Cost-Benefit Analysis and the Stealth Attack on Regulation

As a practical matter, government largely functions through bureaucratic regulations. But controversy is growing around the seemingly benign requirement that regulators consider costs and benefits when adopting new rules. Despite the rationality implied by the words “costs and benefits,” those who champion greater attention to these factors are, in fact, mounting an insidiously dangerous attack on government.

Regulations are subject to review by the courts, and in the first instance this means the District of Columbia Court of Appeals. The New York Times recently reported on the stunning instances of judicial activism by the D.C. Circuit in which SEC rules implementing the Dodd-Frank Act were struck down for insufficient consideration of costs and benefits by the Agency. Republican judges dominate the D.C. Circuit, primarily because Obama’s efforts to fill three vacancies (out of eight positions) have been frustrated by Congress. Their ideologically motivated decisions require quantitative analysis of outrageously remote circumstances that could arise under the new rules.

In parallel, legislation has been proposed to require multiple independent agencies (the SEC and NLRB, for example) to submit new rules to the Executive Branch’s Office of Information and Regulatory Affairs (“OIRA”) for cost/benefit analysis. First of all, this is a dramatic shift of authority from Congress to the Executive. The whole point of “independent” regulatory agencies is that they function beyond the direct control of the Executive, overseen instead by Congress. But the practical motivation is to inject quantitative analysis into the consideration of costs and benefits. That is what OIRA does, after all.

The not-so-subtle motivation for requiring quantitative analysis is that it impedes the process of rulemaking. Analysis will require a lot of work and regulatory resources are more limited than ever because of budgetary cuts by Republicans bent on “starving the beast.” Legislative dysfunction works to further conservative ideology. Why not apply the tactic to the bureaucracy?

But the obstacles do not merely delay the agencies. Exhaustive measurement of costs and benefits involves the use of faux science, employing statistical analysis in ways that are utterly inappropriate for making policy. Mark Twain once described untruths as encompassing “lies, damned lies and statistics.” What he meant was that statistics are even more dangerous than outright lies because they are inevitably interpreted as scientifically sound truths.

In fact, nothing could be further from the truth. Our legislators and judges should be reminded that flawed statistical analysis of the residential real estate market by the Credit Rating Agencies was at the core of the mortgage-backed bond meltdown that triggered the financial crisis. The arithmetic was correctly executed, but the models should never have been used by the rating agencies and investors to justify the massive exposure of the world economy to U.S. mortgages. The biggest bubble in the history of the planet was based, not on bad math, but bad judgment and misplaced faith in statistical algorithms.

More fundamentally, there is no consensus on the meaning of costs and benefits of government action. The left believes in a social contract between the government and the people. The contract constitutes a bulwark against the inherently inefficient dominance of the wealthy and powerful over the disadvantaged. Regulations that implement this social contract provide benefits as a result; and the cost of breeching the social contract is very real.

The current ideology of the right is dismissive of the social contract. Ignoring the painfully obvious correlation between economic malfunctions and deregulation, the right subscribes to the pseudo philosophy of Ayn Rand, clinging to the belief that prosperity is best achieved by allowing the “job creators” to run free without constraints. To paraphrase an old saying, “what’s good for JP Morgan is good for the USA.”

Reducing costs and benefits of government to spreadsheets is rigged to limit the role of government. The benefits associated with the social contract are more difficult to quantify than the projected profit and loss statements of businesses. But that does not mean that these benefits to society are not real. In fact, they should be given great weight since the regulators are presumably implementing the laws of Congress that express the will of the people. Independent regulators should be left to do their work unless they “go rogue” and frustrate Congressional intent.

The dangerous urge to quantify the unquantifiable is not merely a subterfuge perpetrated by the Republicans. Democrats like Senator Warner and some elements of the administration are seduced by the opportunity to appeal to the strain of public opinion that views government as inherently flawed and sometimes malevolent. The public will consider the source when Republicans push these ideas; but when Democrats chime in, the danger is much more real.