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Federal Regulation: The Costs of Benefits
Federal Regulation: The Costs of Benefits
January 07, 2013
Originally published in Forbes
The premise that national top-down regulation of the economy brings substantial net benefits dominates public policy.
But forget the philosophical debate over laissez-faire vs. the managed economy for a moment; do we really know regulations do more good than bad?
Of the 3,500-plus rules enacted each year, what gets audited?
The “Funnel”–the rule-flow trends we can glean from the Office of Management and Budget’s regulatory review program–says “not much.”
Over the past decade, federal regulations with cost estimates have made up less than half a percent of the total annual rule flow of over 3,500.
Of the few hundred major rules among these that get reviewed by the Office of Management and Budget (OMB), fewer than 35 percent sport quantitative cost estimates.
Rules featuring benefit calculations are even rarer; Fewer than three-tenths of a percent of all rules finalized show benefit estimates. Of the few hundred of these rules reviewed at OMB, fewer than a quarter get quantified annually.
On Harvard Law School’s website last year, the administration pointed to “state of the art techniques” for evaluating regulations. But those aren’t as apparent as a lack of benefit calculations altogether.
Nobel economist James Buchanan often noted that costs are subjective, something not available to an external, third-party policymaker (leaving aside that few cost calculations exist today anyway).
The same concept, magnified, applies to attempts to compute social and net benefits.
I admit biases against federally claimed regulatory benefits as a phenomenon in reality, and against efforts to exploit behavioral economics to “nudge” us into doing somebody’s idea of the right thing, as the administration would like to do with things like energy efficiency and retirement investment.
Instead, benefits are best seen as forms of wealth; and what maximizes wealth? It’s a long story, but: Markets.
So when “regulation” as a national “state of the art” pursuit removes values and wealth like risk reduction (or privacy, or cybersecurity, or safety, or online connectedness) from the competitive pressures and discipline required to advance them, federal agencies undermine actual regulation that needs to take place via insurance, liability, contract, customer reaction, competitors and reputation.
Regulatory pursuits in other words can undermine benefits. That’s important to consider when we rarely quantify any benefits in the first place.
To the laissez-faire way of thinking, policymakers must extend institutions of liberty to properly regulate, and promote benefits, or they’re failing in their core function.
Other circumstances discredit the reality of assumed benefits of the modern regulatory state.
Some statutes disallow economic cost considerations altogether; so regulation happens even with benefits plainly absent. (certain Environmental Protection Agency Clean Air Act soot rules are a recent example.)
Benefit claims are also undermined when firms capture the regulator and actively support rules, subsidies and interventions that benefit them at the expense of non-politically connected rivals. Economists call this rent-seeking.
Policymakers repudiate market discipline regularly, such as with, say, federal deposit insurance, rebuilding beachfront homes at taxpayer rather than insurer expense, and indemnifying makers of homeland security technologies when their products fail.
Sometimes what’s called a benefit is not one: Denial of choice on energy efficiency is a cost rather than a benefit, as stressed by the Mercatus Center recently in a study called “Overriding Consumer Preferences With Energy Regulations.”
Cost and benefit review of entire categories of regulated economic enterprise get left out, too. For example independent agencies like the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Reserve get a pass on review.
Other examples of looking the other way when regulation does harm include:
Antitrust regulation’s detrimental broad economic impacts
Federal Communications Commission, telecom, and net neutrality rules are omitted from net benefit review
Cybersecurity, privacy and homeland security regulation failures (negative benefits) get short shrift
Command-and-control environmentalism and the harm of undermining property rights get ignored
Financial intervention broadly: government control of interest rates and money supply, and long-term currency debasement are somehow non-issues even as federal regulation such as Dodd-Frank sweeps across the private financial sector.
“Budget rules” like Medicare & Medicaid supercede markets, but the deadweight costs and harm aren’t evaluated.
What’s the fix? We require institutions to drive benefit consideration and cost minimization to the forefront. That means change the way policymakers regulate.
We should require rent-seeking analysis of each major regulation alongside the still rarely done cost-benefit analyses.
Conceptually I’d “ban” agency benefit calculations since those should have been what Congress had in mind when it passed legislation authorizing whatever it is agencies are currently up to.
Instead, Congress should have to affirm each economically significant and/or controversial agency rule before it is binding. (The recent Congress’s “REINS Act” would have performed a function like this. (REINS stood for “regulations from the executive in need of scrutiny,” but of course it’s Congress that passed the enabling statutes that drive much regulation.)
Addressing over-delegation of regulatory lawmaking power, perhaps ore than any other step, will prioritize the issue of benefits by making Congress accountable, answerable to voters, for the vast body of rules issued by unelected bureaucrats.
Agencies operate within their own square. Ultimately, Congress must enact a regulatory budget to ensure that we achieve the greatest benefit for the least cost across the board. The regulatory state really can’t be controlled otherwise, as agencies get away with one “net-beneficial” rule after another, never challenged. There has to be an upper bound on benefits agencies can claim; EPA can’t save 600% of U.S. population.
Benefits have costs. We can’t afford the costs of unmeasured benefits.