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Module 1: Increasing Pressures to Use Cost-Benefit
Analysis
It is somewhat ironic that the impetus for measuring the benefits and
costs of public decisions originated not in the writings of economists,
but in the agencies of the U.S. government. In particular, decisions over
water resource management were vexing to agency bureaucrats, because requests
for large investments, such as dams for flood control, could originate
either from interested citizens or from the responsible federal agency.
As a consequence, there were always numerous requests for large, capital
intensive facilities that exceeded available budgetary resources. Moreover,
these projects were subject to vote trading and log rolling by Congressional
delegations, because of the attractiveness to members of Congress of bringing
home projects as they stood for election. Cost-benefit analysis appeared
to be an ideal tool to discipline the decision making process, both to
prioritize projects and to indicate when only small payoffs could be expected
from large outlays. In fact, the Flood Control Act of 1936, provided what
could be interpreted as the first legislative mandate to use cost-benefit
analysis by declaring "that the Federal government should improve
or participate in the improvement of navigable waters or their tributaries,
including watersheds thereof, if the benefits to whomsoever they may accrue
are in excess of estimated costs."
In the years following, cost-benefit analysis was increasingly applied
as a decision supporting metric, but without further legislative mandate.
Instead, pressures were applied through Executive Orders, as interpreted
by the Office of Management and Budget. The last four Presidents, divided
equally by party, have required that cost-benefit analysis of regulatory
rule making be conducted. Generally, the requirement is restricted to major
rules impacting the economy by more than $100 million or otherwise deemed
by OMB to be important. The most recent version of this, issued under President
Clinton, is promulgated through OMB
Circulate A-94, as modified on October 29, 1992. In addition to key
guidance on procedures for applying cost-benefit analysis, the circular
provides discount rates for studies internal to the executive branch.
Since 1992, the Clinton administration has extended the role of cost-benefit
analysis through two channels. First, through its support of the Government
Performance and Results Act, the Administration introduced a new form
of strategic planning to government with emphasis on measuring outputs,
rather than inputs, and on creating accountability for dollars spent. Second,
through its interpretation of its role under this Act, the Clinton Administration
placed greater emphasis on the quantitative measurement of benefits and
costs as part of the regulatory process. It did this in part through the
Executive Order "Regulatory Planning and Review" in October
of 1993, which requires agencies to assess the benefit and costs of proposed
new major regulations, to compare them with reasonable alternative approaches
to achieve the same goal, and, finally, to submit them to the OMB Office
of Information and Regulatory Affairs for its review. The Order mandates
that only regulations that maximize net benefits be issued, unless legislation
dictates otherwise.
As part of his February 1998 Budget Message to Congress and in fulfillment
of the Government Performance and Results Act, the President submitted
to Congress the first comprehensive Government-Wide
Performance Plan. As part of this submission, Section 32 contained
a description of "Regulations: Costs and Benefits." This section
described the progress made by the administration between April 1, 1996
and March 31, 1997 in implementing the regulatory executive order. Over
this period, 41 major final regulations were reviewed. Twenty-one were
singled out as meeting the criteria of the order. The remainder focused
largely on implementing transfers from the government to citizen beneficiaries.
Only seven of these passed the net benefit test clearly. For the remainder,
the agencies were not able to submit sufficient information to provide
a clear determination of monetized benefits. In all, the report demonstrated
the challenges to be overcome if government is to inform decision making
using cost-benefit analysis, including the commitment required to develop
the data bases and methodologies necessary to make the requisite calculations,
and the need for agencies to divert scarce resources to this sort of analysis.
An agency wide commitment is required from major regulatory agencies. The
Environmental Protection Agency, for example, has committed to develop
agency wide guidance for cost-benefit analysis that parallels its highly
successful risk management guidance. An agency wide group has been working
intermittently for nearly two years on this effort without issuing a final
report.
Congress is now also reentering the dialog, with the introduction of
the Regulatory Improvement Act of 1997 (reintroduced as the Regulatory
Improvement Act of 1998), also referred to as the Thompson-Levin bill after
its authors. Like President Clinton's "Regulatory Planning and Review"
Executive Order, this Act requires that a cost-benefit analysis of major
rules be conducted and that the analysis consider not only the rule versus
no rule, but also alternative ways to implement the rule that might be
more cost effective. Unlike the executive order, the Act does not require
that the most cost effective approach be chosen, but does require that,
if the most cost effective approach is not taken, the agency promulgating
the rule explain why. Like the executive order, this Act requires the OMB
Office of Information and Regulatory Affairs oversee the process. But unlike
the executive order, the Act also provides for judicial review, such that
if the agency fails to perform the necessary analysis or fails to undertake
peer review, the courts can remand or invalidate the rule.
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