Biden admin plans to rig cost-benefit analysis, boosting federal regulations

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When the Biden administration took office, one of its first actions was to order a series of updates to the federal rulemaking process, all under the general banner of “modernizing regulatory review.”

Included as part of the reforms is an executive order instructing the Office of Management and Budget to update its two-decade-old regulatory analysis guidance for federal agencies. This update carries immense implications as these guidelines shape the preparation of cost-benefit analyses by federal agencies, which is used to support many of the government’s largest and most expensive regulations.

The Biden administration has recently shared a draft of this updated guidance, and it introduces a number of significant modifications. For this discussion, I will focus on three pivotal changes in the draft update and their implications for regulatory analysis.

  1. A shift from efficiency to social welfare: The first significant change is a departure from the conventional notion that cost-benefit analysis (CBA) measures “efficiency,” a term widely used by economists to denote wealth. Instead of quantifying costs and benefits exclusively in monetary terms, the administration is opting for a more nebulous and subjective well-being approach based on a non-specified social welfare function. While CBA within the government has never been truly rooted in efficiency, there has previously been some ambiguity. This draft guidance makes clear that the focus has decisively shifted from wealth accumulation toward “social welfare.”
  • Ignoring the impact of regulations on displaced capital investment: Secondly, the administration dismisses the repercussions regulations have on capital investments. Regulations impose costs on businesses and consumers, which invariably affects the investments they would otherwise make. The new assumption in administration policy is that only consumption bears the brunt of regulatory changes, or, similarly, that impacts on capital investment are so small they can usually be safely ignored. This comes despite the fact that vast empirical literatures exist demonstrating the distorting effect that regulations have on investment.
  • Introducing arbitrary weights based on wealth distribution preferences: Lastly, the Biden administration proposes the inclusion of arbitrary weights into economic analysis, based on analysts’ preferences about the distribution of wealth across society. This means, for example, that if a regulation delivers benefits worth $20 to a less-privileged demographic, while simultaneously imposing costs of $1,000 on a high-income group, analysts are allowed to subjectively amplify the $20 to equal $215, while reducing the value of the costs to $186, thereby enabling the regulation to pass a cost-benefit test. This adjustment is based purely on analysts’ judgements about who is deserving.

These modifications to the regulatory analysis guidance, while not exhaustive, are among the most impactful. The consistent thread across all these changes is that significant costs will be systematically disregarded as a conscious policy decision. Simultaneously, benefit estimates will be subject to distortion, influenced by the political inclinations of analysts or the administration at the helm. Furthermore, the essence of cost-benefit analysis is fundamentally altered as it departs from the primary principle economists offer insights on: efficiency.

The transformation of the regulatory analysis guidelines, if allowed to proceed, will have profound negative effects on future policy formation.