Costs and Benefits of Regulation

One of the major developments in regulation over the last 30 years has been the rise of cost-benefit analysis. At first, agencies squirmed and resisted. But then they realized something: they’re in charge of their own accounting. It’s not an independent audit. There’s no third-party involved. An agency is free to use its own standards and its own measures when calculating its own regulatory costs and benefits.

When it’s that easy to game the system, of course agencies are going to lowball their costs and highball their benefits. This is on full display in the Office of Management and Budget’s pithily titled “Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities.” [PDF]

On page 13 of the report, Table 1-1 lists cost-benefit numbers for selected agencies for their major rules (costing $100 million or more) over the last ten years. It can be hard to quantify costs with precision, so agencies typically report a range estimate. EPA, for example, estimates that its major rules cost from $23.3 billion to $28.5 billion over the last decade.

Benefits are much trickier to calculate. EPA estimates that its major rules have had benefits of $81.8 billion to $550.7 billion — a range of nearly a factor of 7. They might as well say they have idea. Why such a large range? Because EPA is trying to put dollar figures on items such as its air quality rules lowering the number of premature deaths. To do that, they have to pull numbers out of thin air.

Remember, these estimates don’t come from an independent third party. They come from EPA itself. There is a conflict of interest here. EPA wants to maximize its budget and its activities. The more beneficial its regulations appear, the more of them they can issue without too much pushback. So when it comes to putting dollar values on things that aren’t quantifiable, EPA has an incentive to pick the highest numbers it can.

That’s why agencies shouldn’t try to calculate their own regulations’ benefits. After all, nobody claims the tax burden is negative because the benefits those tax dollars confer outweigh their cost. It’s easy to calculate how much people pay in taxes. It’s also fairly easy to calculate how much regulations cost. But the fudge factor in benefit calculations is so high — and so prone to abuse — that it’s literally impossible to come up with an honest number. If it were possible, maybe EPA’s benefit range would be tighter than a factor of 7.