Where Has The Economic Profession Been For The Past Fifty Years On Measuring Income Distribution In Rulemaking?

Some fifty years ago, an economist who was deeply involved in conducting benefit-cost analysis of governmental actions opined on the importance of  disclosing the income distribution effects of federal actions.

Read for example this paper published in 1969 which concluded ( p. 5):

Obviously if there exist more efficient ways to redistribute income and if such alternatives are politically feasible, then public works projects should not be justified on the basis of their contribution to this objective. However, it does not follow that their redistributive effects – whether to low or high income classes -should not be assessed and presented to the public.

The presentation set forth below was made to a panel at  the 2021 Annual Conference of the Society for Benefit-Cost Analysis on March 24 by the Center for Regulatory Effectiveness and duly forwarded to members of the Biden Administration. The enormity of the task promoted CRE to request that the Council of Economic Advisers become involved.[ Rouse  ]

CRE Takeaways

Here are CRE’s takeaways from the aforementioned presentation which is posted below this summary statement:

1. Addressing income distribution can be accomplished by giving sufficient resources to the agencies to implement  the directives currently in existence as so stated in OMB Circular A-4. Income distribution is best accomplished by supplementing existing benefit-cost analyses.

2. The preferred way for addressing income distribution and    therefore the content of the aforementioned supplement   is through  a combination of Distributional Weighting and option (4) below.

3.  Recommendations to eliminate benefit-cost analysis are primitive; all Administration’s need a mechanism for ranking proposals for federal involvement.

CRE agrees  with the above conclusions but with one addition. Traditional benefit-cost analysis is designed to maximize efficiency (the size of the economic pie) not  welfare (the distribution of the economic pie).  Nonetheless the traditional measure of net benefits should accompany the publication of  all of  its ensuing supplements.

 CRE Presentation to Society for Benefit Cost Analysis (2021)

Centralized Regulatory Review began in 1971 when the Director of OMB instituted the Quality of Life Review which required agencies to:

(1) perform a benefit-cost analysis of proposed regulations, and

(2) submit the aforementioned analysis to OMB for review.

During the past one-half a century the aforementioned process has withstood criticism, threats and even unconscionable  reductions in staff levels. It has, however, made modifications to its operating procedures in response to some of the aforementioned  criticisms.

Fifty years ago the architects of centralized regulatory review were primarily economists with a strong background in neoclassical economics. In the intervening half century new disciplines have emerged whose subject matter might enhance the management of the Administrative State. Consequently it is timely that the President has issued an Executive Order directing a review of Centralized Regulatory Review with the objective of modernizing it.

Therefore in response to the Executive Order and under the aegis of the Society for Benefit-Cost Analysis, the Center for Regulatory Effectiveness is conducting a discussion of four options for the possible modernization of Centralized Regulatory Review, each aimed at possibly opening the door to the consideration of income distribution as suggested in the aforementioned Executive Order.

These options are:

(1) Well-Being Analysis
(2) The Use of Distributional Weights
(3)  Addressing  Opportunity Cost Neglect in Public Policy Decisions
(4)  Simultaneous Display of National Account and Distributional Impacts

 Next Steps

(1) As was the case when benefit-cost analysis of regulations began some fifty years ago, a very important cohort  is the rank and file career civil servants who will be responsible for modifying or augmenting the existing procedures for conducting benefit-cost analyses. Consequently they will be contacted by a number of organizations who have been following  this endeavor.

(2) We have presented the aforementioned information which hopefully will serve as a catalyst for continued discussions and feedback to the Administration as it develops mechanisms to implement the President’s Executive Order. Given the abundance of new technologies which permit virtual discussions, such as this one  sponsored by the Society for Benefit-Cost Analysis, hopefully other institutions will sponsor comparable events.

(3) On or more federal agencies should identify an available ANPRM and subject it to review under one or more of the aforementioned options for going beyond  BCA.

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NB  The term “benefit-cost analysis” is used throughout this website in lieu of “cost-benefit analysis”, a term commonly championed, sometimes but less frequently by economists, in the literature  by members of the legal profession who have demonstrated a continued, forceful and productive participation in the management of the Administrative State. Benefit-Cost Analysis of  both public works and federal regulations began in the Corps of Engineers who was directed by statute to calculate benefit-cost ratios–not a mention of cost-benefit ratios-for public works projects.

For those interested in what we hope to be a continued discussion of the management of the Administrative State as a result of the recent Presidential Executive Order, we call your particular attention to the CRE search engine which examines thousands of pages of material on centralized regulatory review on its website as well as nearly 500 journal articles posted in the CRE library.

One focus of the review is to discuss and analyze statements similar to the one below advanced by the proponents of Well-Being Analysis (WBA):

However, WBA cures many of the  largest problems of CBA. It is capable of implementation right away, and even in its infancy can be expected to produce analyses comparable in level of precision to the ones CBA now produces after three decades of refinement.

The author’s of the above statement offer the analysis in this publication  to support their conclusions (p. 26). Without taking a position on the merits of their arguments, nonetheless kudos to the authors for providing real world examples of the impacts of  their recommendations; this type of transparency adds to an informed review.

Bottom Line

(1) The economists at the SBCA meeting concluded: Addressing income distribution can be accomplished by giving sufficient resources to the agencies to implement  the directives currently in existence as so stated in OMB Circular A-4. Income distribution is best accomplished by supplementing existing benefit-cost analyses.

(2)The Editor of the Journal for Benefit-Cost Analysis has identified [ 10.50; 24.40 ] procedures developed by three different economists which will address the issue of income distribution, what is needed are adequate resources to address the issue.

 

 

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