Notice & Comment

Circular Reasoning?, by Susan E. Dudley

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

For almost 30 years, federal regulatory agencies have conducted analysis pursuant to President Clinton’s Executive Order 12866, which each successive president has endorsed and supplemented. Last month, President Biden continued that practice in issuing E.O. 14094, which reaffirms E.O. 12866, albeit with some potentially significant procedural changes that I’ve discussed elsewhere. At his direction, OMB also released a revised draft of Circular A-4, which, for 20 years, has guided regulatory impact analysis under E.O. 12866. 

I marvel at the continuity and durability of the principles and procedures for regulatory analysis and review in the United States. Presidents can, and often do, rescind their predecessors’ executive orders with the stroke of a pen, yet E.O. 12866 has survived through five dramatically different presidencies. Circular A-4 is also a bipartisan success story. Issued in 2003, it built on the Clinton administration’s “Economic Analysis of Federal Regulations Under Executive Order No. 12866,” which in turn had its basis in the “Regulatory Impact Analysis Guidance” published in 1992.[1]

It is through this lens of bipartisan stability that I evaluate the Draft Circular released last month. Will it earn the lasting acceptance that the 2003 Circular and E.O. 12866 have, or will it disrupt that balance and start us down a path in which each change of party in the White House brings new directives on how to measure regulatory effects? 

The proposed revisions to Circular A-4 include some improvements, but also some changes that deviate from the traditional purpose of regulatory analysis, which is to evaluate policies’ economic efficiency. Benefit-cost analysis (BCA) of regulations has proven durable across different presidential administrations because it is grounded in objective and nonpartisan principles that help policymakers identify “the set of feasible projects that would yield the largest positive net benefits to society.” 

Some have criticized BCA for its focus on economic efficiency, and it is true that BCA provides more information on the productive and allocative efficiency of alternative policies than on other values relevant to policymakers. Nonetheless, as OMB’s 2003 guidelines note, “this is useful information for decision makers and the public to receive, even when economic efficiency is not the only or the overriding public policy objective.” BCA examines the welfare differences among alternative policies, but policymakers must consider other factors when making regulatory decisions, including legal constraints, political viability, distributive effects, ethics, practicality, etc. 

In several places, the Draft Circular appears to depart from the goal of offering decisionmakers a transparent presentation of how efficient and effective different options are, and instead seems to bend the analytical methods to point to desired outcomes. This is apparent in a greater willingness to override individual preferences, a muddied distinction between benefits and costs that accrue in the United States vs. elsewhere, an influential revision to accounting for future impacts, and support for embedding normative values in estimates of benefits and costs. 

For example, instead of requiring agencies to require evidence of a need for regulation based on accepted principles of market failure, the draft would encourage them to regulate as long as they think they know better than individuals do about individuals’ own welfare. While consideration of behavioral biases can improve the design of regulation, using it to justify overriding individual preferences discards a key principle of welfare economics.

While the draft appropriately encourages agencies to make their analysis and decision frameworks transparent, in several instances the guidance would do the opposite, obfuscating information on expected impacts and the uncertainty inherent in predicting future outcomes. For example, it does not require agencies to distinguish benefits and costs borne by people in the United States from those that may accrue globally. Some issues—notably climate change—do have global consequences that must be examined, but it is not defensible, either legally or morally, to hide from policy officials and the public information on how U.S. policies will affect U.S. households. 

Similarly, the draft directs agencies to use a single discount rate to translate future impacts to current terms. That number (the social rate of time preference) can have a huge impact on whether a decision will appear beneficial or harmful. Given the uncertainty and lack of consensus on the appropriate number, agencies should be required to show policymakers and the public how sensitive their estimates of benefits and costs are to variations in it.

President Biden has made enhancing equity a priority of his administration, and E.O. 14094’s directive to revise Circular A-4 states “regulatory analysis, as practicable and appropriate, shall recognize distributive impacts and equity, to the extent permitted by law.” Though previous presidents have also encouraged agencies to understand how the benefits and costs of alternative policy options are distributed, regulatory analyses are rarely rigorous on this dimension. The Draft Circular takes some important steps to remedy this deficiency, adding needed detail to the very brief discussion of distributional effects in the 2003 Circular. Disaggregating the effects on lower-income households may be particularly important for regulations that increase the costs of basic goods and services (like food or energy) or address problems that disproportionately affect vulnerable populations. However, the draft also encourages (though it does not require) agencies to apply “weights” to benefit and cost streams to reflect subjective, normative values about how much a dollar is worth to different groups. This could undermine BCA’s fundamental role to provide information on the overall economic efficiency of different policies, and would instead encourage factional fights for favorable treatment. 

Regulatory analysis has helped administrations of different persuasions understand the impacts their policies will have on overall public welfare. As President Obama’s OMB noted, it “also has an important democratic function; it promotes accountability and transparency and is a central part of open government.”

While the most efficient policy will not always be the preferred policy, information on the welfare impacts of alternative approaches serves as invaluable channel markers as the tides change from one administration to the next. To retain the integrity of regulatory impact analysis and ensure Circular A-4 remains durable for the next 20 years, the final draft should not abandon the goal of measuring economic efficiency, nor stray from widely accepted principles and methods. To the extent that the Circular is perceived as not being neutral, or as embedding practices designed to bias results in a way that favors the current administration’s policy preferences, it risks the durability of not only the document, but of regulatory analysis itself. 

Susan E. Dudley is the Director of the George Washington University Regulatory Studies Center and Distinguished Professor of Practice in the Trachtenberg School of Public Policy and Public Administration.

[1] Appendix V of the Regulatory Program of the United States Government, April 1, 1992–March 31, 1993

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