Notice & Comment

Making Regulation More Equality-Friendly, by Daniel Farber

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

The Biden Administration’s proposed agency guidance will make agencies more responsive to income inequality, global equity, and the interests of future generations. 

Inequality is a defining issue of our time. Yet, for the past forty years, the government has largely embraced a theory of regulation that ignores issues of inequality. This theory holds that the sole purpose of government regulations is to give people benefits like clean air that they would be willing to pay for but that the market doesn’t provide. Since the standard is what people would be willing to pay for, the theory inherently favors the rich over the poor. In practice, the theory has been implemented in ways that also ignore or marginalize harms visited on vulnerable groups outside our borders and on future generations. 

When the Reagan Administration embraced that theory of regulation, it implemented the theory by requiring agencies to base regulations on cost-benefit analysis. To ensure that agencies towed the line, Reagan assigned the White House Office of Information and Regulatory Affairs (OIRA) to oversee agency cost-benefit analysis. 

OIRA has frequently been called the “most important agency you’ve never heard of.” OIRA’s importance stems from its role as “regulatory czar,”  but that role is little known to the public. And if OIRA is obscure, its guidance to agencies, known as Circular A-4, is an order of magnitude more obscure. The Biden Administration has recently proposed a major revision in Circular A-4. A major purpose is to bring the guidance in line with advances in regulatory economics over the past twenty years. However, the revision would also do a great deal to increase the attention regulators give to equity. 

Below, I discuss five key ways that the proposed revision will promote equality. The changes may not go as far as some progressives would like, but they do help to improve the ability of agencies to take into account income inequality, international equity, and justice to future generations.

1. Equity and the Need for Regulation

Circular A-4 mentions equity and distribution in passing, but the revision reinforces the legitimacy of these factors in regulatory design.  Among the list of possible needs that can justify regulation, “Promoting Distributional Fairness and Equity” now gets a separate heading. The first sentence after the heading reads, “Regulations can play a key role in promoting distributional fairness and promoting equity.” One improvement would be to add that this role may be especially important when Congress has identified protection of vulnerable populations as a goal. It might also be useful to refer to the theory that redistribution can be promoted without harming economic efficiency. This can be done with small revisions in multiple regulations, something OMB’s current chief economist has referred to as pursuing equality on the cheap.

2. Treating Lives Equally

In theory, if the aim of cost-benefit analysis is to mirror what individuals are willing to pay for, reducing mortality risks for the rich should get more weight than reducing risks for the poor. Economists use a figure called the value of a statistical life as the benchmark for monetizing the risks. Because the rich are willing to pay more to reduce risks, in theory the value of a statistical life should be higher as income increases. 

In practice, however, agencies use a single number for everyone, regardless of income. There has always been a sense that this was a suspect deviation from the theory of cost-benefit analysis. The proposed guidance does not mandate the use of a single number but does support this practice. It adds a quotation from an advisory committee report endorsing the practice. A later footnote acknowledges that this has been the accepted practice and that OIRA has implicitly endorsed it. 

I argue in a forthcoming paper that this practice is best understood as endorsing an important norm of equality. Treating all lives as equally worthy of protection is an important moral principle even if it is at odds with the conventional theory behind cost-benefit analysis. The proposed revision removes some of the cloud that has lain over this approach, and in my view the revision could do even better by mandating it. 

3. Equity Weighting

The proposed revision adds a lengthy discussion of a technique called equity weighting. This methodology takes into account that a dollar given to a poor person improves their quality of life far more than a dollar given to a rich person.  Using this technique favors redistribution to the poor and correspondingly counts regulatory benefits to the poor more heavily than benefits to the rich.  A footnote points out that using the same value of a statistical life for everyone can be seen as an application of this principle.  

While there’s a lot to be said in favor of equity weighting, it also may be hard to apply in a systematic way, simply because it is hard to know how regulatory costs will end up rippling through the economy. For that reason, my forthcoming paper argues that equity weighting may not be ready for prime time. Nevertheless, encouraging agencies to consider the use of equity weighting is all to the good and may encourage them to develop new methods of tracing the economic impacts of regulations. 

4.  International Equity

Some U.S. regulations have important repercussions outside our border. Because the global poor are the most vulnerable to harm from climate change, EPA actions to reduce carbon emissions  serve an important equity function. Circular A-4 currently speaks in terms of cost and benefits within U.S. borders.  The revision makes it easier for agencies to take into account how their regulations create global costs and benefits. 

This change is not pitched in equity terms, and no one really expects U.S. regulatory agencies to view helping the global poor as central to their missions. Rather, the revision points to pragmatic reasons to take into account international repercussions, prominently including the need to enlist the cooperation of other countries in dealing with cross-boundary problems. Increased equity is only a side-effect of these pragmatic considerations — but nevertheless, a very welcome one. It might be helpful if the guidance specifically mentioned the potential for harm to the most vulnerable populations, particularly the global poor, to lead to mass migrations and to political destabilization in ways that can harm U.S. national security.  

5. Justice to Future Generations

Many regulations involve immediate tradeoffs between costs and benefits. But for other regulations, such as those dealing with climate change, the benefits of a regulation may stretch out for decades or even centuries. For instance, sea level rise will continue for thousands of years after we stop emitting carbon. The question of how to account for the interests of future generations has divided economists as well as philosophers.  In economic analysis, the relative weight of the future versus the present is measured by a parameter called the discount rate. The lower the discount rate, the greater weight is given to future costs and benefits. Over long time periods, even very small changes in discount rate have a huge effect on the weight given future impacts.  

For a variety of technical reasons, the proposal advocates a much lower discount rate than the existing version of Circular A-4, with the rate decreasing as impacts move farther into the future. The effect is to give substantially more weight to the interests of future generations.  Although equity is not the reason for the change, it is an important byproduct. 

These changes, to my mind, are all to the good. They should please progressives because of the increased emphasis on equality, and most of the changes should also please economists because they better reflect the current state of the art. They will also please agency lawyers, because agencies like EPA have already started to implement some of these ideas, and the change in OIRA guidance will make it easier to defend the resulting regulations in court. 

This is not to say that more could not be done. In particular, as I have argued, agencies should be encouraged to develop much more granular data on the impacts of regulation and to focus more on designing regulations to protect the most vulnerable populations. But the revision is very much a move in the right direction. 

Daniel Farber is the Sho Sato Professor of Law and the Faculty Director of the Center for Law, Energy, and the Environment (CLEE) at the University of California, Berkeley.

Print Friendly, PDF & Email