The Need for Economic Analysis in Federal Regulation

Apr 30 2014

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Far Too Little Economic Analysis in Rulemaking:

Federal regulatory agencies rarely conduct complete and thorough economic analyses of the things they set out to regulate, the rules they write, and the actual effects their rules have once implemented. Only about a quarter of “major” rules, principally those with an impact of $100 million in a given year, and less than half a percent of the more than 3,500 rules in total that federal agencies issue each year are analyzed for their costs and benefits. Moreover, it is common for agencies to perform an analysis only after they have decided what the rules should be and then to understate their costs and overstate their benefits. Once in effect, agencies generally do not analyze the actual economic effects of their rules in the real world.

Federal Officials Claim to Know Best:

Federal regulation is based heavily on the presumption that regulators know when and how to intervene in a market and that the rules they promulgate are in the “public interest.” But while markets may not perform perfectly, neither does the government. In reality, federal officials face basic problems in prescribing outcomes that are better overall than develop in the marketplace:

Sytemic Problems of Government Regulation

  • Principal-agent problem: Divergent interests between voters (principals) and officials (agents) lead to policies that may not reflect public preferences.
  • Asymmetric information: Federal agencies, the political parties, and special interest groups interact to make policy based on information that may not be available and considerations that may not be transparent to the public.
  • Incomplete information: A central authority cannot fully capture, process, or replicate the new information that markets continually generate.
  • Rent-seeking: Special interest groups seek favorable regulation from government at the public’s expense and waste resources in the process.
  • Organizational problems: Bureaucratic inefficiency and inertia impose administrative costs and delay, and jurisdictional divisions cause overlap, frictions, or leave gaps in regulation.
  • Monopoly power. When government officials supplant market outcomes with mandates, they limit choice, competition, adaptability, experimentation, technological development, and the standards for comparison of their performance.

Choosing Efficient Rules Requires Analysis:

Given the problems of the administrative state, the presumption is unwarranted that federal officials have superior knowledge, motivation, and skills to produce the best outcomes without as much as analyzing the costs and benefits of alternative approaches. Agencies have many different approaches to choose from, and even a partial list suggests it is impossible to know the best one for a given set of circumstances without comparative analysis:

- Improve existing rules rather than issue new ones;

- Better define property and market trading rights;

- Impose fees in place of mandates;

- Improve information dissemination;

- Set performance standards and let the regulated decide how to meet them;

- Prescribe product design and production methods;

- Prohibit production and/or consumption.

Regulatory agencies do not report to Congress as a matter of standard practice on the efficiency of their regulatory regimes or when statutory language may hinder adoption of the most efficient approach to achieve a statutory objective. They should be required not only to conduct comparative analyses and report their findings but also to make recommendations for saving costs to the congressional committees of jurisdiction so that Congress can consider accommodating changes in the law......

 

 

Attached below is the full JEC Study, along with the Executive Summary to the Study:

Related Files:



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