methodology that OMB uses. Whether they are reasonable is less clear. My suspicion is that they are not, and we present some evidence and new survey research that supports this view. Part IV considers whether regulations and regulatory analysis are getting better or worse with time. Some evidence suggests that there is no obvious trend--either in the fraction of regulations passing a benefit-cost test or the quality of regulatory analysis. (6) But a new survey suggests that experts think regulations may be getting worse over time, at least as measured by the fraction likely to pass a benefit-cost test over the last two decades. (7) Finally, Part V summarizes my findings and makes several suggestions for improving the regulatory process.

II. HOW MANY REGULATIONS PASS A BENEFIT-COST TEST?

Before asking how many regulations pass a benefit-cost test, a word is needed about the nature of the test. We will use a test that focuses on quantifiable benefits and costs in the interest of simplicity. It is not because we think unquantifiable benefits and costs are unimportant in making decisions, but rather because we do not have a simple way to address them here.

OMB basically takes the agency's analyses of the expected economic impacts of regulation as given and monetizes benefits where it can.

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