Executive Order 12866’s Cost-Benefit Test is still with us and I Can Hear Ben Franklin Rolling Over in his Grave

It was 20 years ago this week that President Bill Clinton signed Executive Order 12866.   That was a watershed of sorts, because it marked the adoption by a Democratic administration of a key aspect of President Reagan’s anti-regulatory agenda -- the requirement that all major federal regulations undergo cost-benefit analysis.  This was not a move that pleased Clinton’s liberal base, since cost-benefit analysis was widely understood to be a tool favored by industry for weakening and delaying regulation.  But, nonetheless, Clinton signed 12866 in 1993, and it’s been with us ever since.

Maybe the staying power of cost-benefit analysis has partly to do with the superficial appeal of the basic idea.  “After all,” says the Chamber of Commerce, “it’s just basic rationality and common sense! Why would you want a rule that causes more harm than good?”  And then come the inevitable appeals to Ben Franklin, who apparently said something once about writing down pros and cons on a sheet of paper.   So if you’re against cost-benefit analysis you’re basically against Ben Franklin, which means you might as well say you hate your mother and never want another slice of apple pie.  Perhaps it’s no surprise, then, that Clinton capitulated to such arguments.   Or that Obama did the same nearly two decades later,issuing an order “reaffirming” 12866 after briefly flirting with the idea of scrapping it.  

The problem is, there’s cost-benefit analysis and there’s cost-benefit analysis. Ben Franklin’s sheet of paper with the line down the middle is one end of the spectrum.  But at the other end is a highly technical and formal method grounded in economic theory that attempts to fully quantify and monetize all of the social costs and benefits of a whole range of regulatory options and then, by calculating the point at which the marginal benefits curve intersects the marginal costs curve, identify the “economically efficient” level of regulation.   And those two decision-making tools have very little in common.

Nobody really has a much of a problem with a Ben Franklin’s informal weighing of qualitative pros and cons. It’s when you start trying to convert both sides of the ledger into dollars that things get controversial – and for good reason. Who’s to say what clean air is worth? Especially when we haven’t even done enough studies of the various pollutants in the air to quantify all the health effects. And even when we can quantify lives saved or illnesses avoided, who’s to say what they’re worth? Do we ask rich people or poor people how much they’re willing to pay to avoid health risks? And what about future benefits? Economists want to apply a discount rate, but that means treating future generations like they don’t matter. And if you think these problems are hard, try putting a dollar value on an endangered species or an ecosystem.    

That’s why the invocation of Ben Franklin by those promoting cost-benefit analysis can feel a touch disingenuous. What the agencies actually do (or aspire to) has always been a lot closer to the formal economic end of the spectrum.  In 12866, Clinton moved incrementally toward informality, replacing Reagan’s requirement that benefits “outweigh” costs, with the kindler and gentler benefits-“justify”-costs formulation. Clinton’s order also made several references to the difficulties of quantification, and directed agencies to also include “qualitative measures” as well, calling them, “essential to consider.” But at the same time, 12866 contained language that tilts decidedly toward formality, directing the agencies to quantify costs and benefits “to the fullest extent” and to “select those approaches that maximize net benefits.” (Net benefits maximization is the hallmark of formal economic cost-benefit analysis and technically requires complete monetization of the social costs and benefits of all alternatives in order to locate the point of equivalence between marginal costs and marginal benefits.) 

And in the 20 years since, agency practice has moved even further in that direction – a move that has been fully embraced and accelerated under the Obama administration. Obama’s Executive Order 13,563, which “supplements and reaffirms” 12,866, reiterates some of the key language in Clinton’s Order.  But in language that arguably shifts even further toward formality, it also unambiguously sets out full quantification and monetization as the goal, directing agencies “to use the best available techniques” to costs and benefits “as accurately as possible.”  It gives lip-service to the difficulties of quantification, but makes the directive that agencies discuss unquantifiable values permissive rather than mandatory:  “each agency may consider (and discuss qualitatively) values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts.”

Recent writings of Cass Sunstein, describing his experiences as a past “Regulatory Czar” during President Obama’s first term confirm this apparent embrace of formality by the administration. For example, Sunstein characterizes the language of Obama’s executive order as “reflecting an unprecedented emphasis on the importance of quantification.”  In another article, he boasts about the hard line that his OIRA took on CBA: “If the quantifiable benefits are lower than the quantifiable costs, agencies must explain why they seek to proceed . . . In the Obama Administration, it has been very rare for a rule to have monetized costs in excess of monetized benefits.”  And in his book, Simpler he makes clear that he opted for formality over informality: 

In fact, we should make a distinction here. On one view, analysis of costs and benefits really is just a nudge. Agencies have to produce such an analysis, but they do not need to be constrained by it. If the costs outweigh the benefits, they remain entitled to go forward. On another view, the analysis of costs and benefit is not merely a nudge; it is a rule of decision. On this view, agencies cannot proceed unless the benefits justify the costs. In the Obama Administration we took the stronger view: Agencies could not go forward if the benefits did not justify the costs, unless the law required them to do so. This move toward formality is dangerous.  Genuine formal economic cost-benefit analysis cannot be achieved, or even approximated, in practice. Data deficiencies, knowledge gaps, resource constraints, and fundamental irresolvable theoretical dilemmas make it impossible.  And trying to achieve the impossible leads to all sorts of absurdities:  Like the Department of Justice asking how much a victim of prison rape would be willing to pay to avoid the rape.  Or the EPA deciding to weaken a rule because a number representing a complete estimate of the rule’s costs exceeds a number that estimates only a small fraction of its benefits.

Rationality and common sense? Far from it. I fear old Ben is rolling over in his grave.