Regulatory Benefits: Examining Agency Justification For New Regulations
This study attempts to shed some light on whether the benefits claimed by the federal agencies are likely to be achieved. In contrast to other validation studies, the study focuses on the agencies’ benefit claims rather than the actually measured benefits. Since agencies justify their regulatory decisions based on expected benefits, examining the quality of these claims is important. To do that, the study focuses on two aspects of the agencies’ regulatory impact analysis: (1) whether the analysis demonstrates the existence of a systemic failure, and (2) whether the analysis provides a program theory that explains how the regulation would lead to beneficial outcomes. The study uses the Mercatus Center’s Regulatory Report Card to construct its dataset.
Many debates over regulation focus mainly on costs. Critics argue that, among other things, the weight of regulations depresses economic activity, reduces productivity, and discourages new businesses formation. Additionally, regulations confer special privileges on incumbents4 and disproportionately impact smaller businesses. All this results in diminished prosperity and foregone opportunities for the public. Numerous attempts to quantify the regulatory burden resulted in estimates ranging from hundreds of billions6 to well over a trillion dollars.
In contrast, regulation advocates claim that many regulatory burden estimates exaggerate the costs. More importantly, they point out that regulation critics focus exclusively on the costs and overlook the benefits of regulation. These benefits can be substantial. For example, the Environmental Protection Agency (EPA) estimated that Clean Air Act regulations generated $22 trillion in net benefits during the period from 1970 to 1990. The Office of Management and Budget (OMB) summed up agencies’ benefit estimates and found that aggregate benefits of major regulations issued in 2001–2011 ranged between $141 billion and $700 billion, while aggregate costs within the same period ranged between $43 billion and $67 billion. While conceding the critics’ point that regulations may be costly, advocates claim that regulations’ benefits justify their costs.
The OMB report, however, has major shortcomings. It only includes regulations with monetized cost and benefit estimates. Since only a fraction of regulations monetize benefits, the OMB report leaves out the majority of significant regulations. In addition, the estimate’s validity is uncertain. The OMB report acknowledges that it depends on the f