Reported Benefits of Regulation Too Good to Be True?

July 16, 2013

Since 1997, the Office of Management and Budget (OMB) has reported to Congress each year on the benefits and costs of federal regulation. These reports, which generally conclude that the benefits of regulation are an order of magnitude greater than the costs, are used to refute concerns that regulations may be hindering economic growth and to suggest that smart regulation can provide large net economic gains. A closer examination reveals that the benefit figures are highly dependent on a few assumptions and that the ranges presented are unlikely to reflect the true uncertainty surrounding them, says Susan E. Dudley, research professor at the George Washington University Trachtenberg School of Public Policy and Public Administration.

The benefits and costs of regulations, individually and in the aggregate, are notoriously hard to measure. The OMB's annual report probably offers one of the most comprehensive estimates available on the expected benefits and net benefits (benefits minus costs) of federal regulation, but as the agency acknowledges, it has limitations.

  • Federal agencies publish between 3,000 and 4,000 regulations each year.
  • To keep its task manageable, the OMB confines its aggregate estimates to "economically significant" rules (those with estimated impacts of $100 million or more in a year) that are issued by executive branch agencies over the previous 10 years for which the agencies have estimated both costs and benefits.
  • Thus, the estimates exclude the effects of regulations issued by independent regulatory agencies such as the Securities and Exchange Commission, the Federal Communications Commission and the new Consumer Financial Protection Bureau, as well as high impact regulations for which agencies did not estimate either benefits or costs.
  • In the most recent report, for example, the OMB bases benefits and costs for the last 10 years on agency estimates for 115 regulations -- less than one-quarter of the 536 economically significant final regulations issued during that period and a fraction of the 3,203 significant regulations and almost 38,000 total regulations published since 2003.

The reported benefits and costs are based on ex ante estimates developed by the agencies themselves before the regulations went into effect. The OMB recognizes that prospective estimates may contain erroneous assumptions, producing inaccurate predictions and cautions that its reliance on agencies' estimates should not necessarily be taken as an OMB endorsement of all the varied methodologies used by agencies to estimate benefits and costs.

Those caveats often get lost in public discourse and the aggregate estimates are widely reported, without qualification, as evidence of the net benefits of federal regulatory activity.

Source: Susan E. Dudley, "OMB's Reported Benefits of Regulation: Too Good to Be True?" Regulation Magazine, Summer 2013.

 

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