Notice & Comment

Beyond Economic Analysis, by Max Sarinsky

*This post is part of a symposium on Modernizing Regulatory Review. For other posts in the series, click here.

Analytic transparency offers enormous potential. Through the tools of economics and science, a good benefit-cost analysis enables regulators to identify the regulatory alternative among the options studied that leaves society best off. And disclosing that analysis enables outside experts to check the government’s work and provide feedback. 

Good analysis can also support strong controls that promote environmental protection, public health, and other crucial societal priorities. While benefit-cost analysis was viewed by some as a tool to counter onerous environmental and health regulations when it was initially incorporated into regulatory policymaking during the Reagan administration, experts now recognize—partly due to decades of transparency and feedback—that sound analysis frequently supports strong regulations in those areas. 

The Office of Management and Budget’s draft update to Circular A-4, which provides guidance to federal agencies on conducting benefit-cost analysis for proposed rules, embraces this potential at its best. While the current Circular has been criticized by some for tilting the scales against strong health and environmental regulation, the draft revision would update the guidance in key ways to rebalance those scales. 

From an economic standpoint, the draft update is basically a no-brainer. Circular A-4 was last updated in 2003 and now fails to reflect two decades of analytical insights. For instance, the draft update would modernize discounting, which downweights effects that occur further into the future. Incorporating the latest market data and expert consensus, the update assigns greater value than the current Circular to impacts that accrue farther out in time such as long-term environmental and health benefits and costs. Leading experts in discounting have praised the proposed changes as economically sound and long overdue. 

Other overdue updates abound. For instance, the draft update emphasizes that agencies should monetize key environmental impacts including effects on ecosystem services, natural capital, and option value—another improvement that reflects advancements in economic research. The draft update also emphasizes the importance of robust analytical baselines that consider not only technological and economic changes but also the likely trajectory of future government programs and policies. This is crucial for accurately assessing the impacts of regulation in rapidly evolving areas such as the energy sector. 

But transparency also requires agencies to grapple with challenging technical and legal issues. Eager litigants and judges frequently scrutinize the analyses underlying regulations and seize on perceived errors to invalidate rules. When conducting economic analysis, regulators must ensure technical proficiency and legal defensibility. These two priorities frequently, but do not always, align. Increasingly, litigants are challenging regulators essentially for understanding the effects of their rules all too well and using those rules to achieve purportedly impermissible ends. 

The economic improvements in the draft Circular are generally sensitive to these risks and would enable regulators to perform an analysis that is legally durable. In updating the consumption discount rate, for example, OMB applied the same essential methodology that it used to develop the current Circular’s rate in 2003 but incorporated more recent data. Opponents will have trouble challenging that approach.

In other areas, further White House support can help put the guidance into practice in a manner that is technically sound and legally durable. For instance, agencies have struggled to develop analytical baselines that reflect the evolving state of the energy sector, resulting in implausibly sanguine forecasts of policies that promote continued oil and gas development. To rectify this, the White House should bring together technical experts from different agencies, including the Energy Information Administration, to develop realistic energy forecasts consistent with the draft guidance. Forecasts that reflect the best available evidence and are produced through a consensus and open process will both benefit resource-constrained agencies and have a better chance of withstanding attack.

Agencies will also need to remain sensitive to potentially shifting legal limits on the types of impacts that they may consider. For instance, while the draft update calls upon agencies to assess distributional impacts based on a range of indicators, agencies should remain thoughtful about when and how they integrate distributional metrics into regulatory decisionmaking. Agencies should be especially wary of appearing to design regulatory policy for the benefit of particular sex, race, or ethnic groups, which could pose legal risk in the current judicial landscape. 

Agencies must also remain thoughtful about potential statutory limitations. Currently, the draft update essentially mirrors the existing Circular A-4 by advising agencies to consider all benefits and costs that flow from a regulation. But regulatory critics have selectively attacked agency reliance on factors that are less directly connected to the operative statute’s purpose or enumerated factors (which are sometimes called “indirect” effects). Increasingly, those critics have claimed that such consideration implicates the nascent major questions doctrine. The White House’s barebones draft guidance here could do more to rebut such arguments.

Specifically, OMB should lay out a realistic and evenhanded approach to considering regulatory impacts that empowers agencies to durably rebut these legal arguments. Two starting principles would go a long way. First, an agency should disregard a particular benefit or cost only when the relevant statute forecloses its consideration. This is a high standard in light of the legal presumption that agencies consider all important factors. And second, regulatory treatment is presumptively symmetrical. That is, if an agency can consider a certain type of impact under a particular statutory provision when it counts as a cost, it can presumptively also consider the same impact under that provision when it counts as a benefit (and vice versa), unless the statute clearly provides otherwise. These basic considerations would provide a limiting principle that is consistent with precedent and empowers agencies to rebut novel legal arguments. 

The draft update to Circular A-4 is a surefire winner on the technical side. But technical mastery does not always produce legal durability, particularly in today’s legal landscape. Implementing the revised Circular will demand careful attention to analytical challenges and a continued focus on mitigating legal risk. 

Max Sarinsky is a senior attorney at the Institute for Policy Integrity and an adjunct clinical professor at New York University School of Law.

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