Abstract
For public interest advocates engaged on issues of worker health and safety and environmental protections, regulatory cost–benefit analysis has long been seen as an obstacle to meaningful progress. In November 2023, the Biden administration overhauled Circular A-4, which provides guidance to agencies on how to perform cost–benefit analyses for their rules. The reforms seek to make cost–benefit analysis less biased against worker safety, public health, environmental, and other protective safeguards. As such, the new version of Circular A-4 offers important new levers to agencies to justify more stringent protections. By extension, those in the public interest community can use agency implementation of the new Circular A-4 as part of their advocacy efforts for specific rules they are tracking. This article seeks to support this tactic by providing a roadmap for advocates on how to incorporate into their comments critiques of agencies’ cost–benefit analyses based on the Circular A-4 revisions.
Introduction
For public interest advocates engaged on issues of worker health and safety and environmental protection, regulatory cost–benefit analysis has long been seen as an obstacle to meaningful progress. 1 These analyses are time-consuming and resource-intensive for already budget-strapped agencies to produce. In addition, these analyses tend to produce results that are heavily skewed against effective regulations since they rely on methodologies that systematically overestimate costs while dramatically undercounting benefits.
Apparently in response to these concerns, the Biden administration released on its first day in office a memo on “Modernizing Regulatory Review,” which promised to introduce a wide-ranging suite of reforms to the methods by which federal agencies develop and implement regulations to advance their statutory missions. 2
One of the notable provisions in the day one memo called for reforming the way cost–benefit analysis is performed by overhauling a little known government document called Circular A-4. 3 The goals of this effort were both to incorporate new data used to inform key parameters of the methodology and also to introduce new techniques that would effectively “un-rig” cost–benefit analysis so that it is no longer heavily biased against effective safeguards.
The Biden administration completed the revisions to Circular A-4 in November 2023. 4 The administration's revisions may not have gone as far as some public interest advocates would like. Notably, it still requires agencies to monetize “nonmarket” benefits categories—that is effects of a rule that are not or cannot be bought and sold in the market place, such as premature deaths or racial discrimination. In addition, Circular A-4 still urges agencies to design their rules to maximize efficiency, an approach that can often lead to weaker protections and that is incapable of properly accounting for a rule's distributional effects. Still the new version of Circular A-4 still offers important new levers to agencies to justify more stringent protections. By extension, those in the public interest community can use agency implementation of the new Circular A-4 as part of their advocacy efforts for specific rules. This article seeks to support this tactic by providing a roadmap for advocates on how to incorporate into their comments critiques of agencies’ cost–benefit analyses based on the Circular A-4 revisions. These critiques, in turn, could be used to reinforce other arguments offered in support of robust protection for workers and the environment.
Role of Circular A-4 and Cost–Benefit Analysis in Regulation
Since it was issued in 2003 during the George W. Bush administration, Circular A-4 has provided agencies with a comprehensive blueprint for how to conduct a “regulatory analysis” on their planned rules. While such analyses could theoretically take any of a variety of forms, 5 Circular A-4 embraced what is known as “cost–benefit analysis” (or sometimes phrased as “benefit–cost analysis”). In this article, I will use the more inclusive term “regulatory analysis,” unless I intend to refer to the more specific concept of “cost–benefit analysis.”
Although non-economists may define “cost–benefit analysis” more broadly, Circular A-4 uses the term to describe a very specific, technical methodology. It describes the methodology in the following terms: “A distinctive feature of [cost-benefit analysis] is that both benefits and costs are expressed in monetary units, which allows you to evaluate different regulatory options with a variety of attributes using a common measure. By measuring incremental benefits and costs of successively more stringent regulatory alternatives, you can identify the alternative that maximizes net benefits.” 6 Put differently, the idealized goal is to identify from among an infinite number of possibilities a single “optimal” policy design—or that which achieves the greatest economic efficiency by maximizing net benefits. 7 This would require an analyst to accurately predict and quantify all the effects—both good and bad—of a given policy (e.g., the number of hurricanes averted, the number of guardrails installed, etc.), and then to meaningfully convert those quantified effects into a common metric of dollars and cents—a technique called monetization. To tally the net benefits, the analyst then must subtract the aggregate value of the policy's costs from the aggregate value of the policy's benefits. Finally, the analyst must repeat this process on several alternative policy designs to identify the one that yields the greatest net benefits. 8
Carrying out this idealized form of cost–benefit analysis is impossible in practice, of course. Even in the best cases, agencies lack the data and resources to achieve the kind of comprehensive accounting of regulatory impacts that the methodology demands. Cost–benefit analysis also raises intractable theoretical problems—such as the ethical challenges of reducing to monetary terms things like protecting human lives or preventing the extinction of animal species. The upshot is that few regulatory impacts are ever meaningfully quantified and monetized, defeating even the best efforts to calculate net benefits.
It would be bad enough if the only flaw in cost–benefit analysis was that it fell well short of its ambitious methodological goals, wasting scarce agency resources and time. Of even greater concern, though, is the harmful impact that it has on the substance of regulatory decision making. Because of its intrinsic methodological biases, cost–benefit analysis necessarily operates as a barrier to public health, safety, and environmental regulations. 9 One major source of this bias is that its demand for quantification and monetization results in analyses that systematically undercount regulatory benefits. Another is that the methodology's fixation on maximizing “efficiency” leads it to give undue weight to regulatory costs, thereby exaggerating their significance in the final analytical results.
The combined effect of these two biases is often to cast an unfavorable light on even the most sensible of regulatory safeguards. Such biased analyses can have a chilling effect on decision making, inducing agencies to water down their rules or to abandon them altogether. 10
The Biden Administration's “Modernizing Regulatory Review” Reforms
In April of 2023, the Biden administration took its first major step toward implementing the day one memorandum on “Modernizing Regulatory Review” when it published its proposed revisions to Circular A-4. With this step, the administration launched two separate mechanisms for gathering input on the proposed revisions: a public comment process and formal peer review. The administration committed to accounting for this input to inform the final set of revisions.
As discussed in greater detail below, the proposed revisions generally took two forms. The first set of revisions is essentially mechanical in nature, involving relatively routine updates to modeling parameters by incorporating new data (e.g., recalculating the discount rate—a methodological adjustment that analysts use to reduce the value of future impacts compared to present impacts—with new data on the effective annual interest rate on US Treasury Bonds). The second set is more consciously aimed at “un-rigging” cost–benefit analysis. (To be sure, the first set of reforms has this effect, too. For instance, outdated data resulted in a high discount rate, which improperly devalued many regulatory benefits that occurred in the future.) In some cases, this set of revisions seeks to ensure that important benefit categories that were once systematically ignored or undervalued—such as non-fatal cancers—are now meaningfully considered. In other cases, the revisions are aimed at reducing the bias toward regulatory options that maximize net benefits. The revised Circular A-4 still champions this policy objective, but it also elevates consideration of other competing policy goals, such as equity. Put another way, under the old version of Circular A-4, the goal was to design regulations to make the “pie” as big as possible—to maximize economic growth. The proposed revisions would allow for regulations that limit economic growth somewhat to permit the pursuit of other goals. The classic debate in economics—how big to make the pie versus how to divide it—is merely being played out in the context of how we should design and implement regulatory analysis for regulations.
Significantly, the proposed Circular A-4 revisions can be seen as an integral part of a suite of reforms of the administrative state that the Biden administration has undertaken over the last few years. Taken together, these reforms seek to “democratize” the administrative state by expanding opportunities for public participation in various aspects of regulatory implementation, with a particular focus on members of structurally marginalized communities. At the same time, the aim of many of these reforms is to reduce the role of “technocracy”—or the domination of administrative processes by technical experts or other elites. 11 Indeed, cost–benefit analysis has come to epitomize the undue influence that technocracy often exerts on regulatory decision making. 12
How Advocates Can Leverage the Circular A-4 Revisions to Support Robust Worker and Environmental Protections
If properly implemented, these revisions could yield regulatory analyses that would support stronger regulatory protections for workers, public health, and the environment.
Public interest advocates can seek to use their participation in the public comment process to hold agencies accountable for following the revisions to Circular A-4. Advocates typically use their public comments to argue that considerations of legal authority and relevant policy considerations support robust protections. With the revised Circular A-4, advocates should now seek out opportunities to further buttress these kinds of arguments by discussing how the underlying regulatory impact analysis also supports robust protections. As discussed in greater detail below, this would involve critiquing the agencies’ failure to use the techniques afforded by the revisions to account fully for regulatory benefits, as well as agencies’ improper use of methodologies that exaggerate the influence of regulatory costs to the detriment of meaningful consideration of competing policy objectives.
It is also important for public interest advocates to hold agencies accountable for implementing the Circular A-4 revisions now because it will increase the likelihood that they will survive a transition to a future presidential administration that might otherwise reject them due to an ideological hostility to robust public safeguards. Diligent implementation could help the revisions become more ingrained into standard agency operating procedures, thereby making retrenchment to something like the earlier, more anti-regulatory forms of regulatory analysis difficult to accomplish in practice.
The Circular A-4 revisions became effective for agency proposed rules, interim final rules, and direct final rules on March 1, 2024. 13 So, public interest advocates can begin commenting on the regulatory analyses for these forms of agency actions immediately.
A Circular A-4 Commenting Checklist for Advocates
The Basics of Regulatory Analysis
Regulatory analysis can be broadly understood as a rigorous, systematized effort to evaluate different alternative policies by predicting and comparing their effects against one another, including a comparison against a hypothetical future in which no policy action is taken. Accordingly, every regulatory analysis involves the following four basic components.
A Defined Baseline
It is impossible to measure the effects of a given policy without first understanding what the world would look like in the absence of that policy. This hypothetical “no policy” world is called the baseline. A properly defined baseline starts with an accurate description of current policy-relevant conditions (e.g., levels of air pollution) and requires a prediction of how those conditions are likely to evolve in the near- to medium future if no policy action is taken. Predicting future conditions for the baseline is not necessarily a straightforward exercise, though. An accurate baseline must therefore account for the variety of unrelated factors (e.g., change in the structure of the economy) that can cause such factors to change.
Identification and Measurement of the Effects of Alternative Policies
Any change that a policy causes—and that would not occur in the absence of the policy—qualifies as an effect of that policy. For instance, the effects of a workplace protection might include the installation of new safety equipment and the resulting reductions in worker injuries or fatalities. Once all the major effects of a regulation have been catalogued, they can then be measured or described qualitatively, quantitatively, or in monetary terms. What distinguishes cost–benefit analysis from other forms of regulatory analysis is its demand that effects be quantified and monetized. While the revised Circular A-4 maintains its predecessor's preference for monetization and quantification over qualitative analysis, it notably embraces a more expansive view of the appropriateness and legitimacy of qualitative analysis. 14
A Comparison of Policy Alternatives
The manner in which a regulatory analysis compares policy alternatives can take different forms, too. Cost–benefit analysis is unique in that it bases its comparison of policy alternatives on net-benefits calculations, as it seeks the policy alternative that achieves the greatest net benefits possible. Again, the revised Circular A-4 maintains its predecessor's preference for achieving maximized net benefits. 15 Yet, it also explicitly acknowledges that other competing policy objectives—such as equity—can be pursued even if this means rejecting a policy alternative that would have maximized net benefits. 16 Similarly, an important consequence of the revised Circular A-4's reduced emphasis on monetization is that it somewhat diminishes the demand on agencies to perform net-benefits calculations. Indeed, the revised Circular A-4 acknowledges that, in many cases, meaningful net-benefits calculations may be impossible to perform. 17 In such instances, the revised Circular A-4 encourages agencies to use alternative methodologies for comparing policies, such as cost-effectiveness analysis. 18
Presentation of Results
Finally, a regulatory analysis will summarize its results in a clear and concise format that is consistent with the methodology employed. For instance, a cost–benefit analysis might use a table with numbers, while a qualitative analysis might rely on a short narrative discussion. When relevant and helpful to understanding the results, the summary should also discuss key sources of uncertainty. In any event, though, the full regulatory analysis should disclose all underlying data, assumptions, and calculations—to the extent consistent with privacy and other relevant policy considerations—to enable a replication of the results by an independent third party.
The revised Circular A-4 is largely built around providing detailed guidance to agencies on accomplishing each of these components when developing a regulatory analysis. As such, advocates can more effectively comment on regulatory analyses by framing their arguments to fit within this basic structure.
Did the Agency Define the Baseline Properly?
As explained above, the baseline serves as a hypothetical scenario that projects what the world will look like in the absence of a policy and, as such, provides a uniform benchmark against which to measure the incremental effects of different policy options. Several factors are relevant for consideration when defining the baseline, which advocates may wish to address as part of their public comments on a rule's regulatory analysis.
Scope of Analysis
The baseline is the step at which an analysis defines its spatial and temporal scope. Given that the overarching purpose of regulatory analysis is to provide policymakers and the public with as much information as possible about all the important effects of the policies under consideration, both dimensions—time and geography—should be accordingly defined broadly enough to effectuate that purpose. 19 Significantly, the territory of the United States, or perhaps an identifiable subdivision thereof, serves as the default geographic scope. In some instances, though, a given policy problem—such as climate change—requires an analysis that considers global effects. 20 Advocates should, therefore, consider commenting on whether an agency should have used a global scope for its analysis.
Distributional Issues
It is important that the baseline provides as accurate a picture of the real world as possible. As such, an analysis should clearly identify any distributional effects (e.g., preexisting sources of racial or economic inequities) that might be relevant to understanding the effects of a regulatory policy. 21 A good example of distributional effects can be seen in the Occupational Safety and Health Administration's (OSHA) Coke Oven Volatiles standard, which disproportionately benefitted African-American workers due the preexisting injustice that African Americans in steel mills were disproportionately assigned to work on top of coke ovens. Advocates should seek to ensure that such distributional concerns are reflected in the analytical baseline.
Factors That Can Affect the Future Development of the Baseline
As noted above, projecting the future development of baseline conditions is not necessarily a straightforward exercise. Advocates can play a role in ensuring baseline for an analysis properly accounts for factors that might modify future conditions that would have the effect of either (a) increasing the benefits of a regulation or (b) reducing costs. The revised Circular A-4 provides examples of such factors, including changes in relevant markets (e.g., government subsidies that encourage businesses to invest in pollution control equipment) or foreseeable low rates of compliance with other regulations. 22
Did the Agency Measure Regulatory Effects Properly?
Identifying Policy Alternatives
The first step in measuring regulatory effects is to identify an appropriate range of policy alternatives that will be considered. Advocates should use their comments on the analysis to ensure that the range of alternatives under consideration is actually meaningful. For instance, the revised Circular A-4 encourages agencies to consider options that vary according to degree of stringency. 23 It would be misleading, however, if included among the options for consideration are policies so extreme in their stringency that they would obviously be cost-prohibitive. Instead, variations in stringency should be gradual enough to enable a fair consideration of potentially more protective options, despite the incremental increases in compliance costs they might entail.
In addition, if an analysis considers alternative regulatory designs, particularly those that employ information disclosures or market mechanisms as strategies to mitigate compliance costs, 24 then it should properly account for the potential drawbacks of those strategies. In many cases, these policy approaches have been more costly to administer and have been less effective in achieving their goals due to the increased rates of noncompliance they often engender. 25 In occupational health, these methods tend to be inherently less effective even if fully implemented. For example, informing someone that their high paying union job exposes them to carcinogens and that they are free to quit that job and work at Walmart for half the salary does not prevent any cancers even if every employer fully complies with the information requirements. While some workers make use of the information by leaving for a different job, others would still be hired and exposed to the same risk. Information alone, without reductions in exposure, does not reduce risk. Advocates can use their comments on regulatory analyses to hold agencies accountable for considering these kinds of consequences from alternative regulatory designs.
Cataloguing all Important Effects
To fulfill its objective as an informational tool, a regulatory analysis must strive to account for all important effects. As such, the revised Circular A-4 counsels that when faced with uncertainty about a particular category of effects, it is better to include it (and characterize the uncertainty) than to leave it out. 26 The analysis should also include “indirect” benefits—or those positive effects that result from a given policy but are not its main purpose. 27 Finally, when relevant, the analysis should account for a policy's effects on “ecosystem services,” or the contributions to human welfare that the natural environment can provide to humans. 28
Significantly, each of these types of easily overlooked regulatory effects would tend to count as regulatory benefits. The general exclusion or minimization of these kinds of effects has contributed to the historic pattern of antiregulatory bias in regulatory analysis. The revised Circular A-4 aims to correct this bias by placing consideration of these effects on firmer ground. Advocates should therefore ensure that agencies properly account for them in their future regulatory analyses.
Monetization of Regulatory Effects
One of the most controversial aspects of regulatory analysis is the use of monetization for measuring regulatory effects. Besides raising important ethical objections, it has also contributed to the methodology's antiregulatory bias. As noted above, the revised Circular A-4 still retains a preference for monetization, but also offers agencies greater discretion to deviate from its use. Advocates should seek to ensure that the use of monetization in regulatory analysis is properly constrained.
One question that advocates will want to ask is whether monetization was applied in situations that are ethically inappropriate. For example, the revised Circular A-4 notes that monetization is not appropriate for measuring “the value of human dignity, civil rights and liberties, equity, justice, or indigenous cultures.” 29 It also counsels against using monetization for benefits that uniquely affect children. 30
Advocates should also consider using their comments to interrogate any practical limits related to the use of monetization in a regulatory analysis. When important regulatory effects are not bought and sold in the market, and thus do not have a readily identifiable monetary value, agencies can resort to complex economic studies that attempt to artificially approximate a price for them. 31 Advocates should ensure that agencies have properly accounted for any weaknesses in the objectivity or quality of these studies. One common shortcoming is that severe data limits can undermine the usefulness of a study's results (e.g., assigning a value to preventing non-fatal cancer by extrapolating from a study on chronic bronchitis).
Another problem is when a study is designed to measure a person's “willingness to pay” for a particular benefit. This approach can result in underestimates of the benefit compared to an alternative approach known as “willingness to accept.” The difference is in part a result of what psychologists refer to as the “endowment effect,” or an enhanced aversion to losing something that someone already has. It also can be traced to the respondents’ financial realities; budget constraints quite literally limit the amount that they can, and thus are willing, to pay benefits. As a general matter, studies that rely on willingness to accept measure provide a more accurate estimate, but they still involve flaws of their own. 32 For instance, when the benefit involves something like access to an environmental amenity, such as a park, the willingness to accept measure (i.e., what I would be willing to give up to lose access to the park) might seem intuitively to offer a reasonable estimate of that benefit's monetary value. If, however, the question is what I would be willing to accept in order to give up an extra year of life or endure a nonfatal cancer, even then the approach can seem quite controversial. One can imagine a relatively poor person having a much lower “willingness to accept” value—an amount as little as $50,000 might be life-changing for them—as compared to a much wealthier person. For example, this wealth-based distortion for willingness to accept measurements of health-related benefits is evident in the disparities in the “value of statistical life” (or monetary value assigned for preventing a premature death) across countries. These values are developed using a revealed preference studies that rely on a willingness to accept approach called “wage premium studies.” The countries with lower values of statistical life tend to be much poorer, and their workers are willing to accept a much smaller risk-based wage premium for taking on hazardous jobs. 33 Significantly, when an individual's wealth meaningfully influences the value of a regulatory benefit—whether that benefit value is derived using a willingness to pay or a willingness to accept approach—an agency analyst can still seek to correct for it using a technique called “distributional weights,” which is described below.
Finally, one monetization technique involves using what are known as “stated preference” studies. These studies essentially rely on surveys to obtain estimated values. Stated preference studies are so unreliable methodologically speaking, that they are little better than guessing the economic value of the benefit in question. If a cost–benefit analysis relies on stated preference studies, it indicates that there are few or no good data to support monetization. In this case, activists should argue for nonmonetized assessments.
In contrast, “revealed preference” studies attempt to use observations of actual human behavior to generate estimated values. For instance, wage premium studies, which are used to extrapolate a monetary value for preventing a premature death by using market data to determine how much workers in dangerous industries earn, are a type of revealed preference study. (Depending on how they are designed, both revealed preference and stated preference studies can be used to elicit either willingness to pay or willingness to accept measures.)
Revealed preference studies often suffer from significant methodological flaws that lead to systematic underestimates of benefit values. For example, the wage premium studies do not account for the fact that power disparities can prevent workers from demanding wages that properly reward them for the enhanced dangers they face, a problem that is particularly acute for workers of color, women, and those with insecure immigration status. They also inappropriately assume that workers are well informed about the nature and gravity of the risks they are assuming, either through their own efforts or through accurate disclosures by their employers. These studies also involve fundamental mismatches between what they actually measure and what they claim to measure, including a failure to properly account for fatal occupational diseases (as opposed to fatal occupation injuries, which are far less common) and their reliance on extrapolating from large group averages to purportedly describe individual preferences. 34 Still, revealed studies are still considered more reliable than stated preference studies. Because stated preferences studies are the least reliable of monetization techniques, their use should be discouraged. 35
Alternative Approaches to Measuring Nonmonetizable Regulatory Effects
The revised Circular A-4 encourages agencies to use four alternative techniques for measuring nonmonetizable regulatory effects: threshold analysis; break-even analysis; screening; and order of magnitude analysis. 36 Threshold and break-even analysis apply in rulemakings when regulatory costs are readily ascertainable but important benefits are not monetizable. Their goal is to identify what those benefits would need to be worth in order for the regulation to have positive net benefits. 37 While these approaches avoid some of the practical and ethical controversies of monetization, they are still problematic in that they are predicated on the importance of calculating net benefits. Such calculations are intrinsically antiregulatory insofar as they inappropriately equate the moral significance of a rule's benefits and costs. Accordingly, advocates should urge agencies to reject the use of these methodologies whenever possible.
An analysis might use screening or order-of-magnitude analysis techniques when it lacks sufficient data to develop a more precise quantitative estimate of a rule's benefits. Instead, these techniques help provide a rough sense of the magnitude of those benefits (e.g., how many people might be affected by air pollution when different assumptions are adjusted). 38 Screening and order-of-magnitude analysis raise no real ethical concerns when used merely to ascertain the magnitude of regulatory effects. But advocates will want to ensure that the results of these techniques are not improperly used, such as by comparing them directly against regulatory costs in a fashion similar to threshold and break-even analysis.
Qualitative Discussions of Regulatory Effects
Agencies should not use the inability to quantify or monetize certain categories of regulatory effects as a justification for not including qualitative discussions of them in a regulatory analysis. Advocates can play an important role in ensuring that regulatory benefits that might be overlooked—including, as noted above, indirect effects and ecosystem services—are properly considered. Advocates can also use their comments to ensure that qualitative discussions of benefits are as complete and informative as possible. The revised Circular A-4 recommends such discussions include information about a particular effect's magnitude and probability, as appropriate, while providing as many relevant details about the effect as possible. 39
Technological Change
To be accurate, measurements of regulatory effects should account for foreseeable changes in technology. In some cases, such advances would be induced by the policy under consideration. 40 Accounting for these advances is important because they enable regulatory benefits to be achieved at lower costs. Accordingly, advocates should ensure that regulatory analyses have accounted for these developments where relevant.
Noncompliance
High rates of noncompliance can be common for many types of regulations. As noted above, this is often the case for policies based on information disclosure or market mechanisms. The failure to account for pervasive noncompliance can lead to overestimates of both regulatory costs and benefits, but these overestimates will not necessarily be mutually offsetting. 41 Moreover, noncompliance also raises significant distributional concerns, as members of structurally marginalized communities may be more likely to experience the harmful effects that would result. Accordingly, advocates should use their comments to ensure that agencies have properly accounted for the magnitude, probability, and distribution of the effects of noncompliance with the policy alternatives being analyzed.
Market Power
Often, the social or economic problem that a regulation seeks to address is the result of huge disparities in market power, such as those that exist between workers and their employers or between consumers and the large multinational corporations that provide us with many of our goods and services. An accurate measure of a policy's effects should account for the impact it would have on redressing such market power disparities. 42 Advocates should consider using their comments to ensure that relevant market power disparities are identified and properly accounted for. Differences in market power between employers and employees are among the major reasons for which the wage-premium literature, discussed above, is flawed. Employees may enter the market facing a choice of high-risk job that might kill or hurt them later or not being able to pay rent or buy groceries next week, while employers may be risking only a slightly lower profit margin if they have make their jobs safer or pay higher wages.
Distributional Analysis
The effects of a regulation will not necessarily be uniformly distributed across the US population, as some groups may potentially bear a disproportionate share of the costs while others enjoy a disproportionate share of the benefits. 43 A failure to account for such distributional effects can result in regulatory analyses that present a distorted picture of the policy alternatives under consideration and can even affect which policy alternative is ultimately selected. Unlike its predecessor, the revised Circular A-4 gives detailed guidance to agencies on whether and how to account for distributional effects in their regulatory analyses.
Advocates can play a role in ensuring that agencies have not overlooked important opportunities for conducting a distributional analysis as part of a regulatory analysis. The revised Circular A-4 recommends such analyses when the policy alternatives under examination are likely to have significant distributional effects and when the analyses would help inform the agency's decision on which policy alternative to select. 44
When an agency does perform a distributional analysis, advocates should consider using their comments to identify ways in which the analysis could be improved. For instance, advocates should ensure that the analysis identifies and considers the relevant population subgroups. 45 Distributional analyses also share the same basic structure as regulatory analyses more generally. 46 Consequently, advocates can comment on flaws in the analyses’ baseline, effects analysis, comparisons, and presentation. Finally, advocates should consider whether and how the distributional analysis affected the selection of a policy alternative. Significantly, the revised Circular A-4 explicitly recognizes that distributional concerns, as identified through a distributional analysis, may warrant selecting a particular policy alternative other than that which maximizes net benefits. 47 In other words, in certain cases, concerns for distributional justice can take precedence over the default preference for maximized net benefits.
One specific technique that the revised Circular A-4 introduces for accounting for distributional effects in regulatory analysis is known as “distributional weights.” These seek to promote more accurate monetary estimates of regulatory effects by adjusting those amounts to account for the fact that the value of a dollar varies according to a person's relative wealth. 48 In other words, the usefulness of an extra dollar is much greater for a poor person than a wealthier one. Advocates may wish to urge agencies to use distributional weights in regulatory analyses in appropriate circumstances. Such circumstances may include rules whether a substantial portion of the benefits or costs falls on an identifiable low-income or low-wealth population (e.g., an occupational health and safety regulation that protects migrant farmworkers). In addition, agencies may be able to use this technique to offset wealth-based distortions that result from the use of either willingness to pay or willingness to accept approaches to assign monetary values to non-market regulatory impacts.
Uncertainty
As noted above, the revised Circular A-4 admonishes that uncertainty should not be used as an excuse for excluding otherwise important effects from regulatory analysis. 49 Still, it further counsels that analyses include discussions of the sources of uncertainty and whether and to what extent they might obtain their results. 50 Advocates should use their comments to ensure that agencies account for uncertainties that might lead to either overestimates of regulatory costs or underestimates of regulatory benefits. With respect to regulatory benefits, advocates will want to remain vigilant for one unique question of uncertainty: that of “irreversibility.” 51 For instance, this scenario may be relevant for policies affecting such issues as exhaustible natural resources or climate change tipping points. These scenarios differ from the typical situation that regulations are meant to address, where a failure to regulate leads to a reasonably predictable linear increase in a certain bad outcome, such as premature deaths from excess air pollution. In these situations, however, there is a point where that linear relationship gives way to an exponential increase or even catastrophic response that is irreversible. The problem of uncertainty these situations involve is that this point is impossible to predict in advance. Given that these scenarios involve such enormous consequences, a failure to take seriously the uncertainty involved in predicting their occurrence can result in a significant underestimate of regulatory benefits.
Discount Rates
It is often the case that a regulation's effects will occur at different time points in time in the future. The value of effects that occur in the near future is greater than those that occur later. One reason is that people simply prefer to have things now, as opposed to later. Another reason is the operation of inflation—a dollar will have less purchasing power 10 years from now than it does today. Finally, an individual could theoretically invest money today and have more in the future. Waiting to give someone that money in the future deprives them of that investment opportunity.
Regulatory analysis accounts for this phenomenon with a technique known as “discounting.” This is accomplished by multiplying the value of a given regulatory impact that is projected to occur in the future—say, the value of preventing a premature death—by a discounting factor that compounds over time. Two big consequences flow from this formula. First, the further in the future the impact is experienced, the more it is discounted. Indeed, impacts that occur several decades will be reduced to a value nearing $0. Second, the larger the discount rate, the more rapidly the value of future impacts is reduced.
One of the big innovations in the revised Circular A-4 was to adopt updated discount rates for different kinds of regulatory impacts. Importantly, these discount rates are lower than those called for in the 2003 version of Circular A-4. The practical effect of this change is that future benefits will be worth more than would have been the case under the 2003 version of Circular A-4. This change is significant because the earlier high discount rates were a major source of the anti-regulatory bias of cost–benefit analysis.
Advocates should ensure that agencies are following the new discount rates in the revised Circular A-4. First, it directs agencies to use a 2% discount rate for most types of near-term effects (i.e., those that take place within the next 20 years). This rate is based on the rate of return one might earn in a personal savings account and can thus be seen as a proxy for individuals’ time preference for money. Second, the revised Circular A-4 directs agencies to use both a 1.0% and a 1.2% discount rate for the special case of regulatory impacts affecting capital investment, such as long-term investments in infrastructure. These rates, which are derived from complex economic calculations, are meant to mimic the real-world returns on capital investment. Due to imperfections in most investment markets, though, the rates end up being systematically lower than the standard discount rate.
Finally, the revised Circular A-4 recommends using a third discount rate approach for intergenerational effects. 52 In contrast to the near-term forms of discounting discussed above, which in essence involve a choice being made by a single individual, difficult ethical concerns arise from intergenerational discounting. In this case, it involves decisions on how to allocate resources that will affect future generations who, by definition, do not have a chance to weigh in on those decisions. To reflect the special care that is required in these cases, the revised Circular A-4 recommends using an even lower discount rate. (Some economists even argue that no discount rate should be used at all for intergenerational effect; in other words, they argue that future and present generations should be treated equally.) The revised Circular A-4 provides agencies with a model schedule of varying discount rates to use for long-term discounting. Derived from historical on interest rates, this schedule seeks to account for uncertainty and dynamic changes in discount rates that can occur over time.
To be clear, none of this is to say that the recommendations contained in the revised Circular A-4 are ethically “correct.” For instance, one may conclude that it is categorically inappropriate to discount the value of certain health benefits, such as premature deaths averted or non-fatal cancers prevented. Similarly, one may object on moral grounds to the notion that capital investment-related impacts should be discounted as prescribed in Circular A-4. And, most significantly all, there are compelling arguments against applying any kind of intergenerational discount rate. Advocates are encouraged to raise these ethical objections, in addition to ensuring that agencies follow the new discounting guidelines outlined in the revised Circular A-4.
Did the Agency Adopt an Appropriate Approach for Comparing Alternatives?
Limits on Net-Benefits Calculations
As noted above, the revised Circular A-4 retains its predecessor's preferred approach to using net-benefits calculations as the basis for comparing different regulatory alternatives. 53 At the same time, though, it recognizes that the use of net-benefits calculations may not be possible or helpful due to practical or ethical constraints. 54 By definition, if an agency is unable to quantify and monetize the most significant effects of a particular rule, then it will be impossible for the agency to accurately or meaningfully calculate the rule's net benefits. Advocates should use comments to criticize any attempts by agencies to calculate net benefits in situations when significant categories of effects, especially regulatory benefits, are not quantified and monetized.
Cost–Effectiveness Analysis
In situations when net-benefits calculations would be inaccurate and uninformative, the revised Circular A-4 suggests that agencies employ an alternative approach called “cost-effectiveness analysis.” This approach applies when an agency is able to develop a fairly accurate estimate of regulatory costs but can only quantify—but not monetize—a rule's most important benefits. It is designed to identify which of a set of available policy alternatives generates the most benefits for a given investment in compliance costs. Significantly, the most cost-effective policy will not necessarily be the one that maximizes net benefits, as cost–benefit analysis attempts to identify. But cost-effectiveness analysis has the same basic antiregulatory bias as cost–benefit analysis in that it exaggerates the significance of regulatory costs by improperly equating them with regulatory benefits. While cost-effectiveness analysis is arguably preferable to cost–benefit analysis, advocates should still consider using their comments to critique its use. In particular, they should question whether the agency has properly considered the relative merits of a rule's costs and benefits. Where a rule's benefits are not ethically commensurable with its costs, advocates should urge the agency to forgo cost-effectiveness analysis and use a qualitative balancing approach instead.
Qualitative Analysis
The revised Circular A-4 explicitly contemplates the use of qualitative analysis for comparing alternative policies when too many of the most important regulatory effects cannot be quantified or monetized. 55 When undertaking this approach, the revised Circular A-4 urges agencies to describe how they weighted these unquantified effects and the role these unquantified effects played in dictating the ranking of policy alternatives. Further, agencies should strive to support this discussion with the best available evidence it has. 56 Advocates can use their comments to urge agencies to adopt this approach to comparing policy alternatives when appropriate and to ensuring that it is carried out as rigorously as possible.
Did the Agency Present the Results in a Clear and Concise Manner?
Summary of Results
To assist policymakers and affected members of the public to understand the results of a regulatory analysis, the agency should provide a clear and concise summary of its results. Depending on the approach taken for the analysis, the agency should report its topline findings on effects that were monetized (including, where applicable, net benefits), effects that could only be quantified, and all remaining important effects that were unquantified. 57 Experience shows that it is easy for the important effects that are only quantified or qualitatively described to be overlooked in a regulatory analysis, particularly when a few regulatory effects have been monetized and a net-benefits calculation has been performed. To avert this undesirable outcome, agencies should include in the summary for its analysis a prominent synopsis of all significant unmonetized regulatory effects. 58 The revised Circular A-4 further suggests that agencies consider “categorizing or ranking” qualitatively described effects, especially if doing so would help to make their significance for the results of the analysis clearer to policymakers and the public. 59
Advocates should use their comments to hold agencies accountable for following these guidelines and to suggest how the summary of results for a particular analysis could be improved. In particular, they may wish to focus on ways that any discussions of qualitatively described benefits can be made clearer and more prominent in the summary.
Other Considerations
Identifying Potential Justifications for Regulation
The revised Circular A-4 follows its predecessor in providing agencies with guidance on how to identify and describe the need for the regulatory action being contemplated. This exercise in turn can be used to inform the various steps of the regulatory analysis, including measuring regulatory effects and comparing alternative policies. The prior version of Circular A-4 largely frames this guidance in economic or market-based terms. In other words, it largely portrays regulation as legitimate only when intended to correct common market failures, such as externalities or information asymmetries. The revised Circular A-4 takes a broader view of this issue, however. Notably, it recognizes as legitimate needs for regulation the correction of market power disparities, the promotion of distributional fairness and equity, and the advancement of civil rights, civil liberties, and democratic values. 60 Agencies may be unaccustomed to thinking of their policies in these terms and thus are likely to overlook how their regulations may serve to fulfill these needs.
Advocates can use their comments to ensure that agencies recognize the full scope of needs that their regulations are likely to meet. This, in turn, will enhance agencies’ consideration of regulatory benefits and may influence how they compare alternative policies. In some circumstances, these changes in comparisons may even induce agencies to select a different policy alternative than they would have otherwise if they had instead adopted a more restrictive understanding of the needs the regulation would meet.
Transparency
The usefulness and integrity of a regulatory analysis will in part be a function of the transparency with which it is created and shared with the public. The revised Circular A-4 advises agencies to release the draft regulatory analysis along with the proposed rule to allow for meaningful review and comment by the public. In addition, the regulatory analysis should include full documentation and disclosure of its methods, data, and assumptions, consistent with legitimate countervailing policy concerns such as the protection of individual privacy. The goal of these disclosures is to permit a qualified third party to understand how and why the analysis was done such that it could be replicated. 61 Finally, where applicable, the analysis should disclose whether non-governmental entities, such as contractors or consultants, participated in the development of the regulatory analysis and the role and circumstances of their participation. 62 Advocates should monitor whether and to what extent a regulatory analysis abides by these transparency guidelines and uses their comments to identify instances where agencies may have fallen short.
Public Participation
One of the basic objections to cost–benefit analysis is that it tends to crowd out public participation by privileging the perspectives of elite experts, particularly economists and others with graduate-level training in law and policy analysis. The revised Circular A-4 seeks to address this concern by encouraging agencies to engage with affected members of the public so that they can account for their situated knowledge and lived experience when conducting regulatory analyses. 63 It particularly urges agencies to engage with members of the public as early as possible. Advocates should carefully monitor whether agencies are providing the public with meaningful opportunities to participate in the development of regulatory analyses. They can use their comments to identify opportunities where additional public participation could be beneficial to the analysis.
Conclusion
For the last 40 years, the institution of regulatory analysis has served as a major barrier to effective public health, safety, and environmental protections. In particular, the unique methodology of cost–benefit analysis has afforded regulated industry and conservative policymakers a powerful tool for blocking essential safeguards. The revised Circular A-4 promises to change this dynamic. While the reforms it introduces do not completely eliminate all of the sources of antiregulatory bias that have long plagued the practice of regulatory analysis, they do recalibrate the methodology such that it provides a more level playing field for public interest advocates interested in using it to argue in favor of more protective safeguards.
This promise of the revised Circular A-4 will only be realized, however, if advocates are able to effectively use the reforms. For instance, many of the reforms will empower advocates to ensure that regulatory benefits—including those that are easily overlooked or that resist quantification and monetization—are meaningfully accounted for in the analytical results. Others would help prevent considerations of regulatory cost from having an exaggerated influence on the selection of policy alternatives. Only when advocates are better equipped to leverage these reforms in their comments, as this article seeks to accomplish, will the institution of regulatory analysis fulfill its essential function of providing policymakers and the public with accurate and useful information about regulations that are under development, leading to better policy designs and outcomes.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.
