2.3.1. Economic regulation

The presumption against economic regulation that appeared in both the 1996 and 2003 guidelines is replaced in this one with a “note” regarding “certain types of” economic regulation. As the tracked changes below highlight, gone is the recognition that “government actions can be unintentionally harmful, and even useful regulations can impede market efficiency” (OMB, 2003, 6), and added is a vague phrase about “well-functioning” competitive markets.

The Presumption Against A Note Regarding Certain Types of Economic Regulation.

Government actions can be unintentionally harmful, and even useful regulations can impede market efficiency. For this reason, there is a presumption against certain types of regulatory action. In light of both economic theory and actual experience, it is particularly difficult to demonstrate positive net benefits a particularly demanding burden of proof is required to demonstrate the need for any of the following types of regulations:

1. i. price controls in well-functioning competitive markets;

2. ii. production or sales quotas in well-functioning competitive markets;

3. iii. mandatory uniform quality standards for goods or services if the potential problem can be adequately dealt with through voluntary standards or by disclosing information of the hazard to buyers or users; or controls on entry into employment or production, except (a) where indispensable needed to protect health and safety (e.g. FAA tests for commercial pilots) or (b) to manage the use of common property resources (e.g. fisheries, airwaves, Federal lands, and offshore areas).

A vast theoretical and empirical literature supports a presumption against such forms of regulation. From classic works (some of which earned the authors Nobel prizes) (e.g. Buchanan & Tullock, Reference Buchanan and Tullock1965; Stigler, Reference Stigler1971; Green & Nader, Reference Green and Nader1973; Posner, Reference Posner1974; Peltzman, Reference Peltzman1976) to more recent reviews (e.g. Crandall, Reference Crandall2007; Dudley, Reference Dudley2021a; Ellig, Reference Ellig2021), the evidence finds that past efforts at controlling prices and other forms of economic regulation disrupted competition, encouraged rent-seeking, and produced outcomes that benefited organized interests at the expense of less powerful and more diffuse interests. Besanko et al. (Reference Besanko, Doraszelski and Kryukov2019) show that, even when competitive markets are imperfect, “the upside from interventions and policies aimed at shaping competition for the market is likely to be limited,” and that “pricing conduct restrictions can lead to substantial welfare losses” unless regulators have detailed knowledge of underlying conditions and execute their regulations “flawlessly” (Besanko et al., Reference Besanko, Doraszelski and Kryukov2019, 3358). The revised Circular language demands that competitive markets be “well-functioning” without making the same demand of government actions nor acknowledging the evidence that regulatory interventions have often been far from informed and flawless (Winston, Reference Winston2023).

2.3.2. Behavioral biases

Advances in behavioral sciences since 2003 merit attention in the revised Circular; however, as a justification for intervening in market transactions, behavioral biases require greater skepticism than presented in the draft (OMB, 2023, 18–19). Before regulators override individuals’ revealed preferences, they should “provide evidence that individuals behave irrationally (and do not learn) in the specific situation covered by the proposed regulation” (Dudley et al., Reference Dudley, Belzer, Blomquist, Brennan, Carrigan, Cordes, Cox, Fraas, Graham, Gray, Hammitt, Krutilla, Linquiti, Lutter, Mannix, Shapiro, Anne Smith and Zerbe2017, 192). They should also acknowledge that government decision-makers may suffer from similar, if not more problematic, biases (Berggren, Reference Berggren2012; Dudley & Xie, Reference Dudley and Xie2020; Dudley & Xie, Reference Dudley and Xie2022).

Regulatory policies substitute the judgment of government regulators for those of individuals, which may be appropriate in the case of public goods or decisions that have external impacts. Yet, when RIAs calculate large net benefits without being able to identify a “material failure of private markets” (Clinton, Reference Clinton1993), but must depend instead on assumptions about “internalities” that prevent individuals from making decisions in their own self-interest, policy officials and the public should be skeptical (Gayer & Viscusi, Reference Gayer and Viscusi2013; Viscusi & Gayer, Reference Viscusi and Gayer2016; Mannix & Dudley, Reference Mannix and Dudley2015a,Reference Mannix and Dudleyb).

This is not to say that, when considering alternatives to address a compelling public need, regulators should not take behavioral insights into consideration (e.g. the section on informational approaches to regulation and nudges on pages 25–26 of the Draft Circular). There, carefully formed “nudges” may be the best alternative to help individuals overcome heuristics and biases to make choices that improve their well-being (Dudley et al., Reference Dudley, Belzer, Blomquist, Brennan, Carrigan, Cordes, Cox, Fraas, Graham, Gray, Hammitt, Krutilla, Linquiti, Lutter, Mannix, Shapiro, Anne Smith and Zerbe2017).

2.3.3. Federal and state regulation

While the Draft Circular acknowledges that “it can be informative to consider other means of addressing the need for regulatory action you have identified in addition to, or instead of, Federal regulation,” it reflects a greater willingness to override states if they do not do what federal officials think they should. For example, it says:

On both public policy and legal grounds, this open-ended invitation to override State, local, territorial, or Tribal decisions is problematic. Regulations that respect the diversity of preferences and circumstances across the country are likely to have more successful outcomes than top-down approaches (e.g. Ostrom, Reference Ostrom2010). The draft should emphasize the learning value of deferring to States to address problems that do not create interstate commerce issues (ACUS 2017–6). Instead of allowing agencies to assert that other levels of government are “failing to appropriately address a problem,” the draft should encourage the natural experiments that are essential to evaluating how well regulatory programs meet stated goals. A one-size national approach that does not allow for differences in treatment truncates opportunities to test different approaches and eschews the situational knowledge that smaller governmental units have.

The U.S. Constitution established a federal system of government, and courts are increasingly expecting federal agencies to demonstrate clear statutory authority before taking action. Recently, the Supreme Court affirmed that it “require[s] Congress to enact exceedingly clear language if it wishes to significantly alter the balance between federal and state power and the power of the Government over private property” (Sackett v. EPA, 2023, 23). The Draft Circular appears to encourage agencies to override state preferences, which may make resulting regulations more susceptible to legal challenge.

2.5.1. Additional benefits and costs

The draft encourages agencies to “look beyond the obvious benefits and costs of your regulation and consider any important additional benefits, costs, or transfers, when feasible,” and to consider “additional benefits” that are “unrelated to the main purpose of the regulation.” The Preamble notes the terminology change from “ancillary benefits and countervailing risks” to “additional benefits and costs,” and argues that these benefits and costs are “not meaningfully different for analytical purposes” (OMB, 2023a, 7).

To a certain extent, that is true, and in principle, BCA should include all the significant consequences of a policy decision, whether they are direct or indirect, intended or unintended, beneficial or harmful (Dudley & Mannix, Reference Dudley and Mannix2018). However, for practical purposes, agencies must draw boundaries around the scope of impacts covered in the RIA. Agencies’ incentives are to identify additional (or ancillary) benefits that make their preferred option appear more cost-effective, while minimizing or disregarding additional costs or potential risks. RIAs often report additional benefits that greatly exceed primary benefits, while additional costs are ignored (Dudley & Mannix, Reference Dudley and Mannix2018). The guidance should stress that any boundary drawing must be done in an objective and balanced manner, and RIAs should clearly distinguish additional benefits or costs from impacts related to the main purpose of the regulation.

This is also important on legal grounds, as the presence of benefits or costs “unrelated to the main purpose of the regulation” almost always signals that the agency is counting benefits and costs that arise outside of its enabling statutory authority (Dudley et al., Reference Dudley, Belzer, Blomquist, Brennan, Carrigan, Cordes, Cox, Fraas, Graham, Gray, Hammitt, Krutilla, Linquiti, Lutter, Mannix, Shapiro, Anne Smith and Zerbe2017). For that reason, the assertion in the Preamble that these benefits and costs are “not meaningfully different for analytical purposes from categories of effects that are ‘primary’ or ‘direct’” may not be helpful guidance. Courts are looking more carefully at whether regulations are based on clear and explicit statutory language (West Virginia v. EPA, 2022), so encouraging agencies to blur the lines between factors that are authorized and those that are “additional” could invite legal challenges.

2.5.2. Pre-statutory baseline

The Draft Circular departs from past practice by allowing agencies to include statutory requirements in the baseline of their analysis and measure the benefits and costs of going beyond those requirements. The Draft states a case that agencies make from time to time:

The problem with this revised approach is two-fold. First, statutes are rarely so specific that they are self-implementing and leave the agency no discretion (Hickman, Reference Hickman2023). Agencies possess no regulatory authority that is not delegated from Congress, and the line between what is discretionary or not is not a bright one. Even in cases where agencies argue they have no discretion, the RIA framework and interagency peer review provide information and incentives to identify and consider other alternatives that are consistent with statutory mandates. Second, the audience for RIAs is broader than the agency; Congress, the courts, and the public benefit from a transparent examination of the benefits and costs of regulations, whether they stem from direct statutory directives or discretionary actions. Such information can lead Congress to make legislative changes.

Before changing its longstanding policy requiring analysis from a pre-statutory baseline, OMB should provide specific examples of regulations that “simply restate” “self-implementing” statutory requirements. Of course, agencies should be free to present impacts from a post-statutory, in addition to pre-statutory, baseline.

2.5.3. Partial compliance

The Draft includes a new section on “Accounting for Compliance and Take-up,” which encourages agencies “to clearly present any key assumptions about compliance with a regulation.” It goes on to say:

This is problematic. If the RIA projects that entities will not comply with a regulatory requirement (due to cost, complexity, expectations regarding enforcement, etc.), that should be cause for reconsidering the proposed approach and whether an alternative approach could yield superior outcomes. Agency policymakers, Congress, and the public deserve information on the full expected costs and benefits of agency-made law. The Environmental Protection Agency frequently presents only partial compliance costs for its National Ambient Air Quality Standards (NAAQS) (e.g. EPA, 2023), which obfuscates the diminishing marginal returns of the rule (Dudley, Reference Dudley2023).

2.7.1. Social rate of time preference

The revised section on the social rate of time preference is at the same time overly complex and overly simplistic. The Draft Circular devotes seven pages to a discussion of sophisticated methods to account for uncertainty, risk, and the shadow price of capital. These have some theoretical support but little widespread use in practice. They are also too complex for all but the most experienced agencies to apply on their most economically significant regulations; commenters who support revising the discount rate encourage OMB to provide more guidance on how to account for these factors (Howard et al., Reference Howard2023).

Given the complexity in accurately accounting for time preferences, agencies will likely fall back on the Draft Circular’s default rate of 1.7% for all effects from the present through 30 years into the future. While the 1.7% figure applies the same method used in 2003, updated with more recent data (the most recent 30-year yields on 10-year Treasury notes), this may not be the best method for several reasons (e.g. Beales, Reference Beales2023; Boskin, Reference Boskin2023; Morgenstern et al., Reference Morgenstern, Newell, Pizer and Prest2023), including that this recent period was subject to Federal Reserve policies that are unlikely to continue in the future. Experts who support the administration’s approach recognize that other assumptions would lead to quite different rates (Sojourner et al., Reference Sojourner2023).

Given the complexity of the subject and the important effect discount rates have on estimates of benefits and costs, the Circular should not direct agencies to use a single number. OMB simply does not have enough confidence in the appropriate rate to rely on a single rate. Instead, the Circular should provide a range of rates and direct agencies to present estimates reflecting that range (Viscusi & Gayer, Reference Viscusi and Gayer2016).

If the final Circular retains the single default rate, critics would be justified in concluding that this is a normative choice, designed to achieve this administration’s policy preferences by providing “agencies with more incentive to impose short-term costs to obtain long-term benefits such as environmental and health improvements” (Howard et al., Reference Howard2023).

2.7.2. Private discount rates

Separately, the Draft Circular appropriately acknowledges that the social rate of time preference may not be appropriate for certain streams of benefits and costs. In particular:

This is an improvement over existing practice. Estimating private consumer savings from reduced operating costs associated with purchasing a higher-priced home appliance, for example, should rely on real rates those consumers face (Viscusi & Gayer, Reference Viscusi and Gayer2016; NASEM, 2021). This is particularly relevant for understanding the distributional impact of regulations that yield private savings, as lower-income households face borrowing costs much higher than the default rates agencies use to estimate net present value benefits associated with higher up-front expenditures. At the same time, it is important to ensure that agencies do not treat private discount rates as somehow “irrational” or signs of a market failure. Public preferences are the standard by which rules should be measured, not the other way around (Viscusi & Gayer, Reference Viscusi and Gayer2016).

2.8.1. Risk aversion

The Draft moves away from longstanding guidance that agencies should present expected values as their central estimate of benefits and costs, along with ranges that reflect uncertainty. It is true that individuals facing a small number of trials may exhibit risk aversion (or risk seeking) behavior, but regulatory policy, and the BCA that supports it, are concerned with treatments across large populations. There, the expected value, which reflects objective probabilities based on the average payoff over many trials, is more relevant and appropriate.

While behavioral research does suggest that misperceptions of objective probabilities affect human behavior in the face of risk, “whether it is possible to model this aspect of choice is an open question, because it would require a theory of systematic errors” (Munger, Reference Munger2000, 309; see also Stavins, Reference Stavins2023). As noted below, a move away from the standard risk-neutral presumptions here appears to depart from the guidance elsewhere in the document to use regulation to correct behavioral biases.

2.8.2. Value of information and designing regulations for learning

Uncertainty analysis can identify what additional information would be most valuable for decision-making. As the 2003 Circular notes, when expected outcomes hinge on the value assumed for a particular uncertain variable, it can be appropriate to gather more information regarding that variable prior to taking action.

The draft would benefit from a greater focus on a “value of information” (VoI) decision framework. VoI analysis recognizes that approaches that appear to maximize net benefits under one set of assumptions would be suboptimal if those assumptions proved to be inaccurate. It focuses on reducing uncertainty in parameters to which resulting benefits or costs are most sensitive, and evaluating whether – either through regulatory designs that facilitate natural experiments or encompass real options (Greenstone, Reference Greenstone, Moss and Cisternino2009; ACUS, 2017–6; Lee, Reference Lee2023), or expending additional resources on information gathering (ACUS, 2021–2) – reducing that uncertainty can improve ex-ante estimates and ex-post outcomes.

The Circular appropriately recognizes that agencies may not have situational knowledge (what Hayek, Reference Hayek1945 called “knowledge of the particular circumstances of time and place”) and encourages consultation to gain information, especially early in the regulatory development process (OMB, 2023, 4). This could be extended to include consultation and natural experiments specifically designed to reduce key uncertainties (ACUS, 2021–3).

2.9.1. Retrospective review

In E.O. 13563, which E.O. 14094 reaffirmed, President Obama emphasized the importance of evaluating regulatory impacts once regulations are in place, and directed agencies to “consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned” (Obama, Reference Obama2011, Sec. 6).

It is disappointing, therefore, that the Draft Circular does not provide guidance to agencies for formulating new regulations with ex-post evaluation in mind. The Administrative Conference of the United States (ACUS) endorsed the Obama initiatives and offered recommendations to agencies for implementing them, including when developing new regulations (ACUS, 2014–5). For example, it encouraged agencies, when developing new regulations, to “establish a framework for reassessing the regulation in the future and […] consider including portions of the framework in the rule’s preamble” (ACUS, 2014–5, Rec. 2). It encouraged OIRA to “facilitate planning for subsequent retrospective review to the extent appropriate” (ACUS, 2014–5, Rec. 3).

The Conference also recommended that:

More recently, ACUS provided additional specific guidance, noting that “consistent with the Evidence Act, agencies should incorporate periodic retrospective reviews in their Learning Agendas and Annual Evaluation Plans” (ACUS, 2021–2, Rec. 12).

Not only does the revised draft place less value on facilitating natural experiments at the state and local level (as discussed above), but it only discusses designing regulations for learning very briefly:

This is a missed opportunity to update the RIA guidelines to reflect a pivotal regulatory executive order (E.O. 13563) and bipartisan agreement on the importance of evaluating regulatory impacts once implemented (Katzen, Reference Katzen2006; Dudley & Katzen, Reference Dudley and Katzen2019). For more concrete suggestions on how to design regulations for ex-post evaluation, see the ACUS reports noted above, Peacock et al. (Reference Peacock, Miller and Pérez2018), Dudley (Reference Dudley2017), Aldy (Reference Aldy2014), and Coglianese (Reference Coglianese2012).

2.9.2. Risk assessment inputs

The draft would benefit from a discussion of the risk assessment inputs to BCA. The 2023 draft alludes to the importance of risk assessments only in a footnote:

As others have noted,

Risk assessment assumptions aim to be “public health protective” by overstating risk in the face of uncertainty (Gray & Cohen, Reference Gray and Cohen2012) can inflate estimates of certain risks relative to others. Because the degree of precaution differs across risks (Nichols & Zeckhauser, Reference Nichols and Zeckhauser1988; Hamilton & Viscusi, Reference Hamilton and Viscusi1999), and because distortions in different parts of the risk analysis can interact and accumulate, risk assessment inputs can lead to unreliable benefit and cost estimates and welfare-reducing priorities (Hamilton & Viscusi, Reference Hamilton and Viscusi1999; Fraas & Lutter, Reference Fraas and Lutter2012). (See also, Dudley et al., Reference Dudley, Belzer, Blomquist, Brennan, Carrigan, Cordes, Cox, Fraas, Graham, Gray, Hammitt, Krutilla, Linquiti, Lutter, Mannix, Shapiro, Anne Smith and Zerbe2017, Dudley & Peacock, Reference Dudley and Peacock2017; Bipartisan Policy Center, 2009.)

The incompatibility between risk assessment methods and BCA could be compounded with the Draft Circular’s proposal to abandon the assumption of risk neutrality, leading to precautionary policies that generate net social harms (Sunstein, Reference Sunstein2005).

2.10.1. Behavioral biases and risk aversion

The Draft identifies behavioral biases as a problem that regulations can be designed to correct (OMB, 2023, 18–19). In discussing the valuation of benefits and costs, it warns that “a high observed WTP or WTA may reflect a truly high valuation for the underlying good or service or it may reflect a smaller WTP or WTA coupled with a bias that increases consumers’ observed WTP or WTA” (OMB, 2023, 30). It directs agencies to “endeavor to separate these two components, the true valuation and the bias, to accurately measure benefits and costs in your regulatory analysis” (OMB, 2023, 30).

Yet, it modifies long-standing BCA reliance on the assumption of risk neutrality and directs agencies to assume that people are risk averse and value outcomes accordingly. Risk aversion is a behavioral heuristic that may be ingrained in humans (for good evolutionary reasons), but it leads to irrational choices in the modern context (Reference BlunckBlunck, n.d.). Yet, with this particular behavioral bias, rather than directing agencies to understand “the true valuation” based on an assumption of risk neutrality, it requires them to justify any analysis that adopts a risk-neutral assumption (OMB, 2023, 72).

Requiring agencies to measure individual welfare changes based on assumptions other than risk neutrality is complicated as an analytical matter (as noted briefly above), and it seems entirely inconsistent with directions elsewhere in the Draft Circular to override individual valuations of welfare when they may be influenced by behavioral biases.

2.10.2. Reduced caution about economic regulation, which has been shown to harm disadvantaged groups

As noted above, the Draft removes the presumption against economic regulation, despite theory and evidence that such forms of regulation tend to be captured by organized interests at the expense of diffuse, less well-represented interests. Even if originally designed to protect disadvantaged groups against monopoly power, economic regulation in airlines, energy, and telecommunications were largely unsuccessful at achieving purported allocative goals (Ellig, Reference Ellig2021, 206–207). In contrast, the competition unleashed by the bipartisan economic deregulation of the 1970s and 1980s increased allocative and dynamic efficiency and often benefited those without the resources to influence government policy. For example, transportation deregulation reduced racial inequities in employment and wages (Peoples & Saunders, Reference Peoples and Saunders1993). More recent empirical literature confirms that economic “regulation tends to benefit incumbents by limiting entry of economic participants, be it firms or workers, and exacerbates income inequality” (Chambers & O’Reilly, Reference Chambers and O’Reilly2022).

Given the experience with economic regulation and deregulation in the United States, neglecting to require a demanding burden of proof before imposing such regulations is inconsistent with efforts to ensure that regulations do not harm disadvantaged groups (Winston, Reference Winston2023).

2.10.3. Distributional consequences are important, except when considering global impacts

Permitting agencies to present only global benefits for certain regulatory actions is inconsistent with the strong emphasis on understanding distributional impacts. Policymakers and the public cannot begin to understand how costs and benefits are distributed among various U.S. demographic groups if the RIA only presents global estimates (Fraas et al., Reference Fraas, Graham, Krutilla, Lutter and Jason Shogren2023). This may be particularly important with respect to climate change, where increased energy costs will be felt disproportionately by lower-income households. Policymakers should know whether those households are subsidizing populations outside the United States.

2.10.4. More complexity but more flexibility

One reviewer of the revised draft observes that “they read like they were written by a graduate student in economics who was asked to review the developing literature on benefit–cost analysis over the last few decades.” He worries that “they will make benefit–cost analysis so complicated and esoteric that OIRA will lose its audiences and undermine its influence” (Elliott, Reference Elliott2023). The revised draft is almost twice as long as the 2003 version. In some areas (discount rates, distributional weights, and risk aversion, for example), the guidance is much more demanding and complex, and it assumes a level of sophistication and modeling capabilities that few regulatory agencies have (Morgenstern et al., Reference Morgenstern, Newell, Pizer and Prest2023, 4, 8, 11).

Perhaps more importantly, the results will be less transparent to policy officials and the public. The public usually has 60 days to review and comment on a rule and its accompanying RIA. For all but the most significant regulations, a simpler, more transparent presentation of alternatives (especially earlier in the rulemaking process, Carrigan & Shapiro, Reference Carrigan and Shapiro2016; ACUS, 2021–3), with clear acknowledgment of uncertainties and their impact on projections, would be most valuable. The discussion on discounting, in particular, is needlessly complex, while decision-makers would benefit most from a simple exercise that bounds estimates with a reasonable range of rates.

While making the analysis more demanding, the Draft provides more flexibility to opt out of doing analysis. The 2023 Draft caveats guidance with when “feasible,” “practicable,” or “appropriate” more than 70 times, compared to fewer than 10 instances in the 2003 Circular. Such variation in analytical depth will make it much harder for policy officials and the public to evaluate the relative merits of different regulations.