Regulatory Oversight Takes Exciting New Tack. by Robert W. Hahn and Cass R. Sunstein. September 2001.

Current expenditures on health, safety, and environmental regulation now top $200 billion annually. With safety issues receiving so much public concern, and with the economy badly stumbling, the nation will soon be turning its attention to the long-neglected question of regulatory reform. We think the time is ripe for fresh consideration of an old tool: cost-benefit analysis. This tool should be used aggressively and as a basis, not only for eliminating regulations that do little good, but also for encouraging government action where it is most needed.

Cost-benefit analysis has a long and controversial history within the federal government. In one of his earliest decisions, President Reagan required agencies to assess the costs and benefits of all major regulations. He also gave the responsibility for overseeing those analyses to a new agency within OMB, the Office of Information and Regulatory Affairs (OIRA). Skeptics claimed that cost-benefit analysis was almost always used to block regulations, and OIRA became the focal point for a heated debate.

This was one of the reasons that Congress' recent decision to confirm the new OIRA administrator, Harvard Professor John Graham, was so controversial. Environmental groups, labor organizations, consumer advocates, and many others believed Graham was simply going to be a shill for corporate interests, refusing to take a serious look at whether regulations would help people.

Based on OIRA's history, the critics' concerns were understandable. OIRA's basic mission has been to stop unjustified rules, mainly through the use of "return letters," requiring agencies to reconsider their proposals. Yet studies show that adding some regulations, while removing or improving others, could save tens of thousands of lives and millions of dollars annually, thus giving simultaneous boosts to health, safety, and economic growth.

The trick is to figure out how to get government agencies to add regulations that make sense while cutting back on those that don't. Until now, no institution in government has vindicated the hopes of those who believed that cost-benefit analysis could be used to help promote better priority-setting, block senseless rules, and spur agency action when it was justified.

Last week OIRA quietly announced a striking innovation: "prompt letters," designed to encourage agencies to explore new areas in which regulation might deliver benefits that exceed costs. Not only did OIRA announce the use of prompt letters, it also issued two of them. One of those letters, to the Food and Drug Administration (FDA), involved mandatory disclosure of trans fatty acids in the Nutrition Facts panel of food. Drawing attention to evidence that trans fatty acids contribute to coronary heart disease (CHD), the letter noted that a disclosure rule seemed to be supported by the FDA's preliminary analysis, which estimated that, ten years after the effective date, the rule would prevent 7,600 to 17,100 cases of CHD and avert 2,500 to 5,600 deaths per year. Over a 20-year period, the FDA estimated the benefits of such a rule would dwarf the costs. The prompt letter strongly encouraged the FDA to issue a disclosure rule or to explain its failure to do so.

The other prompt letter, involving automatic external defibrillators (AEDs), was sent to the Occupational Safety and Health Administration (OSHA), with a firm request that the agency "consider whether promotion of AEDs should be elevated to a priority." The letter referred to an editorial in the New England Journal of Medicine, noting that only 2% to 5% of the 225,000 persons who have sudden and unexpected cardiac arrest each year outside a hospital are successfully resuscitated compared to the 17% to 38% success rates found with AEDs. The prompt letter observed that "some preliminary cost-effectiveness calculations" showed that mandatory AEDs in the workplace might prove to be a desirable intervention. Indeed AEDs, now required on air carriers by the Department of Transportation, are estimated to save nine lives per year, and at a comparatively low price. The prompt letter suggested that OSHA should consider following the Department of Transportation's lead.

These "prompt letters" are an exceedingly important development. For far too long, the idea of cost-benefit analysis has been wrongly associated with mindless opposition to regulation. To be sure, an exploration of costs and benefits often shows that regulation cannot be justified. But cost-benefit analyses can show, and have shown, that government action is worthwhile--and indeed that government should do more. Such analyses helped encourage policymakers to get the lead out of gasoline and protect the ozone layer.

Prompt letters promise to strengthen the hand of policy analysts in the federal government, ensuring that action will be taken on the basis of a careful assessment of consequences, rather than in reaction to interest groups or political dogmas. Suppose, for example, the government decides that it wants to implement a number of new anti-terrorist measures in airplanes and at airports in response to the recent attacks. Cost-benefit analysis can be used in helping to determine which measures are likely to be most effective in saving lives. In cases where a particular measure is shown to be a winner, OIRA could send a prompt letter to the Federal Aviation Administration, if the agency had not already acted.

But why--it might be asked--should prompt letters be made public? Shouldn't such letters be part of the informal, behind-the-scenes consultation that often occurs within the executive branch? Actually public disclosure of prompt letters is a great virtue. Public disclosure promotes transparency and hence accountability. Equally important, public disclosure increases the likelihood that OIRA's concerns will be taken seriously. In the end, agencies remain in charge of their own priorities; but if OIRA's suggestion is reasonable, public disclosure will give agencies an additional reason to investigate it with care.

Indeed we would go much further. President Bush should issue a new executive order on regulation, designed to increase the role of cost-benefit analysis in regulatory policy and to strengthen OIRA's authority to oversee agency action through both return letters and prompt letters. Agencies should be required to accompany regulations with clear assessments of both expected benefits (in terms of safety, health, and the like) and expected costs--and with clear discussions of the benefits and costs of reasonable alternatives.

Careful analysis of the consequences of regulation is no panacea. But for a government that seeks to save both lives and dollars, it's a terrific start.

Robert W. Hahn is director of the AEI-Brookings Joint Center for Regulatory Studies. Cass R. Sunstein is Karl N. Llewellyn Distinguished Service Professor at the University of Chicago.