Is Donald Trump the Cost-Benefit President?
For decades, presidential executive orders have required economic analysis to accompany federal regulations. For just as long, federal agencies’ adherence has been a giant disappointment. But that’s beginning to change due to several unprecedented steps taken by President Trump. Take the Office of Management and Budget (OMB), which will soon release updated estimates of the cost savings achieved from the administration’s deregulatory efforts. This reporting hasn’t received much attention, but it could usher in a new era of evidence-based federal policy.
In 1981, Ronald Reagan issued a pivotal presidential executive order requiring cost-benefit analysis for major regulations. This was supposed to force agencies to assess the inherent and inevitable economic tradeoffs associated with regulating, rather than basing policy on fanciful hopes and aspirations. Federal agencies instead developed a series of ad hoc reporting practices to justify their regulations. They called the reports they produced “cost-benefit analysis,” but they were little more than marketing gimmicks designed to justify preordained policy conclusions.
One would have expected academic economists, who are trained to assess such things, to cry foul. Instead, perhaps drawn by the allure of power and influence, many economists became little more than rubber stamps for the government’s nonsensical practices. Reagan’s executive order did little to introduce economics into regulators’ decision making. It did create new constituencies of bureaucrats and academics who made entire careers off of lending a veneer of academic respectability to the government’s analytical charade.
Nowhere is that charade more evident than in an annual report on regulations that OMB — until recently — issued. Year after year, the report made the unsubstantiated claim that federal regulations produce more benefits than costs. But it was only able to make this claim by ignoring one of the most central concepts in all of economics: the opportunity cost of capital.
For example, if a regulation produced environmental benefits that individuals psychologically valued at $1 million, but displaced $500,000 worth of capital investment, the OMB report would claim that the rule improves Americans’ welfare. But a $500,000 investment — what society gives up to implement the regulation — can eventually grow into much more than $1 million. These returns could be used to finance any number of valuable social investments, including those that protect public health or the environment.
Such a regulation should fail a cost-benefit test over the long term, because it is inefficient, but these unseen future opportunity costs were ignored by OMB.
To his credit, President Trump’s OMB has put a stop to these reports. While they did include some useful information, their primary effect was to mislead journalists and the public into thinking the federal regulatory system is an unambiguous success.
Trump also issued an executive order in 2017 requiring that on balance, new regulations produce no net cost increase. This meant that if a new rule added to the monumental compliance costs Americans already face, a deregulatory effort would have to be initiated to offset the additional cost. While compliance from regulators hasn’t been perfect, the policy represents a huge step forward because it redirects agency attention towards economic efficiency. Perhaps as a result, it is being followed up with meaningful reporting of greater analytical rigor than in the past.
Critics argue that under the new approach, the benefits of regulation go overlooked, but they misunderstand economic theory. Costs and benefits are mirror images of one another. If a regulation (or a deregulatory action) produces more in financial benefits than costs, it saves money on balance. Any such policy should be allowed under a regulatory cost cap system.
In fact, the Trump administration’s approach to measuring costs and benefits is more comprehensive than what’s been done in the past. It is homing in on the largest, most long-lasting impacts of rulemaking: those affecting investment over time. Previous administrations focused on feel-good intentions while ignoring the broader economic ramifications of regulating.
The approach appears to be bearing fruit. Most recently, the Office of Inspector General (OIG) for the Environmental Protection Agency (EPA) announced that EPA achieved annualized cost savings of $21.5 million in fiscal year 2017 and $75.1 million in FY 2018. A new-and-improved annual report from OMB includes similar figures, estimating that executive branch agencies achieved cumulative net cost savings of $23 billion in FY 2018.
These incremental improvements in efficiency may seem small relative to the size of the economy, but through investment and reinvestment, they have the potential to generate far greater gains for society than the short-sighted fashionable issues-of-the-day agencies usually prioritize.
OMB’s FY 2019 cost savings estimates should be out soon. While not all regulations will be accounted for, this nonetheless constitutes major progress. Agencies like the EPA are taking other proactive steps. Its offices plan to issue self-binding regulations that will force the agency to commit to cost-benefit principles going forward. Together, the new OMB report and EPA OIG report offer a roadmap for how this cost-benefit balancing could look in the future.
Presidents from Reagan to Obama made good intentions, not results, the centerpiece of their regulatory agendas. While the implementation of Trump’s reforms has been challenging, his changes represent a major milestone in the advancement of evidence-based regulating. Rolling back the new cost caps and cost savings reporting would turn the country back to the regulatory dark ages that preceded this administration.
There remains much progress to be made, but one president has done more to champion the cost-benefit state than any other in recent memory. His name is Donald Trump.
James Broughel is a senior research fellow with the Mercatus Center at George Mason University.