Regulation University: Beware of Inflated Benefits and Hidden Costs

Regulation University:
Beware of Inflated Benefits
and Hidden Costs
March 27, 2013

Patrick A. McLaughlin
Senior Research Fellow
Mercatus Center at George Mason University

Review:

1.  What
is
“regula4on”?

2.  What
causes
regula4on?

Regula4ons
are
uniquely
opaque
as

legal
instruments
à
BCA

Why
BCA
for
regula4ons?

1.  Avoid
unnecessary
regula4ons

2.  Choose
most
eﬃcient
alterna4ve

3.  Provide
info
to
Congress,
public

What
can
go
wrong
in
BCA?

1.  Regulate
based
on
anecdote

2.  Approach
a
foregone
conclusion

3.  Ignore/hide
costs

4.  Inﬂate
beneﬁts

What
can
go
wrong
in
BCA?

1.  Regulate
based
on
anecdote
or

untested
theory

2.  Approach
a
foregone
conclusion

3.  Ignore/hide
costs

4.  Inﬂate
beneﬁts

The
shocking

truth…

What
can
go
wrong
in
BCA?

1.  Regulate
based
on
anecdote
or

untested
theory

-‐if
there’s
no
problem,
where
do
benefits

come
from?

2.  Approach
a
foregone
conclusion

3.  Ignore/hide
costs

4.  Inflate
benefits

Quote
from
EO
12866:

“Each
agency
shall
iden4fy
the
problem
that
it

intends
to
address…
as
well
as
assess
the

signiﬁcance
of
that
problem.”

Quote
from
EO
12866:

“Each
agency
shall
iden4fy
the
problem
that
it

intends
to
address…
as
well
as
assess
the

signiﬁcance
of
that
problem.”

Regulatory
Report
Card
Ques4on
6:
How
well

does
the
analysis
iden4fy
and
demonstrate
the

existence
of
a
market
failure
or
other
systemic

problem
the
regula4on
is
supposed
to
solve?

Average:
1.7
/
5
for
111
RIAs
evaluated.

Quote
from
OMB
Circular
A-‐4:

“Once
you
have
determined
that
Federal

regulatory
ac4on
is
appropriate,
you
will
need
to

consider
alterna4ve
regulatory
approaches.”

-‐OMB
Circular
A-‐4
(The
Instruc4on
Manual
for

RIAs)

Quote
from
OMB
Circular
A-‐4:

“Once
you
have
determined
that
Federal

regulatory
ac4on
is
appropriate,
you
will
need
to

consider
alterna4ve
regulatory
approaches.”
-‐
OMB
Circular
A-‐4
(The
Instruc4on
Manual
for

RIAs)

Regulatory
Report
Card
Ques4on
7:
How
well

does
the
analysis
assess
the
eﬀec1veness
of

alterna1ve
approaches?

Average:
2.4
/
5
for
111
RIAs
evaluated.

What
can
go
wrong
in
BCA?

1.  Regulate
based
on
anecdote
or

untested
theory

2.  Approach
a
foregone
conclusion

-‐Failure
to
evaluate
alterna4ves
leads
to

inefficiency,
but
also
real
(unintended)

consequences

3.  Ignore/hide
costs

4.  Inflate
benefits

What
costs
are
le`
out
of
most

RIAs?

Usually
everything
but
direct

compliance
costs!

Some
examples

Failure
to
account
for
eﬃciency
losses
from

taxes/subsidies
(Early
Re4ree
Reinsurance

Program)
–
up
to
44%
more
costs

Some
examples

Design
standards
on

trains,
automobiles
–

prevents
innova4on

domes4cally
and

importa4on
of
desired

goods

Speaking
of
compliance
costs…

While
it
would
be
nice
to
have
es4mates
of
the
costs
of

regula4on
that
were
right
on
average,
it
would
be
even

more
comfor4ng
to
have
es4mates
that
were
close
on

average.

-‐R.
David
Simpson,
EPA,
in
“Do
Regulators
Overes4mate

the
Costs
of
Regula4on?”
Working
Paper,
December,

2011.

What
can
go
wrong
in
BCA?

1.  Regulate
based
on
anecdote
or

untested
theory

2.  Approach
a
foregone
conclusion

3.  Ignore/hide
costs

-‐affects
evalua4on
of
alterna4ves,

misinforms
Congress/public,
and

misinforms
future
regulatory
choices

4.  Inflate
benefits

How
are
beneﬁts
inﬂated?

1.  Assump4ons
of
underlying
risk
not
supported
by
best

available
science
or
data

(Abdukadirov
and
Yazigi
2012;
Ellig
2013)

Ques4onable
Data
(Ellig
2013)

NHTSA’s
Minimum
Sound
Requirements
for
Hybrid
and
Electric

Vehicles
(2013):

-‐Documents
how
vehicle’s
sounds
help
blind
people

-‐Concludes
that
noise
requirements
would
therefore
help
blind

people

BUT

Then
$115.1
million
of
beneﬁts
(>50%)
come
from
avoiding

bicyclist-‐car
collisions.

Are
there
that
many
blind
bicyclists?

How
are
benefits
inflated?

1.  Assump4ons
of
underlying
risk
not
supported
by
best

available
science
or
data

(Abdukadirov
and
Yazigi
2012;
Ellig
2013)

2.  Restric4ng
consumer
choice
as
a
benefit

(Gayer
and
Viscusi
2012)

How
are
benefits
inflated?

1.  Assump4ons
of
underlying
risk
not
supported
by
best

available
science
or
data

(Abdukadirov
and
Yazigi
2012;
Ellig
2013)

2.  Restric4ng
consumer
choice
as
a
benefit

(Gayer
and
Viscusi
2012)

3.  Treat
transfers
as
benefit

(Ellig
and
Conover
2012)

Transfers
as
beneﬁts

Rights
to
book
royal/es
Rights
to
book
royal/es

Publisher
Publisher

Author
Author

Transfers
as
beneﬁts

Preexis4ng
Condi4on
Insurance
Plan
Rule

–

HHS:

Counts
reduc4ons
in
uncompensated
care

as
a
beneﬁt
(Ellig
and
Conover
2012)

How
are
benefits
inflated?

1.  Assump4ons
of
underlying
risk
not
supported
by
best

available
science
or
data

(Abdukadirov
and
Yazigi
2012;
Ellig
2013)

2.  Restric4ng
consumer
choice
as
a
benefit

(Gayer
and
Viscusi
2012)

3.  Treat
transfers
as
benefit

(Ellig
and
Conover
2012)

4.  Assume
perfect
compliance
and
ignore
changes
in
consumer

behavior

Consumer
response
to
TSA

What
can
go
wrong
in
BCA?

1.  Regulate
based
on
anecdote

2.  Approach
a
foregone
conclusion

3.  Ignore/hide
costs

4.  Inflate
benefits

-‐affects
evalua4on
of
alterna4ves,

misinforms
Congress/public,
and

misinforms
other
regulatory
choices

Why
would
anyone
subvert

BCA
in
RIAs?

1.  Incen4ves
of
the
agency

2.  Incen4ves
of
the
individual

Why
should
we
care?

1.  Regulate
when
unnecessary

2.  Fail
to
choose
most
eﬃcient
op4on

3.  Unintended
consequences

4.  Misinform
Congress
and
public

5.  Derail
retrospec4ve
review

Regulation University: Beware of Inflated Benefits and Hidden Costs

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