The Stunning Triumph of Cost Benefit Analysis

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The Stunning Triumph of Cost-Benefit Analysis

It is not exactly news that we live in an era of polarized politics. But Republicans and Democrats have come to agree on one issue: the essential need for cost- benefit analysis in the regulatory process. In fact, cost-benefit analysis has become part of the informal constitution of the U.S. regulatory state. This is an extraordinary development. To understand the point, a little history is in order.

When Ronald Reagan became president in 1981, he was greatly concerned about excessive regulation. He was also aware that the federal bureaucracy was large, decentralized and sprawling. He was the boss, but he had limited tools by which to oversee federal rulemaking. As one of his very early actions, Reagan issued an executive order with two essential components. First, he told executive agencies that to the extent permitted by law, they must not issue a regulation unless the potential benefits to society “exceed the potential costs to society.” Second, he directed the Office of Management and Budget to oversee a process to ensure compliance with the cost-benefit requirement (among others) and to promote consistency with the president’s goals. The Office of Information and Regulatory Affairs, within OMB, soon assumed that responsibility. At the time, both the cost-benefit requirement and the OIRA process were exceptionally controversial, especially among Democrats and groups on the left. Some activists argued that the result would be to undermine important public protections, designed to safeguard health, safety and the environment.

Reagan Approach
Defenders of cost-benefit analysis responded that such protections would be spurred, not undermined, if they promised to deliver big benefits at an acceptable cost -- and that if the costs were high and the benefits low, the protections might not be such a good idea. The enthusiasts insisted that we can’t know whether to support public protections unless we have a sense...
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