Analyzing cost-benefit analyses

Posted Feb. 15, 2011, at 8 p.m.

On Jan. 24, Gov. Paul LePage released his “Phase I of Governor’s Regulatory Reform Proposals,” a six-page list of some 63 proposed changes to state law and regulation governing the Department of Environmental Protection, or DEP, the Land Use Regulation Commission, or LURC, and other natural resource agencies. These proposals have stimulated strong critical responses from environmental organizations in Maine and some negative editorial comments in the state’s major newspapers.

One of the most interesting proposals to me has not gotten much comment yet. It is to “require inclusion of a regulatory impact analysis (cost-benefit analysis) in all environmental rule-makings.” As a professional economist with long experience in applying benefit-cost analysis in the context of environmental regulation, I have two points to make about this proposal.

First, if it really is a good idea to have it apply to new environmental rule-making, it certainly also is a good idea to apply it to the governor’s proposals for regulatory reform. His proposals may bring benefits in the form of reduced costs to business and more jobs in Maine. But they also will impose costs on the state in the form of increased risks to health and damages to fisheries and wildlife.

Just as it is important to ask if a new regulation will produce benefits that are worth the costs it imposes on society, it is necessary to ask whether the benefits of each of the governor’s regulatory reform proposals will bring benefits that are worth the costs that they will impose on us.

Second, since federal agencies have been required to perform benefit-cost analyses on major federal regulatory proposals for more than 25 years, there is much to be learned from their experience with this requirement. Federal agencies submit benefit-cost analyses to a branch of the Office of Management and Budget, or OMB, in the Executive Office of the President where they are reviewed to assure that the analyses are based on sound science, good data and appropriate methodologies.

OMB has a staff of professional economists to perform these reviews. OMB has published guidelines for agencies describing procedures and methodologies to be used. And some agencies have produced their own guidelines and hired their own staff specialists to conduct these analyses.

So, what lessons can we take from the federal experience? First, carrying out benefit-cost analyses that actually will be useful to government decision-makers is not an easy task. It will take time and resources to develop the necessary skills and train people.

Second, before requiring benefit-cost analyses for regulatory decision-making, guidelines should be prepared that define benefits and costs in economic terms and that describe the methodologies and data to be used in estimating benefits and costs.

Third, because doing good analysis is time-consuming and costly, it is appropriate to establish some threshold level of significance for a regulation, above which a benefit-cost would be required but below which a full benefit-cost analysis would not be required. The president’s order requiring benefit-cost analysis specifies that one is required only for a “significant regulatory action” which it defines in part as one that is likely to result in an annual effect on the economy of $100 million or more.”

I long have been an advocate of greater use of benefit-cost analysis of proposed regulations at the federal level. I think Gov. LePage’s proposal is a step in the right direction. But to require a benefit-cost analysis for all environmental rule-makings goes too far.

Rather, I propose the following:

That all proposed regulations and rule-makings be accompanied by a statement that identifies the problem that the regulation is meant to deal with, identifies the beneficial and adverse effects that are likely to occur as a result of the regulation and clearly states the reasons some form of regulation is necessary.

That only significant regulatory actions (however that is defined) be subject to an analysis that quantifies the beneficial and adverse effects.

That these analyses be made public and open to comment and that they be subject to review by a professional staff with the results of these reviews becoming part of the public record.

And, that there be a clear statement that a finding that monetary benefits exceed costs is not a necessary condition for adopting a regulation. Most advocates of greater use of benefit-cost analysis argue that it can help to inform decision-makers but that it should not be considered a rule that dictates that only actions with measured benefit exceeding costs should be undertaken.

Myrick Freeman III is the William D. Shipman Professor of Economics

Emeritus at Bowdoin College.

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