Comment Letter: Proposed Revisions to Circular A-4, Regulatory Analysis
Dear Administrator Revesz:
We appreciate the opportunity to provide comments to the Office of Management and Budget (OMB) on the recent proposed revisions and preamble to Circular A-4 on “Regulatory Analysis.” The revisions are a targeted yet ambitious set of changes to OMB Circular A-4, which since 2003 has provided guidance to federal agencies regarding benefit-cost analyses of federal regulations. The new proposed A-4 and its preamble include many footnotes to recent literature on the economics of regulation and the tools of benefit-cost analysis. OMB staff and leadership should be commended for their efforts to revise the guidance to reflect recent scholarship.
As a group, we bring to our comments a blend of academic experience developing and teaching the tool of benefit-cost analysis and practical experience producing and critiquing benefit-cost analyses inside and outside of the federal government. We also have substantial experience at OIRA—and working with OIRA—over several decades.
We begin with several general impressions based on reading the draft Circular and preamble. Those impressions are intended to be helpful to OIRA staff and leadership as they allocate their limited time between now and the completion of the guidelines.
First, we think OIRA made a good decision to target certain features of the guidelines for an update rather than simply rewrite the entire document. While it has been 20 years since A-4 was updated, many of the basic concepts and tools of benefit-cost analysis have not changed over that period.
Second, many of the proposed revisions to A-4 seem to focus on environmental regulation, especially rules that have global impacts and might impact the wellbeing of future generations (e.g., greenhouse gas regulations). This is an appropriate emphasis because of the importance of climate change as a public issue, the priorities of the Biden administration, the background of the OIRA leadership, and the progress that has been made in thinking about climate policy within the economics profession and related disciplines. However, some of the updating in the draft Circular may not be relevant or applicable to many of the rules that OIRA reviews on an annual basis. Thus, we encourage OIRA to give careful thought to whether some of the new guidance is appropriate for only a subset of rules that OIRA reviews.
Third, the proposed A-4 revision introduces some new analytic requirements and recommendations that may not be practical in the near term, either because applied models of application have not yet been published in the academic literature or in previous regulatory assessments by the agencies, or because analysts at OIRA and the agencies do not have the necessary expertise to implement the draft Circular. We encourage OIRA to give some consideration to the practical implementation of what the draft Circular says, as some of the new requirements and recommendations (e.g., certainty equivalents) will not be self-implementing. The new proposal for distributional analysis appears to be more sensitive to practical implications than some of the other new features. In any event, we encourage OIRA to think about a possible NSF-OMB research program on development of model analyses, and an interagency training program for analysts at OIRA and the agencies.
Fourth, OMB also issued a proposed revision to Circular A-94. Some of the issues we are addressing with respect to the proposed revisions to Circular A-4 also apply to the proposed revision to Circular A-94.
On the substance of the draft Circular and the preamble, we believe some significant changes are necessary to ensure that the new guidelines lead to an improvement in the technical quality of benefit-cost analysis. In some cases, which we identify, the draft Circular may erode the quality of agency analyses, which we know is not OIRA’s intention. We offer some practical suggestions to fix the problems that we have identified.
Our recommendations fall into several areas: geographic scope of analysis, discounting of future benefits and costs, uncertainty analysis, distributional and equity analysis, development of analytic baselines, analysis of incomplete compliance, and retrospective analysis. Table 1 below summarizes our recommendations in each of these areas. The remainder of this note provides background and explains the recommendations.
Table 1.
Summary of Recommendations to the Office of Management and Budget to Improve Circular A-4 “Regulatory Analysis”
- Geographic Scope for Measuring Economic Effects
For regulations having both domestic and significant global effects, report economic effects for both the domestic U.S. and global accounting perspectives. - Discount Rates
a. Adopt real consumption discount rates of 3% and 5% as target and upper end discount rates. These are conservative low and middle estimates for social discount rates given credit constraints in U.S. debt markets for the bulk of U.S. households.
b. Review alternative discounting approaches as alternatives to the Ramsey formula. The results and recommendations of this review should be made available for public comment and should be subject to independent peer review by qualified experts.
c. Allow variation in the shadow price of capital to reflect the specific regulatory context. Also encourage the use of an alternative approach—the Kolb/Scheraga method—in place of the proposed shadow price of capital method. This method is relatively easy to understand and to implement.
d. Where agencies adopt declining discount rates for intergenerational discounting, also require a constant discount rate to avoid temporal inconsistencies. Three percent and 5% are quite conservative, given credit constraints in US debt markets, and would serve as appropriate constant intergenerational discount rates.
e. When a regulation has global effects, use country-level discount rates, growth rates, and benefit/cost measures to accurately reflect the willingness to pay of impacted countries.
f. Use discount rates without adjusting to assure fully risk-free rates. Agencies only rarely provide certainty-equivalent benefit and cost estimates, in part because it is highly impractical to do so and few academic analyses have implemented this approach. Before embarking on this path, develop informative examples of applications of certainty-equivalent (aka option value) approaches to federal regulations to show how certainty-equivalent approaches lead to estimates that are more conceptually sound and materially different than the more common expected surplus estimates. - Uncertainty Analysis
Retain the requirement in A-4 to develop a formal quantitative uncertainty analysis for the largest rules—rules with annual benefits or costs greater than $1 billion. While such analyses have been rare, they are still worth doing and help avoid use of arbitrary and hard-to-interpret ranges of estimates for benefits and costs. Quantitative uncertainty estimates of various outcomes for the benefit and cost streams are also necessary to implement the certainty-equivalent approach. - Distributional Analysis
a. Transparently display benefits, costs, and transfers falling on different stakeholders, as suggested in the current version of A-4. Do not use distributionally-weighted BCA.
b. Represent benefit, costs, and transfers in a table that provides a consistent accounting of all effects, to the extent feasible.
c. Require a prioritarian equity analysis that provides a side assessment of the net effects of the regulation on the lowest income population, to the extent practical.
d. Standardize an income threshold for agencies to use in distributional analysis, such as households with income plus all in-kind transfers less than 200 percent of the poverty level. The guidelines should also standardize the definition of income to include in-kind transfers received, including Medicare, food stamps, housing vouchers, earned income tax credits, etc, as well as earned income.
e. Emphasize the need to heavily caveat distributional analyses in view of the challenges of measuring welfare impacts falling on different groups and comparing welfare across groups.
f. Do not re-label positive transfers as benefits and negative transfers as costs, a possibility raised in the draft A-4 guidelines. - Development of Baselines for Analysis
a. Adopt language establishing existing requirements as set out in regulations as the baseline—the baseline should not include the future effect of other current government programs and policies.
b. Adopt the language from the 2003 Circular A-4: “In some cases, substantial portions of a rule may simply restate statutory requirements that would be self-implementing, even in the absence of the regulatory action. In these cases, you should use a pre-statute baseline. If you are able to separate out those areas where the agency has discretion, you may also use a post-statute baseline to evaluate the discretionary elements of the action."
c. Require agencies to provide a separate estimate of the benefits and costs of complying with existing regulations (beyond current levels of compliance) in instances where such additional compliance would be a part of meeting the requirements of a new regulation. - Incomplete Compliance
Require analysis of full compliance—the rule as written. OMB should also invite analysis of under or over compliance that may be useful as a supplementary analysis to the extent that it can help identify policies that could improve net benefits, e.g., by identifying causes of under compliance and estimating gains in net benefits from improving compliance. - Retrospective Analysis
Require agencies to develop plans to identify and estimate effects of a regulation after promulgation.
Read the rest of the comment letter here.
Arthur Fraas is former branch chief of the Office of Information and Regulatory Affairs (OMB).
John D. Graham is professor at and former dean of the Paul H. O’Neil School of Public and Environmental Affairs, at the University of Indiana.
Kerry Krutilla is professor at the Paul H. O’Neil School of Public and Environmental Affairs.
Randall Lutter is a senior fellow at the Manhattan Institute.
Jason F. Shogren is Strook Chair of Natural Resource Conservation and Management, at the College of Business of the University of Wyoming.
Linda Thunström is associate professor in the College of Business of the University of Wyoming.
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