When the D.C. Circuit Court of Appeals struck down the U.S. Securities and Exchange Commission’s (SEC) proxy access rule in 2011, it cited the agency’s failure to provide a rigorous cost-benefit analysis. Critics of that court decision argued that it created a burdensome new standard that would destroy the SEC’s ability to issue regulations.
Of course, critics of cost-benefit analysis advanced that very same argument in 1981 when President Ronald Reagan issued an executive order making cost-benefit analysis a central tool of regulatory decision-making. More than three decades later, the U.S. Environmental Protection Agency (EPA), the Occupational Safety and Health Administration (OSHA), and the National Highway Traffic Safety Administration (NHTSA) widely apply cost-benefit analysis to regulations with an expected annual economic impact of $100 million or more, and these and other federal agencies have issued hundreds of regulations supported by cost-benefit analysis over the years. If cost-benefit analysis has become the standard for decision-making about environmental, health and safety regulation, why not use it for financial regulation?
Drawing on the work of a conference on cost-benefit analysis for financial regulation held in October 2013, the University of Chicago’s Eric Posner and Glen Weyl build a case for applying cost-benefit analysis to financial regulation in a recent paper. Although President Obama’s Executive Order 13579 does not require independent agencies—including the majority of financial regulators—to conduct cost-benefit analysis, Posner and Weyl argue that applying cost-benefit analysis to financial regulation would improve transparency and accountability, limit gaming, ensure consistent agency decision-making, and cool ideological battles. They propose a framework outlining how agencies could apply cost-benefit analysis to financial regulation. Ultimately, the authors recommend that the Office of Information and Regulatory Affairs institutionalize cost-benefit analysis principles for financial regulators and bring financial regulatory agencies under its supervision.