Evaluating Transfer Regulations: Routine Use of Cost-Effectiveness Analysis Could Dramatically Improve Transfer Programs' Effectiveness While Saving Taxpayers' Money

Article excerpt

WHEN A FEDERAL REGULATOry agency issues a major regulation, the agency usually must provide a cost-benefit analysis that shows the monetized benefits of the regulation exceed the cost it imposes on industry. There has been much debate about whether this practice has improved the quality of regulations, but few doubt that the quality of agencies' reasoning in formulating regulations has improved, and most commentators believe that cost-benefit analysis is a necessary first step toward improved regulation. Agencies, like businesses, are now expected to provide an accounting that shows their projects have a positive net present value. Although agencies, like businesses, can fudge the numbers a bit, regulatory impact statements provide more usable information about regulations than have statements accompanying regulations in the past, and that is a good thing for those who care about government transparency.

The regulations or proposed regulations that have been subjected to cost-benefit analysis are dominated by three areas: healthy, safety, and the environment. Notable recent examples include the Clinton-era arsenic and ergonomic regulations, which were withdrawn by the Bush administration when the analyses indicated that the regulations would produce a net loss for society. In those and other cases, cost-benefit analysis disciplines agencies by preventing them from justifying regulations based on speculative health or environmental benefits.

Cost-benefit analysis forces agencies to complete several valuable tasks: (1) quantify the effects of the regulation (e.g., the evidence either shows that the regulation will reduce cancer rates by a certain percent, or it does not); (2) monetize those effects (e.g., the monetary value of a life saved or a case of bronchitis avoided is a certain amount of dollars); (3) discount future benefits (e.g., a case of bronchitis avoided today is worth more than a case of bronchitis avoided tomorrow); and (4) aggregate those amounts. Then the benefits can be compared to the cost of the proposed regulation and a decision can be made as to the regulation's net results.

Government agencies have intermittently used cost-benefit analysis from the very beginning, but it was in 1981 that President Ronald Reagan issued an executive order that directed all regulatory agencies to perform cost-benefit analysis of major rules. To the surprise of some people, President Bill Clinton issued an executive order that maintained the substance of the Reagan order, though there is some doubt whether his Office of Management and Budget enforced it as vigorously as Reagan's OMB did. Clinton's order remains in force today, and President Bush's OMB has reinvigorated it.

Both the Reagan and Clinton executive orders direct agencies to use cost-benefit analysis on all major regulations, with some exceptions of no interest here. Yet there is a large category of regulations that have escaped cost-benefit srcutiny: so-called "transfer" regulations that determine how money and other benefits are distributed to statutory beneficiaries. Unlike the regulations that normally are subject to cost-benefit analysis, transfer regulations do not solve market failures. Examples of them include guidelines for natural disaster relief, funds issued to victims of the September 11 attack, and payments from Medicare, Medicaid, and Social Security. Transfer regulations implement school lunch programs, research grants, and farm subsidies.

The regulatory impact statements accompanying transfer regulations rarely include cost-benefit analyses or anything resembling them. Annual OMB reports to Congress on the costs and benefits of federal regulation list the dozens of transfer regulations that are promulgated every year, but the agency excludes them from its evaluation of the costs and benefits of regulation.

Cost-effectiveness Why are transfer regulations overlooked? Certainly not because they are unimportant. …