Magazine article Regulation

Improving Regulatory Impact Analysis

Magazine article Regulation

Improving Regulatory Impact Analysis

Article excerpt

Every U.S. president in modern history has required that regulators conduct a cost-benefit analysis as part of the promulgation of "economically significant" regulations. Major new regulatory proposals by executive branch agencies must be supported by a Regulatory Impact Analysis (RIA), a requirement introduced in President

Ronald Reagan's Executive Order 12291. Each RIA's content and methodology are reviewed by the Office of Management and Budget (OMB) to ensure quality. According to the OMB, the goals of an RIA are "(1) to establish whether federal regulation is necessary and justified to achieve a social goal and (2) to clarify how to design regulations in the most efficient, least burdensome, and most cost-effective manner."

From both a theoretical and practical perspective, an RIA is a valuable tool because it helps to improve regulation. For example, the Environmental Protection Agency's phase-out of lead in gasoline--a significant public health success story--was informed strongly by cost-benefit analysis.

However, not all regulatory agencies produce RIAs as part of major rulemakings. So-called "independent" agencies (e.g., the Federal Reserve, Federal Communications Commission, and Securities and Exchange Commission) are not subject to EO 12291. Those agencies are responsible for approximately 20% of all major rules. Even for agencies covered by the order, RIAs have only a limited effect on rulemaking. The analyses are rarely revisited to assess their accuracy after a regulation goes into effect. A handful of academic studies show that agencies can significantly under or overestimate actual costs and benefits. The biggest problem with the RIA process, however, relates to something fundamental: objectivity. A regulatory agency is not unbiased. It has every incentive to develop RIAs that support its preferred regulatory approach. And because regulatory agencies are designed to regulate, RIAs seldom (if ever) conclude that federal regulation is not needed.

Fortunately, the OMB can--and often does--hold agencies accountable for deficient RIAs. But the OMB is not the optimal watchdog because it reports to the president and therefore is subject to political decisions that are not always consistent with objective analysis of regulatory effects. In addition, the OMB does not opine publicly on the quality of agency analysis.

Over the years, observers of this process have suggested many ways to improve the quality of RIAs. These suggestions fall into a few general categories: requiring greater or earlier OMB review of agency analysis, requiring a more searching judicial review of agency analysis, or establishing a new federal agency to conduct RIAs on behalf of regulatory agencies.

Each of these proposed solutions has its merits. But each also has its critics, and their arguments (e.g., delays in achieving public protections, higher cost to the government) have been sufficient to prevent reform. There is an additional argument that lies just below the surface: reform would change the balance of power among the three branches of government, and no branch will support a lessening of its influence.

A proposal / How, then, can we improve the objectivity of regulatory analysis? We can start by considering the source of the problem. Federal regulatory agencies have a monopoly position on the production of RIAs. There is no competition and-just like a market where a single producer controls supply--the result is an insufficient quantity of insufficient quality at too high a price.

To inject needed competition into the RIA market, the government could leverage external expertise on cost-benefit analysis.

Specifically, consider the following proposal: During the public comment period on a proposed major rule, if an agency receives a public comment in the form of an RIA for the proposed rule, then it must submit that public comment to the OMB. The OMB would then determine whether the submitted RIA comports with its established guidelines on regulatory analysis (as outlined in OMB Circular A-4, for instance) and, if not, provide an explanation for why the RIA falls short. …

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