How the Obama Administration Undermined Federal Benefit-Cost Analysis to Justify Its Climate-related Regulations

The Reagan Administration made a serious effort to require that benefit-cost analysis be used to determine whether all new major regulations were economically efficient. Such analyses had long been used for judging the efficiency of Federal water projects, but this was the first time that they were required for analyzing Federal regulations. The purpose was to discourage if not prevent economically inefficient regulations from being approved. Guidelines were approved and used for many years—until the Obama Administration, which was determined to promote climate alarmism and other “green” Federal regulatory interventions in the market. But they also did not want to repeal the Reagan Executive Order Order 12291 and subsequent orders derived from it perhaps because that would have been all too obvious. So they continued to require benefit-cost regulations which should have resulted in disapproval of all their favorite climate alarmist regulations had they been honestly evaluated. After all, that was the very purpose of the order–to keep economically inefficient regulations from being approved. The unfortunate result is that the Obama Administration effectively destroyed the extensive efforts by the Reagan and a number of subsequent administrations to build a framework for implementing an effective and self-regulating check on Federal regulatory activity.

Perhaps recognizing the very extensive damage that EPA had done to the regulatory benefit-cost system EPA appears to be proposing to alter its guidelines, possibly in order to make it harder to do what the Obama Administration felt it needed to do to circumvent the existing benefit-cost regulations and which were not stopped from happening by either the guardians of benefit-cost analysis within EPA or OMB. If done carefully and thoughtfully such changes may help to reduce the many unjustified procedures used by the Obama Administration to justify the unjustifiable. But even if done perfectly it will not solve the problem and do what needs to be done since a future pro-regulatory administration will have little difficulty finding other shady approaches to justify what it wants to do. All it requires is a little creative imagination and an absence of effective enforcement both inside and outside EPA.

What is needed is a more independent group to provide real time review beyond what is done by EPA and the Office of Information and Regulatory Affairs (OIRA) in OMB on each individual proposed RIA. The benefit-cost system used by the Federal Government has evolved over many decades and is likely to continue doing so. Treating it as a static system leads to the disaster of the Obama Administration, where there were no effective controls on using junk science and economics to prevent the gross misuse of benefit-cost analysis of climate-related regulations to justify the economically unjustifiable. I have written at some length in my book on climate concerning some of the junk science and dubious economic analysis used by the last Administration.

So the question is what to do now. I advocate that OMB rebuild its previous review capability and authority in this area and restore its clout while a longer term fix is developed and agreed upon. The problem is that it is too easy for the party in power to disregard or capture the extensive cost-benefit review process (known as Regulatory Impact Analysis or RIA review). Obviously this has to be tightened up. The longer term problem is that OMB is and should be a political operation to implement the President’s programs across the Federal Government so what is needed is a more independent home for ultimate RIA quality review. Obviously some improvement could be made by having EPA offices other than the program offices (the advocates of new regulations) take an active and hard stand on the review process inside EPA or even prepare the RIAs itself, But in the longer run this is not the answer. Any Executive Branch review office can be wiped out or the Director reassigned much too easily if they do not “cooperate” with the Administration currently in power.

A More Independent Review Group Is Needed

What is needed is a more independent group to provide additional review beyond that done by EPA and the OIRA in OMB. One possibility might be to add this function to the duties of the Congressional Budget Office (CBO). After review by the Agency involved and OMB, RIAs would go to the CBO. They could issue a report on the soundness of the economics used in the RIA and the implications of recommended changes. The Agency and OMB could then decide what to do. If the CBO report should be unfavorable, the OMB and agency could disregard what CBO has said and proceed or decide to withdraw the proposed regulation. But the CBO report would remain on the record regardless.