Expanding Cost-Benefit Analysis Helps Tame the Administrative State

Since the Reagan administration, all Presidents have used an office within OMB, called the Office of Information and Regulatory Affairs (OIRA), to review major regulations proposed by executive departments. OIRA is to evaluate the rules according to cost-benefit analysis, i.e. to determine whether agencies have exercised whatever discretion they enjoy under their statutes to gain more benefits for the public than they impose costs.

Cost-benefit analysis was a salutary development for the administrative state. Insofar as agencies possess discretion, cost-benefit review disciplines them to use it in a more reasonable and predictable way that maximizes benefits for society. By placing the review in OMB, an administration tempers the tunnel vision in outlying agencies that carry out their mission in a culture that may be dominated by special interests or just hidebound by bureaucratic inertia. Cost-benefit analysis also creates a dynamic that encourages better weighing of previously unforeseen costs and benefits over time.

Tax regulation has unfortunately been exempted from OIRA review, even though major tax regulations can make a large difference to economic growth and prosperity. Fortunately, the Trump administration ended this tax exceptionalism with an agreement yesterday between the Treasury and OMB. It also sensibly addressed the main concern about OIRA review — undue delay of needed rules — and hired Kristin Hickman, the law professor in the country who knows most about tax administration, to oversee the process. This decision is the Trump administration at its best — improving government in a way that eluded administrations of both parties for decades.

But there are other opportunities to expand oversight of OIRA to the benefit of the nation. First, the so-call independent agencies are currently outside the ambit of the executive order directing cost-benefit review. In my view, the President has inherent power to direct the exercise of discretion of any executive branch agency. But even if the White House is reluctant itself to order the agencies to follow OIRA, nothing prevents these agencies from sending their rules to OMB for advisory opinions. The White House could vet nominees for independent agencies, like the Consumer Financial Protection Bureau, who were willing to do just that. Even advisory opinions would help change the culture at agencies that ignore the cost-benefit implications of their policies. Bureaucrats do not like to be publicly shown up.

And the President undoubtedly has power to expand OIRA’s jurisdiction over agencies that are not independent. Currently, cost-benefit security is limited to major rules and exempts those that concern their internal operations. But agencies make other major decisions, such as that to operate by adjudication rather than by rule, that have large economic implications for the companies they regulate. If that kind of decision were reviewed by OIRA, it would also create a dynamic where agencies would make better choices about this pivotal determination.

I am pessimistic that legislatures or courts will claw back the huge discretion enjoyed by the modern administrative state. Expanding cost-benefit analysis, however, makes the exercise of that discretion more rational and predictable. The Trump administration should build on its splendid decision to rationalize tax regulation under the tutelage of OIRA.

Reader Discussion

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on April 13, 2018 at 11:32:56 am

I'm quite enthusiastic about a cost/benefit analysis of policy, at least in principle. And tax policy should be no exception, at least in principle. But how, exactly, would it work?

Yes, standard economic models reveal that imposing a tax creates a dead-weight social loss--at least, relative to a world in which government services are provided for free. Using this kind of analysis, I'm sure we could justify eliminating all forms of public finance.

Yet when we look to places with no effective taxation--the center of the Amazon rainforest, lawless parts of Pakistan and Afghanistan, the center of the oceans--they don't seem to be especially productive environments. Clearly government services have some value. And now McGinnis wants some bureaucrats to identify the appropriate level of trade-offs between taxation and government services writ large? Really?

And I'm really looking forward to an analysis of social welfare programs. I can't wait to see the cash value these bureaucrats place on human life and suffering. Because, in the great Rawlsian analysis, this is the unavoidable question: Should we tax Scrooge to preserve the life of Tiny Tim? Or would a cost/benefit analysis say that it would be better that Tim die quickly to decrease the surplus population? I'd be astonished if any administration would want to make such a public declaration.

Then there's the question of time trade-offs. Yes, reducing taxes tends to increase economic activity--activity that might be taxed later. So there's always a rationale for eliminating taxes today in anticipation of reaping tax rewards tomorrow. But that assumes that the government can maintain solvency (and low interest rates) indefinitely, even in the face of unforeseen calamities, and that future generations will find it in their interest to honor past debts. Again, with these Herculean assumptions, we can justify eliminating all taxes. And this illustrates that people conducting a cost/benefit analysis of taxation would really be engaged in adopting or rejecting Herculean assumptions. To avoid this, the CBO has a standard set of assumptions--measuring consequences over 10 years, no dynamic assumptions, etc. You can like these assumptions; you can hate them; there are rationales supporting either opinion. But the point is, the assumptions drive the conclusions.

All that being said, I expect bureaucrats could focus on narrower, more technocratic questions: IF we're going to do this or that, what is the least burdensome way to do it? Does it make sense to subsidize green power--or could we better achieve the same benefits via taxing carbon emissions? That sort of thing. Indeed, I believe bureaucrats at the CBO already do kind of analysis.

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on April 13, 2018 at 13:36:37 pm

" no dynamic assumptions...But the point is, the assumptions drive the conclusions. "


In other words, here we find nobody really advocating for "static assumptions' when for the past week or so, this same nobody (couldn't avoid the pun, sorry) was preaching the significance of *incentives* on human behavior.

BUT static assumptions, in say tax rate changes for example, would indictae that people, at least TAXPAYERS, DO NOT respond to incemtives.

What shall it be? Incentives as a prime motivator of human behavior? or not?

And oh BTW, it does not make sense to either subsidize green power (read as "crony capitalism) or tax carbon emissions (read as soak the poor) in the name of saving them.

Regrettably bureaucrats at the CBO already perform their BIAS laden analyses.

Oddly enough, I agree with nobody as to the ultimate futility of cost-benefit's ability to rein in the admin state. After all, the CBO and other agencies are staffed by HUMANS and as nobody has previously argued, these humans respond to incentives (biases, perhaps?).

Then again, we may be observing a sea change in the thinking of this highly literate / informed nobody; or is it simply a change in Democrat party talking points. Nobody. really knows - Ha!

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on April 13, 2018 at 15:41:20 pm

I believe that OMB should test the assumption that cost-benefit analysis has a beneficent impact on the quality and quantity of federal regulation. The involvement of OMB in cost-benefit analysis of the major rules of most agencies began over 35 years ago, yet to my knowledge the assumed economic and regulatory benefits of that effort remain unsubstantiated.

Further, if we're going to be ruled by economists and by laws that flout regulatory cost/impact considerations (from the legally-uncontrolled/uncontrollable, incomparably powerful Federal Reserve and Consumer Financial Protection Bureau to the economically reckless and unaccountable EPA) then cost-benefit analysis is mostly a waste of effort. Unless it's mandatory and its outcomes are binding on the big stuff, it's largely a waste of effort and creates the false appearance of rigor and efficiency, even assuming it works where it's binding. In effect, it may work where it's binding on the outcome, which is essentially nowhere, or it's binding but only on small-ball stuff. So Congress should amend all current laws to preclude future regulations the costs of which exceed benefits.

Finally, the absence of serious cost-benefit analysis is most felt where it's most touted, in Congress, a truism about our national legislature which, forever personifying irony, seems to exempt its members and their work product (sic) from all the rules they demand of everybody and everything else in government. So Congress should take a pledge: no new laws the costs of which exceed their benefits. If Members had to face Voters with a cost-benefit balance sheet deficit on their handi-work maybe they'd think more economically and less politically about the real cost of buying votes with laws and benefits.

It's not crony capitalism that's the real danger. Rather, it's crony democracy. And crony democracy is why Democrats want open borders.

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on April 13, 2018 at 16:47:57 pm

"Crony democracy is the gift that [allows the Democrat party] to keep on giving"

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