Before a federal agency can issue a new regulation, it must usually prove that the benefits of the proposal justify its costs. In theory, this process makes vast swaths of the American regulatory regime more legitimate, efficient, and effective. But what about zoning, building codes, licensing requirements, and other state and local rules? These regulations, which can have significant impacts, rarely face the scrutiny of cost-benefit analysis.
In “Moneyball for State Regulators,” a forthcoming article in the journal National Affairs, two scholars note this asymmetry and argue that states and local entities should adopt the cost-benefit analysis procedure used by the federal government.
Harvard Professors Edward Glaeser and Cass Sunstein—the latter also previously served as Administrator of the White House Office of Information and Regulatory Affairs (OIRA)—compare their argument to the data-based transformation of baseball described in the book Moneyball. They believe drawing on the federal example and adopting cost-benefit analysis in the states could have a similarly transformative effect on the effectiveness of state regulation.
Modern cost-benefit analysis of federal regulations started when President Reagan signed Executive Order 12291, which required agencies to pass their regulations on to a White House office for review. In slightly modified forms, that process has endured for nearly 35 years under presidents from both political parties. In fact, both some scholars and the Obama administration argue that agencies and OIRA, the body responsible for conducting the cost-benefit analysis, should similarly review older regulations to see if their benefits still justify their costs.
Glaeser and Sunstein acknowledge some criticisms of the system, but they argue OIRA cost-benefit analysis has reduced costs, increased political control, encouraged interagency coordination, and generally “made the situation far better than it would otherwise be.”
Although federal regulations might get more attention, Glaeser and Sunstein argue that state and local regulations, unconstrained by cost-benefit review, can have significant effects on individuals and economic growth. Without passing on the wisdom of individual regulations, they point to the real consequences of state and local rules. Overly complex or burdensome building codes might make it more difficult for low-income people to afford housing. Some occupational licensing regimes might prevent otherwise qualified people from opening small businesses as barbers, interior designers, or manicurist. Other rules, like Boston’s cap on liquor licenses and its arcane requirement that if “a bar wants a television set that exceeds 27 inches, it will need an entertainment license” may discourage growth and entrepreneurship.
On the other hand, these regulations may serve important public functions. Glaeser and Sunstein’s point is that regulators should use cost-benefit analysis to balance competing interests, instead of relying on hunches, tradition, or regulatory capture by interested parties.
To guarantee effective regulation, the authors suggest each state create a sort of mini-OIRA, “charged with the goals of ensuring that regulations survive some kind of cost-benefit test, of promoting interagency coordination, and of increasing accountability.” They would centralize review power in a state entity, even for local regulations, because very few cities have the institutional capacity to conduct sometimes complicated and expensive cost-benefit analysis.
To capture additional efficiency benefits, Glaeser and Sunstein further argue that these mini-OIRAs should also mirror the Congressional Budget Office (CBO) and analyze the costs and benefits of state legislation and executive action. The new offices would serve only as consultants in this context, but could be given actual authority to reject state agency regulations.
The authors outline a general framework for review based on the federal process, but they acknowledge, “a degree of experimentation is highly desirable.” Under their “maximalist” approach, some states might follow the pathway laid out in the article and create a state Office of Regulatory Affairs, staffed with economists empowered to evaluate state and local regulations. For costly rules, the state agency might even be required to produce “a full-scale regulatory impact analysis.” The depth and breadth of review would depend on the expected costs of each potential regulation.
Other states, perhaps constrained by cost or wary of dramatic change, might create or empower an existing small group with technical knowledge that could give a “reality check” to the most “significant, burdensome, or controversial rules.” The creation of this group could be paired with a state-wide commitment to consider the relative costs and benefits of regulation. Glaeser and Sunstein argue that even this “minimalist” approach might realize significant benefits by helping to ensure, “officials are focused on what really matters, which is the human consequences of their actions.”