Building Capacity for Economic Analysis at Independent Agencies

Independent regulatory agencies face increasing pressure to improve the quality of the economic analysis that informs their decisions about regulations.

The administrator of the Office of Information and Regulatory Affairs (OIRA), Neomi Rao, has argued that regulations from independent agencies should be subject to the same economic analysis standards and review procedures as regulations from executive branch agencies. Sixteen state governors and attorneys general signed a letter requesting that President Donald J. Trump issue an executive order to accomplish that goal. Former OIRA administrators of both political parties agree. Requiring economic analysis and OIRA review is also one of the statutory regulatory process reforms that enjoys bipartisan support in Congress. Legal scholars like Cass Sunstein, Jonathan Masur and Eric A. Posner predict that federal courts will eventually adopt the doctrine that it is arbitrary for an agency to ignore economic factors if the authorizing statute does not prohibit the agency from considering them.

In short, economic analysis of independent agency regulations is not just good public policy but it may soon become the law. Consequently, independent agencies should build the capacity to conduct more thorough economic analysis and integrate it into the regulation-writing process. In particular, independent agencies should undertake five steps to improve the quality of economic analysis and its use in decisions:

1. Establish an organizational structure that gives economists the freedom to produce high-quality, objective analysis. Economists should be organized in a functional unit that is separate from the program office that writes the regulations, and their performance evaluations should depend on the quality, objectivity, and usefulness of their analysis.
2. Adopt agency-wide standards for regulatory impact analysis. These standards should specify the four major topics a good regulatory impact analysis is expected to include: analyze the problem, alternative solutions, benefits of alternatives, and costs of alternatives; identify the situations in which benefit-cost analysis, cost-effectiveness analysis, and distributional analysis are most appropriate; provide guidance on any agency-specific analytical issues; and specify standards for the quality of evidence and transparency of research inputs and results.
3. Conduct analysis before making decisions about regulations. Involve economists early in the regulatory development process through cross-functional teams, ensure that the economics office has the freedom to make its own recommendations to decision-makers, consult stakeholders before writing rules, and at least for major regulations, publish a preliminary analysis of alternatives for public comment before writing a proposed rule.
4. Explain in the notice of proposed rulemaking and final order how the economic analysis affected decisions. If the agency made decisions for reasons other than considerations of benefits and costs, it should provide a transparent explanation of the reasons.
5. Invite OIRA to review proposed rules, final rules, and the accompanying analysis, just as OIRA does for executive branch regulations.

In addition to building capacity, there is the issue of how the agency can credibly commit itself to implementing and sustaining these reforms. Experience shows it is possible for an agency to do so.

To some extent, bureaucratic inertia plays a useful role. Restructuring of agencies and establishment of internal operating procedures are costly, so structural changes are more likely to survive than just changes in leadership or policies. The Federal Trade Commission, for example, has housed most of its economists in a separate Bureau of Economics since 1963. The Economic Analysis Group in the U.S. Department of Justice’s Antitrust Division was created in 1973.

An agency can also commit by putting its policies and procedures for economic analysis in the Code of Federal Regulations (CFR). The U.S. Department of Energy, for example, codified its regulatory analysis procedures for its regulations establishing energy or water efficiency standards for appliances. In the CFR, the Energy Department outlines major factors it will consider when designing the regulations, explains how the analysis of these factors will be conducted, commits to publishing an advance notice of proposed rulemaking that specifies the alternative standards under consideration and preliminary analysis of those standards, and establishes procedures for stakeholder feedback.

The Federal Communications Commission used a less detailed version of this strategy when it created its Office of Economics and Analytics in January 2018. Duties of the new office listed in the CFR include preparation of “a rigorous, economically-grounded cost-benefit analysis for every rulemaking deemed to have an annual effect on the economy of $100 million or more.”

Short of amending its portion of the CFR, an agency can make a public commitment that would be embarrassing or difficult to renege upon. The general counsel and chief economist of the U.S. Securities and Exchange Commission (SEC) took this approach in March 2012 when they issued a joint guidance memo on economic analysis that essentially committed the SEC to following the analytical principles in Executive Order 12,866. The quality of the SEC’s economic analysis has improved substantially since then.

Finally, the agency can contract for external enforcement of its economic analysis obligations. The 2018 Memorandum of Agreement between the U.S. Department of the Treasury and Office of Management and Budget on OIRA review of tax regulations is a recent example. For decades, the Internal Revenue Service had benefited from a loophole that exempted its regulations from OIRA review. The recent agreement closes that loophole by specifying that Executive Order 12,866 applies to tax regulations and establishing deadlines for OIRA review of tax regulations.

By taking these steps, independent agencies can help ensure that their regulatory decisions are guided by actual evidence about regulation’s likely effects and less by mere intentions or hopes. Given the mounting external pressures for improved economic analysis at independent agencies, the agencies that adopt these measures sooner will look farsighted indeed.

Jerry Ellig is a research professor at the George Washington University Regulatory Studies Center. From July 2017 to July 2018, he served as chief economist at the Federal Communications Commission, where he advised on the creation of the FCC’s new Office of Economics and Analytics.