RFF's Morgenstern discusses cost-benefit analysis reform

As the Obama administration weighs its options for changing the regulatory review process, what changes can be expected on cost-benefit analysis provisions? During today's OnPoint, Richard Morgenstern, senior fellow at Resources for the Future, discusses a new report focused on reforming regulatory impact analyses. He explains how the Obama administration may handle regulatory reform. Morgenstern also discusses how EPA climate adviser Lisa Heinzerling, one of the report's co-authors, will influence the discussion on regulatory reform.


Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. With me today is Richard Morgenstern, senior fellow at Resources for the Future. Richard is co-editor of a new report on the reform of regulatory impact analysis. Richard, nice to have you on the show.

Richard Morgenstern: Thank you.

Monica Trauzzi: Richard, this new report is very timely because the Obama administration is reviewing regulatory practices right now. What are the main concerns with RIAs at this point? I mean why did you have to come out with this report sort of analyzing some of the problems?

Richard Morgenstern: Well, ever since the first presidential executive order that actually called for this type of analysis by President Reagan back in the early 1980s, the issue of economic analysis of regulations has been controversial. And many people believe that there's too much focus on economic efficiency concerns in setting regulations. Others think there ought to be a lot of concern on economic efficiency. So this debate has raged and its raged on kind of several levels. One of them is how the analyses are done and whether they really include all the right elements and then how they're used in the decision-making process. And we try to touch on both of those in this volume.

Monica Trauzzi: Senators Inhofe and Voinovich recently sent a letter to OMB Director Peter Orszag urging the administration to continue using cost-benefit analysis. What is the expectation for how this new administration may handle or change the way that we do cost-benefit analysis? I mean is there going to be a big regulatory overhaul here? What's the expectation?

Richard Morgenstern: Well, that's a great question and I certainly don't know the answer, but I can offer a few comments. I was around in the days when President Clinton was just coming into office and just coming out of the Bush I era and there was a lot of concern then that these economic assessments of regulations were, in fact, too rigid and not very favorable to environmental and other forms of regulation. And there was a lot of expectation that there was going to be radical change at that point. In fact, there was a Clinton executive order issued that did introduce some I would call them relatively minor modifications into the prior order and there was not an enormous change in the approach that was followed. Now, there are some nuances and some differences. At this point we're kind of at another era like that where we have a change of political party and there's certainly a lot of indication that there is continuing dissatisfaction with the regulatory analytic mechanisms and the way they were used, frankly, in the second Bush administration. So the situation is ripe for reform. How extensive that reform will be I don't know, but there certainly are forces on both sides here and President Obama has made it clear that he is for a strong environmental agenda and strong regulatory agenda I think in general. At the same time, he has expressed obvious concern about the economy and wanting to do things efficiently and smarter, which would suggest perhaps you'd have a focus on economic approaches. So I think the jury is out, but I guess if I was a betting person I wouldn't bet strongly on the side of radical change, but I'm sure there will be some change.

Monica Trauzzi: And we are expecting some big environmental regulations coming from this new administration, including on greenhouse gas emissions.

Richard Morgenstern: Um-hmm.

Monica Trauzzi: How might this debate play into something like that, the regulation of emissions?

Richard Morgenstern: Well, I think that the real issue with the control of greenhouse gas emissions is the use of economic analysis in setting the policy and I think, frankly, that there's a pretty broad agreement on both sides that economically efficient mechanisms should be used to control greenhouse gases. The particular debate that we're focusing on in this book is much more at the level of specific regulations and certainly if Congress follows a legislative route, which there is some indication that they will, then this would become not an unimportant issue, but it would become perhaps a secondary issue. But even if when Congress does, assuming that Congress does that, there will be issues that will be left to the agencies to resolve and some of those for example in the area of fuels in vehicles, how some of the measures that would be used to press the adoption of particular fuels, how strongly they would be pushed and how much flexibility there would be. Those are the kinds of things that could be resolved at the agency level with this type of studies.

Monica Trauzzi: Lisa Heinzerling, she is one of the co-authors ...

Richard Morgenstern: She is.

Monica Trauzzi: … of this report and she is currently at EPA. She is administrator Jackson's chief adviser on climate change. She's been critical of the cost-benefit analysis approach to decision-making. As a top official at EPA how do you think she's going to influence the discussion on regulation and what changes might come about as a result of her being in that position?

Richard Morgenstern: Sure, well, Lisa has written widely, has a strong public record and she has generally written, as you say, kind of critical of the use of cost-benefit analysis in regulatory decision making. At the same time, Lisa agreed to participate in this project, which I should point out began almost 2 years ago and, in fact, it began when Lisa was a professor of law at the Georgetown University here. And she participated quite willingly and very positively and the agreement that the three of us had in putting this whole project together was that we can disagree both before, during, and after the project on what we think about cost-benefit analysis, but our goal was to try to make it better and try to make it less objectionable and try to address some of the issues that people have raised that the three of us, the three co-editors, would agree could be changed. So we, in fact, worked hard to try to come up with a series of recommendations that the three of us agreed upon and we've ended up with, in fact, 14 recommendations on how to change the process. Now, they don't address every philosophical issue that's ever been raised by cost-benefit analysis, I don't want to mislead you. But they do address some, I think, fairly specific and controversial parts of the process.

Monica Trauzzi: And what are the top recommendations that you have in the report?

Richard Morgenstern: Sure, well, we focus on a couple of areas. We talk about the technical quality of the regulations. We talk about relevancy to decision making. We talk about the transparency of the whole process and the treatment of new scientific information among other areas. So let me give you a couple of concrete things. One of the things that we found in actually reviewing specific regulations was that despite the mandate that exists and the guidelines that agencies consider alternatives, that, in fact, in many instances they do not consider alternatives. So if you think about it, what's the point of doing what's probably a million dollar study in looking into a lot of aspects of regulation if you're not going to give serious consideration to an alternative? We find this totally objectionable and we recommend strongly against it. Another specific recommendation that we made is the time limits of these things. Sometimes these studies don't come out until right at the very period of really a couple of days of actual decisions being made. So how do you expect an agency which has a lot of pressures on it to incorporate this type of scientific information and economic information into their decisions? They're kind of handicapped in doing so. So we recommend that these analyses be made available about six months before a decision is made so that the information can be fully digested by decision-makers in the agency. We also recommends that particularly in the area where there's not a strong record of being able to quantify or monetize a lot of the benefits that there be extra effort made to kind of look for ways of coming up with better estimates of these hard to quantify areas. And the alternative, which is often done now, is just to reject them altogether and say, well, we don't know and throw our hands up. But that has the effect of kind of downgrading their importance and zero is probably not the right answer for these things.

Monica Trauzzi: So, what would this level of reform mean long term? I mean does this mean less litigation down the line? I mean what would the benefits be of sort of revamping this process? How do you justify the costs involved with doing that?

Richard Morgenstern: Well, there are some costs involved, there's no question. But I think that the principal way you would justify the cost is that you get higher-quality outcomes, is that you got regulations that are more sensible for the American economy and the American environment and you get more outcomes that are more accepted by people who might otherwise be very dissatisfied. They might say, well, this is too lenient a regulation. It should have been much stronger and there's a lot of evidence to think it should have been stronger. Well, this is a way of bringing that evidence to the table in a timely way so that it can be factored into real decisions. So it can well lead to less discord is the way I would see it.

Monica Trauzzi: Interesting. All right, we'll end it right there on that note. Thank you for coming on the show.

Richard Morgenstern: Thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

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