*This is the sixteenth 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.
In their incisive book Reviving Rationality, Michael Livermore and Richard Revesz document the bipartisan consensus across Presidents of both parties in favor of sensible analysis of regulatory costs and benefits—including Presidents Jimmy Carter (who issued Executive Order [EO] 12,044 in 1978, and presided over the creation of OIRA in 1980), to Ronald Reagan’s EO 12,291 in 1981, Bill Clinton’s EO 12,866 in 1993, and Barack Obama’s EO 13,563 in 2011.
Livermore and Revesz argue that the Trump administration defected from this consensus by distorting cost-benefit analysis (CBA) to cater to deregulatory aims. Their extensive and detailed critique points to the Trump administration’s efforts to reduce regulatory costs without considering the foregone regulatory benefits (via EO 13,771, see pp.107-117), and its exclusion of the indirect benefits of new regulatory measures (pp.145-153) yet inclusion of the indirect benefits of deregulatory measures (pp.153-155). For example, the Trump EPA sought to exclude the indirect benefits of fine particulate matter (PM2.5) reductions due to the Mercury Air Toxics Standard (MATS) (p.152), while it included the indirect benefits of traffic safety gains asserted to arise from relaxing motor vehicle fuel economy standards (p.154).
Livermore and Revesz argue that these moves “ignore settled economic theory and the precepts of rationality; fly in the face of clear, long-standing guidance from the executive branch on how cost-benefit analysis should be conducted; and are inconsistent with the regulatory practices of administrations of both parties over several decades” (p.155).
The implication is that good regulatory CBA should take full account of benefits, including indirect benefits, as well as costs. It’s the Ash Ketchum adage: “gotta catch ‘em all !” (Even if Ash ultimately didn’t catch ‘em all, his quest was a worthy pursuit.) Gotta count ‘em all.
I agree—subject to some important provisos. First, the agreement: as a general principle, good regulatory analysis should consider all important impacts. Sound decision making requires consideration of the full portfolio or scope of important consequences that may arise from a decision, compared to alternative options. Omission of important impacts—whether benefits or harms—could lead a decision maker to choose an option that disserves overall social well-being, causes undue harm, unfairly burdens a subgroup, and breeds public frustration.
This basic principle enjoys bipartisan and longstanding support, and figures centrally in regulatory law. In State Farm (1983), the Supreme Court held that it would be arbitrary and capricious under the Administrative Procedure Act (APA) for an agency to have “entirely failed to consider an important aspect of the problem.” Citing that doctrine, Justice Breyer’s separate opinion in the Census citizenship question case, Dept. of Commerce v. NY (2019), faulted the agency for neglecting important indirect impacts of its proposed policy. Executive Order 12,866 (1993), issued by President Bill Clinton, first implemented by OIRA administrator Sally Katzen, and still in effect today, calls on agencies to “assess all costs and benefits of available regulatory alternatives” which “shall be understood to include both quantifiable measures (to the fullest extent that these can be usefully estimated) and qualitative measures of costs and benefits that are difficult to quantify, but nevertheless essential to consider” as well as “distributive impacts” and “equity” (section 1(a)). OMB Circular A-4 (2003), issued by then OIRA administrator John Graham, instructs agencies conducting regulatory analyses to “look beyond the direct benefits and direct costs of your rulemaking and consider any important ancillary benefits and countervailing risks. An ancillary benefit is a favorable impact of the rule that is typically unrelated or secondary to the statutory purpose of the rulemaking … while a countervailing risk is an adverse economic, health, safety, or environmental consequence that occurs due to a rule and is not already accounted for in the direct cost of the rule . . . .” Former OIRA administrator Susan Dudley and former EPA policy official Brian Mannix wrote in 2018 (p.12): “In principle, a benefit-cost analysis should be ‘complete.’ It should include all of the significant consequences of a policy decision: direct and indirect, intended and unintended, beneficial and harmful.”
The rationale for considering all important impacts, both direct and indirect, is as much psychological as economic: to overcome what Justice Stephen Breyer (1993) terms “tunnel vision,” and ensure holistic attention to full consequences, despite cognitive constraints and heuristic limitations. As Benjamin Franklin advised Joseph Priestley in 1772, decisions are “difficult, chiefly because while we have them under Consideration, all the Reasons pro and con are not present to the Mind at the same time . . . . When I have . . . got them all [the Pros and Cons] together in one View, I endeavour to estimate their respective Weights . . . and thus proceeding I find at length where the Ballance lies . . . And, tho’ the Weight of Reasons cannot be taken with the Precision of Algebraic Quantities, yet, when each is thus considered, separately and comparatively, and the whole lies before me, I think I can judge better, and am less liable to make a rash Step . . . .”
The cognitive challenge of getting all important impacts “together in one view” so that “the whole lies before me” and one is “less liable to make a rash step” is fundamental to modern advocacy of full analysis. EO 12,866 consciously employed the more embracing term “justify” (in section 1(b)(6)), in place of the arithmetic term “outweigh” used in EO 12,291, in order to exhort regulatory decision makers to exercise good judgment about the full scope of impacts and justifications. John Graham & Jonathan Wiener (1995, chapter 11) argued that neglect of indirect risk impacts is driven by bounded thinking, omitted voice of those affected, and fragmented institutions. Susan Rose-Ackerman (2016) observes that “All benefits and costs should be included; the problem is, rather, how they should be measured, put into a metric of value, and traded off with other factors.” Former OIRA administrator Cass Sunstein (2000) has advanced a “cognitive case” for CBA, argued that arbitrariness review implies attention to important impacts (2017), and critiqued the neglect of important regulatory benefits (2021). Richard Stewart (2014) and Jonathan Wiener (2021) emphasize the problem of “disregard”—neglect of impacts or affected groups—and the need for corrective mechanisms to ensure “due regard.”
After Reviving Rationality was published, on his first day in office, President Biden rescinded Trump executive order 13,771 on regulatory cost offsets, and he issued a memorandum reaffirming the Clinton and Obama orders as well as calling for efforts to improve regulatory CBA such as by addressing distributional equity. Then on May 14, 2021, EPA withdrew its recent rule on CBA under the Clean Air Act, in part because that rule had suggested treating indirect benefits as secondary; in the withdrawal, EPA noted that ancillary benefits have sometimes been called co-benefits but this term is unnecessary (86 Fed. Reg. at 26413 & n.43).
Now, the provisos, with which I suspect Livermore and Revesz would also agree: First, full accounting of regulatory impacts needs to be comprehensive and evenhanded (addressing the important benefits, costs, and ancillary impacts, including both co-benefits and countervailing harms, as well as the distribution of these impacts). For example, see Joseph Aldy et al. on full impact assessment of the MATS, and Martin Smith et al. on full impact assessment of genetically modified salmon. Second, it needs to be honest, avoiding double-counting of indirect impacts under one policy that are also counted under another policy. Third, it needs to consider the alternative option of regulating an indirect benefit (or regulating an indirect harm) directly in a companion rule, rather than adding these ancillary impacts to the net benefits of the initial policy—though the latter might still be the best option. Fourth, it needs to respect statutory restrictions, if any, on analysis of impacts (albeit quite unlikely that Congress would require an agency to neglect important impacts).
And, fifth, as we suggest in a forthcoming paper, it needs to be tempered by the costs of analysis, including the out of pocket expenses of analysis, and the costs of delay—to ensure that the value of added analysis in improving policy decisions justifies the cost (including delay) of obtaining data and undertaking analysis. Added analysis of indirect or ancillary impacts—or really any impacts—is especially warranted where such impacts could change the ranking of preferred policy options. On the other hand, delays during added analysis could themselves impose costs and risks. Due regard is not maximum regard, but is optimal regard in light of the important benefits of regard and the costs of excessive regard. In that context, it can be a larger error to omit an important impact, than to estimate impacts imprecisely. As John Maynard Keynes is reputed to have said (perhaps originally said by Carveth Read): “I’d rather be roughly right than precisely wrong.”
With these understandings, progress toward full analysis of important regulatory impacts can help improve regulatory policies, outcomes, transparency, and public confidence in government. Nonetheless, ex ante prospective analyses (conducted before policies are adopted) will inevitably be imperfect, and may become outdated as the world changes. Hence mechanisms will also be needed to advance regulatory learning—monitoring, data analysis, and adaptive updating over time—such as through retrospective reviews, periodic reviews, and the learning agendas being developed by federal agencies under the Foundations for Evidence Based Policy Act. “Gotta catch ‘em all” is a repeat player game.
Mike Livermore and Ricky Revesz have written a terrific critique of politicized dysfunction in regulation, and a call to restore analytic rigor. When I worked at the Council of Economic Advisers (CEA), I saw that serious policy analysis was crucial to national well-being but precarious amidst powerful political forces. I am heartened by the history that Livermore and Revesz recount of past presidential consensus, by the durability of sensible regulatory oversight, and by the Biden administration’s restoration coupled with improvement. I remain guardedly optimistic that good analysis will continue to play a constructive role in government.
Jonathan B. Wiener is the William R. & Thomas L. Perkins Professor of Law, and Professor of Environmental Policy and Public Policy, at Duke University.