Dynamic Analysis, Welfare, and Implications for Tax Reform

Sep 23

From: The White House

Jason Furman, Chairman, Council of Economic Advisers

National Bureau of Economic Research Tax Policy and the Economy Conference

Washington, DC | September 22, 2016

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The Contrast Between Regulatory Analysis and Dynamic Analysis

Before getting to tax policy, I want to start with regulatory policy, which is one area where practitioners do welfare analysis in a conceptually correct way when deciding between alternative policies. Consider, for example, a decision about whether or not to promulgate a regulation that would require factories to install a piece of equipment that would prevent local pollution. One approach to this decision is cost-benefit analysis: do the benefits of the policy change (in this case, the number of lives saved by reduced pollution multiplied by the value of a statistical life) exceed its costs (in this case, the cost of installing the equipment multiplied by the number of factories that would have to install it)? An alternative approach would be to judge the policy based on the net impact of the regulation on jobs (or output), including the additional jobs (or output) created installing the pollution-reducing equipment less the jobs (or output) lost as a result of the higher production costs.

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Federal agencies considering regulations, and the Office of Information and Regulatory Affairs (OIRA), put the right items on the cost and benefit side of the ledger in making regulatory decisions. This is not to say this framework provides a definitive answer; there will always be uncertainty and debate about both basic parameters (e.g., the value of a statistical life) and the impacts of any given policy (e.g., the long-run costs of the pollution-reducing equipment or number of lives saved). But at least a decent amount of both the public debate and court review of regulations genuinely does focus on debating these parameters within a coherent welfare framework.

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