Center for Progressive Reform

Looking in the Wrong Place: Senators Warner and Moran Join House GOP Seeking to Codify Cost-Benefit Analysis, an Erroneous Remedy for Anemic Economic Growth

by Sidney Shapiro

Senators Mark Warner (D-VA) and Jerry Moran (R-KS) introduced a bill earlier this month that proposes to change regulatory and tax policies with the goal of encouraging more entrepreneurial activity and creating more jobs. The legislation contains a grab-bag of proposals, such as allowing more aliens with professional expertise in stem cell research to become permanent residents and extending an income tax credit for certain small businesses. I can’t speak to the merits of these and other proposals in the bill with one exception. The legislation would codify the current requirement found in executive orders that federal agencies complete a cost-benefit analysis of proposed and final “major” rules. This idea may sound reasonable on its face, but ultimately it would hinder the ability of federal agencies to issue health and environmental safeguards, and provide no help to the economy.

As other CPR scholars and I have discussed (see here, here, here, here and here, for example), the policy evidence refutes arguments that regulation is somehow at fault for the slow economic recovery. Ignoring the evidence, House Republicans have spent countless hours on hearings and legislation that is intended to slow down and impede the regulatory process. It is therefore disappointing that Senators Warner and Moran include cost-benefit analysis, one such anti-regulatory idea repeatedly endorsed in the House, as one of their proposals to jump start entrepreneurial activity.

When it comes to deciding the level of protection for people and the environment, Congress most of the time has adopted a precautionary stance – requiring risk creators to do the best they can to reduce safety, health and environmental harms. But every President since Ronald Reagan has required agencies to analyze potential costs and benefits, even though agencies usually do not base regulations on a comparison of costs and benefits. Proponents of this requirement insist that it helps agencies focus on adopting the most appropriate regulation, but this claim ignores the fact that many health, safety and environmental benefits cannot be easily stated in dollar terms. As a result, cost-benefit often consists of incomplete benefit estimates and complete cost estimates (or over-estimates), skewing the analysis in favor of less protection.

As an example, one of the most successful environmental regulations has been to ban lead in gasoline. But it would have looked like a bad idea according to cost-benefit analysis. The benefits of removing the lead weren’t understood well enough to put a number on it (though the health effects generally speaking were certainly known). Only after the lead was banned would it later be possible to describe in detail the incredible health benefits the regulation created.

Senators Warner and Moran undoubtedly will point out that they are merely codifying what agencies are already required to do by executive order, but even if one favors cost-benefit analysis, codification is not a good idea. To date, regulatory analysis has been a management tool used by the White House, and it shouldn’t go any further than that. If Congress changes cost-benefit analysis from a management to a legal requirement, it prevents future presidents from adjusting the analysis in appropriate ways, including adopting a more holistic form of regulatory analysis that would acknowledge the difficulty of monetizing many regulatory benefits.

The premise for including the cost-benefit analysis requirement in a bill to spur economic activity is that agencies are engaging in excessive regulation, and cost-benefit analysis will demonstrate that much regulation is unnecessary. As a CPR report establishes, that premise is false. The report evaluates the impact of regulation by looking at studies that compare the cumulative benefits and costs for groups of regulations; measurements of the extent to which fatalities, injuries, diseases, and environmental destruction has been reduced; the costs associated with the failure to regulate effectively; retrospective evaluations of the impact of individual regulations; and prospective estimates of the benefits and costs of individual regulations. When all of this various information is compiled, a clear picture emerges: regulation has brought great benefit to the United States without any significant economic dislocation.

It is a good sign that Senators Warner and Moran are looking for ways to jump-start economic activity. Unfortunately, in the case of cost-benefit analysis, they are looking in the wrong place.