2. Development of the U.S. Regulatory Analysis Program
As discussed above, the late 1960's and early 1970's marked a period in U.S. history of
major expansion of health, safety and environmental regulation. Numerous new government
agencies were set up to protect the American workplace, the environment, highway travelers, and
consumers. As with almost every political development, the significant growth in the amount
and kinds of regulation created a counter political development that ultimately produced a
companion program to evaluate the regulatory system.
The Nixon and Ford Review Programs
The Nixon Administration established in 1971 a little known review group in the White
House called the "Quality of Life Review" program. The program focused solely on
environmental regulations to minimize burdens on business. These reviews did not utilize
analysis of the benefits and costs to society. The controversy that resulted from the program
began a debate about both Presidential review of regulations and the use of benefit-cost analysis
that would continue for two decades and to some extent continues today.
Soon after Gerald Ford became President in 1974, he held an economic summit that
included top industry leaders and economists to seek solutions to the stagflation and slow growth
that the nation was then facing. Out of that summit came proposals to establish a new
government agency in the Executive Office of the President, called the Council on Wage and
Price Stability (CWPS), to monitor the inflationary actions of both the government and private
sectors of the economy. It also led President Ford to issue Executive Order 11821, requiring
government agencies to prepare inflation impact statements before they issued costly new
regulations. The innovative aspect of the Ford program was the creation of a specific White
House agency to review the inflationary actions, mainly regulations, of other government
agencies. CWPS was staffed primarily by economists drawn from academia and had little
authority beyond the influence of public criticism.
The economists at CWPS quickly concluded that a regulation would not be truly
inflationary unless its costs to society exceeded the benefits it produced. Thus the economists
turned the inflation impact statement into a benefit-cost analysis. This requirement, that agencies
do an analysis of the benefits and costs of their "major" proposed regulations -- generally defined
as having an annual impact on the economy of over $100 million -- was adopted in modified
form by each of the four next Presidents.
The Administrative Procedure Act requires agencies to give the public and interested
parties a chance to comment on proposed regulations before they are adopted in final form. The
agency issuing the regulation must respond to the comments and demonstrate that what it is
intending to do is within its scope of authority and is not "arbitrary or capricious." CWPS used
this formal comment process to file its critiques of the agencies' economic analyses of the
benefits and costs of proposed regulations. CWPS would also issue a press release summarizing
its filing in non-technical terms. The CWPS analyses attracted considerable publicity. But while
this system was effective in preventing some unsupportable regulations from becoming law, it
had little success in preventing the issuance of poorly thought out regulations that had strong
interest group support.
Nevertheless, one of the legacies of this approach was that it slowly built an economic
case against poorly conceived regulations, raising interest particularly among academics and
students who began to use the publicly available analyses in their textbooks and courses. When
benefit-cost analysis was first introduced, it was not welcomed by the political establishment,
especially the lawyers and other non-economists who comprised many agencies and
congressional staffs. But over time, as these analyses became standard fare in textbooks, the
value and legitimacy of benefit-cost analysis became evident, and it slowly gained acceptance
among the public.
The Carter Review Program
After President Carter came to office in 1977, the regulating agencies argued that the
Executive Office of the President should not have a role in reviewing their regulations. On the
other hand, the President's chief economic advisers argued that a centralized review program
based on careful economic analysis was necessary to assure that regulatory burdens on the
economy were properly considered and that the regulations that were issued were cost effective.
Rapidly escalating inflation in 1978 convinced President Carter of the need to act. In March of
1978, he issued Executive Order 12044, "Improving Government Regulations." It established
general principles for agencies to follow when regulating and required regulatory analysis to be
done for rules that "may have major economic consequences for the general economy, for
individual industries, geographical regions or levels of government."
President Carter also set up a new group, called the Regulatory Analysis Review Group
(RARG), with instructions to review up to ten of the most important regulations each year.
The RARG was chaired by the Council of Economic Advisors (CEA) and was composed of
representatives of OMB and the economic and regulatory agencies. It relied on the staff of
CWPS and the CEA to develop evaluations of agency regulations and the associated economic
analyses and to place these analyses in the public record of the agency proposing to issue the
regulation. The analyses were reviewed by the RARG members and reflected the views of the
member agencies, including the agency that proposed the regulation.
In this way, the Carter Administration helped to institutionalize both regulatory review by
the Executive Office of the President and the utility of benefit-cost analysis for regulatory
decision makers. Also, in an important legal ruling, the U.S. Court of Appeals for the District of
Columbia in Sierra Club v. Costle (657 F. 2d 298 (1981)) found that a part of the President's
administrative oversight responsibilities was to review regulations issued by his subordinates.
The Reagan/Bush Review Program.
During the Presidential campaign of 1980, the issue was not whether to continue a
regulatory review oversight program, but whether to strengthen it. President Reagan had made
regulatory relief one of his four pillars for economic growth -- in addition to reducing
government spending, tax cuts, and steady monetary growth. He specifically used the term
"regulatory relief" rather than "regulatory reform" to emphasize his desire to cut back regulations,
not just make them more cost effective. One of his first acts as President was to issue Executive
Order 12291, "Federal Regulation" (February 17, 1981).
The Reagan regulatory oversight program differed from the Carter Program in a number
of important respects. First, it required that agencies not only prepare cost-benefit analyses for
major rules, but also that they issue only regulations that maximize net benefits (social benefits
minus social costs). Second, OMB, and within OMB the Office of Information and Regulatory
Affairs (OIRA), replaced CWPS as the agency responsible for centralized review. Third,
agencies were required to send their proposed regulations and cost-benefit analyses in draft form
to OMB for review before they were issued. Fourth, it required agencies to review their existing
regulations to see which ones could be withdrawn or scaled back. Finally, President Reagan
created The Task Force on Regulatory Relief, chaired by then-Vice President Bush, to oversee
the process and serve as an appeal mechanism if the agencies disagreed with OMB's
recommendations. Together these steps established a more formal and comprehensive
centralized regulatory oversight program.
In 1985, President Reagan issued Executive Order 12498, "Regulatory Planning Process,"
that further strengthened OMB's oversight role by extending it earlier into the regulatory
development process. The Order required that agencies annually send OMB a detailed plan on
all the significant rules that they had under development. OMB coordinated the plans with other
interested agencies and could recommend modifications. It also compiled these detailed
descriptions of the agencies' most important rules -- usually about 500 -- in one large volume
called the Regulatory Program of the U.S. Government.
The Bush Administration continued the regulatory review program of the Reagan
Presidency. Nonetheless, the pace of new health, safety, and environmental regulations that had
begun to increase at the end of the Reagan Administration continued during the first two years of
the Bush Administration. In 1990, President Bush responded to expressions of concern about
increasing regulatory burdens by returning to the approach used by the Reagan Task Force on
Regulatory Relief. Vice President Quayle was placed in charge of a task force -- now called the
Competitiveness Council -- whose mission was to provide regulatory relief.
The Clinton Review Program
On September 30, 1993, President Clinton issued Executive Order 12866, "Regulatory
Planning and Review." The Order reaffirmed the legitimacy of centralized review but
reestablished the primacy of the agencies in regulatory decision making. It retained the
requirement for analysis of benefits and costs, quantified to the maximum extent possible, and
the general principle that the benefits of intended regulations should justify the costs. In
addition, while continuing the basic framework of regulatory review established in 1981, it made
several changes in response to criticisms that had been voiced against the Reagan/Bush
One of the changes was to focus OMB's resources on the most significant rules, allowing
agencies to issue less important regulations without OMB review. OMB had been reviewing
about 2,200 regulations per year with a staff of less than 40 professionals. This change enabled
OMB to add greater value to its review by focusing on the most important rules.
A second change was the establishment of a 90-day period for OMB review of proposed
rules. Executive Order 12291 contained no strict limit on the length of review, and some reviews
had dragged on for several years before resolution. The Clinton Executive Order also set up a
mechanism for a timely resolution of any disputes between OMB and agency heads.
A third change was to increase the openness and accountability of the review process.
All documents exchanged between OIRA and the agency during the review are made available to
the public at the conclusion of the rulemaking. The Executive Order also requires that records be
kept of any meetings with people outside of the Executive branch on regulations under review by
OMB, that agency representatives be invited to attend the meetings, and that all written
communications be placed in the public docket and given to the agency.
OMB has produced three reports on its implementation of this Executive Order. On
May 1, 1994, OMB published a six month assessment of the Executive Order that the President
had requested when he issued the Order (Report to the President On Executive Order No. 12866,
1994). The report concluded that many initial improvements in the regulatory review system had
been made, but that in some areas it was taking longer to show results than expected. Among
other things, the report documented that the new Executive Order was resulting in increased
selectivity. The 578 rules reviewed by OMB over the six-month period was about one half the
rate of review under the previous Executive Order. Freeing up limited staff resources to
concentrate on the more significant rules resulted in a higher percentage of changes to the rules
reviewed. Second, the new time limits for OMB review were for the most part being met. Of the
578 reviews completed in the first six months of the Executive Order, only three had gone
beyond 90 days and those delays were requested by the agencies. Third, the report concluded
that the new requirements for openness and accountability were being met. During the six-month period, 36 meetings were held with outsiders about specific rules under review. These
meetings were disclosed to the public and agency representatives were always invited.
In October 1994, OIRA produced a second report entitled, The First Year of Executive
Order No. 12866, that basically confirmed the findings of the first report. The number of
significant rules that OIRA was reviewing fell to a rate of about 900 per year, 60 percent lower
than the 2200 per year average reviewed under the previous Executive Order, and the number of
rules that were changed continued to increase. About 15 percent of the rules were "economically
significant"-- meaning in general that the regulation was expected to have an effect on the
economy of more that $100 million per year. The 90-day review period was generally observed,
and there were about 70 meetings during the first year, to which agency representatives were
invited. The report concluded that the new openness and transparency policy had served to
defuse, if not eliminate, the criticism of OIRA's regulatory impact analysis and review program.
The third report, More Benefits Fewer Burdens: Creating a Regulatory System that
Works for the American People, was issued in December 1996. The report provided a series of
examples of how the agencies and OMB had worked together to produce regulations that adhered
to the principles of Executive Order 12866. The examples were organized around six broad
themes, several of which emphasize economic analysis and efficiency:
- properly identifying problems and risks to be addressed, and tailoring the regulatory
approach narrowly to address them;
- developing alternative approaches to traditional command-and-control regulation, such as
using performance standards (telling people what goals to meet, not how to meet them),
relying on market incentives, or issuing nonbinding guidance in lieu of rules;
- developing rules that, according to sound analysis, are cost-effective and have benefits
that justify their costs.
- consulting with those affected by the regulation, especially State, local, and tribal
- ensuring that agency rules are well coordinated with rules or policies of other agencies;
- streamlining, simplifying, and reducing burden of Federal regulation.
The report included examples of incremental improvements in the regulatory systems
across the government. Although few major eliminations or reforms of regulatory programs
were listed, the sum of the improvements indicated that significant benefits were attained with
lower costs. A key recommendation of this report was the continued use by the agencies, and
vigorous promotion by OMB, of the principles of the Executive Order.
An appendix to More Benefits Fewer Burdens contained information on the costs of
regulations issued between 1987 and 1996, which we use below to estimate the aggregate costs
of regulation. Another appendix included a discussion of regulatory reform legislation that
President Clinton had supported and was passed by Congress during the three-year period,
including three statutes that require agencies to follow certain procedures and/or consider various
economic impacts before taking regulatory action: the Unfunded Mandates Reform Act of 1995,
the Paperwork Reduction Act of 1995, and the Small Business Regulatory Enforcement Fairness
Act of 1996.
3. Basic Principles for Assessing Benefits and Costs
In order to help agencies prepare the economic analyses required by Executive Order
12866 or the various statutes enacted by the Congress in the last few years, OMB developed,
through an interagency process, a "Best Practices" document that was issued on January 11,
1996. Best Practices sets the standard for high quality economic analysis (EA) of regulation --
whether in the form of a prospective regulatory impact analysis of a proposed regulation, or in
the form of a retrospective evaluation of a regulatory program. The principles that are described
in detail in Best Practices are summarized here because they can serve as an introduction to how
we have evaluated the studies on the costs and benefits of regulation discussed in the following
chapters. We discuss those principles in Best Practices that are general in nature, then those that
pertain to benefits, and then those that pertain to costs.
Costs and benefits must be measured relative to a baseline. Best Practices states that "the
baseline should be the best assessment of the way the world would look absent the proposed
regulation." Typically, the baseline should start with the world before the action taken, be
consistent with other pending government actions, and applied equally to benefits and costs. In
some instances where the likelihood of government actions are uncertain, analysis with multiple
baselines is appropriate.
Costs and benefits should be presented in a way to maximize their consistency or
comparability. Costs and benefits can be monetized, quantified but not monetized, or presented
in qualitative terms. A monetized estimate is one that either occurs naturally in dollars (e.g.,
increased costs by a business to purchase equipment needed to comply with a regulation) or has
been converted into dollars using some specified methodology (e.g., the number of avoided
health effects multiplied by individuals' estimated willingness-to-pay to avoid them). A
quantitative estimate is one which is expressed in metric units other than dollars (e.g., tons of
pollution controlled, number of endangered species protected from extinction). Finally, a
qualitative estimate is one which is expressed in ordinal or nominal units or is purely descriptive.
Presentation of monetized benefits and costs is preferred where acceptable estimates are possible.
However, monetization of some of the effects of regulations is often difficult, if not impossible,
and even the quantification of some effects may not be easy. As discussed below, aggregating
costs and benefits is particularly difficult, if not impossible, where they are not presented in
consistent or comparable units.
An economic analysis cannot reach a conclusion about whether net benefits are
maximized -- the key economic goal for good regulation -- without consideration of a broad
range of alternative regulatory options. To help decision-makers understand the full effects of
alternative actions, the analysis should present available physical or other quantitative measures
of the effects of the alternative actions where it is not possible to present monetized benefits and
costs, and also present qualitative information to characterize effects that cannot be quantified.
Information should include the magnitude, timing, and likelihood of impacts, plus other relevant
dimensions (e.g., irreversibility and uniqueness). Where benefit or cost estimates are heavily
dependent on certain assumptions, it is essential to make those assumptions explicit, and where
alternative assumptions are plausible, to carry out sensitivity analyses based on the alternative
The large uncertainties implicit in many estimates of risks to public health, safety or the
environment make treatment of risk and uncertainty especially important. In general, the
analysis should fully describe the range of risk reductions, including an identification of the
central tendency in the distribution; risk estimates should not present either the upper-bound or
the lower-bound estimate alone.
Those who bear the costs of a regulation and those who enjoy its benefits often are not
the same people. The term "distributional effects" refers to the distribution of the net effects of a
regulatory alternative across the population and economy, divided in various ways (e.g., income
groups, race, sex, industrial sector). Where distributive effects are thought to be important, the
effects of various regulatory alternatives should be described quantitatively to the extent
possible, including their magnitude, likelihood, and incidence of effects on particular groups.
There are no generally accepted principles for determining when one distribution of net benefits
is more equitable than another. Thus, the analysis should be careful to describe distributional
effects without judging their fairness.
The analysis should state the beneficial effects of the proposed regulatory change and its
principal alternatives. In each case, there should be an explanation of the mechanism by which
the proposed action is expected to yield the anticipated benefits. As noted above, an attempt
should be made to quantify all potential real benefits to society in monetary terms to the
maximum extent possible, by type and time period. Any benefits that cannot be monetized, such
as an increase in the rate of introducing more productive new technology or a decrease in the risk
of extinction of endangered species, should also be presented and explained.
The concept of "opportunity cost" is the appropriate construct for valuing both benefits
and costs. The principle of "willingness-to-pay" captures the notion of opportunity cost by
providing an aggregate measure of what individuals are willing to forgo to enjoy a particular
benefit. Market transactions provide the richest data base for estimating benefits based on
willingness-to-pay, as long as the goods and services affected by a potential regulation are traded
Where market transactions are difficult to monitor or markets do not exist, analysts
should use appropriate proxies that simulate willingness-to-pay based on market exchange. A
variety of methods have been developed for estimating indirectly traded benefits. Generally,
these methods apply statistical techniques to distill from observable market transactions the
portion of willingness-to-pay that can be attributed to the benefit in question.
Contingent-valuation methods have become increasingly common for estimating indirectly
traded benefits, but the reliance of these methods on hypothetical scenarios and the complexities
of the goods being valued by this technique raise issues about its validity and reliability in
estimating willingness-to-pay compared to methods based on (indirect) revealed preferences.
Health and safety benefits are a major category of benefits that are indirectly traded in the
market. The willingness-to-pay approach is conceptually superior, but measurement difficulties
may cause agencies to prefer valuations of reductions in risks of nonfatal illness or injury based
on the expected direct costs avoided by such risk reductions. The primary components of the
direct-cost approach are medical and other costs of offsetting illness or injury; costs for averting
illness or injury (e.g., expenses for goods such as bottled water or job safety equipment that
would not be incurred in the absence of the health or safety risk); and the value of lost
Values of fatality risk reduction often figure prominently in assessments of
government action. Reductions in fatality risks as a result of government action are best
monetized according to the willingness-to-pay approach for small reductions in mortality risk,
usually presented in terms of the value of a "statistical life" or of "statistical life-years" extended.
Another type of benefit can be characterized as "losses avoided." When our banking
system and capital markets systems work well, providing capital and credit to the economy, it is
easy to forget that effective supervision and regulation is needed to prevent disasters like the
thrift crisis of the 1980s.
It is important to keep in mind the larger objective of consistency -- subject to statutory
limitations -- in the estimates of benefits applied across regulations and agencies for comparable
risks. Failure to maintain such consistency prevents achievement of the most risk reduction from
a given level of resources spent on risk reduction.
The preferred measure of cost is the "opportunity cost" of the resources used or the
benefits forgone as a result of the regulatory action. Opportunity costs include, but are not
limited to, private-sector compliance costs and government administrative costs. Opportunity
costs also include losses in consumers' or producers' surpluses, discomfort or inconvenience, and
loss of time. The opportunity cost of an alternative also incorporates the value of the benefits
forgone as a consequence of that alternative. For example, the opportunity cost of banning a
product (e.g., a drug, food additive, or hazardous chemical) is the forgone net benefit of that
product, taking into account the mitigating effects of potential substitutes. Note that since "costs"
may be viewed as benefits foregone, the difficulties in estimating benefits described above in
principle also apply to the estimation of costs.
All costs calculated should be incremental -- that is, they should represent changes in
costs that would occur if the regulatory option is chosen compared to costs in the base case
(ordinarily no regulation or the existing regulation) or under a less stringent alternative. As with
benefit estimates, the calculation of costs should reflect the full probability distribution of
An important, but sometimes difficult, problem in cost estimation is to distinguish
between real costs and transfer payments. As discussed below, transfer payments are not social
costs but rather are payments that reflect a redistribution of wealth. As Best Practices states
"While transfers should not be included in the EA's estimates of the benefits and costs of a
regulation, they may be important for describing the distributional effects of a regulation."