Panel Paper: What's Wrong With the Back of the Envelope? A Call for Simple (and Timely) Cost-Benefit Analysis

Saturday, November 9, 2013 : 2:25 PM
Salon III B (Ritz Carlton)

*Names in bold indicate Presenter

Christopher Carrigan, George Washington University and Stuart Shapiro, Rugters University
Cost-benefit analysis has been a part of the regulatory process for more than three decades.  Over this period, it has been the subject of criticism across the ideological spectrum.  Supporters of analysis have bemoaned the fact that it has not led to more cost-effective regulatory policies.  Opponents have accused it of undermining public health protections in the name of economic efficiency.  Both sides have argued that it is often used to justify decisions already made for political reasons rather than to inform those decisions.

     Solutions to the perceived ineffectiveness of cost-benefit analysis tend toward one of two extremes.  Opponents of analysis, not surprisingly, want to see it eliminated.  Supporters of analysis often call for “deeper and wider cost-benefit analysis” (Hahn and Sunstein 2001).  But both of these approaches have shortcomings.  If analysis is to have a place in regulatory decision-making, perhaps there is another way to institutionalize it.  This paper is an argument for a leaner cost-benefit analysis requirement that will play more of a role in regulatory decision-making.

     We argue that cost-benefit analysis has evolved into a complex tool that does little to inform decisions on regulatory policy.  Analyses either omit consideration of meaningful alternatives or are so detailed that they become practically indecipherable.  And in either case they are often completed after a policy alternative is selected.  Adding complexity or judicial review may eliminate the naive studies but will also increase incentives for agencies to make them even more opaque.  Yet, eliminating analysis abandons all hope that an analytical perspective can inform critical policy decisions.

     We believe that a noticeably simpler analysis conducted much earlier in the regulatory process can play a critical role in regulatory decisions.  Such an analysis would have to be completed well before a proposed rule and be subject to public comment.  However, to ensure that it does not cripple the regulatory process, the examination could eschew the monetization and complex quantification that bedevils most current regulatory impact analyses (and leads to much of the controversy about them).

     The more timely and modest analysis would be required to detail several policy alternatives being considered by the agency.  The agency would list the likely benefits for each alternative in terms of gains to public health or welfare and an approximate size of these benefits, even if only within an order of magnitude.  Moreover, it would be required to do the same with the probable costs.  Public and political overseers would then not only be better able to comprehend the analysis, but they would also be in a position to provide meaningful feedback before the agency has already decided on its course of action.  Agencies would later be permitted to conduct a more detailed cost-benefit analysis of their chosen option in conjunction with the proposed and final rules.  Asking agencies to prepare a streamlined analysis earlier will better inform policy makers, facilitate participation, and lead to a more meaningful discussion of policy alternatives to better serve the purposes of requiring RIAs in the first place.