Though the U.S. economy has been slow to recover from the Great Recession, the nation has experienced a boom in new regulations, many of which have supposedly introduced large “social” benefits. Examples include the Environmental Protection Agency’s (EPA) Cross-State Air-Pollution Rule, recently rejected by the District of Columbia Court of Appeals, and Department of Energy (DOE) regulations mandating energy efficiency standards for refrigerators. These new rules are good for everyone, at least according to cost-benefit analyses performed by the EPA and DOE.
Cost-benefit analyses, done correctly, produce sound regulatory policy and help avoid excessive, inefficient regulation. When done incorrectly, however, cost-benefit analyses are useless and can serve as mere propaganda for the regulatory agencies.
Many of the regulations advanced under the Obama administration rely on cost-benefit analyses which exaggerate benefits by including essentially unquantifiable and vastly dispersed benefits, such as very slight improvements to air quality spread across the whole country, and ignoring a number of relevant costs. This new approach to cost-benefit analysis has led to the justification of many more regulations; where George W. Bush’s regulators saw about $3 billion in total economic benefits from additional types of regulation spread across all U.S. industries, President Obama’s see more than $90 billion.
The 30-fold difference in alleged benefits results from how government economists now calculate benefits. For example, the EPA quantifies no benefits from its Utility Maximum Achievable Control Technology (MACT) Standards for emissions of air toxics like mercury from electric utility generating plants. Yet the regulation is touted as generating tens of billions of dollars of benefits annually due to coincidental benefits; reductions in fine particulate matter alleged to occur as a side effect will save Americans somewhere between $53 and $130 billion by 2016 in the form of better respiratory health. Thus, the benefits numbers are nonsense, based on vague and unquantifiable benchmarks of success.
Indirect, coincidental benefits should never be used as the sole and primary criterion for regulation. If mercury, for example, is a problem, then regulations should target mercury directly and be justified based on resulting reductions in emissions of mercury. Rather than proceed with caution regarding spillover regulatory benefits, government agencies are replacing traditional cost-benefit analysis with a more loosely defined approach. Economist Anne Smith documents that 10 of 12 major Clean Air Act regulations from 2010 and 2011 were justified economically, not based on direct benefits, but rather from reductions in particulate matter; for eight of these regulations, no real attempt was made to quantify any direct benefits of regulation.
In a new policy study for the Institute for Energy Research, we warn policymakers about this new form of regulatory analysis, which is driven by both ideology and a flawed behavioral approach to economics. America, which recently slipped to 18th in the Economic Freedom of the World Report, previously enjoyed high economic freedom scores due to keeping regulation at a somewhat sensible level. Some environmental regulations make sense and have obvious direct benefits which economists can quantify, but most EPA regulations today impede economic progress and are justified by dubious spillover benefits. This tradeoff happened recently in Alabama, when an EPA regulation halted a $350 million expansion of a cement kiln which would have created 1,500 jobs.
The “new” benefits of regulation, as trumpeted by the current presidential administration, are not new; these indirect benefits have always existed, but economists performing standard cost-benefit analyses have long acknowledged them as too slight and remote to quantify. The burden of proof, therefore, should remain on the regulators to show direct, measurable benefits to new policies. By opening up cost-benefit analysis to a vaguer notion of benefits, government bureaucrats are destroying jobs, raising the price of goods, and making America less competitive in the global economy.
Scott Beaulier is director of the Manuel H. Johnson Center for Political Economy at Troy University. Dan Sutter is professor of economics at Troy University.