Earlier this year, the Office of Management and Budget (OMB) published a draft revision of Circular A‑4 and solicited public comment on the changes. The document provides guidance for executive branch agencies required to conduct Regulatory Impact Analyses (RIAs) of a subset of their regulations under Executive Order 12866. The circular was last revised in 2003, and few would argue that a re-examination of how regulatory benefits and costs are analyzed is not merited. In this article, we focus on what we view as a possible missed opportunity to encourage broader engagement with RIAs to allow them to play a more useful role in agency decision-making.

Improving transparency and process / The academic literature identifies at least three roles that analysis can play in the regulatory process:

  • Serve as a decision-making criterion, especially since benefit–cost analysis provides the user with a clear decision rule regarding whether to proceed with a regulatory policy.
  • Increase transparency to allow interested parties to both monitor a regulator’s activities and engage in the rulemaking process.
  • Aid agencies’ regulatory planning, allowing them to compare potential regulatory approaches systematically while prioritizing regulatory needs.

The proposed updates to Circular A‑4 generally focus on the first of these roles, and the justification given by OMB’s Office of Information and Regulatory Affairs (OIRA) for the changes reinforces this impression. The first sentence of the preamble states, “Assessing benefits and costs of alternative regulatory options through analysis helps agency policymakers arrive at sound regulatory decisions.” However, as it is used in practice, analysis generally does not function as a decision-making criterion in the regulatory process, especially because EO 12866 merely suggests that the rule’s benefits should “justify its costs.” Therefore, despite the attention given to analysis as a decision-making criterion, the direct effects of the proposed changes on actual regulatory decision-making may be more limited than many expect.

Still, further revisions to Circular A‑4 could position RIAs to more effectively contribute to the other roles noted above. To do so, we offer the following thoughts.

Clarity and conciseness / RIAs accompanying rules are already long, complicated, and technical, and becoming more so. As a result, the typical interested party does not have the training to comprehend the level of analytical rigor that characterizes current analyses, and their length often precludes even those with the ability to participate from doing so. Regardless, analysis and participation can be complements: public participation can lead agencies to better understand the issues they are analyzing and, in doing so, improve their economic analysis and the rules themselves. An RIA that is done well and explained clearly can help the public better understand how regulations affect them and, simultaneously, allow them to give valuable input to encourage more thoughtful regulatory decisions by agencies.

Unfortunately, an emphasis in the revised Circular A‑4 on applying more advanced analytical tools to produce precise estimates of benefits and costs could easily lead to agency RIAs that are even more complex and, hence, less transparent than they are now. Given that a goal of President Biden’s associated EO 14094 is to ensure the regulatory process is “designed to promote equitable and meaningful participation by a range of interested or affected parties, including underserved communities,” this issue should be acknowledged and addressed.

For example, we largely agree with the impetus behind emphasizing distributional analysis in the revised Circular A‑4. In addition to their implications for economic efficiency, many regulations have distributional effects, and providing information on those effects could theoretically increase transparency associated with these regulatory decisions. However, asking agencies to produce a detailed distributional analysis is likely to have the unintended consequence of further lengthening RIAs, making them even less accessible to the affected communities.

Better planning / The revised Circular A‑4 can also be expected to promote RIAs that are less likely to function as planning tools. Perhaps the key element that allows analysis to function in a planning role is the consideration of reasonable alternatives. While revised Circular A‑4 does address the importance of considering alternatives, the heightened analytical focus on the preferred agency approach can mean less serious consideration of reasonable alternatives, particularly those that differ in marginal ways from the preferred approach.

The timing of the RIA is also important. In the current environment, analysis is typically made public concurrent with the issuance of a Notice of Proposed Rulemaking (NPRM), which is too late in the process to allow any participation based on it to shape the rulemaking in fundamental ways. Similarly, to function as an agency planning tool, analysis must again be performed before the agency has already decided on its preferred approach.

As one potential solution, we recommend back-of-the-envelope analysis on a broader set of regulatory alternatives that would be performed earlier in the process. In the context of the changes to Circular A‑4, this would entail producing a public analysis well before the NPRM is issued, given that agencies may be resistant to making significant changes to rules at that point. Such an analysis would present numerous regulatory alternatives and “rough” estimates of both their benefits and costs, as well as possible effects on particular populations. In fact, it may even be sufficient to note the direction and approximate magnitude of the differences between alternatives. For example, a reasonable back-of-the-envelope discussion might simply suggest something like: “Increasing the emissions threshold by 1 part per million would decrease costs 10-fold and increase the incidence of illness only marginally. However, most of the increase in illness would be in communities located near stationary sources.”

Ensuring that affected communities—both those bearing the costs and those reaping the potential benefits of regulatory changes—can see these RIAs and provide feedback before a preferred option is chosen in an NPRM is critical. In addition, making it more likely agencies would faithfully perform back-of-the envelope analysis on a broader set of feasible alternatives earlier in the process means considering the incentives of the agencies. One general approach that could help would be to offer “carrots” to agencies for faithfully performing back-of-the-envelope analysis.

Help from OIRA / In revising Circular A‑4, OIRA would do well to give careful thought to how analysis is presented by agencies as well as when it is performed. While we ideally would like to see agencies incentivized to produce an earlier and simpler analysis that is made publicly available, some small process changes could also begin to cultivate this mindset among agencies. These include encouraging or requiring agencies to:

  • Include an executive summary for each RIA that lists the benefits and costs of the policy chosen and realistic alternatives.
  • Analyze alternatives that represent marginal differences in stringency and are realistic options, and present the results to the public early in the process.
  • Experiment with different modes of soliciting public input before issuing NPRMs.
  • Consider alternatives that may be precluded by statute, including discussing the agency’s perspective on the legality of those alternative approaches in their NPRMs.

In sum, the new Circular A‑4 should facilitate transparency and act as an input to regulatory agency decision-making rather than to simply support existing agency decisions. That will require setting up agencies to perform analysis well before the NPRM is released, consider more reasonable alternatives, and present the analysis in a way that is comprehensible to those the rule will affect. Restructuring the regulatory process in these ways will position RIAs to occupy a more useful place in that process, allowing it to fulfill its potential to inform the public and aid agency planning.

Readings

  • “A New Executive Order for Improving Federal Regulation? Deeper and Wider Cost–Benefit Analysis,” by Robert W. Hahn and Cass R. Sunstein. University of Pennsylvania Law Review 150(5): 1489–1552 (2002).
  • “Can Analysis of Policy Decisions Spur Participation?” by Stuart Shapiro. Journal of Benefit–Cost Analysis 9(3): 435–461 (2018).
  • “Regulating Agencies: Using Regulatory Instruments as a Pathway to Improve Benefit–Cost Analysis,” by Christopher Carrigan, Mark Febrizio, and Stuart Shapiro. Gray Center for the Study of the Administrative State Working Paper 20–01, February 2020.
  • “Rulemaking in the Shade: An Empirical Study of EPA’s Air Toxic Emission Standards,” by Wendy Wagner, Katherine Barnes, and Lisa Peters. Administrative Law Review 63(1): 99–158 (2011).
  • “The CAIR RIA: Advocacy Dressed Up as Policy Analysis,” by Wendy E. Wagner. In Reforming Regulatory Impact Analysis, edited by Winston Harrington, Lisa Heinzerling, and Richard D. Morgenstern; Routledge, 2009.
  • “What’s Wrong with the Back of the Envelope? A Call for Simple (and Timely) Benefit–Cost Analysis,” by Christopher Carrigan and Stuart Shapiro. Regulation and Governance 11(2): 203–212 (2017).