Pareto Policy Solutions, LLC

advancing innovation through smart regulation

Pareto Policy Solutions, LLC is a policy analysis and advocacy firm committed to advancing sustainability through “smart” regulation: regulation that rewards, and does not penalize, superior performance.  Often, such actions leverage advances in science and technology and make the regulatory program itself more effective as well as more efficient.

Cost-Benefit Analysis, the SEC, and Ben Franklin

The US Chamber of Commerce recently published a report, The Importance of Cost-Benefit Analysis in Financial Regulation, which calls for regulators to use cost-benefit analysis (CBA) when crafting regulations for the financial sector.  Specific focus is spent describing the recent experience of the Securities and Exchange Commission (SEC), which decided to make CBA a routine part of its rulemaking only after losing several court cases over its inadequate regulatory analysis. It is a shame the US Chamber had to even issue this report. 

The fact is, several regulatory agencies—many of them “independent regulatory commissions” (IRCs) such as the Commodities Futures Trade Commission (CFTC), which regulates parts of the financial sector—don’t routinely use CBA to evaluate regulatory proposals.  These IRCs are responsible for roughly 20% of the major rules issued every year. And because their leadership cannot be removed for cause by the President, the President cannot require them to follow procedures (such as CBA) required of other regulatory agencies.

Using CBA has been known for decades to improve regulation, by making it more cost-effective (and more defensible in court).  Some well-known regulatory efforts include the placement of automatic defibrillators in the workplace (OSHA), the removal of lead from gasoline (EPA), the phasing out of chemicals that deplete the ozone layer (EPA), automotive fuel efficiency standards (DOT), and the labeling of food for trans-fat content (FDA).  CBA is a proven winner, and every President since Ronald Reagan has agreed.  President Obama’s first regulatory “czar”, Cass Sunstein, wrote about the “stunning triumph of cost-benefit analysis” in a Bloomberg column last September.

One might think that CBA is new and relatively complicated, but the truth is that this tool is conceptually easy to understand and has been known for hundreds of years.  In the late 1700s, Benjamin Franklin used a basic form of CBA to simplify decisionmaking on complex issues.  It has been practiced in regulatory settings by trained eonomists for several decades.

Perhaps the IRCs could voluntarily undertake CBA?  It happens, but not very often.  As the Chamber report indicated, about one-fourth of the 192 proposed or final rules issued to date under the Dodd-Frank financial reform law have no accompanying CBA, and one-third have just a qualitative analysis of costs and benefits.

IRCs such as the CFTC should follow the lead of the SEC.  The result will be smarter regulation.

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