September 17, 2013

Benefits of Detailed Regulatory Impact Analysis Outweigh the Costs

Patrick McLaughlin

Senior Research Fellow

Keith Hall

Former Senior Research Fellow
Summary

The Congressional Budget Office recently estimated that the Regulatory Flexibility Improvements Act—which would require regulators to do more thorough analysis prior to adopting new rules—would cost an estimated $45 million over the next five years to implement. But, according to analysis by Mercatus Center at George Mason University researchers, the long-term economic benefits of more prudent rulemaking could easily outweigh additional costs incurred in the short term.

The Congressional Budget Office recently estimated that the Regulatory Flexibility Improvements Act—which would require regulators to do more thorough analysis prior to adopting new rules—would cost an estimated $45 million over the next five years to implement. But, according to analysis by Mercatus Center at George Mason University researchers, the long-term economic benefits of more prudent rulemaking could easily outweigh additional costs incurred in the short term.

Mercatus senior research fellow Patrick McLaughlin, former economist at the Federal Railroad Administration:

“The CBO scoring only looks at effects on the budget and not the effects on society. If doing better analysis saves billions in costs to society, then $45 million is a deal.

Although executive orders and OMB guidance require agencies to consider different alternatives in their economic analysis, they often fail to explore potentially less-costly approaches or approaches that might avoid unintended consequences. More thorough analysis could cost time and money up-front, but it could save businesses and consumers more money in the long run and produce regulations that more efficiently achieve the outcomes desired.”

Mercatus senior research fellow Keith Hall, former commissioner of the Bureau of Labor Statistics:

“Poorly designed regulation can significantly distort the economy and impact the labor market. It’s basic economics: Regulation can often raise the cost of production in the affected industry. Those higher production costs lower productivity, raise market prices, and lower employment as demand for those goods and services fall.

In addition to the direct effects in the regulated industry, there will be indirect effects on other industries and on consumers. If the regulated product is purchased by other industries, then their costs rise as well, raising prices in those other industries and leading to an increase in unemployment.”