Perpetuating puffery: an analysis of the composition of OMB's reported benefits of regulation.
Keywords: regulation, social benefits, benefit-cost analysis, economic measurement, environmental protection, Office of Management and Budget, Environmental Protection Agency
The Office of Management and Budget (OMB) reports to Congress each year on the benefits and costs of federal regulation. These reports, which generally conclude that the benefits of regulations are an order of magnitude greater than the costs, are used to rebut concerns that regulations may be hindering economic growth, and suggest that smart regulation can provide large net economic gains.
This article focuses on three key components of OMB's estimated benefit totals to examine how reliable these figures are.
1. Agencies are Required to Estimate Regulatory Benefits and Costs
Measuring the effects of regulations is notoriously difficult. Regulations are designed to achieve social goals, as is the direct government spending supported by taxes; but the costs of regulations are felt through higher prices paid for goods and services and opportunities foregone. There is no mechanism like the fiscal budget for keeping track of the spending by individuals and businesses on regulatory compliance, nor of the benefits that regulation brings.
Perhaps because the issuance of new regulations is not constrained by a budget, presidents and Congress have tried to rely on other tools to ensure regulations make society better off. For over three decades, presidents have required agencies to conduct ex ante regulatory impact analysis (RIA) of proposed new major regulations to determine whether their net effects will be positive. Executive Order (EO) 12866, issued by President Clinton in 1993 and still in effect today, reflects the regulatory philosophy that he and subsequent presidents have endorsed:
(a) The Regulatory Philosophy. Federal agencies should promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling public need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people. In deciding whether and how to regulate, agencies should assess all costs and benefits of available regulatory alternatives, including the alternative of not regulating. Costs and benefits shall be understood to include both quantifiable measures (to the fullest extent that these can be usefully estimated) and qualitative measures of costs and benefits that are difficult to quantify, but nevertheless essential to consider. Further, in choosing among alternative regulatory approaches, agencies should select those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity), unless a statute requires another regulatory approach. [E.O. 12866, Sec.1(a)]
Presidents have assigned the Office of Information and Regulatory Affairs (OIRA) in the U.S. OMB authority to ensure that regulations meet E.O. 12866 requirements. Pursuant to the order, executive branch agencies submit all significant regulations to OIRA for review. Agencies must prepare for OIRA and the public an RIA for proposed and final regulations that are deemed to be "economically significant," defined as the subset of significant regulations that are expected to have "an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities" [E0 12866, Sec. 3(f)(1)].
In 2003, OIRA issued Circular A-4 to guide agencies in conducting RIAs, and in 2011 President Obama reinforced E.O. 12866 and elaborated on its analytical requirements in E.O. 13563. In a recent primer, OIRA described the purpose of the RIA as follows:
Executive Orders 13563 and 12866 require agencies to provide to the public and to OMB a careful and transparent analysis of the anticipated consequences of economically significant regulatory actions. This analysis includes an assessment and (to the extent feasible) a quantification and monetization of benefits and costs anticipated to result from the proposed action and from alternative regulatory actions. Executive Order 13563 specifically requires agencies "to use the best available techniques to quantify anticipated present and future benefits and costs as accurately as possible." The purpose of the RIA is to inform agency decisions in advance of regulatory actions and to ensure that regulatory choices are made after appropriate consideration of the likely consequences. To the extent permitted by law, agencies should proceed only on the basis of a reasoned determination that the benefits justify the costs (recognizing that some benefits and costs are difficult to quantify). Regulatory analysis also has an important democratic function; it promotes accountability and transparency and is a central part of open government. [OMB 2011]
Pursuant to these executive orders, OIRA reviews over 500 significant regulations each year, of which between 40 and 75 are economically significant regulations undergoing a final review before they become law.
2. OMB Reports to Congress Annually on Total Regulatory Costs and Benefits
Since 1997 OIRA has prepared a report to Congress presenting the benefits and costs of the economically significant regulations issued during the previous fiscal year, as well as the preceding 10 years. (1) In its most recent (2012) draft report to Congress, OIRA finds:
The estimated annual benefits of major Federal regulations reviewed by OMB from October 1, 2001, to September 30, 2011, for which agencies estimated and monetized both benefits and costs, are in the aggregate between $141 billion and $700 billion, while the estimated annual costs are in the aggregate between $43.3 billion and $67.3 billion. These ranges reflect uncertainty in the benefits and costs of each rule at the time that it was evaluated. [OMB 2012, p. 3]
OMB recognizes its estimates likely understate regulatory impacts for several reasons. First, they exclude "budgetary transfer rules" from the totals. Second, they cover only executive branch agency regulations, and thus exclude the impacts of regulations issued by independent regulatory agencies, such as the Securities and Exchange Commission, the Federal Communications Commission, and the new Consumer Financial Protection Board. Third, OMB derives its estimates by aggregating the ex ante estimates of the benefits and costs agencies develop before the regulations are in effect. OMB notes, "Prospective estimates may contain erroneous assumptions, producing inaccurate predictions" [OMB 2012, p. 4]. Fourth, the totals reported include regulations issued during the preceding 10 fiscal years, and do not count the effects of regulations issued before that window. Finally, the aggregate figures only include regulations with annual impacts of $100 million or more for which agencies estimated both costs and benefits. For example, OMB bases benefits and costs for fiscal year 2011 on agency estimates for only 13 regulations, less than one-quarter of the 58 major final regulations issued during that period, and a fraction of the 317 significant regulations, and over 3,500 total regulations. (2)
Furthermore, the reported benefits and costs are based on agency estimates, without independent verification or assurance that assumptions and methods are consistent across programs and activities. OMB states "while we have generally relied on agency estimates in monetizing benefits and costs, and while those estimates have generally been subject both to public and to interagency review, our reliance on those estimates in this Report should not necessarily be taken as an OMB endorsement of all the varied methodologies used by agencies to estimate benefits and costs" [OMB 2012, p. 18].
Despite the limitations, OMB's annual report probably offers the most comprehensive estimate available on the expected benefits and net benefits (benefits minus costs) of federal regulation. (3) The caveats often get lost in public discourse, however, and the aggregate estimates are widely reported, without qualification, as evidence of the large net benefits of federal regulatory activity.
Even the Administrator of OIRA appears to draw strong conclusions from these estimates. Making an allusion to Moneyball (the book by Michael Lewis that describes how Oakland Athletics general manager, Billy Beane, relied on statistical analysis to create a better baseball team at lower cost than his rivals), Cass Sunstein, the current Administrator of OIRA, uses these data to suggest that the Obama administration is a much smarter regulator than either of its predecessors:
Over the Obama administration's first three years, the net benefits of regulations reviewed by OIRA and issued by executive agencies exceeded $91 billion--25 times the corresponding number in the Bush administration and more than eight times the corresponding number in the Clinton administration. These benefits include billions of dollars in savings for consumers, achieved through historic rules increasing the fuel economy of cars and trucks. They include thousands of lives saved and tens of thousands of illnesses and accidents prevented. They include billions of dollars in economic savings for businesses. [Sunstein 2012]
The next sections examine the reliability of OMB's reported net benefits, and the advisability of using them to make such claims about regulatory outcomes. They focus on three categories of benefits that comprise over 80 percent of total reported benefits.
3. The Benefits Attributed to Reducing Fine Particles are Likely Overstated
The majority of the reported benefits (and the main source of the reported "thousands of lives saved and ... billions of dollars in economic savings for businesses") derive from regulations that reduce a single pollutant, fine particulate matter of less than 2.5 micrometers ([PM.sub.2.5]) in ambient air.
Figure 1 presents OMB's upper bound estimates of the benefits of all regulations over the last decade. To facilitate evaluation of recent claims about the benefits of regulations across presidential administrations, these data reflect "presidential years," or regulations issued from January 21 in one year until January 20 of the following calendar year. (4) The stacked column within each year distinguishes benefits attributed to (I) reductions in [PM.sub.2.5], (2) regulations that yield private consumer savings, and (3) other actions.
It should be evident from Figure 1 that a large portion of reported benefits derive from reducing [PM.sub.2.5] and that the years in which the largest benefits are claimed are years in which the U.S. Environmental Protection Agency (EPA) issued regulations that reduce PM2.5. Differences between years are thus less likely to reflect one administration's superior regulating skills than the number of regulations addressing [PM.sub.2.5] [Hicks 2012].
OMB's 2012 Report to Congress observes that:
EPA rules account for 60 to 81 percent of the monetized benefits and 44 to 54 percent of the monetized costs. The rules that aim to improve air quality account for 97 to 98 percent of the benefits of EPA rules. ... It is important to emphasize that the large estimated benefits of EPA rules are mostly attributable to the reduction in public exposure to a single air pollutant: fine particulate matter. [OMB 2012, p. 15]
Given the significance of the estimated benefits and costs associated with the clean air rules for the total benefits and costs OMB reports for all regulations, it is important to understand how these figures are derived and the level of confidence we should place in these estimates.
The bulk of the benefits associated with reducing [PM.sub.2.5] come from reducing premature mortality. EPA derives dollar benefits by multiplying an estimated reduction in premature deaths by a value per statistical life (VSL). In reporting these estimates in its annual report, OMB recognizes that "significant uncertainty remains" as to both "the reduction of premature deaths associated with reduction in particulate matter and ... the monetary value of reducing mortality risk" [OMB 2012, p. 16].
The assumption of a causal relationship between [PM.sub.2.5] and premature mortality likely overstates benefits
OMB identifies six key assumptions that contribute to this uncertainty in the benefits estimates. (5) One key assumption behind the estimates is that "inhalation of fine particles is causally associated with premature death at concentrations near those experienced by most Americans on a daily basis" [OMB 2012]. While EPA expresses confidence in this assumption based on epidemiological evidence of an association between PM concentrations and mortality [EPA 2011a], other experts question whether an association exists, and if it does, whether that association is causal. Some studies indicate with a greater than 95 percent probability that no such association exists, raising the question of whether EPA's results are a product of its choice of models and selected data rather than a real measured correlation [Cox 2012].
Further, even if a real statistical association exists, it may not be causal. This is particularly important because EPA does not clearly present a biological mechanism by which [PM.sub.2.5] would cause premature mortality. Indeed, as OMB notes,
EPA assumes that all fine particles, regardless of their chemical composition, are equally potent in causing premature mortality. This is an important assumption, because particulate matter (PM) produced via transported precursors emitted from electrical generating utilities (EGUs) tends to differ significantly from direct PM released from diesel engines and other industrial sources, but EPA has concluded that the scientific evidence is not yet sufficient to allow differentiation of benefits estimates by particle type. [OMB 2012]
If the assumption of either association or causality is incorrect, then the benefit of reducing [PM.sub.2.5] is zero.
The assumption of a linear, no-threshold concentration-response relationship likely overstates benefits
Experts have argued that "even if historical data showed a clear, unambiguous, causal relation between concentration and response, ... at some point ([PM.sub.2.5] concentrations) might reach (or might already have decreased below) a threshold below which no further reductions in response are gained" [Cox 2012, p. 823]. Both theory and data suggest that such thresholds exist, but EPA assumes a linear concentration-response impact function that extends to concentrations below background levels [Smith 2011c, p. 17].
If the concentration-response function is not linear, or a threshold exists above the levels of current exposure, then the benefit of reducing [PM.sub.2.5] would be less than estimated (and as low as zero).
Based on its assumptions of a causal, linear, no-threshold relationship between [PM.sub.2.5] exposure and premature mortality, EPA quantifies a number of "statistical lives saved" expected to derive from declining concentrations of [PM.sub.2.5] brought about through regulation. EPA recognizes that this lives-saved metric is an approximation of the life-extending benefits of improved air quality. EPA states:
Avoided premature mortality is one of the more commonly cited results of benefits analyses for air pollution control. However, ... a more accurate description of the benefit of clean air is a reduction in the risk of mortality for the exposed population over many years, which results in the extension of lives (sometimes referred to as "lives saved"). Other useful metrics of the benefit of cleaner air are the number of life years that are gained through the reduction of mortal risks, and the number of years of life expectancy gained on average throughout the population. [EPA 2011a]
EPA's valuation method likely overstates benefits
Further, as OMB  notes, "the value of mortality risk reduction is taken largely from studies of the willingness to accept risk in the labor market and might not necessarily apply to people in different stages of life or health status." This caveat is particularly important for the estimates of lives saved from reducing [PM.sub.2.5], because the median age of the beneficiaries of these live-saving regulations is around 80 years old. According to EPA, the average extension in life expectancy attributable to lower [PM.sub.2.5] levels is less than six months. (6)
Cox estimates that EPA's valuation of [PM.sub.2.5] benefits is equivalent to assigning $80,000 per additional month of life [Cox 2012, p. 819]. He comments that EPA's approach treats reducing [PM.sub.2.5] as "a sort of fountain of youth, restoring the full value of youth (e.g., with at least another 50 years of healthy life expectancy) to people who, in fact, have a median age close to 80 years," which he dryly notes, "appears to be overly optimistic" [Cox 2012].
The large net benefits appear inconsistent with EPA's statutory mandate
EPA regulates [PM.sub.2.5] directly as a "criteria pollutant" under the Clean Air Act, which directs the EPA Administrator to set National Ambient Air Quality Standards (NAAQS) at a level that is "requisite to protect the public health ... allowing an adequate margin of safety." EPA must revise NAAQS periodically (7) based on "air quality criteria [that] shall accurately reflect the latest scientific knowledge useful in indicating the kind and extent of all identifiable effects on public health or welfare which may be expected from the presence of such pollutant in the ambient air, in varying quantities" [section]108(a)(2). The Supreme Court has confirmed EPA's interpretation that this statutory language precludes consideration of any impacts other than direct health effects from exposure to "criteria pollutants" [Whitman v. American Trucking 2001].
Thus, EPA cannot consider the costs of reducing [PM.sub.2.5] in setting the NAAQS, but instead must reduce the pollutant in the ambient air below the "optimum" level (that is, beyond the point where marginal benefits equal marginal costs), in order to provide an "adequate margin of safety."
When EPA last established NAAQS in 2006, it estimated benefits associated with achieving the standard ranging from $3.8 billion to $39.9 billion, compared with costs of between $2.6 billion and $2.8 billion. These results seem inconsistent with the statutory requirement. If the benefits of reducing [PM.sub.2.5] are so significant, and no threshold exists below which those marginal benefits decline, why would EPA stop at 15 [micro]g/[m.sup.3], rather than setting a lower standard to further protect public health and provide an adequate margin of safety? (8)
4. "Co-benefit" Calculations Appear to Bias Benefit-Cost Analyses
Even more perplexing is that EPA estimates (and OMB reports) benefits from reducing [PM.sub.2.5] below the levels it has established to be protective of public health with an adequate margin of safety under the NAAQS. Indeed, Anne E. Smith has observed that for many of the Clean Air Act regulations issued since 1997, "the bulk of the benefits estimates in their RIAs are attributable to reductions in already-low concentrations of ambient [PM.sub.2.5] that EPA has predicted will occur coincidentally as a result of regulation of those non-PM pollutant(s)" [Smith 2011a].
EPA refers to these as co-benefits, because they arise not directly from reducing emissions targeted by the particular regulation, but from other things that EPA thinks will happen as beneficial side effects.
OMB's report alludes to this practice in a footnote, noting that EPA's assumption that exposure to [PM.sub.2.5] has linear effects at concentrations below the NAAQS means that "a significant portion of the benefits associated with more recent rules are from potential health benefits in regions that are in attainment with the fine particle standard" [OMB 2012, fn 18].
Figure 2 illustrates that in 2008 and 2010 in particular, co-benefits from [PM.sub.2.5] reductions represent significant portions of total benefits. (In 2008, the NAAQS for another criteria pollutant, ozone, derived over 70 percent of its benefits from reductions in PM. In 2010, four regulations claimed 100 percent of their benefits from ancillary reductions in [PM.sub.2.5]. Three of those targeted emissions of toxic air pollutants and one set NAAQS for sulfur dioxide, another criteria pollutant.) [Smith 2011c]
These co-benefits comprise over 50 percent of total benefits in these two years, and appear to be growing in prominence. OMB notes:
Midway through FY 2009, EPA made changes to some underlying assumptions as well as updates to some of the model inputs. These changes are reflected in EPA's more recent Regulatory Impact Analyses. [OMB 2012, p. 16]
Prior to 2009, EPA calculated benefits below the NAAQS level, but not below the lowest levels measured (LML) in statistical studies (10 [micro]g/[m.sup.3]). The new assumption to which OMB refers is that EPA now calculates "risks to the lowest level projected by its air quality models, even though no observed or empirical evidence exists for what the slope of the concentration-response may be in that low-concentration zone" [Smith 2011c, p. 24].
In other words, in 2009, EPA suddenly started including an entirely new set of presumed risks in its RIAs, based entirely on an extrapolation that has little to no scientific support and without assessing the statistical confidence for predictions of risk changes even at the LMLs of the studies that EPA started from ... Overall, the decision in 2009 to extrapolate risks below the LML caused EPA's estimates of total US deaths due to [PM.sub.2.5] to nearly quadruple. [Smith 2011c, p. 24]
EPA's mercury and air toxics regulation illustrates its use of cobenefits
The practice of relying on co-benefits to justify unrelated regulations appears to be increasing. Smith identifies five additional proposed or final regulations EPA issued in 2011 for which over 99 percent of reported benefits derive from ancillary reductions in [PM.sub.2.5] (9) For example, in December 2011 EPA announced new nation-wide regulations limiting mercury emissions from electric utilities. While not covered in OMB's 2012 annual report because it was issued after the September 30, 2012 cutoff, EPA's mercury and air toxics standard (MATS) provides a useful illustration of its application of co-benefits.
EPA's fact sheet highlights the benefits of the rule as reducing emissions of heavy metals, including mercury (Hg) and acid gases, which "are known or suspected of causing cancer and other serious health effects." It focuses on mercury emissions from power plants, noting that
once mercury from the air reaches water, microorganisms can change it into methylmercury, a highly toxic form that builds up in fish. People are primarily exposed to mercury by eating contaminated fish. Methylmercury exposure is a particular concern for women of childbearing age, unborn babies, and young children because studies have linked high levels of methylmercury to damage to the developing nervous system, which can impair children's ability to think and learn. [EPA 2011c]
According to EPA's RIA, regulatory preamble, and fact sheets, the mandated new control technologies will reduce mercury from coal-fired power plants by 90 percent, avoid as many as 11,000 premature deaths per year, and have annual economic benefits of up to $90 billion per year. (10) EPA's estimated costs of complying with the regulation, while large at almost $10 billion per year, are barely 10 percent of these huge benefits.
A closer look at the RIA reveals, however, that the estimated $90 billion per year and 11,000 premature deaths avoided are derived not from reducing the toxic emissions that EPA is statutorily obligated to address (and which its press releases tout), but by counting cobenefits of [PM.sub.2.5] reductions that emission controls will produce.
Methylmercury (MeHg) is a neurotoxin that can impair children's cognitive function. In its analysis supporting the regulation, EPA focused "on exposure to MeHg through ingestion of fish, as it is the primary route for human exposures in the U.S., and potential health risks do not likely result from Hg inhalation exposures associated with Hg emissions from utilities" [EPA 2011b, p. 119]. Relying on IQ as a measure of neurological effects, EPA developed a model that involved complex chemical, biological, and physical interactions to estimate how microbes might convert Hg emitted by electric utilities into MeHg, and how that MeHg would accumulate through different trophic levels in the food web. This allowed the agency to estimate the average mercury concentrations in fish, which it combined with estimates of the consumption of freshwater fish by pregnant women, and a modeled concentration-response relationship between mercury ingestion and IQ loss to estimate the effect of mercury ingestion on the IQ of children exposed in-utero both with and without regulation.
Based on this modeling, EPA estimates the reductions in mercury emissions will result in an increase of 0.00209 points in the average IQ of exposed children, for a total of 511 IQ points nationwide. (11) Because children in the United States are exposed to mercury from other sources (natural sources, anthropogenic sources from other countries, and nonutility U.S. sources), EPA estimates they will continue to experience a decrement of 23,909 IQ points nationwide after the rule is fully implemented. The rule will have reduced the IQ decrement from mercury exposure by 3 percent. EPA assigns a dollar value ranging from $0.5 to $6.2 million per year to these gains. EPA did not attempt to quantify or value the health benefits of the other air toxic emissions associated with this regulation. (12)
If these were the only benefits of EPA's MATS rule, and if one took EPA's estimates of costs and benefits at face value, the $9.6 billion in annual cost would be between 1,500 and 19,000 times greater than the benefit.
However, EPA argues that its rule will generate cobenefits that more than make it worthwhile. The benefits of controlling mercury and air toxics comprise less than one ten-thousandths of the total benefits reported for the mercury and air toxics rule. The claimed $33 to $90 billion per year in economic benefits and 11,000 in premature deaths avoided are derived instead by counting cobenefits that arise not directly from reducing toxic emissions, but from other things EPA's models predict will happen as beneficial side effects of the controls that will be required by the rule. Figure 3 illustrates the portion of benefits from the MATS rule that derive from reductions in mercury and air toxic emissions compared with cobenefits.
One such cobenefit is a reduction in carbon emissions, which contribute to greenhouse gases in the atmosphere, but this benefit is relatively small (between 1/2 and 1 percent of the total benefits).
Ninety-nine percent of the benefits attributed to the MATS rule are derived by assigning high dollar values to reductions in emissions of fine particles (PM's), which are not the focus of this regulation and which are regulated elsewhere [Dudley 2012].
EPA does not suggest that the MATS rule will help states meet the [PM.sub.2.5] NAAQS. Other federal and state regulations are designed to do that and, as far as this author can tell, EPA correctly avoids double-counting those benefits here. Rather, EPA calculates almost all of its monetary benefits for this rule from [PM.sub.2.5] reductions well below the levels it has already determined are "protective of public health with an adequate margin of safety, taking into consideration effects on susceptible populations" (13) [Smith 2011a]. Using a linear, no-threshold assumption and attributing effects from small reductions in [PM.sub.2.5] at levels that are just measurable with modern techniques, the MATS RIA models thousands of premature mortalities from exposures to [PM.sub.2.5] concentrations it has determined to be protective.
These large cobenefits are difficult to reconcile with EPA's determination that the 2006 standard was "requisite to protect public health" based on "latest scientific knowledge ... of all identifiable effects on public health or welfare which may be expected from the presence of such pollutant in the ambient air, in varying quantities." If they are legitimate, certainly confronting them directly would achieve [PM.sub.2.5] reductions more cost-effectively than going after them indirectly using statutory authority designed to reduce toxic air pollutants. (14)
5. Private Benefits Ignore Consumer Preferences
Another category of benefits that appears to comprise an increasing portion of total benefits reported by OMB is what we will call private benefits. Consistent with economic theory, federal regulatory guidance states that "agencies should promulgate only such regulations as are ... made necessary by compelling public need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people" [E0 12866].
This philosophy recognizes that private markets are generally efficient at providing for the health and welfare of the public, and that regulatory intervention is appropriate only when private markets demonstrably fail. Yet recent RIAs derive significant benefits, not from correcting market failures, but from saving businesses or consumers money by constraining their choices. Fuel and energy-efficiency standards, in particular, are justified not because they provide social benefits, but because they provide private benefits such as reduced spending on fuel and electricity.
The Department of Energy has long estimated private savings associated with its appliance efficiency standards, but for half of the years in OMB's 10-year window, private benefits contribute little to the totals. Then, in 2006 and 2007, OMB reported approximately $1 billion in private benefits each year. Over the last three years (2009-2011), almost $15 billion of OMB's reported benefits were from private savings.
The 2010 joint rulemaking by EPA and the Department of Transportation to reduce greenhouse gas emissions from vehicles illustrates the effect of this analytical approach. The agencies estimate that their regulations setting corporate average fuel economy (CAFE) standards for model years 2012-2016 will increase the cost of vehicles by $345.9 million (present value discounted at 3 percent). They estimate the present value of the social benefits associated with reducing greenhouse gas emissions at $176.7 million. If these were the only costs and benefits considered, the regulation would impost net social costs on society, but the agencies calculate fuel savings over the life of the vehicles of $1.5 billion (also using a 3 percent discount rate) [EPA 2010].
These impressive private benefits imply that automobile consumers and manufacturers are irrational in not maximizing utility or profits. DOT and EPA do not identify a material failure of private markets that would prevent consumers from reaping these cost savings absent government regulation. They do not question why, if their analysis accurately reflects consumer preferences, all consumers do not choose high-mileage vehicles currently.
Rather, their results depend heavily on their assumptions about future energy prices and the choice of discount rate--a rate significantly lower than consumers reveal they use when making purchasing decisions. Their RIAs do not appear to appreciate other vehicle attributes consumers might value. By looking at average prices and usage patterns, and applying a low discount rate, the regulators paradoxically conclude that by taking away consumers' choices, they can make them better off.
This appears to be a classic case of the "planner's paradox," where planned solutions always look better on paper than unplanned solutions, because the planner sees only his "data, assumptions, biases, and understandings of the way the world works. ... All of the unseen difficulties with the planned solution--the data, assumptions, biases, and understandings of the world that turn out to be wrong--are invisible to the analyst because the data he considers are his own" [Mannix 2003].
Almost by definition, regulatory policies substitute the judgment of government regulators for those of individuals, and it is easy to succumb to what Friedrich Hayek called the "fatal conceit" [Hayek 1988]. When agencies calculate large net benefits without being able to identify a material failure of private markets, and must depend instead on assumptions about consumer irrationality such that consumers cannot be trusted to make decisions in their own self-interest, those benefits should be viewed with skepticism.
[I]f federal regulatory agencies abandon the assumption that citizens are rational, benefit-cost analysis will cease to be informative. Rather than summarizing the effect of a regulation on public health and welfare as the public experiences it, the analysis will simply document what the agency thinks the public ought to want. The result is a terminal case of Planner's Paradox, wherein an agency's decisions always look good because they are examined only through the lens of its own assumptions. The chief danger is that regulatory agencies will take the irrationality of consumers as sufficient reason, by itself, to intervene in markets, and will give primacy to the government's own judgment of what is good for us. Ultimately, we insist that our regulators start from a presumption of rationality for the same reason that we insist that our criminal courts start from a presumption of innocence: not because the assumption is necessarily true, but because a government that proceeds from the opposite assumption is inevitably tyrannical. [Mannix 2010]
6. Straightforward Adjustments in Three Areas Result in Significantly Reduced Total Benefits Estimates
OMB's annual reports to Congress provide the only information available on both the benefits and costs of regulation. OMB qualifies the numbers it presents, listing numerous caveats and emphasizing that the reports merely summarize agencies' ex ante estimates of the likely effects of forthcoming rules. Yet, many, including representatives from OMB, use the results to make sweeping statements about the benefits of recent regulation, and to compare one administration favorably with another.
This article has shown that OMB's quantified benefits of federal regulation depend heavily on how agencies quantify (1) the benefits of regulations designed to reduce fine particles, (2) the cobenefits achieved from ancillary reductions in these particles, and (3) private savings for which agencies have hypothesized no market failure. Together, these categories of benefits contribute over 80 percent of total benefits reported over the last decade; yet, as discussed, the assumptions behind these benefits should be viewed with some skepticism.
Cox's reexamination of the assumptions, methods, and models used to estimate [PM.sub.2.5] benefits concludes that "EPA's evaluation of health benefits is unrealistically high, by a factor that could well exceed 1,000" [Louis Anthony 2012, p. 817]. (15)
If we adjust OMB's total reported benefits by (1) dividing direct [PM.sub.2.5] benefits by Cox's factor of 1,000, (2) eliminating [PM.sub.2.5] cobenefits, and (3) eliminating private benefits, the upper bound benefits of regulation drop from $700 billion per year to around $130 billion per year, and exceed estimated costs by a factor of less than two, not over 10 as OMB reports.
Agencies have strong incentives to demonstrate through analysis that their desired regulations will result in benefits that exceed costs. In principle, a benefit-cost analysis should be "complete." It should include all the significant consequences of a policy decision: direct and indirect, intended and unintended, beneficial and harmful. In practice, all such analyses must to some degree fall short of completeness. The problem with the methods described here is that agencies do not appear to be approaching the problem objectively. On the benefits side of the equation, they quantify or list every conceivable good thing that they can attribute to a decision to issue new regulations, while on the cost side, they only consider the most obvious direct and intended costs of complying with the regulation. Thus, in setting stringent utility emissions standards, EPA dismisses risks associated with reduced electric reliability, the competitiveness of the U.S. economy in international trade, or the effect that higher electricity prices will have on family budgets. In establishing new fuel economy standards, EPA, DOT, and DOE use unrealistic assumptions to estimate consumer energy and fuel savings, without considering all the complex factors that go into individual decisions about which car or appliance to buy.
OMB's role is to serve as a check against agencies' natural motivation to paint a rosy picture of their proposed actions. While it cannot ensure that agencies consider all the possible consequences of an action in a regulatory analysis, it should try to ensure that the boundaries of the analysis are set with some regard to objective science. When a few categories of benefits that have questionable legitimacy puff up benefits by a factor of more than five, that does not appear to be the case. (16)
OIRA is institutionally in a difficult position. Having reviewed and signed off on agencies' analysis, it cannot deny them in its annual reports, thus the reports perpetuate the puffery embedded in the agencies RIAs. Public officials then use these inflated benefits figures to make claims about regulatory success, such as the Money ball analogy. A better baseball analogy might note that, as the regulatory game is now structured, OIRA is the umpire--the sole judge of the balls and strikes pitched by the agencies When the umpire boasts with such enthusiasm about his team's score, one has to wonder who will ensure that the game is played fairly.
Cox, Louis Anthony. 2012. "Reassessing the Human Health Benefits from Cleaner Air." Risk Analysis, 32(5): 816-29.
Dudley, Susan. 2012. Testimony before the United States Senate Committee on Environment and Public. Works Subcommittee on Clean Air and Nuclear Safety, April 14, www.epw.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=b269d179-8ef3-4897-8483-c5f33fb3ec62.
Executive Order 12866, 1993. Regulatory Planning and Review, www.epa.gov/fedrgstr/eo/eol2866.htm.
Hayek, F.A. 1988. The Fatal Conceit: The Errors of Socialism. The University of Chicago Press.
Hicks, Josh. 2012. Who Has the Better Regulatory Record--Obama or Bush? Washington Post (March 21), www.washingtonpost.com/blogs/fact-checker/post/who-issued-more-regulations-obama-or-bush/2012/03/22/gIQAVvGYWS_blog.html.
Mannix, Brian. 2003. "The Planner's Paradox." Regulation, Summer, www.cato.org/pubs/regulation/regv26n2/mannix.pdf.
Mannix, Brian. 2010. "The Troubling Prospect of Behavioral Regulation," GW Regulatory Studies Center Regulatory Policy Commentary. April 19, www.regulatorystudies.gwu.edu/images/commentary/20100419-mannix-behavioralists.pdf.
Smith, Anne. 201 la. "Testimony before the Subcommittee on Energy and the Environment, Committee on Science, Space, and Technology," United States House of Representatives. Quality Science for Quality Air, October 4, www.nera.com/nera-files/PUB_Smith_QualityAir_testimony_1011.pdf.
Smith, Anne. 2011b. "Technical Comments on the Regulatory Impact Analysis Supporting EPA's Proposed Rule for Utility MACT and Revised NSPS (76 FR 24976)," www.nera.com/nera-files/PUB_Smith_EPA_report_0811.pdf.
Smith, Anne. 2011c. "An Evaluation of the Pm2.5 Health Benefits Estimates in Regulatory Impact Analyses for Recent Air Regulations," NERA Economic Consulting, December.
Sunstein, Cass. 2011. "Why Regulations are Good Again." Chicago Tribune (March 3), www.articles.chicagotribune.com/2012-03-19/news/ct-oped-0319-regs-20120319_1_regulation-baseball-scouts-requirements.
U.S. Environmental Protection Agency, 2010. Final Rule-making: Model Year 2012-2016 Light-Duty Vehicle Greenhouse Gas Emissions Standards and Corporate Average Fuel Economy Standards Regulatory Impact Analysis, EPA-420-R-10-009, www.epa.gov/oms/climate/regulations/420r10009.pdf, April.
U.S. Environmental Protection Agency, 2011a. "The Benefits and Costs of the Clean Air Act, 1990-2020," www.epa.gov/air/sect812/feb11/fullreport.pdf, March.
U.S. Environmental Protection Agency, 2011b. Mercury and Air Toxics Standard Regulatory Impact Analysis, EPA-452/R-11-011, www.epa.gov/ttn/ecas/regdata/RIAs/matsriafinal.pdf, December.
U.S. Environmental Protection Agency, 2011c. "Mercury and Air Toxics Standards for Power Plants," www.epa.gov/mats/pdfs/20111221MATSsummaryfs.pdf.
U.S. Office of Management and Budget, 2011. "Regulatory Impact Analysis: A Primer," www.whitehouse.gov/sites/default/files/omb/inforeg/regpol/circular-a-4_regulatory-impact-analysis-a-primer.pdf.
U.S. Office of Management and Budget, 2012. Draft 2012 Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities, www.whitehouse.gov/sites/default/files/omb/oira/draft_2012_cost_benefit_report.pdf.
Whitman v. American Trucking Associations, Inc, 2001, 531 U.S. 457.
(1.) The "Regulatory Right to Know Act" (Section 624 of the Treasury and General Government Appropriations Act of 2001, Pub. L. No. 106-554, 31 U.S.C. [section]1105 note) required OMB to submit an accounting statement and report that included "(1) an estimate of the total annual costs and benefits (including quantifiable and nonquantitiable effects) of Federal rules and paperwork, to the extent feasible--(A) in the aggregate; (B) by agency and agency program; and (C) by major rule; (2) an analysis of impacts of Federal regulation on State, local, and tribal government, small business, wages, and economic growth; and (3) recommendations for reform." "Major" is a term defined in a separate statute; hut, since it relies on the same $100 million threshold as E0 12866, OMB appears to use the two terms interchangeably in its report.
(2.) The number of major and significant regulations was derived using the search engine at www.reginfo.gov. Total regulations published are reported by the Office of the Federal Register.
(3.) The Small Business Administration Office of Advocacy publishes reports on the total costs of regulation, but these focus on cost impacts on small-and medium-sized entities, and do not attempt to measure benefits.
(4.) OMB  reports data on a fiscal year basis, except for its comparisons across presidential administrations. Figure 1 is comparable to Figure 1-1 in the report with some adjustments. Benefits claimed by OMB in a year are included here, whereas, to avoid double counting benefits, OMB removes benefits from previous years when more recent regulations would require actions to achieve reductions previously claimed. Thus, the estimates in these columns are not additive, but we believe this approach provides a more accurate comparison between years.
(5.) The uncertainties listed by OMB are: (1) Inhalation of fine particles is causally associated with premature death at concentrations near those experienced by most Americans on a daily basis. (2) All fine particles, regardless of their chemical composition, are equally potent in causing premature mortality. (3) The impact function for fine particles is approximately linear within the range of ambient concentrations under consideration, which includes concentrations below the National Ambient Air Quality Standard. (4) The forecasts for future emissions and associated air quality modeling are valid. (5) Some rules apply a national dollar benefit-per-ton estimate of the benefits of reducing directly emitted fine particulates from specific source categories. (6) The value of mortality risk reduction is taken largely from studies of the willingness to accept risk in the labor market and might not necessarily apply to people in different stages of life or health status [OMB 2012, footnote 18].
(6.) Table 5-8 of EPA [2011a] presents the age cohorts and life expectancy of the beneficiaries of reduced [PM.sub.2.5]exposure.
(7.) The Act requires EPA to revise the standards every five years, though this schedule sometimes slips. As of this writing, EPA is poised to propose a new NAAQS for [PM.sub.2.5] in the summer of 2012.
(8.) As of this writing, EPA has proposed to lower the national ambient air quality standard for PM2.5 to between 12 and 13 [micro]g/[m.sup.3], still higher than the levels for which it derives co-benefits in other regulations. https://www.federalregister.gov/articles/2012/06/29/2012-15017/national-ambient-air-quality-standards-for-particulate-matter.
(9.) Smith identifies the following as being issued in proposed or final form in 2011 for which all or most of the benefits derive from ancillary reductions in [PM.sub.2.5]: National Emission Standards for Hazardous Air Pollutants for Major Sources: Industrial, Commercial, and Institutional Boilers and Process Heaters (2060-AQ25); Risk and Technology Review for Ferroalloys Production (2060-AQ11); National Emission Standards for Hazardous Air Pollutants From Coal-and Oil-Fired Electric Utility Steam Generating Units and Standards of Performance for Electric Utility Steam Generating Units (2060-AP52); National Emission Standards for Hazardous Air Pollutants for Area Sources: Industrial. Commercial, and Institutional Boilers (2060-AM44); Commercial and Industrial Solid Waste Incineration Units; Response to Remand of New Source Performance Standards and Emission Guidelines (2060-AO12).
(10.) EPA provides links to several fact sheets and technical support documents at: www.epa.gov/mats/actions.html
(11.) EPA estimates that in 2005, children exposed to mercury (from all sources) experience a decline of 0.1068 IQ points (relative to no exposure), for a total of 25,545 IQ points nationwide. Without the regulation, EPA estimates that in 2016, exposed children will face a 0.1000 IQ point decrement for a total of 24,419 IQ points nationwide (a 4 percent improvement). With the regulation in 2016, the analysis predicts exposed children will experience a 0.0979 IQ point decrement, for a total of 23,909 IQ points nationwide (a 3 percent improvement over the no-rule scenario).
(12.) "Due to methodology and data limitations, we did not attempt to monetize the health benefits of reductions in HAPs in this analysis" [EPA 2011b, pp. 4-72].
(13.) The RIA states, "While benefits occurring below the standard may be less certain than those occurring above the standard, EPA considers them to be legitimate components of the total benefits estimate" [EPA 2011 b, p. 23].
(14.) For a thorough discussion of this issue, sec Smith [2011b].
(15.) Cox gets this factor by assigning weights of 50 percent to assumptions regarding association and causality, which he suggests is generous, given available data.
(16.) In the case of the MATS, the search for side effects caused the benefits to rise by a multiple of 15,000 to 66,000, while the costs rose not at all.
SUSAN E. DUDLEY *
This paper is based on a presentation at the NABE Washington Policy Conference, March 26, 2012.
* Susan E. Dudley directs the George Washington University Regulatory Studies Center and is a research professor in the Trachtenberg School of Public Policy & Public Administration. She founded the Center in 2009 to improve regulatory policy by raising awareness of regulations' effects through research, education, and outreach. As the Presidentially appointed Administrator of the Office of Information and Regulatory Affairs (OIRA) of the U.S. Office of Management and Budget from April 2007 through January 2009, she was responsible for reviewing agency regulations and producing two reports on the benefits and costs of regulation in which she confesses to perpetuating puffery.
Business Economics (2012) 47, 165-176.
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|Title Annotation:||Office of Management and Budget|
|Comment:||Perpetuating puffery: an analysis of the composition of OMB's reported benefits of regulation.(Office of Management and Budget )|
|Author:||Dudley, Susan E.|
|Date:||Jul 1, 2012|
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