The Evolution of Benefit-Cost Analysis into Federal Rulemaking, by Jim Tozzi
Nearly fifty years ago Alan Schmid, a visiting professor working at the Office of the Secretary of the Army, made a game changing announcement to his colleagues in the Systems Analysis Group housed in the Pentagon. Schmid argued that the then use of benefit-cost analysis, which was applied to capital expenditure projects such as dams and waterways, should be extended to federal regulations. The systems analysts in attendance were dumbfounded by the idea of applying benefit-cost analysis to a pile of paper as well as to a pile of concrete.
The staff of the Systems Analysis Group made an immediate search of the then-existing benefit-cost literature to determine if there were others that shared Schmid’s views—there were none. Subsequent to Schmid’s departure from the Systems Analysis Group it became apparent that if benefit-cost analyses were to be applied to regulations then some entity had to check the accuracy of the benefit-cost analyses thereby leading to centralized regulatory review.
Consequently not only was he the first individual to apply benefit-cost analysis to regulations but his work formed the basis for OMB announcing the first government-wide requirement that benefit-cost analysis be applied to regulations when it issued the Quality of Life directive. Newcomers should note that establishing the use of benefit-cost analysis as an integral component of the federal regulatory process was no cakewalk—the Systems Analysis Group was abolished by an act of Congress.
Dr. Schmid was first exposed to the use of benefit-cost analysis in a policymaking context during his tenure with the Systems Analysis Group who had oversight of the Civil Works program of the US Army Corps of Engineers. Subsequent to his departure and some twenty years later he wrote a book titled: Benefit-Cost Analysis: A Political Economy Approach, more than 300 pages in length, which was very popular with the managers of the regulatory state but less so with its practitioners, possibly a result of his emphasis on welfare economics–not quantitative algorithms. Consider for example this statement: “BCA rules are themselves property rights instituting value judgments which in turn determine what is efficient”.
A detailed reading of his text demonstrates that he accorded a higher priority to getting a benefit-cost analysis correct in the first place than to establishing a process for centralized regulatory review. In addition he constantly demanded disclosing the limitations of benefit-cost analysis.
Dr. Schmid passed in May of this year and is the founder of the modern day application of benefit-cost analysis to regulations.
Jim Tozzi served as a regulatory official in five presidential administrations starting with Lyndon Johnson and ending with Ronald Reagan. He is presently the head of the Center for Regulatory Effectiveness.