Michael A. Livermore is the executive director of the Institute for Policy Integrity at New York University School of Law. He is the author, along with Richard L. Revesz, of Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health.
On Thursday, newspapers reported that Cass Sunstein is expected to be appointed the Administrator of the Office of Information and Regulatory Affairs (OIRA). The post, often referred to as the “regulatory czar,” is charged with coordinating the alphabet soup of federal agencies, including the EPA, Energy Department, and OSHA. Among top officials, this is the most important position that Americans know nothing about. All major regulations—from rules on clean air to airline safety—will pass Sunstein's desk.
Sunstein, a professor at Harvard School of Law (and a contributing editor at The New Republic), is a public intellectual on topics ranging from constitutional law to behavioral economics, and, as a prolific scholar of the first order, he is extremely well-qualified for this position. One area of particular specialty for Sunstein has been cost-benefit analysis. As one of the few intellectuals that embraces both a strong regulatory state and rigorous use of cost-benefit analysis, Sunstein has shown that he can see the wisdom in two sides of a debate that rarely find value in each other.
Cost-benefit analysis in a Democratic administration occupies difficult territory. The groups that support this sort of analysis—mainly industry and conservative groups—tend to dislike strong regulation. On the flipside, many of the Democratic party's core constituencies, such as organized labor and environmentalists, see cost-benefit analysis as inherently biased against regulations. This dynamic has historical, not conceptual, roots. Cost-benefit analysis was first placed at the center of the regulatory state by President Ronald Reagan in 1981, as a tool to roll back environmental, consumer, and labor protections.
Since then, many progressive groups have fought against the expanded use of cost-benefit analysis, even as it has gained support from both Republican and Democratic administrations. The animosity of environmentalists to cost-benefit analysis went so far that, during President Clinton’s term, many progressives forfeited the opportunity to reform the technique. When new guidelines on economic analysis were prepared by EPA in the late 1990s, industry groups made their voices heard, but environmentalists were absent from the debate. Sally Katzen, who headed up OIRA under Clinton, was largely ignored when she invited progressive groups to improve the agency's cost-benefit analysis. They preferred to engage in broadside and futile attacks against the very concept.
But, as Professor Sunstein has argued (and I would agree), cost-benefit analysis, properly used, can be used to identify smart policy options, maximizing environmental and public-health benefits while minimizing economic costs. The technique enjoys broad bipartisan support because the American public is unwilling to pay infinite costs to reduce risks. Rationally, they want to ensure that government regulations don't impose greater costs than they're worth. If the Obama administration were to jettison cost-benefit analysis, in favor of something like the precautionary principle, it would make it harder, not easier, to convince a cash-strapped country that strong environmental and public-health protections make sense.
None of this means that cost-benefit analysis is perfect—or even beneficial—in its current form. The Institute for Policy Integrity (IPI) has documented the ways in which the outgoing Bush administration has abused the technique to promote its ideological agenda. From climate change to worker safety, good economic reasoning has been ignored to delay or avoid important regulations. Sunstein should make sure that cost-benefit analysis becomes an unbiased tool. In our book, Retaking Rationality (for which Sunstein contributed a blurb), Richard L. Revesz and I detailed a set of fallacies in current cost-benefit analysis that render it biased against strong protections. These errors range from ignoring the distribution of regulatory costs and benefits, to institutional defects like failing to subject deregulation to strict analysis. Taken together, these fallacies have biased cost-benefit analysis against regulation, making good regulations look bad and contributing to a dirtier environment.
To correct this imbalance, the next president should issue an executive order reforming how OIRA conducts its business. IPI has released a set of needed reforms to achieve balanced cost-benefit analyses. Reforms include increasing transparency, reviewing deregulation and agency inaction, ensuring that costs of regulation are not overestimated, and taking distributional effects into account. All of these changes would signal President Obama’s commitment to a more reasonable and just system of regulation. Sunstein’s appointment makes clear that Obama wants change at OIRA—he is too talented to be wasted in a business-as-usual role in the next administration. But the task of reforming cost-benefit analysis, removing its biases, and reforging it into a neutral tool for sound policymaking, all while promoting a strong regulatory agenda in a time of economic crisis, will not be easy.
--Michael A. Livermore