OMB just did something boring but important

On November 9, the Office of Management and Budget issued a revised Circular A4 giving agencies guidance on the conduct of cost-benefit analysis.

I know it is hard to write a more boring first sentence to an article, but bear with me — this is important.

In 1981, President Ronald Reagan issued Executive Order 12291, which required federal agencies under the president’s control to conduct a “Regulatory Impact Analysis” (RIA) when issuing regulations with an economic impact of more than $100 million in any year. The order was modified by President Bill Clinton into Executive Order 12866, but the RIA requirement was largely maintained.

As part of the RIA, agencies must, to the extent possible, calculate the costs and benefits of their regulatory actions. Doing so often involves making important economic assumptions about the nature of those costs and benefits. How do we treat costs and benefits that occur in the future as opposed to now? How do we deal with the uncertainty inherent in predicting the future? And should financial benefits and costs that accrue to different people be treated the same (e.g., is it the same if Elon Musk is $1000 richer as it is if you are)?

In 2003, OMB issued Circular A4, which formalized guidance for agencies conducting these cost-benefit analyses. While this circular was widely used and cited, the field of economics hasn’t stayed frozen since. Work on issues like measuring the impact of climate change has led to innovative thought about cost-benefit analysis. Many agreed that it was time for a revision, and OMB obliged by earlier this year putting a draft revision out for public comment.

From 1993 until 2017, the process for agencies conducting a regulatory cost-benefit analysis and submitting their regulations to OMB for review was tinkered with by each administration, but largely left intact. The biggest change occurred when the Trump administration issued a complementary executive order requiring agencies to withdraw two regulations every time they issued a new one, and imposing a budget on regulatory costs.

Unlike the more modest changes made by the Obama and Bush administrations, these changes were clearly intended to lead to more deregulation. They also ran counter to the logic of cost-benefit analysis, placing a greater emphasis on regulatory costs than on regulatory benefits. Not surprisingly, President Biden rescinded these requirements upon taking office.

The changes to Circular A4, while more grounded in sound economics than Trump’s “two for one” order, are similarly bold. The revised circular contains many changes, but two are particularly important and could have a major impact on regulatory decisions.

The first significant change involves the recommended discount rate. When tabulating benefits or costs that occur in the future, mainstream economic thinking is that those values must be “discounted,” because a dollar today is worth more than a dollar in the future. Circular A4 previously recommended that agencies discount future costs and benefits at rates of 3 and 7 percent. The new A4 recommends a rate of 2 percent.

The impact of this change will be to increase the tabulated benefits of many regulations, particularly those involving climate change, because these benefits occur over a longer time horizon than most regulatory costs.

The second change is to put greater emphasis on the analysis of the distribution of regulatory benefits and costs. While long required in Executive Order 12866, distributional analysis has often been ignored by agencies. It is not immediately clear whether distributional analysis will lead to more stringent regulations, but many advocates expect this is the intent of the change.

Presidents face a difficult choice when revising the regulatory process via executive order or through modifying OMB circulars. Modest changes are more likely to last when control of the executive branch switches parties. Some (but not all) of the changes put in place by Presidents Bush and Obama were kept by their successors. Larger changes, particularly those that move policy in an explicit direction, like those put in place by the Trump administration, are excellent candidates for repeal on day one of a new presidency.

Despite largely agreeing with the analytical basis for the changes made by the Biden administration, I suspect they fall in the latter category. Their fate is one of many issues at stake in the 2024 election.

Stuart Shapiro is the Dean of the Bloustein School of Planning and Public Policy at Rutgers University, and a member of the Scholars Strategy Network. Follow him @shapiro_stuart.