The Issue OMB's annual report to Congress on the costs and benefits of regulation create the false impression that cost-benefit analysis can meaningfully sort those regulations that are good for society from those that are bad. OMB has capitalized on this misimpression by using the annual report process to create a "hit list" of purportedly "bad" regulations targeted for elimination or reform - a hit list that is little more than a backdoor channel for industry lobbyists to create a wish-list of regulations for the chopping block.
Each year, the White House's Office of Management and Budget (OMB) issues a Report to Congress on the Costs and Benefits of Federal Regulation. This report purports to provide an overall accounting of the aggregate costs and benefits of federal regulations issued during the previous ten-year period. While OMB always finds that, in the aggregate, the benefits of federal regulations far outweigh their costs, behind this seemingly sunny assessment is a biased and ideologically driven attempt to discredit and dismantle important environmental health and safety protections. In attaching precise numbers to the costs and benefits of regulations, the OMB reports create a false impression that such values can be meaningfully measured in monetary terms and that cost-benefit analysis can be used to scientifically assess the efficacy and desirability of particular regulations. This sets the stage for the creation of OMB's regulatory "hit list" - an industry wish-list of federal regulations targeted for elimination or reform in the guise of promoting neutral-sounding principles like "economic efficiency."
OMB's 2005 report, for example, pegs the aggregate costs of federal regulations issued during the previous ten years at $34.8 to $39.4 billion and the aggregate benefits at $68.1 to $259.6 billion. Lest we too hastily conclude that federal regulation offers a good bargain, however, the report immediately cautions that "[a] substantial portion of both benefits and costs is attributable to a handful of Environmental Protection Agency clean air rules that reduce public exposure to fine particulate matter." Thus, when it comes to individual rules outside the EPA's regulation of fine particulate matter, OMB's accounting shows many of these provisions delivering far fewer dollars in benefits than they impose in costs. Often these disparate numbers simply reflect the fact that the benefits of regulation - things like health, safety, clean air and water, or functioning ecosystems - are far more difficult to measure in monetary terms than are the costs. The OMB reports, however, suggest that such regulations are "economically inefficient" and therefore undesirable.
Indeed, in several of its most recent reports, OMB has compiled a "hit list" of purportedly inefficient regulations that, in OMB's view, should be considered for elimination or modification. While OMB has never explained why particular rules were targeted for this list, contemporaneous press accounts indicated that the "hit list" process was initiated through a series of meetings with industry lobbyists convened at the behest of OMB. The purpose of these meetings was to identify and rank regulations that business groups found "overly burdensome."
In 2001, for example - the first year that OMB compiled the "hit list" - it received nominations covering 71 federal regulations. Forty-four of these nominations were submitted by the Mercatus Center at George Mason University, a conservative think tank funded by many of the same industries that are directly regulated by the targeted rules. Of the 71 submissions, OMB ranked 23 as "high priority" on the basis of brief, skeletal statements (often no more than a page) submitted by Mercatus and other industry groups. Thirteen of the 23 rules on the "hit list" were environmental regulations, including such important promulgations as the Forest Service's roadless area conservation rule and EPA's rule strengthening the standard for arsenic in drinking water. EPA's rule regulating water pollution from Concentrated Animal Feeding Operations (CAFOs) also made it onto the list, just one month after representatives of the agriculture industry met with top-level OMB officials. Despite repeated requests from the Center for Progressive Reform and OMB Watch, however, OMB has never disclosed the criteria by which it selects rules for inclusion on the "hit list."
What People Are Fighting About
Those who favor the use of cost-benefit analysis in evaluating regulatory programs argue that it is a neutral standard that will enhance economic efficiency and cut government waste. In fact, however, cost-benefit analysis has a long pedigree as a tool for the promotion of an extremist, anti-regulatory agenda. President Reagan, who first came into office in 1981 with the avowed mission of dismantling the regulatory state, charged the OMB with the task of subjecting federal regulations to cost-benefit scrutiny. OMB soon became the institutional home of the most ardent anti-regulators in the administration. By demanding that agencies prepare detailed and comprehensive cost-benefit analyses for major regulations and frequently sending rules back for more and more detailed analyses, the Reagan OMB held up regulations with which it had substantive objections for months and in some cases forever. While OMB softened its approach somewhat under the Clinton administration, the Bush II OMB has again adopted an aggressive anti-regulatory posture, frequently using its cost-benefit mandate to push agencies to roll back or weaken regulatory protections for health, safety and the environment.
The problem is that, while cost-benefit analysis purports to be neutral, its methodologies systematically under-value health, safety and environmental protection. [See CPR Perspective on Cost-benefit Analysis, "Pricing the Priceless: Cost-Benefit Analysis of Health, Safety, and Environmental Protection."] The benefits that we derive from regulation - particularly environmental regulation - are usually intangible and not amenable to measurement in monetary terms. Things like human life, clean air and water, pristine wilderness, or the survival of an endangered species simply cannot be measured in dollars. In its annual report, OMB sometimes responds to this dilemma by simply declining to include all the benefits of a regulation in its monetary estimate. In many instances, this creates the impression that a particular regulation imposes costs far in excess of the benefits it delivers. One needs to read the fine print in order to learn that the quantified estimate "does not fully capture" all of the environmental benefits conferred by the rule. And ultimately, of course, it is only these incomplete monetary estimates of benefits - purged of all narrative caveats - that are incorporated into the ten-year accounting of the overall costs and benefits of all federal regulations in the aggregate.
In other instances, OMB employs highly controversial and contestable methods to derive monetary estimates of environmental values. For example, economists actually purport to put a price on life itself by studying things like how much more pay workers demand to take jobs that increase their risk of death. But aside from the practical difficulties of deriving such numbers, there are theoretical conundrums that decades of scholarly attention have failed to resolve. Consider, for example, the likelihood that rich people will demand more to take on risk than poor people. Which value is correct? Or are the lives of the poor worth less than those of the rich?
This is just one of many difficulties that make estimates of environmental benefits endlessly contestable. The result is that for virtually any determination that the benefits of a particular regulation exceed the costs, anyone with the money to hire an economist can massage the numbers to make the opposite case. EPA's arsenic rule - one of the members of the original "hit list" - provides a telling example. EPA's cost-benefit analysis pegged the costs of the rule at $206 million per year and the benefits at $140 to $198 million per year. A scholarly analysis of EPA's underlying data, however, concluded that reasonable people employing reasonable assumptions could estimate the benefits as low as $13 million or as high as $3.4 billion. In cases like this, cost-benefit analysis is ultimately indeterminate and simply creates an invitation to the rich and powerful to manipulate the numbers to legitimize their desired result. This may explain why industry groups largely support the increased use of cost-benefit analysis in environmental rulemaking, while environmental groups oppose it.
OMB's annual reports on the aggregate costs and benefits of federal regulations are highly misleading. By attaching precise numbers to costs and benefits, they create the false impression that these values can be meaningfully and objectively measured, and that the efficacy and desirability of a regulatory scheme can be determined with scientific precision. In fact, underneath the veneer of mathematical precision lie a host of uncertainties, ambiguities and value judgments.
Moreover, OMB's annual reports are grossly incomplete. While they purport to provide an estimate of the costs and benefits of all federal regulations, they in fact leave out major categories of regulation. Homeland security regulations, for example, are categorically excluded from OMB's accounting of overall costs and benefits because "the benefits of improved security are very difficult to quantify and monetize." The exclusion of this major category of regulation obviously raises questions about the capacity for OMB's aggregate figures to generate meaningful generalizations about the success or "efficiency" of the federal regulatory program as a whole. It also highlights the way in which OMB provides selective treatment to regulations depending on their goals or content. Homeland security regulations apparently get a free ride from OMB. That is, OMB does not require the Department of Homeland Security to justify its regulations with cost-benefit analysis because OMB accepts that the benefits of such regulations are simply too difficult to monetize.
This treatment contrasts sharply with the treatment OMB accords regulations that produce environmental, health, and safety benefits, even though those benefits are also, by OMB's own admission, extremely difficult and often impossible to monetize. Nonetheless, OMB continues to subject environmental regulations to quantified cost-benefit analysis and - even where only a grossly incomplete quantification can be derived - to include them in its aggregate estimate of overall regulatory costs and benefits. This is particularly insidious because cost-benefit analysis often creates the misimpression that the costs of such regulations outweigh their benefits.
By purporting to measure the social costs and benefits of regulations with mathematical precision - sometimes calculating out to the second decimal place - OMB's annual reports create the false impression that cost-benefit analysis can meaningfully sort those regulations that are good for society from those that are bad. OMB has capitalized on this misimpression by using the annual report process to create a "hit list" of purportedly "bad" regulations targeted for elimination or reform. But there are two problems with the "hit list." First, it is not at all clear that cost-benefit analysis provides a meaningful measure of the social desirability of regulations. Second, there is no evidence that OMB has actually even bothered to make compliance with a cost-benefit standard a criterion for inclusion on the list. Indeed, it is not clear that there are any criteria for the list other than lobbying power. In the end, OMB's "hit list" appears to be little more than a backdoor channel for industry lobbyists to create a wish-list of regulations for the chopping block.