Thread by @epopppp

Okay, here’s a Sunday night thread on economic analysis of regulation for the three of you not watching GoT.

My book ms. is partly organized around following the impacts of two communities that help introduce economic reasoning into policymaking.

One is a systems analytic community with answers to the question “How should government make decisions?” Another is an industrial organization community asking “How should we govern markets?”

In the (penultimate!) chapter I’m currently working on, the two intersect to provide new answers to the question “How should we make decisions about governing markets?” This is the story of social regulation.

The late 60s/early 70s saw a dramatic expansion of social regulation—that is, rules meant to improve the environment, health, and safety; as opposed to economic regulation, which controlled price and entry in particular markets.

This included the major wave of environmental legislation—NEPA, the Clean Air and Water Acts, etc.—as well as a wide range of other policies, including ones to address transportation safety and worker health.

This legislation came from a variety of places, but was optimistic about government’s ability to improve things (civil rights! man on the moon!), while also being carefully written to avoid widely acknowledged problems with regulatory capture.

It was, in a way, the second wave of the Great Society—after guns had squeezed out butter, but before cynicism about government action had fully set in.

It was also, in many cases, explicitly anti-economic. Standards for health, safety, and environmental protection were set high, without regard to cost. This was intentional, as high, inflexible standards were seen as necessary to avoid capture.

But it also brought almost immediate backlash from affected industries—auto, chemical, oil—who did not want to pay for these new requirements. They advocated for cost-benefit analysis as a means to contain them.

The mid-1960s had seen RAND systems analysts disseminate closely related techniques to rationalize government decision-making. During the LBJ administration, they created an infrastructure for economic analysis across Washington (Chs. 3 + 5).

But the heyday of liberal systems analysts had passed by the time of the industry backlash against social regulation. Nixon was sympathetic to industry complaints, but made only modest changes in response.

But the Ford administration placed I/O economists into new positions of influence hoping they’d fix inflation. While primarily interested in economic deregulation (airlines, railroads), they also favored viewing social regulation through an efficiency lens.

Ford’s economists made some moves toward requiring agencies to estimate the economic impact of new regulations and submitting comments on the estimates.

But more change happened under Carter and CEA chair Charles Schultze. Schultze had overseen the implementation of systems analysis as LBJ's budget director. He was a Democrat, but also a strong advocate of cost-effectiveness as the measure of good regulation.

Schultze created a review process with more teeth. It required much more explicit comparison of costs and benefits, and led agencies to hire more economists both to meet the new requirements and defend their actions.

Finally, upon Reagan’s election, “regulatory reform” became “regulatory relief”—but still under guise of CBA. EO 12291 gave OMB’s new Office of Information and Regulatory Affairs oversight of agency regulations, and required CBA where statutorily permissible.

In practice, though, Reagan’s administration did not pursue “neutral” economic analysis of regulation as Schultze had advocated, but reduction of regulation in accordance with both its ideological commitments and business interests.

Though in some cases the courts upheld Congressional language limiting weighting of costs in regulatory decisions, the use of CBA was greatly expanded.

This shift toward economic analysis of regulation was advocated by both liberal and conservative economists, yet in practice it constrained the left in a way it did not the right.

The strict (but inefficient) rules Congress had put into place were there precisely to limit the kind of industry intervention into regulatory decision-making that now became common.

It provided cover for an administration that simply wanted to throw out regulation, while appearing as a neutral, technocratic decision-making tool.

And it made it harder to consider a range of values—ecological, equity- and rights-centered—that did not fit neatly into a cost-benefit framework, yet were very much part of Congress’s motivation for regulation.

By the 1990s you see people committed to competing values trying to force them into an economic framework—so ecology becomes ecosystem services, and environmental justice becomes distributional effects.

There are liberal and conservative advocates (and versions) of CBA. But efficiency as the measure of good regulation becomes taken for granted—and written into institutions—in a way it simply was not during the 60s/70s wave of regulatory expansion. /fin