Regulation University: Beware of Inflated Benefits and Hidden Costs

March 27, 2013

Patrick A. McLaughlin Senior Research Fellow

Mercatus Center at George Mason University

Review:    1. What  is  “regula4on”?  2. What  causes  regula4on?  

Regula4ons  are  uniquely  opaque  as  legal  instruments  à  BCA    

 

Why  BCA  for  regula4ons?  1.  Avoid  unnecessary  regula4ons  2.  Choose  most  efficient  alterna4ve  3.  Provide  info  to  Congress,  public  

 

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

The  shocking  truth…    

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  -­‐if  there’s  no  problem,  where  do  benefits  come  from?  

2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

Quote  from  EO  12866:  “Each  agency  shall  iden4fy  the  problem  that  it  intends  to  address…  as  well  as  assess  the  significance  of  that  problem.”  

 

Quote  from  EO  12866:  “Each  agency  shall  iden4fy  the  problem  that  it  intends  to  address…  as  well  as  assess  the  significance  of  that  problem.”    Regulatory  Report  Card  Ques4on  6:  How  well  does  the  analysis  iden4fy  and  demonstrate  the  existence  of  a  market  failure  or  other  systemic  problem  the  regula4on  is  supposed  to  solve?    Average:  1.7  /  5  for  111  RIAs  evaluated.  

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

Quote  from  OMB  Circular  A-­‐4:  “Once  you  have  determined  that  Federal  regulatory  ac4on  is  appropriate,  you  will  need  to  consider  alterna4ve  regulatory  approaches.”    -­‐OMB  Circular  A-­‐4  (The  Instruc4on  Manual  for  RIAs)  

 

Quote  from  OMB  Circular  A-­‐4:  “Once  you  have  determined  that  Federal  regulatory  ac4on  is  appropriate,  you  will  need  to  consider  alterna4ve  regulatory  approaches.”  -­‐OMB  Circular  A-­‐4  (The  Instruc4on  Manual  for  RIAs)  Regulatory  Report  Card  Ques4on  7:  How  well  does  the  analysis  assess  the  effec1veness  of  alterna1ve  approaches?  

Average:  2.4  /  5  for  111  RIAs  evaluated.  

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  -­‐Failure  to  evaluate  alterna4ves  leads  to  inefficiency,  but  also  real  (unintended)  consequences  

3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

What  costs  are  le`  out  of  most  RIAs?  

Usually  everything  but  direct  compliance  costs!    

 

Some  examples  

Failure  to  account  for  efficiency  losses  from  taxes/subsidies  (Early  Re4ree  Reinsurance  Program)  –  up  to  44%  more  costs    

 

 

Some  examples  

 Design  standards  on  trains,  automobiles  –  prevents  innova4on  domes4cally  and  importa4on  of  desired  goods  

 

 

Speaking  of  compliance  costs…  

While  it  would  be  nice  to  have  es4mates  of  the  costs  of  regula4on  that  were  right  on  average,  it  would  be  even  more  comfor4ng  to  have  es4mates  that  were  close  on  average.    -­‐R.  David  Simpson,  EPA,  in  “Do  Regulators  Overes4mate  the  Costs  of  Regula4on?”  Working  Paper,  December,  2011.  

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  -­‐affects  evalua4on  of  alterna4ves,  misinforms  Congress/public,  and  misinforms  future  regulatory  choices  

4.  Inflate  benefits  

 

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

How  are  benefits  inflated?  1.  Assump4ons  of  underlying  risk  not  supported  by  best  

available  science  or  data  (Abdukadirov  and  Yazigi  2012;  Ellig  2013)        

 

 

 

 

 

 

 

Ques4onable  Data  (Ellig  2013)  NHTSA’s  Minimum  Sound  Requirements  for  Hybrid  and  Electric  Vehicles  (2013):  -­‐Documents  how  vehicle’s  sounds  help  blind  people  -­‐Concludes  that  noise  requirements  would  therefore  help  blind  people    BUT  Then  $115.1  million  of  benefits  (>50%)  come  from  avoiding  bicyclist-­‐car  collisions.    Are  there  that  many  blind  bicyclists?            

 

How  are  benefits  inflated?  1.  Assump4ons  of  underlying  risk  not  supported  by  best  

available  science  or  data  (Abdukadirov  and  Yazigi  2012;  Ellig  2013)  

2.  Restric4ng  consumer  choice  as  a  benefit    (Gayer  and  Viscusi  2012)        

 

 

 

How  are  benefits  inflated?  1.  Assump4ons  of  underlying  risk  not  supported  by  best  

available  science  or  data  (Abdukadirov  and  Yazigi  2012;  Ellig  2013)  

2.  Restric4ng  consumer  choice  as  a  benefit    (Gayer  and  Viscusi  2012)  

3.  Treat  transfers  as  benefit    (Ellig  and  Conover  2012)        

 

Transfers  as  benefits            

 

Rights  to  book  royal/es  

Publisher  

Author  

Rights  to  book  royal/es  

Publisher  

Author  

Transfers  as  benefits            

 

Preexis4ng  Condi4on  Insurance  Plan  Rule  –  HHS:  Counts  reduc4ons  in  uncompensated  care  as  a  benefit  (Ellig  and  Conover  2012)    

How  are  benefits  inflated?  1.  Assump4ons  of  underlying  risk  not  supported  by  best  

available  science  or  data  (Abdukadirov  and  Yazigi  2012;  Ellig  2013)  

2.  Restric4ng  consumer  choice  as  a  benefit    (Gayer  and  Viscusi  2012)  

3.  Treat  transfers  as  benefit    (Ellig  and  Conover  2012)  

4.  Assume  perfect  compliance  and  ignore  changes  in  consumer  behavior        

 

Consumer  response  to  TSA            

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  -­‐affects  evalua4on  of  alterna4ves,  misinforms  Congress/public,  and  misinforms  other  regulatory  choices    

 

 

What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or  

untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits  

 

 

Why  would  anyone  subvert  BCA  in  RIAs?  

1.  Incen4ves  of  the  agency  2.  Incen4ves  of  the  individual    

 

Why  should  we  care?  

1.  Regulate  when  unnecessary  2.  Fail  to  choose  most  efficient  op4on  3.  Unintended  consequences  4.  Misinform  Congress  and  public  5.  Derail  retrospec4ve  review