You don’t have to be a business owner to feel the effects of a growing regulatory state. If you’re a homeowner, for instance, you might have tried getting your A/C replaced, wanted to buy a new gas stove, or get a dishwasher that actually washes dishes. Or you’ve gone into your local deli for breakfast wanting something hot off the griddle and been told that they can’t do that anymore, that they can only microwave the eggs or bacon for your sandwich.
Or you’ve seen the prices for consumer goods skyrocket, not just because of monetary inflation but because regulatory costs have accelerated, and those costs have been passed on to you.
Regulatory costs matter, and because of that, agencies are supposed to measure those costs using objective tools like “cost benefit analysis” (CBA). But a new proposal from the Office of Management and Budget (OMB) wants to fundamentally change how those costs are assessed. Right now, open for public comment (due June 6), is a proceeding at the OMB to revise “Circular A-4”, the executive branch’s standards for such reviews. Instead of objective, transparent measurements, the Biden administration is calling for greater subjectivity in such analyses—to justify ever more marginal regulatory burdens and grow the regulatory state even more.
It is a massive power grab, and one nobody is talking about.
Worse, though never mentioned in their proposal, OMB’s call for “weighting” the distributional impacts of regulation in analyses is essentially a way of implementing environmental and social governance (ESG) wholesale in the regulatory process, without being upfront about it or letting Congress weigh in.
As described by OMB in their proposal, distributional weights apply to the costs and benefits of different groups based on various demographic parameters such as income, race, sex, disability, etc. The intent is, allegedly, to account for the diminishing marginal utility of goods when aggregating benefits and costs, thereby theoretically creating a more “equitable” regulatory environment. However, upon closer examination, it becomes evident that this approach carries significant pitfalls and should be reconsidered.
To begin with, the use of distributional weights introduces potential for vast inefficiencies. Weighting costs and benefits can skew the actual costs and benefits experienced by individuals, leading to a risk of adopting regulations where the costs may outweigh the benefits and bypassing regulations that could have positive net benefits. This distortion of cost-benefit analysis could lead to misguided rulemaking, potentially causing harm to those it intends to help.
Moreover, the theoretical underpinnings of these distributional weights are fundamentally flawed. The usage of these weights is predicated on the belief that redistributing income increases total welfare. Such a premise is not supported by economic theory, which only serves to rank an individual's preferences for different quantities or bundles of goods, not to compare the utility of different people.
Furthermore, the use of these weights could significantly reduce transparency in the rulemaking process. Presenting the weighted estimates alongside the traditionally-weighted estimates could sow confusion and make it more challenging for the public to understand how policy decisions were being made. This lack of clarity could obstruct public discourse and dilute the democratic accountability of regulators.
The adoption of these weights could gradually supplant the use of judgment in policy decisions, replacing it with a formulaic approach that cannot fully capture the nuances of regulations and their distributional effects. As agencies gain familiarity with the weights, there is a risk that they might become the default tool, leading to a mechanistic approach to distributional analysis that overlooks the intricate dynamics of policy impacts.
If that weren’t enough to merit OMB scrapping this proposal, what’s worse is what OMB leaves out of its revision: Indirect costs, which include reduced innovation, productivity losses, and reduced competitiveness due to compliance burdens, are often underestimated or overlooked. These costs are substantial and can significantly hamper economic growth and efficiency. Yes OMB leaves this out of their proposal.
Another potential reform that OMB leaves out of their proposal is assessing opportunity cost. When a regulation is imposed, resources are directed towards compliance rather than more productive uses, leading to lost economic opportunities. By failing to account for these lost opportunity costs, we may underestimate the true cost of regulation, potentially leading to over-regulation that inhibits free-market efficiency.
To underline the importance of these indirect and opportunity costs, one should look at the work of Professors John Dawson and John Seater. In their 2013 paper, "Impact of Regulation on Aggregate Economic Growth", they argued that excessive regulation can hinder economic growth by imposing burdensome opportunity costs, thereby inhibiting entrepreneurial activity.
They emphasized the vital role of entrepreneurship in driving economic growth, and noted how burdensome regulations could deter potential entrepreneurs, thus stifling innovation and economic dynamism. They also highlighted that sectors subject to excessive regulation often experience slower growth rates.
Perhaps most strikingly, they estimated that for every dollar in direct regulatory costs, there is a massive multiplier in indirect opportunity costs (some say as high as $19 for every dollar in direct cost!). This suggests that the true cost of regulation is significantly higher than what is typically accounted for in traditional CBA.
The implications of these findings are profound. It suggests that our current approach to CBA may be significantly underestimating the true costs of regulation, potentially leading to an excessive regulatory burden that hinders economic growth and efficiency.
But as the proposed revisions to Circular A-4 make clear, OMB has zero interest in addressing these deficiencies in the regulatory process, so that we might, as a society, have a better understanding of the impact of regulation on America’s working families and small businesses. Instead, OMB wants to make regulatory assessments less transparent and more subjective, thereby making it easier for them to justify a massive regulatory state.
You can review the proposal, review comments, and file comments of your own here: https://www.regulations.gov/document/OMB-2022-0014-0001
Andrew Langer is Chairman of the Institute for Regulatory Analysis and Engagement.
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