Notice & Comment

Cost as the Ultimate Regulatory Restraint, by Jonathan H. Adler

*This is the third post in a series on Michael Livermore and Richard Revesz’s new book, Reviving Rationality: Saving Cost-Benefit Analysis for the Sake of the Environment and Our Health. For other posts in the series, click here.

Much of Michael Livermore and Richard Revesz’s Reviving Rationality is devoted to critiquing the Trump administration for its ill-grounded and poorly executed deregulatory initiatives. Many (though not all) Trump administration deregulatory actions were undertaken with insufficient analytical grounding and without regard for relevant legal constraints and procedural requirements. As a consequence, the administration lost early and often in federal court. The Environmental Protection Agency, in particular, suffered numerous early defeats in court and ultimately accomplished little in the way of lasting accomplishments, deregulatory or otherwise.

The authors’ detailed critiques of several Trump administration initiatives are forcefully presented and often compelling. Some of the authors’ broader claims about the role of regulatory review and cost-benefit analysis are less powerful and are less likely to persuade those who do not share the authors’ progressive outlook and regulatory sympathies. It is one thing to excoriate the Trump Administration for its disregard of the legal and administrative norms governing regulatory agency activity. It is another to brush aside concerns for aggregate regulatory burdens or suggest that ex ante cost-benefit assessments should be the central focus of regulatory policy.

It is certainly true that we should want the benefits of any given regulatory proposal to exceed the costs. Government interventions should do more good than harm. An expectation that benefits exceed costs is the least we should demand of governmental interventions that trump private decision-making, particularly when we recognize that even the best-intentioned interventions are capable of doing harm.

One benefit of a liberal market order is economic dynamism and discovery. Governmental interventions have a tendency to foreclose avenues and constrain private choice, which is why many administrations, perhaps starting with that of President Jimmy Carter, have operated on the assumption that private market ordering is to be preferred, and that governmental intervention is only necessary when there is a market failure to be corrected. There is little evidence in Reviving Rationality that the authors share this intuition, potentially limiting their argument’s appeal to those less enamored with regulation. 

One purpose of centralized regulatory review is to discipline agencies, check their inherent tendency toward tunnel vision, and ensure that regulatory interventions are consistent with prevailing law and administration policy. Cost-benefit analysis can play an important role in this process, but it need not be lodestar of regulatory analysis.

The precision and sophistication of cost benefit analysis has improved over the past fifty years, but it remains far from perfect. Many regulatory consequence are difficult to quantify. Further, as progressive critics like to note, agency CBAs often overestimate the costs of compliance. Yet as retrospective review has shown, agency CBAs tend to overestimate the benefits as well. An oft-cited Office of Management and Budget report found “a greater tendency for costs to be overestimated than underestimated” in the rules it analyzed. Less-often cited is the same report’s finding that benefits of regulatory interventions, including lives saved, tended to be overestimated as well, and that overall, the ratio of benefits to costs was more often overstated than the reverse.

CBA is imprecise because such analyses are always conducted with imperfect information, particularly concerning how market actors are likely to respond to regulatory constraints over time. As a wise sage once remarked, “it’s tough to make predictions, especially about the future.” Market conditions, technological constraints, and consumer demands, all change over time in ways that are difficult to foresee. If a problem has attracted the attention of a federal regulatory agency, there is a decent chance it has attracted the attention of firms, consumers and activists as well, perhaps triggering non-regulatory or non-federal responses. 

However well-intentioned, regulatory impositions often constrain dynamic market responses to emerging problems. The imposition of a permitting or approval regimes, in particular, hamper the development and deployment of welfare-enhancing technologies and business practices. Incentives created by regulatory interventions sometimes work against their purposes. Insofar as such developments may have been unforeseen, they will not have been accounted for in prospective CBAs.

Livermore and Revesz are particularly critical of the Trump administration’s focus on regulatory costs and steps taken by the Office of Information and Regulatory Affairs toward the creation of a regulatory budget, not unlike the fiscal budget the Office of Management and Budget produces. The “one-sided” emphasis on costs “makes a mockery of cost-benefit analysis” and risks having a “pernicious” effect on needed health and environmental protections.

The authors are particularly concerned about the administration’s attempt to impose a regulatory cost cap on federal agencies and demand that agencies repeal two existing regulations for each new regulation adopted. The two-for-one requirement was admittedly a gimmicky and vulnerable to agency gamesmanship (perhaps fitting, given the President), but the critique is overstated. Concern for the aggregate federal regulatory burden was no innovation of the Trump Administration, and there is value in having agencies consider repealing old regulations before adopting new ones.

The focus on costs as a primary metric defies common sense, the authors claim, writing:

“In our daily lives, we might decide that it is not worth spending $50 to prevent a stubbed toe. But we are likely to feel quite differently if, instead, the result is the loss of a limb. To set a goal of saving $50, no matter the consequences, is obviously foolish.”

Yet this does not quite make their point. Few would risk life or limb to save a mere $50, but this does not mean such costs are irrelevant. Most of us, in our daily lives, operate under budget constraints, so if it is necessary to spend $50 to save a limb, we may need to make up for those costs somewhere else. Cost constraints often require families and firms to consider trade-offs and divert resources from one set of worthy purposes to another.

When operating under a budget it is not enough that a given expenditure or investment will produce a positive return. There must also be funds available. Individuals, families and firms never have sufficient resources to make every potential investment with an expected positive return. Choices must be made. Cost-benefit analysis is useful—perhaps even essential—in the prioritization process, but so is an awareness of the ultimate cost constraint.

The federal government generally operates under fiscal constraints when it comes to taxing and spending, but not when it comes to regulating. This often creates pressure to accomplish through regulatory diktat what could better be achieved through fiscal means. Adopting a regulatory budget is a means to constrain regulatory appetites and account for the extent to which governmental decisions command and direct private resources. The authors persuasively show how several of the Trump administration’s actions lacked sufficient underlying analyses, but they overshoot in suggesting concern for regulatory costs is misplaced.

Like many critics of the Trump administration’s regulatory policies, the authors note the federal government’s poor record defending Trump-directed initiatives. Such critiques are fair. (I have made some myself.) Going forward it will be interesting to see whether such legal failures were an artifact of the Trump administration, or are signs of larger problems within the administrative state, including Congress’s failure to update and revise the statutes delegating agencies the authority to act. If the Biden Administration likewise struggles in court, it may be a sign of deeper rot, and not something that was particular to Trump.

Jonathan H. Adler is the inaugural Johan Verheij Memorial Professor of Law and Director of the Coleman P. Burke Center for Environmental Law at the Case Western Reserve University School of Law.