Financial market regulation.
"Towards Better Cost-Benefit Analysis: An Essay on Regulatory Management," by John C. Coates IV. July 2014. SSRN #2471682.
In 2011, the D.C. Circuit Court of Appeals struck down a Securities and Exchange Commission regulation because the agency failed to provide an adequate cost-benefit analysis (CBA) for the regulation. In Congress, Sens. Mike Crapo (R-Idaho) and Richard Shelby (R-Ala.) have introduced a bill that would require the financial regulators to conduct CBA of all future proposed regulations.
In a previous issue of Regulation, University of Chicago professors Eric Posner and Glen Weyl argue that the time has come to require CBA by the independent financial regulatory agencies ("The Case for Cost-Benefit Analysis of Financial Regulation," Winter 2013-2014).
In an earlier issue, Richard Zerbe and two of his doctoral students at the University of Washington examined CBA as conducted by an actual government agency ("Benefit-Cost Analysis in the Chehalis Basin," Summer 2013). He concluded that
the results of bureaucratic [CBA] reflect costs and benefits that are readily countable, rather than a careful consideration of economic standing or economically significant cost or benefit flows.... Bureaucratic [CBA] tends to find positive net benefits for a given alternative when conducted or commissioned by project supporters, and negative net benefits when conducted or commissioned by project detractors. Both positions may be supported by legitimate bodies of credible evidence.
John Coates IV has written two papers in the same vein as Zerbe, arguing that the proponents of CBA of financial regulations (CBA/FR) have oversold its capabilities. In the first paper, he conducts a hypothetical CBA of the monetary policy known as the "Taylor rule," proposed by Stanford economics professor John Taylor. The rule would set the federal funds rate at 1 + 1.5 x the inflation rate + 0.5 x the "output gap," defined as the percentage deviation of actual GDP from "potential" GDP. Coates argues that the capacity of anyone to conduct qualified CBA with any real precision or confidence does not exist for important financial regulations like a Taylor rule. The data are not available and analysis often involves the use of contested macroeconomic analysis. He even quotes Taylor himself at a 2013 congressional hearing as saying "while discretion [by the Federal Reserve] would be constrained [by the rule], it would not be eliminated." Coates rhetorically asks how would anyone evaluate such a regulation?
In the second paper, Coates argues that it "is CBA supporters themselves who need to show that CBA is anything different than judgment in drag." "Any guestimates that emerge from superficial CBA/FR will only reflect crude assumptions based on the prior judgmental beliefs (i.e., theoretical guesses, informed by experience and ideology) of researchers about the value of regulation."
He spends the remainder of the paper suggesting how we should encourage regulators to engage in meaningful "conceptual" CBA (that is, do not regulate unless real market failures exist and be careful about reducing competition, etc.) to encourage the development of actual quantitative CBA. His recommendations include giving agencies deference and restricting court review to those cases in which an agency is expanding its jurisdiction (or at least some people think it is) and using "bad" CBA to cover up that fact; appoint more economically literate regulatory commissioners so that the staff know that CBA is really important; allow CBA to be released by staff without commissioner approval, like inspector general reports; and use the equivalent of clinical trials to develop true knowledge about effects.
Some of these recommendations have as much "assume-a-can-opener" feel to them as the CBA recommendations Coates criticizes. In the end, I am reminded of Bill Niskanen's thoughts on the struggle over the proper role of economically informed analysis in policy decisions ("More Lonely Numbers," Fall 2003), which are worth repeating: "If lawmakers want more or better regulatory analysis, then [such analysis] would be valuable.... But it is not at all evident that Congress wants better regulatory analysis."
PETER VAN DOREN is editor of Regulation and a senior fellow at the Cato Institute.
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|Author:||Van Doren, Peter|
|Date:||Dec 22, 2014|
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