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.