On his very first day in office President Joe Biden issued a memorandum directing the Office of Management and Budget (OMB) to make “recommendations for improving and modernizing regulatory review.” This memorandum has been overlooked in public commentary about the Biden administration, but everyone involved with the regulatory state grasps its importance.
Regulatory review is a procedure for OMB oversight of all regulations issued by an Executive Branch agency. This structure was put in place by executive order 40 years ago, and it has been maintained since then. Every regulation must satisfy a cost-benefit test (unless prohibited by statute) and significant regulations must be sent to OMB for review. The Biden memorandum may well upend this long standing mechanism.
Cost-benefit analysis has been criticized from various perspectives. In our judgment its key flaw and one that OMB must seek to rectify is its failure to account for distributional effects.
The current regulatory review process focuses on the magnitude of a proposed regulation’s costs and benefits and pays no attention to where they fall. For example, whether the costs are borne by low-wage workers or owners of corporate stock makes no difference. The main executive orders that currently structure regulatory review mention distributional impacts only in passing. This is no doubt why the Biden memorandum instructs OMB to “propose procedures that take into account the distributional consequences of regulations … to ensure that regulatory initiatives appropriately benefit and do not inappropriately burden disadvantaged, vulnerable, or marginalized communities.”
Notably, OMB’s failure to account for distributional impacts has persisted during Republican and Democratic administrations alike. At least part of the reason is that even some liberal economists and law professors argue that regulatory review should pay no attention to distribution. How could that be?
Their answer has both appealing simplicity and conceptual rigor. If a policy’s benefits exceed its costs, society as a whole is better off by implementing it. Of course, that policy may have undesirable distributional effects, such as burdening vulnerable communities while benefiting those who are already well off. But fortunately, they say, we have a system of taxes and government benefits that can take care of reversing these undesirable distributional effects. Tweaking this system to increase the tax burden of those who benefit and offering additional benefits to those who suffer can make everyone better off. Taxes are costly — they distort economic activity and inhibit growth. But our society is willing to incur these costs out of compassion, desire for social stability and many other reasons. Moreover, inserting distributional considerations into cost-benefit analysis itself would impose the same costs that additional taxes do, but will also lead to enacting inefficient, wasteful, growth-reducing regulations. Voila, cost-benefit analysis should ignore distribution.
We believe that this view is flawed for at least three fundamental reasons. First, reality looks nothing like the tidy allocation of functions we just described. The U.S. system of taxes and benefits has a dismal recent track record of compensating those harmed by legal change. For example, trade liberalization policy (NAFTA and the admission of China to the WTO) led to lower wages or job loss for millions of workers, but no significant benefits programs mitigated their hardship. Environmental laws beginning in the 1990s have contributed to a dramatic drop in coal mining jobs, yet Congress enacted no significant assistance for displaced coal miners. The dramatic rise of monopoly and wage-setting power of U.S. businesses depressed wages and increased prices, disproportionately harming workers without college degrees. Yet Congress failed to counter these distributional burdens as well.
Second, the holy grail of cost-benefit analysis is efficient (and growth-inducing) regulation of the economy. Bringing distributional considerations into cost-benefit analysis, it is argued, would undermine this goal. While this argument may have theoretical appeal, it fails the reality check. It has become increasingly clear that many major U.S. regulatory regimes are nowhere close to being efficient. So no economic benefits are necessarily lost by taking account of distribution in regulatory design.
Finally, not every dimension of distributional impact can be addressed by the tax system. Imagine a proposed regulation that passes a cost-benefit test, but raises serious racial equity concerns. Should we imagine that the regulation’s distributional flaws will be fixed by providing a tax credit on the basis of race? Even if such a credit were politically feasible, our current Supreme Court would likely invalidate it.
The details of distributional analysis are up to OMB in light of the values of this presidency. This analysis should surely take account of the actual changes to the tax code that are feasible and reasonably likely. OMB should also coordinate distributional adjustments across multiple agencies. But the potential of the tax system to redress some distributional inequities does not justify keeping all distributional considerations from regulatory review.
Matthew Adler is the Richard A. Horvitz professor of Law and professor of Economics, Philosophy and Public Policy at Duke University School of Law. Alex Raskolnikov is the Wilbur H. Friedman professor of Tax Law at Columbia Law School.