You Can Be for Cost-Benefit Analysis or You Can Be for Regulatory Budgeting, But You Can’t be for Both

For decades, so-called regulatory “reformers” have backed up their sales pitches with the same basic promise:  Their goal is not to stop regulation per se but to promote smarter ones.  This promise, of course, was always a hollow one.  But it gave their myriad reform proposals—always involving some set of convoluted procedural or analytical requirements designed to surreptitiously sabotage the rulemaking process—some shred of legitimacy, while insulating the proponents against any public backlash that might follow from such cynical attacks on broadly popular public health, safety, and environmental programs.

If the real motivation behind the “regulatory reform” movement wasn’t clear before, then tomorrow’s hearing before the Senate Homeland Security and Government Affairs and Budget Committees on “regulatory budgets” ought to peel away the last of any lingering doubts.  The idea behind “regulatory budgeting” (or “regulatory pay-go,” as it is sometimes known) is that Congress would set a hard cap on total regulatory costs, and once the cap has been met, agencies would be prohibited from issuing any rules until their costs have been offset by the removal of existing regulations.  Its proponents claim that this cap on regulatory costs somehow reflects all the safeguards our country “needs” or “can afford.”  Ask them to substantiate that claim, though, and all you’ll get is a lot of arm waving and vague platitudes.

To see how extreme the regulatory budget proposal is one only need to compare it to cost-benefit analysis, which conservatives have long championed as the ultimate weapon for defeating wasteful or unnecessary regulations.  Opponents of regulation, of course, like cost-benefit analysis because it is relentlessly stacked against stronger safeguards.  By overemphasizing costs and underestimating benefits, the methodology inevitably leads to a slanted view of the rules it purports to assess.  Nevertheless, in theory, a regulation could still proceed forward if its undercounted benefits outweighed its over-counted costs.

Under this “Pay-Go” proposal, neither a rule’s benefits nor the relative weight of those benefits to the rule’s costs receive any consideration.  Instead, all that matters is the rule’s costs.  Imagine if the Environmental Protection Agency (EPA) wanted to issue a rule that produced $100 million of benefits at a cost of only $10 million.  The adoption of such a rule should be a no-brainer, since, in theory, it makes the United States better offer by $90 million.  Regulatory budgeting would ban this policy from taking effect unless and until the EPA gets rid of another regulation that costs at least $10 million.  So, imagine further that the EPA gets rid of a rule that produces $50 million of benefits at a cost of $10 million.  The exchange makes the United States better off by $50 million, but we would have been even better off still in the absence of regulatory budgeting.  If the EPA had been able to keep both regulations in place, then the United States would be enjoying net benefits of $130 million (as opposed to just $90 million with just the second rule in place).  In other words, regulatory budgeting forced society to give up $40 million in benefits all to satisfy some arbitrary cap.  This result is entirely consistent with and compelled by regulatory budgeting.

Despite these results, people who have long vocally supported cost-benefit analysis will during tomorrow’s hearing speak up in favor of regulatory budgeting.  This includes former OIRA Administrator Susan Dudley and Senators Johnson and Lankford, some of the more outspoken opponents of regulation on the Senate Homeland Security and Government Affairs Committee.

How can they hold such mutually incompatible views on regulatory policy?  I’m afraid I can’t answer that.  Hopefully one of the Senators at the hearing tomorrow raises that question.  We’ll see, though.

To learn more about why regulatory budgeting is “so fundamentally flawed that it cannot be regarded as a serious policy proposal,” I urge you to read through CPR’s 2012 Issue Alert Regulatory 'Pay-Go': Rationing the Public Interest.  The report takes a closer look at the flawed theoretical basis for regulatory budgeting.  It also highlights the many implementation problems that would make the policy unworkable in practice.