Politics and Regulatory Policy Analysis: What Role Does Cost-Benefit Analysis Really Play in Policymaking?

By Shapiro, Stuart | Regulation, Summer 2006 | Go to article overview

Politics and Regulatory Policy Analysis: What Role Does Cost-Benefit Analysis Really Play in Policymaking?


Shapiro, Stuart, Regulation


The question of what role cost-benefit analysis (CBA) should play in regulatory decision-making is now over 35 years old. Proponents laud its potential to bring rationality to government decision-making. Opponents argue that it is inherently biased against government intervention in the market because it insufficiently measures benefits as a result of discounting and the difficulty associated with monetizing lives saved by regulations.

While the normative debate over CBA is well-worn ground, the positive debate over the role it has actually played is often ignored or ill-informed. Opponents often bemoan the influence of economic analysis, citing the correlation between lower levels of regulation in Republican administrations that typically support CBA. Meanwhile, supporters see the continuing federal output of regulations that would not pass a cost-benefit test and conclude that CBA, as it is currently implemented, is not working.

This positive debate is particularly important because its resolution bears on discussions over reforms to the regulatory process. Before strengthening or weakening CBA requirements, it would behoove would-be reformers to understand how CBA currently works and why.

In the Fall 2003 issue of Regulation, Bob Hahn and Erin Layburn squared off against William Niskanen in a discussion of reforming the regulatory process. Hahn and Layburn recommend expanded reporting from regulatory agencies and the creation of a congressional office of regulatory analysis. As grounds for doing so, they contend that the current requirements for regulatory impact analyses are too weak to make a difference in regulatory policy. The office in charge of reviewing these analyses, the Office of Information and Regulatory Affairs (OIRA), "has shown that its political constraints are too great to allow enough flexibility to critique agencies' analysis." Niskanen is skeptical about the solutions proposed by Hahn and Layburn, claiming that their proposals would merely "produce more lonely numbers" that policymakers would ignore. Implicit in Niskanen's argument is the claim that OIRA's political constraints would also constrain any reform proposal that attempts to strengthen requirements for CBA.

Many of the scholarly and political debates about CBA focus on the merits or problems of the technique itself. The articles by Hahn and Layburn and by Niskanen, however, touch upon central but relatively unexamined questions: What role has cost-benefit analysis already had, and how have the institutional constraints surrounding it affected the regulatory process? This article suggests answers to those questions and assesses the Hahn/Layburn proposals accordingly.

CBA'S IMPACT

The debate over CBA is more than two decades old and shows no sign of abating. With every increase in the number or complexity of the analytical requirements imposed on agencies promulgating regulations, supporters of economic analysis voice their hopes that regulation will become more cost effective, while opponents argue that the regulatory process will suffer greatly or that agencies will abandon rulemaking altogether.

Despite the stridency of the disagreement, there is little empirical evidence to support either position. Rulemaking has not been abandoned in the wake of OIRA's creation, nor have the net benefits of regulations measurably increased. Neither the promoters nor the critics of CBA have seen their predictions realized. Weighing against the claim that analysis requirements have stifled regulatory movement are the facts that agencies have continued to regulate throughout the period during which CBA requirements have been in place, the cost of regulations has continued to run as high as $800 billion annually, and there is little evidence that the time to produce a rule has increased.

While there is little evidence that CBA requirements have deterred rulemaking, this leaves unanswered the question of whether cost-benefit analysis has resulted in regulations with greater net benefits. …

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