Wednesday, November 25, 2009

New OIRA Regulations on Regulatory Review

Just after taking office, the Obama Administration announced that it would considered amending the existing Executive Order that requires executive-branch agencies to performing benefit-cost analyses (BCAs), subject to review by the Office of Information and Regulatory Affairs (OIRA) in the President's Office of Management and Budget (OMB). Since that announcement,  the OIRA has received more than 180 comments from various individuals (including me) and organizations, which making all kinds of recommendations for improving, expanding, reducing, etc., regulatory review. Those comments can all be viewed here.

Regulated industries, environmental organizations, the agencies, and interested academics have been waiting patiently for the results of the process, which were delayed by the protracted confirmation process for new OIRA administrator Cass Sunstein. Sunstein's appointment was finally confirmed in September. So, the wait shouldn't be too much longer.

Of particular interest to me is whether a new Executive Order or a subsidiary OMB circular lowers the base-case discount rate that federal agencies must utilize in discounting future streams of costs and benefits to net present value. I've argued, both in past papers (not available in final published version on-line) and in my own comments to OMB, that the current required discount rate of 7% is significantly higher than most economists believe is appropriate for environmental regulations designed to reduce market externalities. In my view, the OMB should follow the UK Treasury's lead in designing a schedule of discount rates that decline over time, starting from 3 or 3.5%. In addition, it would be appropriate to have two separate discount rate schedules in order to distinguish circumstances in which the government is acting to correct market failures (as in environmental protection) from those in which it is acting in an entrepreneurial capacity to stimulate economic development (e.g., government reclamation and irrigation projects).

Aside from the issue of discounting, I am hopeful that a new Executive Order might require federal agencies to engage in more post hoc benefit-cost accounting. Under the existing Executive Order, the agencies have to assess estimated costs and benefits before issuing major regulations (those with annual costs of $100 million or more). They are not required, however, to re-examine those regulations later in order to determine whether they have, in fact, resulted in net benefits or costs to society. Not only would post hoc benefit-cost analyses contribute to improved federal regulations, they would also help to improve the process of ex ante benefit-cost analysis, by allowing analysts to see where possible methodological flaws contributed to erroneous estimations.

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