CPR's Comments on OMB's Draft Report on Costs and Benefits of Regulations: Why More of the Same?

Cass Sunstein had barely begun settling in to his new position as Administrator of OMB’s Office of Regulatory Affairs (OIRA) in September, when OIRA released a draft of OMB’s 2009 Report to Congress on the Benefits and Costs of Federal Regulations. Today marks the deadline for submitting comments to OMB on the draft, and I joined CPR President Rena Steinzor and Policy Analyst James Goodwin in submitting comments.

We read this year’s report with interest, curious to see how the new administration would approach this annual ritual. While OIRA has in the past been a nerve-center of anti-regulatory ideology and the annual report a ritualized hymn to the virtues of cost-benefit analysis, we hoped Obama’s OIRA would use the annual report as an opportunity to fundamentally re-envision its mission – to perhaps re-invent itself as a resource providing positive and constructive assistance to the embattled, de-funded and demoralized federal agencies charged with protecting our health and environment.

Overall, we were disappointed. While this year’s report sanitized some of the more blatantly ideological material that had become a staple of past reports, the basic form and content of the report remain unchanged. It continues to waste inordinate time and resources on the inane and ultimately fruitless task of attempting to aggregate in dollar terms the overall costs and the overall benefits of dozens of regulations issued by a diverse array of federal agencies – rules that protect all sorts of intangible, non-market values: protecting the health of mothers and newborns, protecting endangered whale species, reducing respiratory and other health effects of ozone, reducing neurological damage to children. This year’s report concludes cheerily that the annual benefits of major rules issued by the federal government over the past ten were somewhere between $126 billion and $663 billion, while the annual costs of those regulations was just $51 billion to $60 billion. Phew! What a relief!

As we explain in more detail in our comments, the entire premise of the report—the notion that by aggregating ex ante projections of the costs and benefits of all federal regulations to see if total benefits outweigh total costs, one can produce meaningful information about the efficiency of such regulation—is misguided and fundamentally inconsistent with the economic theory to which OIRA purports to subscribe. And that’s assuming that the estimates of costs and benefits that form the basis of the Report bear some relationship to reality to begin with. In fact, OIRA’s accounting of the overall costs and benefits of federal regulation is built on a house of cards – on estimates of regulatory costs and benefits that are almost certainly wildly inaccurate and untrustworthy.

The data on the effects of various environmental and public health threats are rarely, if ever, complete enough to support reliable quantification. And the process of converting intangible environmental values into monetary terms is fraught with controversy. Indeed, we were particularly disappointed to see this year’s report simply carry over from the Bush years the extremely controversial practice of applying an across-the-board 7 percent discount rate to future benefits (saying, in effect, that a human life one year from now is worth 7 percent less than a human life today). Even moderate voices on cost-benefit analysis, like Richard Revesz and Michael Livermore, condemn this practice because it has the effect essentially selling our grandchildren down the river by significantly devaluing the lives of future generations in relation to our own.

Because of these inevitable uncertainties, controversies and data gaps, cost-benefit analyses of individual rules are always peppered with caveats and conditions that explain the uncertainties underlying the numbers, including which benefits could not be quantified, what assumptions were made to reach the numeric results, etc. Indeed, OIRA’s own guidance on conducting cost-benefit analyses, Circular A-4, stresses the importance of these narrative explanations of quantitative results.

The problem, of course, is that when you aggregate the monetary “results” of a whole series of cost-benefit analyses, all of this vital narrative information is of necessity lost. The result is a set of naked sums that at best provides no useful information and at worst can be dangerously misleading.

The authors of this year’s report get this – sort of. They acknowledge that “the aggregate estimates offered here do not capture the non-quantified benefits and costs . . and . . . should not be taken as either precise or complete.” But they nonetheless insist that their aggregate estimates provide “indispensable information.”

“Indispensible” for what purpose is not entirely clear. Though, to be fair, OIRA is required by law to produce a report every year “containing . . . an estimate of the total annual costs and benefits . . . of Federal rules . . . in the aggregate.” We're concerned that they’ve wasted unnecessary time and effort going beyond the call of duty with this ultimately pointless exercise, by, for example, extending their aggregate analysis back over a full ten-year period. And most importantly, they’ve missed an opportunity to show the Obama promise of “change” in action, by using this document to begin to fundamentally re-define and re-orient the role of OIRA, from an anti-regulatory attack dog, to an office dedicated to ensuring that the federal protector agencies—those created by Congress to protect health, safety, and the environment – have the resources they need to fulfill their missions.

In our comments submitted to OMB, we’ve offered a list of new tasks that OIRA might fruitfully take on and announce in its annual report to Congress as a first step toward re-envisioning its role:

1. Cataloguing Agencies’ Regulatory Priorities, As Identified by the Agencies Themselves: OIRA should ask each agency to identify and list actions the agency needs to take but has been unable to complete due to inadequate resources, inadequate legal authority, or even political interference (we have also offered some ideas of our own of regulatory gaps that need to be filled).
2. Cataloguing Inter-Agency Coordination Priorities, As Identified by the Agencies Themselves: OIRA should seek input from regulatory agencies regarding the regulatory priorities for which they need coordination with other agencies that OIRA could help facilitate.
3. Assisting Agencies to Develop “Trued-Up” Budgets: OIRA should use something called the Program Assessment Rating Tool (PART) to analyze each program that an agency implements to determine what resources it needs to carry out the program effectively. OIRA could then help agencies use this information to develop “trued-up budgets”—that is, budgets that account for all the resources an agency actually needs to carry out its mission. By comparing them to the agencies’ actual budgets, these trued-up budgets can help reveal the magnitude and nature of the resource shortfalls they face. ORIA can then use this information to advocate for the agencies with the President and Congress.
4. Assisting Agencies to Obtain Enhanced Legal Authority to Ensure That People and the Environment Remain Adequately Protected Against New and Emerging Risks: OIRA should also work with the regulatory agencies to identify those areas where they need enhanced legal authority to address new and emerging issues relevant to their statutory missions and act as an advocate on behalf of the agencies, helping them present this information to Congress and the President.
5. Producing Retrospective Studies of Cost Estimates: OIRA is uniquely positioned to conduct accurate retrospective studies of regulatory cost estimates in order to combat the endemic problem of the over-statement of costs in the ex ante regulatory cost estimates routinely used in cost-benefit analysis.
6. Documenting the Costs of Regulatory Delay: OIRA could use its annual Report to Congress as an opportunity to document the dozens of workers that are killed, thousands of children harmed, and millions of dollars that are wasted each year because of unjustifiable delays in federal regulatory action. This would provide an important and innovative contribution to regulatory reform efforts because the problem of regulatory delay and the costs it generates has been virtually ignored in the debate over the general wisdom of the U.S. regulatory system over the last 30-plus years.