Biden administration’s proposed changes would make it easier for agencies to justify regulations
Photo 10901289 © Songquan Deng |


Biden administration’s proposed changes would make it easier for agencies to justify regulations

Federal agencies wouldn't have to adequately address the fiscal consequences of most regulations.

In January 2021, the Biden administration issued a directive to modernize the regulatory review process. Part of this directive ordered the Office of Management and Budget (OMB) to look into revising one of their inter-agency directives, called circulars. On April 7, 2023, OMB released a set of proposed rule changes that nearly doubled the length of OMB Circular A-4, a document that serves as a set of best practices for benefit-cost analyses by federal agencies.

On the plus side, the Biden administration has reformed Circular A-4 rather than killing it completely, which was a possibility given some of his political party’s disdain for the review process. These changes, paired with a recent memo issued from within OMB, run the risk of making it easier for federal agencies to push new regulations without adequately addressing their fiscal consequences. They will also make it harder for OMB to do its job without being buried in paperwork.

Some of these changes were ordered in a memo from Richard Peresz, administrator of the Office of Information and Regulatory Affairs (OIRA), in response to an April 6 executive order from the Biden Administration.

First and most concerning, is the requirement that the Office of Information and Regulatory Affairs administrator sign off on any “other significant” rules. In a recent Forbes column, Susan Dudley, OIRA administrator from 2007 to 2009, defined other significant rules as any regulation that raises “novel legal or policy issues.” These other significant rules can range in topics, addressing issues like equitable access to transit facilities or refunds for airline tickets and fees. She worries that this change could politicize the OIRA review process.

Requiring the administrator’s approval for each ‘other significant’ case is more work for no gain, and those rules that do not get the administrator’s approval could skip the process altogether. Adding this extra step to OIRA’s workload would slow down the regulatory impact analysis process, which should be efficient as possible. It would also lower the number of rules designated as other significant.

Another concerning section of the memo is the administration’s decision to raise the minimum economic impact for review from $100 million to $200 million, the threshold for when a regulation becomes “economically significant.” The change also requires that the threshold be reassessed and increased as necessary every three years based on Gross Domestic Product growth.

This decision was initially justified due to inflation since the initial 1993 executive order. It’s correct: $100 million in 1993 equates to $213 million today, but I worry some projects worth analyzing could fly under the radar. While it is true that it may help OMB focus its analysts on more consequential rules, I can’t help but feel that federal officials should be erring towards doing more regulatory impact analyses, not less. Especially when considering the federal budget deficit and the questionable federal funding for transportation.

The memo also requires the Office of Information and Regulatory Affairs to “proactively engage” with interested parties to get additional feedback during the regulatory process. When paired with the size of OIRA, this demand would compound their workload for little tangible benefit. While this may sound good on paper, OIRA is not an agency that should alter proposed rules to align with public opinion. OIRA is a division dedicated to expert analysis of the impacts of proposed rule changes.

Interested people and parties that leave comments, Dudley warns, “may become disillusioned” given the division’s low responsiveness to public comment and meetings.

The memo specifies that offices like OIRA should look to engage parties that have “not historically requested such meetings,” but this could lead to similar disillusionment. Parties that engage may not bring anything that OIRA can use to the table, and both OIRA and the commenting party’s time would be wasted. It would be better to avoid wasting OIRA resources on these meetings and instead use them for regulatory impact analyses as outlined in Circular A-4.

The most troublesome proposed change to Circular A-4 is how discount rates are chosen for federal agencies’ regulatory analyses. Discount rates are the interest rates used to determine the present value of future cash flows and are critical for regulatory analysis. The OMB initially adapted discount rates as a tool from the private sector to calculate the costs and benefits of regulation. A higher discount rate can reflect changing financial circumstances, like interest rates and inflation. Most critically, it represents the risk of investment. A higher discount rate typically translates to more risk and is chosen to show possible negative impacts on future cash flows.

Circular A-4 in the past recommended that two discount rates should be used for benefit-cost analysis: 3% and 7%. The lower value, 3%, represents the social rate of time preference. Simply put, this lower percent is used to gauge the value of consumption today versus consumption in the future. The Office of Management and Budget chose this rate by taking the difference between the yield on 10-year Treasury notes (8.1%) and the annual rate of change in the Consumer Price Index over a 30-year period (5.0%), resulting in a discount rate of 3.1%. The higher value, 7%, represents a before-tax return in private capital.

The proposed change replaces those rates with a lower discount rate, ranging from 1.7%-3%, based on the formula that helped the OMB arrive at the original, lower 3% discount rate. While the decision-making behind this proposal is sound, it does raise some concerns.

With a discount rate as low as 1.7%, regulatory changes could appear to always provide more benefits than costs. In a nutshell, a lower discount rate means there’s very little difference in value between benefits today and in the future. Even a marginal benefit would outweigh any potential costs for regulatory action. Financially justifying regulations would be easier than before.

This could have a profound effect on the transportation sector. If the Federal Highway Administration (FHWA) were to propose a rule that would slow automation in trucking by mandating all trucks have a driver, similar to the Federal Rail Administration’s train crew size rule (which my Reason colleague Marc Scribner has written about), it would likely drive some shippers away from trucks and toward competing transport modes, even if shifting to a different mode had other consequences ranging from price hikes to lower cost-effectiveness.

The Biden administration’s proposals and memos would make federal agencies face less scrutiny when pushing for rulemaking changes and dilute the process for little gain. Wasting OMB resources on meetings and a politicized administrator approval process would hinder that. The federal government and its agencies need to do more regulatory impact analyses, not less. The proposed changes to Circular A-4 and its implementation would hurt regulatory impact analyses far more than they would help.