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How Well Do Regulators Use Regulatory Impact Analyses?

How Well Do Regulators Use Regulatory Impact Analyses?

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Regulation should take economics into consideration.
Regulation should take economics into consideration.

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07/19/2013

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No. 105February 2012
MERCATUS CENTER AT GEORGE MASON UNIVERSITY
 
MERCATUSON POLICY
How Well Do FederalAgencies Use RegulatoryImpact Analysis?
 
By Jerry Ellig and James Broughel
F
or more than
three decades, presidentshave instructed executive branch agenciesto use the results of Regulatory Impact Analysis (RIAs) when deciding whetherand how to regulate. Scores from theMercatus Center’s Regulatory Report Card—an in-depth evaluation of the quality and use of regulatory analysis conducted by executive branch agencies—show that agencies often fail to explain how RIAsaffected their decisions. For this reason, regulatory reform should require agencies to conduct analysis before making decisions and explain how the analysisaffected the decisions.
HOW MUST AGENCIES USE RIAS?
Executive Order 12866
contains several provisionsexplaining how agencies are to use the results of regu-latory analysis:
1
An agency shall adopt a regulation “only upon areasoned determination that the benets of theintended regulation justify its costs.” (Sec. 1(b)(6))Agencies should select those approaches thatmaximize net benets … unless a statute requiresanother regulatory approach.” (Sec. 1(a)) (“Net benet” is the difference between benetsand costs.)Agencies shall design regulations “in the mostcost-effective manner to achieve the regulatory objective.” (Sec. 1(b)(5))“Each agency shall tailor its regulations to imposethe least burden on society, including individuals, businesses of differing sizes, and other entities …(Sec. 1(b)(11))
 
2 MERCATUS ON POLICY JULY 2013
For economically signicant regulations, agenciesshall assess the benets and costs of alternativesand explain why the proposed regulation is pref-erable to the alternatives. (Sec. 6(a)(3)(C)(iii))The executive order recognizes that some ben-ets and costs may be qualitative rather thanquantied or monetized. It also allows agencies toconsider values other than benets or costs, suchas distributive impacts and equity. (Sec. 1(a))
2
 
HOW DO AGENCIES USE RIAS?
The Mercatus Center’s
Regulatory Report Cardevaluates the extent to which agencies use RIAs in theirregulatory decisions.
3
 
RIAs are a useful tool for regula-tory decision making because they allow greater trans-parency into the thinking and processes that lead to anagency decision. RIAs create greater accountability forregulators’ decisions and ultimately for the outcomes arule generates. Additionally, RIAs make it more likely that regulators will use society’s scarce resources in anefcient manner. For these reasons, one Report Card cri-terion asks whether the agency claimed or appeared touse any part of the analysis to guide decisions. Anotherasks whether the agency selected the alternative thatmaximized net benets or, if it chose another alterna-tive, whether it explained its reasons for its choice.Both of these criteria identify how well the agency followed the process laid out in the executive order.However, a high score does not mean that the evalua-tors agreed with the agency’s decisions, and a low scoredoes not mean that they disagreed with the decisions.Thus, the Report Card is an evaluation of the degreeto which an agency adhered to the requirements laidout in executive orders and OMB guidelines and not a judgment on the efcacy or reasonableness of the regu-lation itself.The chart above shows the frequency of each score for108 prescriptive regulations in 2008–12. Regulationsreceive a score ranging from 0 (no useful content) to 5(comprehensive analysis with potential best practices).The results are not encouraging:The RIA appeared to affect at least one majordecision for only 21 percent of the regulations(score = 4 or 5). There is no evidence that the RIAwas used at all for 60 percent of the regulations(score = 2 or lower).For 33 percent of regulations, the agency con-sidered the net benets of all alternatives thatthe analysis considered, then chose the alterna-tive that maximized net benets or explainedthe reason it chose another alternative (score =4 or 5). The agency neither chose the alternativethat maximized net benets nor explained why itchose another option for 50 percent of the regula-tions (score = 2 or lower).
8-11 AnyUseCl CognizanceofNetBenefits2 434 2320 1916 1616 236 9l 94 9420122 36 40 25 10 41 0l 14 14
THEDATABELOWFORCHARTSINTHEMOP-12 AnyUseCl CognizanceofNetBenefits
 
051015202530354045012345
       #     o        f     r     e     g     u        l     a       C     o     n     s
ReportCardScoreAnyUseClaimedCognizanceofNetBenefits
DISTRIBUTION OF SCORES FOR USE OF ANALYSIS, 2008–12
 Source: Authors’ calculations based on data available at www.mercatus.org/reportcard.
 
MERCATUS CENTER AT GEORGE MASON UNIVERSITY 3
BEST AND WORST PRACTICESBest Practice: Any Use o Analysis
In 2011, the
Department of Justice (DOJ) proposeda regulation intended to reduce incidence of rape in America’s prisons. The regulation emerged as a resultof the Prison Rape Elimination Act of 2003. The leg-islation established a commission to study the effectsof prison rape and to recommend improvements toprevent it. The law also mandated that the DOJ avoidnational standards “that would impose substantial addi-tional costs compared to the costs presently expended by Federal, State, and local prison authorities.”
4
Thedepartment commissioned an independent contractorto perform a cost analysis of the commission’s recom-mended standards.In the RIA for the rule,
5
DOJ did not estimate how muchits proposed standards would reduce prison rape. How-ever, the department performed a breakeven analysisthat began by estimating the value to society of reducing the prevalence of prison rape and sexual abuse by 1 per-cent. The department did this by estimating the mon-etary benet of avoiding prison rape, a number deter-mined by consulting relevant literature on the
costs
of prison rape. Costs of the proposed regulation were thencompared to theoretical reductions in order to deter-mine what level of reduction would justify the costs. As a result of the breakeven analysis, DOJ estimatedthe standards would only have to yield a small percentreduction from the baseline level of prison rape in any given year, without even considering benets that wereunquantiable, in order to justify the regulation. DOJfound its proposal to be more cost-effective than thecommission’s recommendations, for which the agency also did a cost-effectiveness analysis. While analysisof net benets was absent in the RIA, the agency stillmade good use of the information it had available andclearly referenced the economic analysis as a reason formodifying some of the commission’s recommendationsto carry out the law’s directives.
Best Practice: Maximizing Net Benefts
 Also in 2011,
the Department of Transportation issueda regulation mandating use of electronic on-boardrecorders on commercial motor vehicles. In the RIAfor the rule,
6
DOT explicitly stated that it chose thealternative that maximized net benets. DOT analyzedthree alternatives against multiple baselines and chosethe alternative that produced the highest net benetsagainst each of the baselines. The rst baseline reectedthe level of noncompliance under current regulations,while the alternative baselines reflected proposalsconsidered under another rule DOT was considering simultaneously.Unfortunately, the range of alternatives consideredwas not very broad, since the alternatives differed only with respect to who is subject to the regulation. Eachoption required the use of electronic on-board record-ers on certain commercial motor vehicles. The optionsonly varied in terms of which vehicles would be subjectto the regulation. Thus, it is not clear if the regulationmaximized net benets compared to all possible alter-natives, but DOT clearly indicated how the net benetcalculations affected the choice among the alternativesthat were considered.
Best Practice: Explaining Factors OtherThan Net Benefts
In 2012, the
Department of Agriculture (USDA) pro-posed a regulation to modernize its system of poultry slaughter inspection. The rulemaking came as a resultof President Obama’s Executive Order 13563 requir-ing executive branch agencies to review existing rules.The goal was to have agencies assess “rules that may beoutmoded, ineffective, insufcient, or excessively bur-densome, and to modify, streamline, expand, or repealthem in accordance with what has been learned.”
7
Inresponse to this executive order, USDA reviewed itspoultry slaughter inspection system to see if it couldidentify ways to increase efciency and improve safety.Shortly thereafter, USDA completed a qualitativerisk assessment measuring how different inspectionprocedures affect the prevalence of human illnessesassociated with tainted poultry.
8
USDA determinedthat its resources could be better utilized if it allowedestablishments to sort out more potentially tainted birdsprior to inspections, allowing USDA to concentratemore of its own resources on verifying compliance andsanitation standards.Using information garnered from the risk assessment,USDA conducted a benefit-cost analysis for severalalternative ways of modernizing its poultry inspectionsystem.
9
One of the striking aspects of this RIA, as dem-onstrated in Table 1 below, is the small difference in the

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