February 25, 2015

Comprehensive Regulatory Impact Analysis: The Cornerstone of Regulatory Reform

Testimony before the Senate Committee on Homeland Security and Governmental Affairs
  • Jerry Ellig

    Research Professor, George Washington University Regulatory Studies Center

Good morning Chairman Johnson, Ranking Member Carper, and members of the committee. Thank you for inviting me to testify today.

I am an economist and research fellow at the Mercatus Center, a 501(c)(3) research, educational, and outreach organization affiliated with George Mason University in Arlington, Virginia. I’ve previously served as a senior economist at the Joint Economic Committee and as deputy director of the Office of Policy Planning at the Federal Trade Commission. My principal research for the last 25 years has focused on the regulatory process, government performance, and the effects of government regulation. For these reasons, I’m delighted to testify on today’s topic.

I work at a university. That means I’m for knowledge and against ignorance. I think that regulators have a moral responsibility to make decisions about regulations based on actual knowledge of a regulation’s likely effects—not just on hopes, intentions, or wishful thinking. A decision maker’s failure or refusal to acquire this knowledge before making decisions is a willful choice to act based on ignorance.

Executive orders, and sometimes laws, seek to encourage regulatory agencies to act based on knowledge rather than ignorance. For more than three decades, presidents of both political parties have instructed executive branch agencies to conduct regulatory impact analysis when issuing significant regulations. Some independent agencies, such as the Securities and Exchange Commission, are required by law to assess the economic effects of their regulations. Executive orders and laws requiring economic analysis of regulations reflect a bipartisan consensus that economic analysis should inform, but not dictate, regulatory decisions. A good regulatory impact analysis also lays the groundwork for an effective retrospective review of the regulation by identifying the outcomes that should be tracked in order to assess whether the regulation accomplishes the desired goals.

Unfortunately, agencies’ regulatory impact analyses are not nearly as informative as they ought to be, and there is often scant evidence that agencies have utilized any part of the analysis in making decisions. These problems have persisted through multiple administrations of both political parties. The problem is institutional, not partisan or personal. Improvement in the quality and use of regulatory impact analysis will likely occur only as a result of legislative reform of the regulatory process. To achieve improvement, all agencies should be required to conduct thorough and objective regulatory impact analysis for major regulations and to explain how the results of the analysis informed their decisions.

Let me elaborate on each of these points.

WHY REGULATORY IMPACT ANALYSIS IS NECESSARY

We expect federal regulation to accomplish a lot of important things, such as protecting us from financial fraudsters, preventing workplace injuries, preserving clean air, and deterring terrorist attacks. Regulation also requires sacrifices; there is no free lunch. Depending on the regulation, consumers may pay more, workers may receive less, our retirement savings may grow more slowly due to reduced corporate profits, and we may have less privacy or less personal freedom. Regulatory impact analysis is the key tool that makes these tradeoffs more transparent to decision makers. So, understanding the effects of regulation has to start with sound regulatory impact analysis. A thorough regulatory impact analysis should do four things:

  1. Assess the nature and significance of the problem that the agency is trying to solve, so the agency knows whether there is a problem that could be solved through regulation. If there is, the agency can tailor a solution that will effectively solve the problem.
  2. Identify a wide variety of alternative solutions.
  3. Define the benefits that the agency seeks to achieve in terms of ultimate outcomes that affect citizens’ quality of life, and assess each alternative’s ability to achieve those outcomes.
  4. Identify the good things that regulated entities, consumers, and other stakeholders must sacrifice in order to achieve the desired outcomes under each alternative. In economics jargon, these sacrifices are known as “costs,” but just like benefits, costs may involve far more than monetary expenditures.

Without all this information, regulatory decisions are likely to be based on hopes, intentions, and wishful thinking rather than on reality. Regulators should not adopt a regulation without knowing whether it will solve a significant problem at a reasonable cost. Given the enormous influence regulation has on our day-to-day lives, decision makers have a moral responsibility to act based on knowledge of regulation’s likely effects, not just good intentions.

High-quality regulatory impact analysis is also essential for effective congressional oversight.

Mechanisms that provide for congressional approval or disapproval of individual regulations, such as the Congressional Review Act or the proposed REINS Act, presume that members of Congress have thorough knowledge about the root cause of the problem that the regulation seeks to solve and about the benefits and costs of alternatives. After all, how can legislators make a responsible decision to approve or disapprove a regulation if they do not know whether the regulation solves a real problem or whether there is a better alternative solution than the proposed regulation? Oversight of existing regulatory programs also presumes that congressional committees have good information about the outcomes that the regulation is intended to achieve and the results that are expected. A high-quality regulatory impact analysis provides that information.

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