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Alex Lee An Options Approach to Agency Rulemaking Comment by Dan Klerman Faculty Workshop USC Law School May 3, 2013

Alex Lee An Options Approach to Agency Rulemaking Comment by Dan Klerman Faculty Workshop USC Law School May 3, 2013. Summary I. Supreme Court has recently tightened the rules on Cost-Benefit Analysis (CBA) Agencies need data to rebut business claims regarding costs and benefits

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Alex Lee An Options Approach to Agency Rulemaking Comment by Dan Klerman Faculty Workshop USC Law School May 3, 2013

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  1. Alex LeeAn Options Approach to Agency RulemakingComment byDan KlermanFaculty WorkshopUSC Law SchoolMay 3, 2013

  2. Summary I Supreme Court has recently tightened the rules on Cost-Benefit Analysis (CBA) Agencies need data to rebut business claims regarding costs and benefits Nearly impossible to do, because costs and benefits of proposed regulations are, by their nature, speculative Other commentators Supreme Court should loosen rules on CBAs Alex Agencies should build learning into their regulations Commit to exempt high-cost entities Commit to repeal when costs outweigh benefits
  3. Summary II -- Exemptions Suppose regulation affects 2 kinds of businesses $900,000 for high-cost business to comply $100,000 for low-cost businesses to comply Equal numbers of low and high cost businesses Benefit of regulation is $400,000 per businesses Average net benefit is i$100,000 So if regulation applied to all, it flunks cost-benefit analysis If high-cost businesses exempted Then $500,00 net benefit per business, and regulation passes cost-benefit analysis
  4. Summary III – Conditional Sunsets Suppose effect of regulation is uncertain 50% chance that benefits will exceed costs by $1 million per year (good outcome) 50% chance that costs will exceed benefits by $2 million per year (bad outcome) This regulation fails ordinary CBA, b/c expected net benefit is negative $1 million per year If agency commits to rescinding regulation in a year if costs exceed benefits, then net benefits are positive 50% chance of one year of $2 million net loss 50% chance of many years of $1 million net benefit
  5. Summary III - Caveats Strategy only works if Regulation easily reversible Can get cost and benefit information cheaply and quickly Start-up costs aren’t too high
  6. Who Does CBA? Paper assumes that same agency which proposes regulation also performs CBA which determines whether regulation is rescinded Neither courts nor regulated entities may trust agency to perform CBA impartially Might be better to have another group perform the CBA Consider role of non-partisan Congressional Budget Office GAO – General Accountability Office OIRA – Office of Information & Regulatory Affairs Outside experts IOM (Institute of Medicine), NAS, NAE, etc.
  7. Won’t Work for Most Important Regs Global warming Many investments in new technologies are irreversible New power plants, hydrogen filling stations… Would take decades to find out whether regulations were effective in reducing global warming Regulation of systemic financial risk Even without effective regulation, one doesn’t expect a Great Depression or other financial crisis more than once every few decades
  8. More Modest Proposals CBAs should take into account fact that agencies already grant exemptions to high-cost businesses Even though agency is not legally committed or required to do so CBAs should take into account that regulations are likely to be repealed if costs turn out to be very high or benefits turn out to be low Even if regulation does not have explicit sunset provision Judicial review of regulations should take into account data on actual costs and benefits Such data is currently excluded by doctrine that review must be based on the evidence that the agency had at the time the regulation was issued
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