The Evolution of Benefit-Cost Analysis into Federal Rulemaking

A. Allan Schmid: Founder of the Modern Day Application of Benefit-Cost Analysis to Regulations—the evanescent utilization of an outstanding academician in Washington
My Work As An Institutional Economist

Some fifty years ago (1969) A. Allan Schmid, a visiting professor working at the Office of the Secretary of the Army, made a game changing announcement to his colleagues in the Systems Analysis Group housed in the Pentagon. Schmid argued that the then use of benefit-cost analysis, which was applied to capital expenditure projects such as dams and waterways by the Corps of Engineers, should be extended to federal regulations. The systems analysts in attendance were dumbfounded by the idea of applying benefit-cost analysis to a pile of paper as well as to a pile of concrete. The Schmid announcement is in this compendium: Schmid PPB located here.

The staff of the Systems Analysis Group made an immediate search of the then existing benefit-cost literature to determine if there were others that shared Schmid’s views—there were none. Subsequent to Schmid’s departure from the Systems Analysis Group it became apparent that if benefit-cost analyses were to be applied to regulations then some entity had to check the accuracy of the benefit-cost analyses thereby leading to centralized regulatory review by OMB.

He was not only the first individual to apply benefit-cost analysis to regulations but his work formed the basis for OMB emphasizing its implementation as mandated in the first government-wide requirement that benefit-cost analysis be applied to regulations as required by the Quality of Life Review directive. See EPA’s views on History of BCA. As one author stated: “It was during this time that environmentalists and others formed their first, unfavorable impressions of centralized review and cost-benefit analysis.” Newcomers should note that establishing the use of benefit-cost analysis as an integral component of the federal regulatory process was no cakewalk—the Systems Analysis Group was abolished by an act of Congress.

Dr. Schmid was first exposed to the use of benefit-cost analysis in a policy making context during his tenure with the Systems Analysis Group who had oversight of the Civil Works program of the US Army Corps of Engineers. Subsequent to his departure and some twenty years later he wrote a book titled: Benefit-Cost Analysis: A Political Economy Approach, more than 300 pages in length, which was very popular with the managers of the regulatory state and the economics profession but less so with its practitioners, possibly a result of his emphasis on welfare economics—not quantitative algorithms. Consider for example this statement: “BCA rules are themselves property rights instituting value judgments which in turn determine what is efficient.”

A detailed reading of his text demonstrates that he accorded a higher priority to getting a benefit-cost analysis correct in the first place than to establishing a process for centralized regulatory review. Once in a written statement he remarked: “One never knows how one’s ideas will be used. Still, I had no idea that Nixon with Tozzi’s help would use it to beat up on the EPA after passage of the Clean Air Act of 1970 and the National Environmental Policy Act of the same year.” Dr. Schmid is referring to the implementation of the aforementioned Quality of Life Review (1971) which required all regulations and related material dealing with the environment, health and safety be submitted to OMB before they were proposed or issued as a final rule.

He constantly demanded disclosing the limitations and value judgments associated with benefit-cost analysis. To this end he was supportive of a comprehensive review aimed at possibly changing the metrics for assessing the impact of regulations. Here are two in-depth reviews of his book, Schmid BCA and Schmid BCA # 2. He concludes: “BCA rules are themselves property rights instituting value judgments which in turn determine what is efficient.”

Dr. Schmid, an irreplaceable colleague, passed in May of this year.

N.B. Readers can offer comments in the space provided below.

Background Material

Research Papers on a Regulatory Budget

The three disciplines which control the Administrative State; see OIRA Reference Library

Corps of Engineers: The Birthplace Of Benefit/Cost Analysis and Centralized Regulatory Review

Google Search The Evolution of Centralized Regulatory Review    Implementing policy through the Administrative State

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