OMB Requests Comments on Proposed Circular A-4, “Regulatory Analysis”
On April 7, 2023, the Office of Management and Budget (OMB) requested comments on proposed Circular A-4, “Regulatory Analysis.” 88 Fed. Reg. 20915. According to OMB, since 2003, OMB Circular A-4, Regulatory Analysis, has provided guidance to federal agencies on the development of regulatory analysis as required under Section 6(a)(3)(C) of Executive Order (EO) 12866 (Regulatory Planning and Review), the Regulatory Right-to-Know Act, and a variety of related authorities. OMB states that it proposes revisions to the Circular, as well as a preamble that offers further context for prospective public commenters and peer reviewers. In addition to the request for public comments, OMB will conduct a peer review of these materials in accordance with its Final Information Quality Bulletin for Peer Review and the Regulatory Right-to-Know Act. Comments are due June 6, 2023.
According to the preamble, by revising Circular A-4, OMB seeks to ensure that analytic guidance reflects new developments in economic and other scientific understanding. OMB states that it believes that the benefits of revising Circular A-4 are “likely to be substantial.” Improving the guidance on the analytical assessment of regulatory benefits and costs will facilitate better decision-making in the policymaking process, and clarifying guidance in the Circular is likely to “reduce confusion and allow for the more effective use of agency and [Office of Information and Regulatory Affairs (OIRA)] resources.” The preamble provides some of the motivations for the “more important” proposed revisions, and some considerations that OMB would like to highlight.
Scope of Analysis
The Preamble states that the revised “Scope of Analysis” section notes that primary analyses of regulations can often continue to focus on effects experienced by citizens and residents of the United States, but since U.S. citizens and residents are frequently affected by a regulation indirectly, it clarifies that such effects may be important to estimate. The section emphasizes the importance of consistency in the scope of analysis used to analyze benefits and costs and provides additional guidance about analysis in the context of regulations that implicate international regulatory cooperation. The Preamble notes that while most of the section focuses on the geographic scope of analyses, it also clarifies that the temporal scope of analyses should be long enough to encompass all of the important effects that are likely to result from the regulation.
OMB solicits comment on all aspects of the proposed revisions to this section, including:
- Should a revised Circular include suggestions for useful data sets, and if so, which data sets should be listed?
- Given the data-intensive nature of estimating the portion of regulatory effects ultimately experienced by U.S. citizens and residents indirectly through foreign noncitizens, are there rules of thumb that agency analysts should follow toward the goal of not omitting such effects?
- Does the revised Circular provide sufficient guidance on cases when it may be especially relevant to assess benefits or costs that may accrue to noncitizens residing abroad, for example in the context of non-tariff barriers to trade?
- Are there any interactions between this section and other sections of the Circular, for example, between the sections “Scope of Analysis” and “Distributional Effects,” that should be further accounted for in the revisions to the Circular?
Developing an Analytic Baseline
According to the Preamble, a common area of confusion in the development of regulatory impact analyses has been the nature of an analytic baseline as a projection of the future in the absence of the regulation being assessed. The Preamble states that proposed revisions to this section of the Circular “include adding more thorough discussion regarding the differences between the present and the absence-of-regulation future that may be important in characterizing a baseline; narrowing the specific circumstances in which use of a pre-statute baseline is called for; and including more robust discussion of instances in which comparisons of regulatory effects against multiple baselines may be appropriate.”
OMB’s proposed revisions include more robust discussion of instances in which comparisons of regulatory effects against multiple baselines may be appropriate. According to the Preamble, Circular A-4 illustrates this practice with a reference to a 1998 analysis, recent at the time of Circular A-4’s issuance in 2003, conducted by the U.S. Environmental Protection Agency (EPA). OMB requests comment on whether revisions reinstating this type of real-world illustration would be helpful, if a fictional example would offer less risk of becoming quickly dated, or if it might “usefully blend real and hypothetical elements” in an example. OMB also requests comment on potentially helpful clarifications where there is overlap or interaction between the “Developing an Analytic Baseline” section and content that appears or could be added elsewhere in revisions to the Circular.
Identifying the Need for Federal Regulatory Action
According to the Preamble, proposed revisions to material in the section previously entitled “The Need for Federal Regulatory Action” primarily fall within two categories. First, the proposed revisions would amend discussion in Circular A-4 to clarify that analysis of a regulation’s anticipated effects can reveal that what was previously assumed to be a need for regulation is not present, or identify additional needs for regulation not previously considered. Second, proposed revisions to this section would elaborate and expand upon the existing discussions of market failures and other distortions.
OMB seeks feedback on its proposed reorganization of, and revisions to, the section with the proposed title “Identifying the Need for Federal Regulatory Action.” The Preamble states that OMB recognizes that societal problems motivating regulatory action may be challenging to analyze using a benefit-cost analysis framework, so OMB solicits comment related to problems that pose this type of challenge, including analyzing associated regulatory effects using quantitative and qualitative methods. OMB asks for comment on whether more explication would be helpful about any particular or additional types of market failures, behavioral biases, or other important examples of a need for regulatory action associated with EO 12866 Section 1(a), 1(b), or 6(a)(3)(B)(i), as well as if or how the approach to regulatory analysis should be adjusted if a distortion or market failure is not identified.
Developing Benefit and Cost Estimates
According to the Preamble, OMB proposes many updates to the material in the “Developing Benefit and Cost Estimates” section, including regarding revealed preference methods, stated preference methods, benefit-transfer methods, general equilibrium analysis, and how to account for non-monetized effects. The Preamble states that these revisions “largely elaborate on material that was previously present in Circular A-4, with reference to more recent methods and findings in the academic literature, and make other incremental improvements.” In addition, OMB proposes a terminological change from discussion of “ancillary benefits and countervailing risks” to “additional benefits and costs” to clarify that categories of effects such as “ancillary” or “indirect” are not meaningfully different for analytical purposes from categories of effects that are “primary” or “direct.” OMB solicits comment and feedback on all of these proposed revisions, including on how to ensure that unquantified and non-monetized effects are given appropriate attention in the analysis, such as through summary tables with categories or rank ordering.
The Preamble states that a peer review of OMB’s 2013 Report to Congress on the Benefits and Costs of Federal Regulations notes that Circular A-4 “provides very little guidance on estimating costs.” OMB welcomes feedback related to this observation — and the related need to provide additional guidance on estimating benefits — including, but not limited to, potential revisions of the Circular to include or address any of the following:
- The use of wage data to estimate cost of time spent responding to a regulation is addressed in a section of 2011’s Circular A-4 Frequently Asked Questions titled “How do I value time?” Should this content, or a revised version of it, be incorporated into the Circular itself? Are there other metrics for estimating the cost of time that can be used where wage data are not readily available, such as for volunteers, retirees, or the self-employed? How should fringe benefits and overhead also be accounted for in estimating the cost of time?
- Is there general guidance that can be provided regarding how regulatory benefits or costs differ depending on the length of time allowed for compliance (that is, the length of time between issuance of a regulation and the date(s) when regulated entities must comply with its provisions)? For example, are there rules of thumb related to “rush” charges that would be broadly applicable?
- For many regulations, the most direct costs are associated with activity that does not itself yield benefits, but instead may prompt intermediate actions that connect the direct effects with ultimate beneficial outcomes. Is there guidance that can be provided toward the goal of avoiding the inappropriate omission of costs of activities that accrual of benefits is contingent upon?
- In some cases, empirical evidence, including cost-related data, will be available only from entities or individuals who have voluntarily performed (or refrained from) some activity. All else equal, a regulatory requirement will impose higher costs than what is observed from voluntary actions or inaction — if not in terms of direct spending, then in some other aspect of the broader phenomenon of opportunity cost. Are there potential revisions to the Circular that would inform extrapolation from empirical evidence in such cases?
According to the Preamble, Circular A-4 gives limited attention to transfers, a category of regulatory effects that can be differentiated from societal benefits or costs. In 2011, OIRA issued “Regulatory Impact Analysis: A Primer” and an accompanying set of frequently asked questions (FAQ) that provided further guidance. The proposed revisions to the Circular draw on examples listed in the Primer and the FAQs. The Preamble states that the proposed revisions would clarify that agencies “can alternatively eschew the use of the category of transfers, and treat transfers instead as offsetting benefits and costs (which leaves estimates of net benefits unchanged).” The Preamble notes that this approach may be of particular use when producing a distributional analysis. The proposed revisions would also include discussion of why agencies should not use the marginal cost of public funds (MCPF) when analyzing changes in government revenues and expenditures caused by regulations.
OMB requests comment on whether there is terminology-related guidance that it should include to enhance clarity in categorizing regulatory impacts. For instance, according to the Preamble, “use of the phrase ‘in-kind benefits’ or ‘cash benefits’ illustrates a common challenge in regulatory assessment when using the concepts of benefits, costs, and transfers: the imperfect overlap between phenomena ordinarily described using the words ‘benefits,’ ‘costs,’ or ‘transfers’ and those three categories as they would be used for analysis conducted in accordance with the Circular.” OMB requests comments and recommendations for overcoming this challenge.
Review of Agencies’ Analyses of Distributional Effects
The Preamble states that both Circular A-4 and EO 12866 direct agencies to include an analysis of the expected distributional effects of their regulatory actions. According to the Preamble, recent studies of agencies’ regulatory impact analyses have found that most contain little analysis of regulations’ effects on particular groups, aside from analysis of effects on small businesses included to comply with the requirements of the Regulatory Flexibility Act. The expanded guidance on distributional analysis in the proposed revisions to Circular A-4 is intended to assist agencies in expanding estimation of disparate effects of rules on individual groups.
Rationale for Distributional Analysis
According to the Preamble, analyzing the full welfare effects of regulations requires analyzing the incidence, or distribution, of their effects. In addition, policymakers may be concerned about the effects of regulations on particular groups — such as the incidence of benefits and costs of regulations on lower income groups and other underserved communities — for a variety of reasons. As a result, it can be important for policymakers to have estimates of the distributional effects of regulatory alternatives (along with estimates of the aggregate net benefits of these alternatives).
Considerations in Distributional Analysis
In developing proposed revisions to Circular A-4, the Preamble states that OMB considered whether the Circular should call for agencies to produce generally distributional analyses in regulatory impact analyses for certain types of rules. After consideration, OMB proposed revisions that do not adopt this approach. According to the Preamble, regardless of the type of rule, not all rules of a given type necessarily have important distributional effects, distributional analysis can be a complex undertaking (especially when the expected incidence of benefits and costs is fully analyzed), and agencies’ resources for conducting economic analyses of regulatory actions are scarce. For this reason, OMB proposed revisions that emphasize agency discretion to perform preliminary screening of rules to determine which are most likely to have significant differentiated effects on particular demographic groups and to analyze important distributional effects in those cases.
Weights and Benefit-Cost Analysis
The Preamble notes that “[a] standard assumption in economics, informed by empirical evidence (as discussed below), is that an additional $100 given to a low-income individual increases the welfare of that individual more than an additional $100 given to a wealthy individual.” According to the Preamble, traditional benefit-cost analysis, which applies unitary weights to measures of willingness to pay, does not usually take into account how distributional effects may affect aggregate welfare because of differences in individuals’ marginal utility of income. Related to the topic of distributional analysis is the question of whether agencies should be permitted or encouraged to develop estimates of net benefits using weights that take account of these differences. The Preamble states that the proposed revisions suggest that “agencies may wish to consider weights for each income group affected by a regulation that equal the median income of the group divided by median U.S. income, raised to the power of the elasticity of marginal utility times negative one.”
OMB solicits comment on the expanded guidance on distributional analysis in the draft Circular A-4, as well as the following specific questions:
- How can OMB refine the list of groups identified for consideration in distributional analysis?
- Are there available data sources that OMB should identify as being potentially useful for agencies that would like to perform a distributional analysis, particularly focusing on underserved populations?
- Should OMB provide additional guidance on when, and using what methods, it would be most appropriate for agencies to undertake benefit-cost analysis weighted by income (or other measures of economic status)?
- How can OMB refine its preliminary default estimate of elasticity of marginal utility? What additional studies should be considered? What other methods should be considered to derive a default estimate?
Treatment of Uncertainty
The Preamble states that treatment of uncertainty in Circular A-4 warrants revisiting as the literature and the tools to assess uncertainty have evolved significantly since guidance was issued in 2003. According to the Preamble, two important changes in the proposed revisions include no longer stating that an assumption of risk-neutrality is generally appropriate and providing more guidance on how to calculate risk-adjusted benefit or cost values when willingness-to-pay or willingness-to-accept values do not already reflect individuals’ risk preferences. OMB solicits comment on all aspects of these proposed revisions, and it notes that many of these topics are interrelated. OMB asks stakeholders to provide information including peer-reviewed journal articles, data, and other relevant information that would be helpful.
Expected Utility Framework and Non-Expected Utility Framework
OMB notes that Circular A-4 “implicitly directs agencies to use expected utility frameworks in their quantitative assessment of uncertainty.” According to the Preamble, while expected utility frameworks still possess usefulness in benefit-cost analysis, the economics literature highlights the potential for alternatives to expected utility frameworks — referred to as non-expected utility frameworks — to be deployed in benefit-cost analysis. OMB seeks comment on whether and how to incorporate non-expected utility frameworks.
Objective and Subjective Probability
According to the Preamble, Circular A-4 states that “[w]henever possible, you should use appropriate statistical techniques to determine a probability distribution of the relevant outcomes.” While there are various statistical techniques to determine probability distributions, OMB notes that both objective and subjective probability distributions have garnered much academic attention and have relevance to benefit-cost analysis of regulations. The Preamble states that generally, federal benefit-cost analysis deploys extrapolation of historical information to derive future probability distributions in assessing expected benefits and costs. The Preamble notes that depending on the quality of historical information and the different use of such information, subjective probability may be more informative for regulatory analysis. OMB seeks comment on whether and how to incorporate subjective probability.
Circular A-4 directs agencies to assume “risk neutrality” generally. According to the Preamble, there is a growing literature in measuring risk preferences that may be relevant in regulatory analysis, however. The Preamble states that to capture these findings, there are at least two measures of risk preferences that could receive attention: measures of risk preferences that adjust probabilities associated with different goods or assets, and measures of risk preferences that adjust prices as reflected in certainty-equivalent values. OMB seeks comment on how to incorporate risk preferences and whether the proposed guidance regarding incorporation of risk preferences is sufficiently clear in the “Economic Values of Uncertain Outcomes” section.
Treatment of Low-Probability, High-Consequence Events
According to the Preamble, Circular A-4 does not explicitly give guidance on the analysis of low-probability, high-consequence events. The Preamble states that improvements in analyzing these types of events are important, as policymakers and the public need information to assess accurately the efficacy of various policies to avoid such disasters as major oil spills or airline crashes. The Preamble notes that past federal benefit-cost analyses have used break-even comparisons or probabilistic risk assessment to analyze low-probability, high-consequence events. OMB seeks comment on improvements in methods that may improve discussion of analysis of low-probability, high-consequence events.
The Preamble states that as a general rule, the proposed revisions to Circular A-4 follow the same basic discount rate principles as in Circular A-4; the discount rate guidance warrants updating, however, as the academic literature and financial markets have evolved significantly since 2003. According to the Preamble, there are two trends that are worth noting: first, there has been a persistent decline in real interest rates over the last 40 years; and second, over the last 20 years, the literature on the treatment of the long-term discount rate has evolved substantially. The Preamble states that OMB believes that this guidance should be updated to incorporate advances in the economics literature. OMB solicits comment on all aspects of this proposed revision, including the specific rates, parameters, and approaches discussed. OMB specifically solicits comment on the frequency of subsequent updates to the proposed recommended rates or guidance, as well as the form of updates such as through separate notices, appendices to Circular A-4, or other suitable vehicles.
Estimating an Appropriate Social Rate of Time Preference
According to the Preamble, the social rate of time preference is a term that refers to the discount rate (or schedule of discount rates) that can be used to convert consumption effects across different time periods into a present value. OMB proposes to retain the existing method for calculating the social rate of time preference and updating the 30-year average using data from 1993 to 2022, except that the ten-year Treasury Inflation-Protected Securities (TIPS) yield would be used for the years it is available (2003-2022). The Preamble states that using this method, the proposed revisions would update the estimate of the social rate of time preference to 1.7 percent.
Accounting for Capital
The Preamble states that Circular A-4 “advises agencies to look not only at the social rate of time preference as measured by the risk-free rate in the marketplace, but also ‘the average before-tax rate of return to private capital in the U.S. economy’ which ‘approximates the opportunity cost of capital.’” This led to Circular A-4’s recommendation to use a second default discount rate, an opportunity cost of capital rate of 7 percent. OMB solicits comment on when and how agencies should conduct incidence analysis to ascertain to what extent regulatory benefits or costs displace consumption versus capital.
Discount Rates over the Long Term
According to the Preamble, Circular A-4 states, and OMB continues to believe, that:
[S]pecial ethical considerations arise when comparing benefits and costs across generations. Although most people demonstrate time preference in their own consumption behavior, it may not be appropriate for society to demonstrate a similar preference when deciding between the well-being of current and future generations. Future citizens who are affected by such choices cannot take part in making them, and today’s society must act with some consideration of their interest.
As noted in the draft revision of the Circular, “some believe that it is ethically impermissible to discount the welfare of future generations.” OMB solicits comment on the various approaches to discounting over the long term. OMB asks stakeholders to provide explanations and evidence on the strengths and weaknesses of the approaches described in the Preamble, including the conceptual framework, availability of data, and ease of implementation. OMB solicits comment on the default schedule of discount rates presented, including whether such a default schedule is useful, if OMB should consider a shorter or longer timeframe, and whether OMB should use an alternative approach to derive the default schedule.
Accounting for Risk
The Preamble states that when risk is material to the analysis, using certainty-equivalent valuations or other measures of risks enables measurements of benefits and costs to reflect important risks. OMB solicits comment on whether risks should be modeled as certainty-equivalent valuations or whether some other guidance on modeling risk should be provided and, if so, what form it should take. OMB also solicits comment on the usefulness of modeling or estimating risks and the relevant time horizons. OMB asks stakeholders to comment on the conceptual strength of an approach, data availability, and ease of implementation.
Time Preference for Health-Related Benefits and Costs
According to the Preamble, a common challenge in health-related analysis is to quantify the time lag between when a rule takes effect and when the resulting physical improvements in health status will be observed in the target population. The Preamble states that in such situations, “agencies must carefully consider the timing of health benefits before performing present-value calculations.” OMB solicits comment on how to draft revisions to Circular A-4 to improve current practice regarding discounting health-related effects, both monetized and non-monetized.
Private Discount Rates vs. Social Discount Rates
The Preamble states that proposed revisions to Circular A-4 would clarify that analysis modeling private behavior requires the use of appropriate private discount rates faced by the relevant population. According to the Preamble, once necessary private discount rates are modeled, “then the social discount rate can be applied to ascertain the social benefits and costs of a regulation.”
Given the significance of this proposed rewrite of Circular A-4, it is surprising more has not been written about it and disappointing more time is not being provided to comment. The proposed changes could, if implemented as proposed, profoundly change benefit-cost analysis in federal rulemaking and greatly expand opportunities for public participation in the regulatory review process. Significant issues relating to how to quantify the impacts of federal action differently for different groups is consistent with the Biden Administration’s commitment to environmental equity, and it offers much on which to think about and comment. No attempt is made here to outline these issues in detail. The revisions span some 90 pages and make for some tough, but essential, reading. As noted, comments are due by June 6, 2023.