A few weeks ago, I was at the Society for Benefit-Cost Analysis’ annual research conference. One of the sessions I attended was a panel discussion about the role of regulatory budgeting and how we should think about the tradeoffs involved when we try to limit the cumulative burden of federal rules.
What is regulatory budgeting?
The main idea proponents of regulatory budgeting would argue is that regulations have economic costs and we should be cognisant of those and not try to overwhelm people with costs. Even though regulations may have benefits that outweigh costs, we still should not just regulate everything so that we don’t overwhelm some people with costs.
This mirrors the logic in fiscal budgeting. Even though there are countless ways for the public sector to spend money that creates benefits exceeding costs, we place some limit on how much money agencies spend.* Financing debt comes at a cost states don’t want to incur too much of. From a regulatory perspective, policymakers may want to impose a similar limit so that they allow firms to operate with some independence and allow markets to optimize themselves.
Another way to think about these budgets is that in order to increase the financial budget for the public sector, we need to raise revenue (presumably via taxes) and we know that the process of raising public revenue creates some drag on the economy. The budget requires policy makers to try to optimize that limited spending potential. Economist Cass Sunstein coined the term “sludge” to describe the similar burden created by the paperwork required to ensure compliance with each additional regulation. A regulatory budget can cap the sludge the same way the financial budget caps the burden of taxation.
How policymakers implement regulatory budgeting
The United States currently has one form of regulatory budgeting in place thanks to a Trump administration executive order. Currently, any executive branch agency that wants to implement some new regulation must first identify 10 existing regulations to repeal in its place. During the first Trump presidency, there was a similar 2-for-1 rule in place. While economists tend to agree these approaches are a hammer for a problem that needs a scalpel, these blunt approaches attempt to accomplish the goal of putting some cap on the economic burdens of our regulations.
Systems like the 10-for-1 or 2-for-1 regulatory budgeting are ineffective approaches to regulatory budgeting because not all regulations have the same cost. If OSHA wants to require some new design for hardhat, that would require companies to purchase some new safety equipment. That does not impose the same cost on the economy as something like the EPA banning the use of gasoline as a transportation fuel. Why is it then that if these agencies wanted to impose these regulations they’d both have to pick some random selection of existing regulations to repeal?
The better way to implement a regulatory budget would be to require agencies to estimate the cost of a regulation and give these agencies an actual budget to work with.
Regulatory budgeting and cost-benefit analysis
It may seem at first glance that regulatory budgeting is the same as just doing half of a cost-benefit analysis, but this isn’t necessarily true. There is a semantic issue that arises in cost-benefit analysis sometimes when dealing with negative expected values for certain parameters.
Say you are comparing two policies against a baseline of not enacting either. One option costs a lot of money but provides some health benefit, while the other saves money and reduces health outcomes. Which of these should we consider costs or benefits? In the first case, we clearly have a financial cost with a health benefit, but in the second we have a health cost and a financial benefit. Whether an impact counts as a “cost” or a “negative benefit” is largely in the eye of the beholder.
Cost-benefit analysis has allows analysts to work through these contradictions, but accountants need to have better defined terms. Certain things would need to be fixed as the “costs” of a regulation so that comparison to the budget can be made universally.
A well‑designed regulatory budget wouldn’t replace cost‑benefit analysis, but it could complement it by forcing agencies to confront the cumulative burden of their rules. The challenge is defining costs clearly enough that budgets are comparable and enforceable. If we can get that right, regulatory budgeting could become a useful tool for managing the overall weight of federal regulation without losing sight of the benefits rules are meant to deliver.
*Some progressives floated the idea that federal government spending can be uncapped because the federal government makes the money it borrows, but this idea has been largely dismissed by economists. Every U.S. state currently works to balance their state government budgets, most due to constitutional amendments requiring them to do so.
