The Paradigm Shift in the Cost-Benefit State: Requiring More Good Than Harm

The U.S. Environmental Protection Agency (EPA) took an historic step to advance the “cost-benefit state,” the paradigm in which “government regulation is increasingly assessed by asking whether the benefits of regulation justify the costs of regulation.”[1] EPA Administrator Andrew Wheeler issued a memorandum directing agency staff to ensure “the agency balances benefits and costs in regulatory decision-making.”[2] He further directed the heads of each office – air, water, solid waste, and chemical safety – to develop a media-specific notice-and-comment rulemaking on how benefit-cost balancing and analytical best practices will be applied under each statute, starting with the air office, which will propose a regulation later this year.

Reasonable minds can agree that the goal of regulation is to enhance, not undermine, societal well-being. For over 38 years, every president has ordered executive agencies like EPA to consider important tradeoffs and to regulate only if the benefits justify the costs. As the Clinton administration put it:

“The only way we know how to distinguish between regulations that do good and those that do harm is through careful assessment and evaluation of their benefits and costs. Such analysis can also often be used to redesign harmful regulations so they produce more good than harm and redesign good regulations so they produce even more net benefits.”[3]

As an alumnus of the White House Office of Information and Regulatory Affairs (OIRA) that reviews regulatory proposals, I wholeheartedly support the presidential orders to do more good than harm. I also believe the status quo is inadequate due to the institutional limitations of the agencies and OIRA (e.g., bureaucratic turf battles, failure to utilize both internal and external expertise, bias and the mismatch between the vast volume of regulation and OIRA’s shrinking resources), and political dysfunctions (e.g., inconsistent support for OIRA by varying administrations, interest group rent-seeking and presidential electoral politics).[4]

One of the greatest yet most readily addressable impediments to the cost-benefit state that I have seen first-hand is that agencies too often have interpreted their statutes to impede benefit-cost balancing despite the presidential directive to do more good than harm.[5] Yet, the statutory text typically does not prohibit benefit-cost balancing and thus does not require or authorize non-compliance with the presidential orders.[6] Moreover, alternatives to benefit-cost analysis, such as feasibility analysis, are inferior tools for enhancing societal well-being. Feasibility analysis involves regulating any significant risk to the extent technologically or economically feasible, while benefit-cost analysis seeks to maximize societal well-being. Compelling evidence shows that feasibility analysis lacks a normative justification, can just as easily lead to under-regulation as to over-regulation, and should have no place in government regulation.[7]

The Supreme Court has clarified that EPA and other agencies can fully implement most regulatory statutes through benefit-cost balancing, not just feasibility analysis, and doing so can avoid an arbitrariness challenge.[8] EPA’s initiative would take the next step by committing the agency to do more good than harm through binding regulations. This could overcome current impediments and greatly improve the efficiency, effectiveness and accountability of EPA’s regulations.

Although I believe other agencies should follow, EPA is a good agency to lead by example. EPA’s regulations account for about 70 percent of the monetized costs and 80 percent of the monetized benefits of all regulations by the executive agencies.[9] EPA also is among the most experienced and qualified agencies at estimating costs and benefits, but there is ample room for improvement, as the National Academy of Sciences and OIRA have stated.[10]

Inside the politically polarized Capital Beltway, it will come as no surprise if critics attack this initiative (just like the first benefit-cost executive order by President Reagan). But an evidence-based regulatory system can be a salutary antidote to political polarization. Important rules that can save lives and protect our health and environment are the very rules that can pass benefit-cost analysis with flying colors.[11]

The importance of EPA both clarifying its authority to implement regulatory statutes through benefit-cost balancing and channeling its discretion to do more good than harm should not be underestimated. Most environmental statutes (like most other regulatory statutes) are silent or ambiguous on benefit-cost balancing. Fully embracing the first principle to do more good than harm is long overdue. EPA can be a leader on sustainable regulation.

Paul Noe is Vice President for Public Policy at the American Forest & Paper Association. From 2001 – 2006, he served as Counselor to Administrator John Graham in OIRA, where he worked on the benefit-cost approach in the EPA regulation upheld by the Supreme Court in Entergy v. Riverkeeper.
 

[1] Cass R. Sunstein, The Cost-Benefit State: The Future of Regulatory Protection, American Bar Association Section of Administrative Law and Regulatory Practice, Chicago, IL (2002).

[2]  https://www.epa.gov/environmental-economics/administrator-wheeler-memorandum-increasing-consistency-and-transparency

[3] Office of Management and Budget, Office of Information and Regulatory Affairs, Report to Congress on the Costs and Benefits of Federal Regulation (Sept. 30, 1997), at 10.

[4] See, e.g., John D. Graham and Paul R. Noe, “Beyond Process Excellence: Enhancing Societal Well-Being,” in Achieving Regulatory Excellence, Brookings Institution Press, Washington, DC, 2017, pp. 72 – 87; Paul R. Noe, “Crossing the Regulatory Divide to Enhance Societal Well-Being,” The Regulatory Review, University of Pennsylvania Law School (Aug. 28, 2018).

[5] See, e.g., Paul R. Noe, “Crossing the Regulatory Divide to Enhance Societal Well-Being,” The Regulatory Review, University of Pennsylvania Law School (Aug. 28, 2018); John D. Graham and Paul R. Noe, “A Paradigm Shift in the Cost-Benefit State,” RegBlog, University of Pennsylvania Law School (April 26, 2016); John D. Graham and Paul R. Noe, “A Reply to Professor Sinden’s Critique of the ‘Cost-Benefit State,’” RegBlog, University of Pennsylvania Law School (Sept. 27, 2016).

[6] Id.

[7] See, e.g., Jonathan S. Masur & Eric A. Posner, “Against Feasibility Analysis,” 77 U. Chicago L. Rev. 657 (2010), cited in John D. Graham and Paul R. Noe, “A Reply to Professor Sinden’s Critique of the ‘Cost-Benefit State,’” RegBlog, University of Pennsylvania Law School (Sept. 27, 2016).

[8] See Entergy Corp. v Riverkeeper, Inc., 556 U.S. 208 (2009) (EPA has broad discretion to implement a statute through benefit-cost balancing); Michigan v. EPA, 576 U.S. __, 135 S. Ct. 2699 (2015) (EPA’s refusal to consider cost in determining whether regulation was “appropriate and necessary” is arbitrary and capricious); see also, Paul R. Noe, “Crossing the Regulatory Divide to Enhance Societal Well-Being,” The Regulatory Review, University of Pennsylvania Law School (Aug. 28, 2018); John D. Graham and Paul R. Noe, “A Paradigm Shift in the Cost-Benefit State,” RegBlog, University of Pennsylvania Law School (April 26, 2016); John D. Graham and Paul R. Noe, “A Reply to Professor Sinden’s Critique of the ‘Cost-Benefit State,’” RegBlog, University of Pennsylvania Law School (Sept. 27, 2016).

[9] See U.S. Office of Information and Regulatory Affairs, Office of Management and Budget, 2017 Draft  Report to Congress on the Benefits and Costs of Federal Regulations and Agency Compliance with the Unfunded Mandates Reform Act (Feb. 23, 2018), at 12 (https://www.whitehouse.gov/wp-content/uploads/2017/12/draft_2017_cost_benefit_report.pdf) (“OMB 2017 Report”).

[10] OMB 2017 Report, at 12-18 (identifying the assumptions underlying EPA’s benefits calculations, and noting that to the extent any is incorrect, the benefit ranges could be significantly different. OMB also “recommended that EPA begin to develop approaches to monetize and more explicitly consider the implications of these sources of uncertainty in its benefits and co-benefits analyses.” Id. at 18. See also, National Research Council, Estimating the Public Health Benefits of Proposed Air Pollution Regulations, The National Academies Press, Washington, DC (2002) (https://doi.org/10.17226/10511); Institute of Medicine of the National Academies of Sciences, Valuing Health for Regulatory Cost-Effectiveness Analysis, The National Academies Press, Washington, DC (2006), at 150-51, 156, 178-80  (https://doi.org/10.17226/11534). 

[11] See, e.g., John D. Graham, “Saving Lives Through Administrative Law and Economics,” 157 U. Pa. L. Rev. 395, 465-81 (2008) (providing examples of beneficial EPA regulations); Economic Analyses at EPA, Richard D. Morganstern, Editor, Resources For the Future Press, Washington, DC (1997) (providing case studies on EPA’s use of benefit-cost analysis on rules such as the removals of lead from gasoline and from drinking water, and finding the result was reduced regulatory costs and often increased benefits as well); U.S. Environmental Protection Agency, “EPA’s Use of Cost-Benefit Analysis: 1981-1986,” EPA-230-05-87-028 (Aug. 1987), p. 5-2 (“the return to society from improved environmental regulations is more than one thousand times EPA’s investment in cost-benefit analysis”).