While the administration may be saying what businesses want to hear on regulation, a less noticed change in its regulatory approach has the potential to undo any of its supposed efforts to improve the regulatory climate. Over the last year, the administration has quietly altered the calculus in its cost-benefit analyses by treating any worker hired by a business or government entity as a benefit to the economy because of the job created, and not as an additional cost of doing business. Such an approach stands the entire concept of cost-benefit analysis on its head. It threatens to remove the ability of the Office of Management and Budget — which is tasked to play traffic cop for regulations — to apply any sort of rigorous analysis to the raft of regulations promulgated by the various executive branch agencies every year.

The EPA’s creative analyses | One agency exemplifying this confused thinking about costs and benefits is Obama’s Environmental Protection Agency. According to the EPA’s own Regulatory Impact Analyses (RIAs), regulations issued by the agency since the end of 2009 will impose $153.4 billion in new economic costs on businesses and result in an estimated 58,000 jobs lost. The agency estimates that compliance costs for new rules in 2011 alone will surpass $7.7 billion. Although these might sound like staggering numbers during an abbreviated period, the way the EPA produces its estimates suggests that the true figures are much higher.

Currently, several laws and executive orders require the EPA and most other administrative bodies to review new rules and conduct cost-benefit analyses, but none go so far as to spell out exactly how such analyses should be conducted. As a result of this omission, the administration appears to have carte blanche in its methodology.

For example, in the EPA’s recent RIA covering Industrial, Commercial, and Institutional Boilers and Process Heaters, it found that “an increase in labor demand due to regulation may have a stimulative effect that results in a net increase in overall employment.” This language was reprised verbatim in a RIA covering Commercial and Industrial Solid Waste Incineration Units as well as the revised Toxics Rule for mercury emissions. Put simply, this analysis confuses a cost for a benefit, an error that the agency seems intent on making in every new rule that has the potential to affect employment.

Economists agree that when regulations force firms to buy equipment and hire compliance officers, those burdens entail a cost. Though it may be true that, to use language from the Process Heaters RIA, “regulated firms demand workers to operate and maintain pollution controls within those firms,” it is inappropriate to attribute the forced hiring of new workers as benefits or stimulative to the economy when businesses have to absorb the costs of hiring and training new workers.

Under the EPA’s economic analysis, forcing firms out of business might be a boon to the struggling legal industry and bankruptcy attorneys. As the agency has suggested in its past RIAs, times of high unemployment are optimal for imposing regulations that “increase overall employment.” President Obama’s new order seems to have forced the wrong sort of innovative thinking among his agencies; the tone of most RIAs makes it clear that few EPA analysts are reading Frédéric Bastiat.

Furthermore, the EPA has repeatedly stated that forcing businesses to purchase pollution control equipment should be treated as a benefit, not a cost on production, for the same dubious reasons. In its Process Heaters RIA, the agency found that “in addition to the increase in employment in the environmental protection industry (increased orders for pollution control equipment), environmental regulations also create employment in industries that provide intermediate goods to the environmental protection industry.” Once again, the EPA is conflating benefits with actual costs. It addresses the costs imposed on specific businesses as a result of buying pollution control devices, but then asserts that the increased business costs will benefit the overall economy.

A fair assessment of costs and benefits should be an industry-specific approach. The EPA should quantify the cost of having to hire more employees or purchase new goods for each particular business sector. If the agency also seeks to examine the macro effects of reduced profitability, lowered stock prices, and diminished wages and employment in a particular sector, then that analysis would be welcomed as well, provided the agency remains at least partly tethered to reality when performing the analysis.

Cost estimates of new regulations should provide a valuable guide to politicians and voters. In the past two years alone, the EPA has promulgated rules that will impose billions in new regulatory costs, which in turn could result in tens of thousands of lost jobs. It makes far more sense to publish an accurate cost estimate of proposed rules than to underestimate the costs due to semantic obfuscation and later discover that a regulation reduced economic growth and eliminated jobs from the private sector.

Revising current cost estimates | Besides discerning the difference between an economic cost and a benefit, the EPA should also review the original cost estimates of newly issued regulations where analyses of economic impacts are opaque for whatever reason. While lobbyists, think tanks, and a whole host of other interests pore over legislation, regulations often occur far from the public eye, with less scrutiny. The efforts of the OMB, Congressional Budget Office, and Congress’s Joint Committee on Taxation are generally successful when estimating the impact of any piece of legislation that affects the budget; but the Office of Information and Regulatory Affairs and the agencies themselves do a poor job of communicating the actual cost of regulations to the public.

As a belated acknowledgement of this fact, Section 6 of EO 13563 calls for a retrospective analysis of existing rules. Agencies have been slow to formulate plans for carrying this out, but each agency must “periodically review its existing significant regulations to determine whether any such regulations should be modified, streamlined, expanded, or repealed.”

The EPA should start by reviewing its cost estimates for the Sewage Sludge Incineration Units Rule and the Greenhouse Gas Tailoring Rule. Both are considered major regulations but lack estimates on potential job losses. The current Incineration Units RIA estimates potential costs of approximately $132 million, but it nowhere mentions its potential impact on employment. The agency’s cost estimates for using the Clean Air Act to regulate carbon emissions are similarly suspect, mentioning only the benefits of regulating major greenhouse gas sources and saying nothing of the impact on employment. In fact, the most recent RIA lists more than $193 billion in net benefits for final implementation, but categorizes potential burdens as “unquantified social costs” of foregone environmental benefits. According to the EPA, costs can be benefits and the cost of not enacting legislation would be lost benefits.

Improving future cost estimates | The EPA largely relies on its own assessments of costs and benefits or those of contractor RTI International, a private company in North Carolina’s Research Triangle that receives a significant amount of federal funding. RTI has performed numerous environmental cost-benefit analyses and received $23 million in EPA funding during FY 2010.

RTI collects the lion’s share of its $758 million in revenue from government agencies, including the EPA. With more than 80 percent of its funding in the form of federal payouts, it seems reasonable to question RTI’s independence. It is not absurd to suggest that on some occasions private companies conducting federal research may strive to publish results that their client desires. Instead of solely relying on RTI, rotating between private economic firms should yield more accurate cost projections, or at least end the virtual monopoly that one company has for performing important cost-benefit analyses.

In addition, many Obama administration regulations that qualify as “economically significant” (compliance costs of more than $100 million) under EO 12866, President Clinton’s regulatory executive order, do not contain actual cost estimates, in violation of that order. The OMB completed reviews of 41 economically significant EPA regulations in the past two years, but only 15 RIAs were issued during that period.

A recent Government Accountability Office report covering the 1995 Unfunded Mandates Reform Act (UMRA) underscores this problem. The GAO found that many rules are never characterized as federal mandates under the act because they supposedly qualify for one of its 14 exemptions. For example, among the major rules published in 2001 and 2002, more than half did not trigger UMRA. The GAO found that an “evaluation of existing rules through retrospective reviews has the potential of being able to better assess the effectiveness of UMRA, among other benefits.” During the EPA’s review of “obsolete, unnecessary, unjustified, excessively burdensome, or counterproductive” regulations, it should reexamine previous rules and determine whether they were excluded from scrutiny under UMRA.

Fostering transparency at the EPA | In addition to communicating with the public via cost estimates, the EPA should place transparency and accountability at the forefront. The agency’s website for regulatory analysis, Reg Stat, is a good tool, but it is not enough. For instance, the agency could post dockets and comments it has received directly on its website rather than solely listing them in the Federal Register. In comparison, the Federal Communications Commission has a searchable database on its website of rulemaking dockets and public comments.

The EPA failed the basic transparency test last March when it established rules for power plant mercury emissions, but it mentioned only the benefits and not the costs of that rule in its press release and on its webpage. It neglected to note the estimated 45,000 jobs that could be lost as a result of the new regulations. The agency did, however, suggest that the rule might someday generate 35,000 jobs “in the directly affected sector.”

Scholars can debate the merits of certain EPA regulations, but one thing is certain: these material omissions should not continue. Federal agencies are now operating essentially as propaganda outlets for the current administration. Whether it is Andy Griffith touting the supposed benefits of the new health care law or the EPA hiding the potential job losses from new regulations, only regulators benefit from reduced transparency. Legislative cost estimates from the CBO or JCT generally include nonpartisan employment consequences and total costs. The EPA should be no different.

Hope for change | The EPA is unlikely to change its practices drastically during the current administration. Even if President Obama fails in his reelection bid next November, his successor can only accomplish so much given the bureaucratic inertia.

It is no secret that the typical EPA bureaucrat has strong environmentalist leanings and is willing to err on the side of the environment when it comes to issuing regulations. Americans should at least insist that the agency perform something approximating an honest accounting of the costs and benefits of any regulation it issues and that the OMB act as a impartial judge when analyzing those regulations. And each should start off with a basic understanding of the difference between a cost and a benefit.