Regulation University: Beware of Inflated Benefits and Hidden Costs

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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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