This post was originally published on LPE Blog and is part of a symposium on the future of cost-benefit analysis. Reprinted with permission.
Over the last 40 years, the U.S. regulatory system has played an increasingly influential role in redefining our political and economic relationships in fundamentally neoliberal terms. A key but often overlooked institutional force behind this development is the peculiar form of cost-benefit analysis that now predominates in regulatory practice. Building a new regulatory system befitting our vision of a post-neoliberal America requires a formal rejection of prevailing cost-benefit analysis in favor of a radically different approach—one that invites public participation, permits open and fair contestation of competing values at the heart of policy debates, and recognizes and honors our social interdependencies.
The predominant form of cost-benefit analysis—one embraced by neoliberals—finds its theoretical underpinning in the controversial ideology of welfare economics. This theory holds maximized economic growth as its prime directive, to the exclusion of other important social values, such as justice and fairness. Cost-benefit analysis purports to increase welfare by promoting "socially optimal" regulations—that is, regulations that are designed to achieve maximum net benefits.
How do we determine which regulations meet this policy objective? Agency economists are supposed to quantify and monetize all impacts—pro and con—of an infinite number of potential solutions. This aim is, unsurprisingly, impossible to achieve in practice. After decades of experience with cost-benefit analysis, we have a much clearer picture of the troubling implications that flow from its theoretical and practical flaws.
First, contemporary cost-benefit analysis is profoundly undemocratic. The complex technocratic techniques that define the methodology render it inaccessible to all but a rarified elite of highly trained economists (or those with the resources to hire them). Moreover, the anti-democratic nature of this process results in policies that do not align with the preferences of most citizens. While treating economic growth as the summum bonum of public policy may reflect value preferences within the field of economics, recent polling confirms that large majorities of voters across the political spectrum oppose using the goal of wealth maximization to guide regulatory decision-making. Instead, they are willing to forgo some economic growth to advance public interest policies like safer drinking water and effective action on climate change. Thus, contrary to defenders claims of moral neutrality, cost-benefit analysis simply substitutes the value judgments of economists for those of ordinary citizens.
Second, rather than promoting rationality and scientific integrity, this form of cost-benefit analysis undermines those qualities in regulatory decision-making. Here, monetization is the main culprit. In their headlong rush to assign a monetary value to as many regulatory impacts as possible, practitioners resort to all manner of clumsy techniques, including pseudoscience, arbitrary assumptions, and unrealistic leaps of logic. For example, when attempting to place a monetary value on preventing non-fatal cancers caused by arsenic exposure, the Environmental Protection Agency has simply "borrowed" the one it had used in the past for monetizing the prevention of chronic bronchitis (which itself was of dubious origin), apparently willing to accept that the analogy between the two diseases was "good enough." As cases like these illustrate, cost-benefit analysis introduces into regulatory decision-making new sources of irrationality and arbitrariness where none previously existed.
Finally, welfare economics-based cost-benefit analysis reinforces racial injustice and other institutionalized forms of power disparities. This is, in part, a consequence of its claim to moral neutrality, which provides an effective conduit for injecting racism into regulatory decision-making. This neutrality permits status quo conditions of racial injustice to become part of the analytical baseline, distorting the final results in ways that reinforce existing inequities. The analysis of anticipated impacts further amplifies this effect by placing all impacts on the same moral plane. A multinational corporation's profits receive the same ethical consideration as the health and wellbeing of systematically marginalized communities. Similarly, some of the common monetization techniques bake underlying race-based disparities into analyses in ways that distort the analyses' results.
Yet, despite these and other objections, welfare economics-based cost-benefit analysis has increased in influence, thanks in part to the rise of neoliberal ideology and its dominance over federal regulatory policy. This development reached its apotheosis in 1993, when President Bill Clinton signed Executive Order 12866, which governs the conduct of regulatory analysis among federal executive branch agencies. Section 1 of this order distills the neoliberal regulatory philosophy, casting regulations as inherently suspect and counseling against their use except as a last resort.
When regulation is deemed necessary (a condition defined in narrow, market-oriented terms), 12866 prescribes welfare economic-based cost-benefit analysis and calls on agencies to design regulations to "maximize net benefits." For any rule designated "economically significant," an agency must perform a regulatory analysis that includes a "quantification" of the rule's costs and benefits, along with a similar analysis for all "potentially effective and reasonably feasible alternatives."
A Progressive Approach to Regulatory Analysis
Fortunately, a progressive approach to regulatory analysis is possible—and necessary if we are to address climate change, widening economic inequity, racial injustice, and other pressing challenges in our country and our world. To be effective, this approach requires at least the following attributes.
First, it must strive for democratic inclusivity. Agencies must identify and eliminate all potential barriers to meaningful participation in the development of analyses, especially for people of color and low-wealth individuals. A big part of this challenge is to orient the analysis around individual's lived experiences, rather than demand specialized technical expertise as the price of admission. It also requires agencies being able to recognize the significance of this situated non-expert knowledge and to effectively incorporate it into the broader analysis. Making sure that agencies are able to "meet the public where it's at" in this manner may require institutional changes, including hiring staff with diverse backgrounds or appropriate training in disciplines like sociology. Finally, to sustain engagement, agencies must report back to participants and explain whether and how their input contributed to the analysis.
Second, analysis must be broad enough in scope to permit consideration of all relevant values that are permissible under the authorizing statute, such as fairness, justice, and equity. At the same time, it must start from a position of humility, recognizing that no single "optimal" solution likely exists that would give full effect to each competing value. Instead, the analysis should operate as a forum in which trade-offs among values are fairly considered and subject to deliberation, as a means to identifying mutually acceptable and thus legitimate solutions. And the results must be treated as contingent, permitting ongoing reconsideration and revision.
Third, the analysis must recognize and properly account for the complex patterns of social relationships that define and give meaning to each of our lives. Welfare economics-based cost-benefit analysis denies these linkages, viewing individuals in strictly atomistic terms and pretending our existence is little more than the single-minded pursuit of self-interested utility. An analysis lacking a richer understanding of our situated, mutual dependencies is not merely incomplete; it is systematically biased against pro-social policies, such as controls on toxic mercury pollution emissions from fossil-fueled power plants or effective COVID protections for workers in the service industry. Worse still, it rewards and reinforces the cultural disconnectedness at the root of so many of our public policy challenges.
On his first day in office, President Joe Biden signaled his intention to revisit how regulatory analysis is performed with his memorandum on "modernizing regulatory review." But I doubt this effort will yield the fundamental changes described above. Biden's memo recognizes the inherent biases of welfare economics-informed cost-benefit analysis, as well as its systematic neglect of distributional justice. Yet, it also appears to endorse the neoliberal precepts of 12866. As such, we can expect little more than marginal tweaks to smooth the roughest edges of the current practice of cost-benefit analysis. This would be a replay of President Barack Obama's Executive Order 13563, which pursued a similar failed vision of "compassionate neoliberalism."
Whatever results from the Biden administration's "modernizing regulatory reform," the fundamental incongruity between cost-benefit analysis and progress—our pursuit of a more perfect union—will only become more glaring with time. Hopefully, it will not be too late when we're finally spurred to take necessary action.