Regulation University:Beware of Inflated Benefitsand Hidden Costs               March 27, 2013            Patrick A. McLau...
Review:	  	  1.  What	  is	  “regula4on”?	  2.  What	  causes	  regula4on?	  Regula4ons	  are	  uniquely	  opaque	  as	  l...
Why	  BCA	  for	  regula4ons?	  1.  Avoid	  unnecessary	  regula4ons	  2.  Choose	  most	  efficient	  alterna4ve	  3.  Prov...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  2.  Approach	  a	  foregone	  conclusion	  3....
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
The	  shocking	  	     truth…	  	  
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	         -­‐if	  t...
Quote	  from	  EO	  12866:	  “Each	  agency	  shall	  iden4fy	  the	  problem	  that	  it	  intends	  to	  address…	  as	 ...
Quote	  from	  EO	  12866:	  “Each	  agency	  shall	  iden4fy	  the	  problem	  that	  it	  intends	  to	  address…	  as	 ...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
Quote	  from	  OMB	  Circular	  A-­‐4:	  “Once	  you	  have	  determined	  that	  Federal	  regulatory	  ac4on	  is	  appr...
Quote	  from	  OMB	  Circular	  A-­‐4:	  “Once	  you	  have	  determined	  that	  Federal	  regulatory	  ac4on	  is	  appr...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
What	  costs	  are	  le`	  out	  of	  most	  RIAs?	  Usually	  everything	  but	  direct	  compliance	  costs!	  	  	  
Some	  examples	  Failure	  to	  account	  for	  efficiency	  losses	  from	  taxes/subsidies	  (Early	  Re4ree	  Reinsuranc...
Some	  examples	  	  Design	  standards	  on	  trains,	  automobiles	  –	  prevents	  innova4on	  domes4cally	  and	  impo...
Speaking	  of	  compliance	  costs…	  While	  it	  would	  be	  nice	  to	  have	  es4mates	  of	  the	  costs	  of	  regu...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
How	  are	  benefits	  inflated?	  1.  Assump4ons	  of	  underlying	  risk	  not	  supported	  by	  best	            availab...
 	  
 	  
 	  
Ques4onable	  Data	  (Ellig	  2013)	  NHTSA’s	  Minimum	  Sound	  Requirements	  for	  Hybrid	  and	  Electric	  Vehicles	...
How	  are	  benefits	  inflated?	  1.  Assump4ons	  of	  underlying	  risk	  not	  supported	  by	  best	            availab...
 	  
How	  are	  benefits	  inflated?	  1.  Assump4ons	  of	  underlying	  risk	  not	  supported	  by	  best	            availab...
Transfers	  as	  benefits	         	   Rights	  to	  book	  royal/es	         Rights	  to	  book	  royal/es	         	     ...
Transfers	  as	  benefits	           	         Preexis4ng	  Condi4on	  Insurance	  Plan	  Rule	           	         –	  	  ...
How	  are	  benefits	  inflated?	  1.  Assump4ons	  of	  underlying	  risk	  not	  supported	  by	  best	          available...
Consumer	  response	  to	  TSA	         	         	         	         	         	  	  
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  2.  Approach	  a	  foregone	  conclusion	  3....
What	  can	  go	  wrong	  in	  BCA?	  1.  Regulate	  based	  on	  anecdote	  or	      untested	  theory	  2.  Approach	  a...
Why	  would	  anyone	  subvert	  BCA	  in	  RIAs?	  1.  Incen4ves	  of	  the	  agency	  2.  Incen4ves	  of	  the	  individ...
Why	  should	  we	  care?	  1.  Regulate	  when	  unnecessary	  2.  Fail	  to	  choose	  most	  efficient	  op4on	  3.  Unin...
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Regulation University: Beware of Inflated Benefits and Hidden Costs

  1. 1. Regulation University:Beware of Inflated Benefitsand Hidden Costs March 27, 2013 Patrick A. McLaughlin Senior Research Fellow Mercatus Center at George Mason University
  2. 2. Review:    1.  What  is  “regula4on”?  2.  What  causes  regula4on?  Regula4ons  are  uniquely  opaque  as  legal  instruments  à  BCA      
  3. 3. Why  BCA  for  regula4ons?  1.  Avoid  unnecessary  regula4ons  2.  Choose  most  efficient  alterna4ve  3.  Provide  info  to  Congress,  public      
  4. 4. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits      
  5. 5. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  6. 6. The  shocking     truth…    
  7. 7. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  8. 8. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory   -­‐if  there’s  no  problem,  where  do  benefits   come  from?  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  9. 9. Quote  from  EO  12866:  “Each  agency  shall  iden4fy  the  problem  that  it  intends  to  address…  as  well  as  assess  the  significance  of  that  problem.”    
  10. 10. Quote  from  EO  12866:  “Each  agency  shall  iden4fy  the  problem  that  it  intends  to  address…  as  well  as  assess  the  significance  of  that  problem.”    Regulatory  Report  Card  Ques4on  6:  How  well  does  the  analysis  iden4fy  and  demonstrate  the  existence  of  a  market  failure  or  other  systemic  problem  the  regula4on  is  supposed  to  solve?    Average:  1.7  /  5  for  111  RIAs  evaluated.  
  11. 11. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  12. 12. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  13. 13. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  14. 14. Quote  from  OMB  Circular  A-­‐4:  “Once  you  have  determined  that  Federal  regulatory  ac4on  is  appropriate,  you  will  need  to  consider  alterna4ve  regulatory  approaches.”    -­‐OMB  Circular  A-­‐4  (The  Instruc4on  Manual  for  RIAs)    
  15. 15. Quote  from  OMB  Circular  A-­‐4:  “Once  you  have  determined  that  Federal  regulatory  ac4on  is  appropriate,  you  will  need  to  consider  alterna4ve  regulatory  approaches.”  -­‐OMB  Circular  A-­‐4  (The  Instruc4on  Manual  for  RIAs)  Regulatory  Report  Card  Ques4on  7:  How  well  does  the  analysis  assess  the  effec1veness  of  alterna1ve  approaches?  Average:  2.4  /  5  for  111  RIAs  evaluated.  
  16. 16. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  17. 17. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion   -­‐Failure  to  evaluate  alterna4ves  leads  to   inefficiency,  but  also  real  (unintended)   consequences  3.  Ignore/hide  costs  4.  Inflate  benefits  
  18. 18. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  19. 19. What  costs  are  le`  out  of  most  RIAs?  Usually  everything  but  direct  compliance  costs!      
  20. 20. Some  examples  Failure  to  account  for  efficiency  losses  from  taxes/subsidies  (Early  Re4ree  Reinsurance  Program)  –  up  to  44%  more  costs        
  21. 21. Some  examples    Design  standards  on  trains,  automobiles  –  prevents  innova4on  domes4cally  and  importa4on  of  desired  goods    
  22. 22. Speaking  of  compliance  costs…  While  it  would  be  nice  to  have  es4mates  of  the  costs  of  regula4on  that  were  right  on  average,  it  would  be  even  more  comfor4ng  to  have  es4mates  that  were  close  on  average.    -­‐R.  David  Simpson,  EPA,  in  “Do  Regulators  Overes4mate  the  Costs  of  Regula4on?”  Working  Paper,  December,  2011.    
  23. 23. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs   -­‐affects  evalua4on  of  alterna4ves,   misinforms  Congress/public,  and   misinforms  future  regulatory  choices  4.  Inflate  benefits  
  24. 24. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  25. 25. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  26. 26. How  are  benefits  inflated?  1.  Assump4ons  of  underlying  risk  not  supported  by  best   available  science  or  data   (Abdukadirov  and  Yazigi  2012;  Ellig  2013)          
  27. 27.    
  28. 28.    
  29. 29.    
  30. 30. Ques4onable  Data  (Ellig  2013)  NHTSA’s  Minimum  Sound  Requirements  for  Hybrid  and  Electric  Vehicles  (2013):  -­‐Documents  how  vehicle’s  sounds  help  blind  people  -­‐Concludes  that  noise  requirements  would  therefore  help  blind  people    BUT  Then  $115.1  million  of  benefits  (>50%)  come  from  avoiding  bicyclist-­‐car  collisions.    Are  there  that  many  blind  bicyclists?        
  31. 31. How  are  benefits  inflated?  1.  Assump4ons  of  underlying  risk  not  supported  by  best   available  science  or  data   (Abdukadirov  and  Yazigi  2012;  Ellig  2013)  2.  Restric4ng  consumer  choice  as  a  benefit    (Gayer  and  Viscusi  2012)          
  32. 32.    
  33. 33. How  are  benefits  inflated?  1.  Assump4ons  of  underlying  risk  not  supported  by  best   available  science  or  data   (Abdukadirov  and  Yazigi  2012;  Ellig  2013)  2.  Restric4ng  consumer  choice  as  a  benefit    (Gayer  and  Viscusi  2012)  3.  Treat  transfers  as  benefit    (Ellig  and  Conover  2012)          
  34. 34. Transfers  as  benefits     Rights  to  book  royal/es   Rights  to  book  royal/es           Publisher   Publisher   Author   Author    
  35. 35. Transfers  as  benefits     Preexis4ng  Condi4on  Insurance  Plan  Rule     –    HHS:   Counts  reduc4ons  in  uncompensated  care     as  a  benefit  (Ellig  and  Conover  2012)        
  36. 36. How  are  benefits  inflated?  1.  Assump4ons  of  underlying  risk  not  supported  by  best   available  science  or  data   (Abdukadirov  and  Yazigi  2012;  Ellig  2013)  2.  Restric4ng  consumer  choice  as  a  benefit    (Gayer  and  Viscusi  2012)  3.  Treat  transfers  as  benefit    (Ellig  and  Conover  2012)  4.  Assume  perfect  compliance  and  ignore  changes  in  consumer   behavior        
  37. 37. Consumer  response  to  TSA              
  38. 38. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits   -­‐affects  evalua4on  of  alterna4ves,   misinforms  Congress/public,  and   misinforms  other  regulatory  choices    
  39. 39. What  can  go  wrong  in  BCA?  1.  Regulate  based  on  anecdote  or   untested  theory  2.  Approach  a  foregone  conclusion  3.  Ignore/hide  costs  4.  Inflate  benefits    
  40. 40. Why  would  anyone  subvert  BCA  in  RIAs?  1.  Incen4ves  of  the  agency  2.  Incen4ves  of  the  individual      
  41. 41. Why  should  we  care?  1.  Regulate  when  unnecessary  2.  Fail  to  choose  most  efficient  op4on  3.  Unintended  consequences  4.  Misinform  Congress  and  public  5.  Derail  retrospec4ve  review  
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