Budget office's benefit numbers are simply bananas

Budget office's benefit numbers are simply bananas
© Greg Nash

Each year, the Office of Management and Budget (OMB) issues a report to Congress summarizing key information about regulations finalized over the previous decade. Among other things, it includes a bold estimate: the aggregate costs and benefits of federal regulations. And each year — without fail — the report proudly proclaims that the benefits vastly exceed the costs. 

But is it true? Here’s why you should be skeptical.

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First, some background. OMB must produce an annual regulatory “accounting statement and associated report.” The agency complies by pulling together and aggregating the cost and benefit estimates from the different federal regulatory agencies’ “regulatory impact analyses” — documents required for the biggest executive-branch regulations.

 

In its most recent report, issued in March, OMB estimates the benefits of rules promulgated over the previous decade to be between $287 and $911 billion. The costs are much lower, at between $78 and $115 billion.

In the past, critics have sometimes focused on the very small fraction of rules for which OMB has usable dollar estimates. For example, in its latest report, OMB’s cost-benefit totals come from 137 rules finalized from 2006 to 2016. That’s about one-third of 1 percent of the more than 36,000 regulations finalized during those fiscal years.

Meanwhile other critics have focused on the highly uncertain assumptions that go into benefit and cost estimates. For example, agencies attach dollar values to outcomes that are hard to monetize, such as the expectation that a rule will save a human life. These estimates may be wildly inaccurate.

Even if we put those concerns aside, there is a more fundamental problem: OMB’s cost and benefit numbers don’t make apples-to-apples comparisons. Even if one accepts them as credible, there is no easy way to interpret them. 

Many of the benefits, for example, are estimates of the monetary value people place on reducing risk in their own lives. Other benefits are estimated financial savings to people, like when households save on utility bills as home appliances become more energy efficient.

The first type of benefit, risk reduction, is a “consumption good.” Yes, we can express its value in monetary terms—but ultimately it can only be consumed, not invested in an account like money. The second type of benefit, savings from lower utility bills, can be put in a bank account and invested. It has the potential to create a “capital good”—something used in the production of final consumption goods.

It turns out that the dollar values of these different types of goods are not directly comparable. To illustrate, consider two theoretical policies: one saves $1,000 worth of bananas from being thrown away, and the other saves $1,000 worth of banana trees from being cut down. Are these two policies equivalent? The answer, of course, is no, because although their benefits are valued the same in dollar terms, the trees, which are capital goods, can produce bananas in the future (and even more trees with their “pups”). The trees have a higher consumption value for this reason.

This is why the OMB’s own regulatory analysis guidelines say its “analytically preferred method” is “to adjust all the benefits and costs to reflect their value in equivalent units of consumption.” In other words, agencies should express the value of the banana trees in terms of what they produce over time. But the OMB never follows its own recommendation, and regulatory agencies continue to report both consumption and capital values together, year after year.

This is more than economic semantics, and no minor oversight.

The estimated costs of regulation are typically compliance expenditures — money that might otherwise go in the bank or expand a company. Meanwhile, the estimated benefits are primarily consumption-related, like reduced risk. And other capital-related benefits, like household savings stemming from energy efficiency, are added to consumption-related benefits without any adjustments.

Without more information about what the capital goods on both sides of the ledger produce in the future, there is no way to know whether the benefits of federal regulations truly exceed their costs, as the OMB’s headline numbers imply.

So why would the OMB release such a confusing report every year? Consider the incentives faced by OMB officials. Every president wants to claim regulations under his watch are doing more good than harm. Even the Trump administration, known for being skeptical of regulations, will be tempted to tweak the numbers in its favor.

Furthermore, going back and fixing the sloppy estimates produced by past administrations takes time and effort. Who wants to revisit the agendas of past presidents?

The OMB needs to be held to the standards it outlines in its own analysis guidelines. That means presenting all costs and benefit estimates in a manner that can be compared meaningfully. It’s time OMB’s annual regulation report started comparing apples with apples — or, better yet — bananas with bananas.

James Broughel is a research fellow with the Mercatus Center at George Mason University.