Improving Regulation Requires Closer Scrutiny of Benefits

From: RegBlog/Penn Program on Regulation

Many debates over regulation focus only on the costs of new rules. Critics argue that the weight of regulatory costs depresses economic activity, reduces productivity, and discourages formation of new businesses. Estimates seeking to quantify the total federal regulatory burden range from hundreds of billions to well over a trillion dollars. Regulation advocates, in contrast, claim that many of those estimates exaggerate the costs of regulation. More importantly, they point out that regulation critics focus exclusively on the costs and overlook the benefits of regulation.

Costs are only half of the question, of course.  I recently examined the benefit side of the equation. Using a dataset constructed from the Mercatus Center’s Regulatory Report Card, I examined the likelihood that regulations would realize the benefits that agencies claimed that new rules would provide. I focused on two aspects of the regulatory analysis: (1) whether the agencies’ analysis demonstrated the need for regulation, and (2) whether the analysis demonstrated that the regulatory action would address the problem.

This exercise had a straightforward logic.  When agencies fail to demonstrate that the problem they are trying to solve exists and is systemic, they are less likely to achieve the beneficial outcomes that they seek through regulation. Similarly, if agencies fail to explain how their regulation will fix the problem, the regulation may not deliver the intended results. I did not check the accuracy of the agencies’ estimates; instead, I examined the logic of the regulatory analysis to determine whether the regulation would likely deliver the promised benefits.

In the study, I constructed a dataset made up of the Report Card scores for 94 regulatory impact analyses (RIA) for economically significant regulations issued between 2008 and 2011. Examining the dataset, I found that almost a third of RIAs failed either to demonstrate the need for regulation or to explain how the regulation would lead to the promised beneficial outcomes.

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