On Balance: Benefit Cost Analysis and the Statutory Mandate

December 11, 2019

By: Deborah Aiken

This post describes a new article forthcoming in the Journal of Benefic Cost Analysis, “When Benefit-Cost Analysis Becomes Optional: Regulatory Analysis at the Consumer Product Safety Commission in the CPSIA Era.” The article describes a familiar scenario for practitioners of regulatory benefit cost analysis: a high impact event followed by swift and forceful congressional action. In the Consumer Product Safety Commission (CPSC) case, the high impact event was a series of product recalls involving toys contaminated with lead. Congress’s response was to pass the Consumer Product Safety Improvement Act (CPSIA) and require several rulemakings.

Benefit-cost analysis of a statutory mandate presents some special challenges. Mandates often arise in the aftermath of a crisis involving significant human fatality, environmental destruction, or as in the case of CPSC, one affecting a sensitive population like children. In crisis mode, decisionmakers might view economists skeptically or actively reject their input, especially if that input focuses on costs. Additionally, some believe that economic analysis hinders rather than facilitates the policy process. As practitioners, it can be difficult to see how we can add value when the parameters of the decision have been largely dictated by Congress. But the CPSIA relaxed the legal requirement for CPSC to conduct benefit-cost analysis, and the agency elected to forego such analysis for all CPSIA rules.

The CPSC case represents an opportunity to consider what is lost when benefit-cost analysis is not factored into regulatory decisions, and why economic input is especially critical in the case of a statutory mandate.

Economic analysis can serve as valuable feedback to the decisionmakers even after they issue the mandate. The CPSIA required CPSC to issue a rule for manufacturers of children’s products to test their products at a third-party laboratory. While the CPSIA relieved the agency of the benefit-cost analysis requirement, CPSC was still required to conduct an analysis of small business impacts under the Regulatory Flexibility Act. The analysis of small business impacts uncovered that compliance costs for very small producers could be prohibitively high. Due largely to these findings, Congress made legislative changes to the CPSIA to provide some flexibility for the CPSC to grant relief to small producers. A more complete analysis of the benefits and costs would have provided valuable information to legislators—who were clearly (in this case) open to making changes to the law—and could have resulted in further improvements.

Agencies commonly go beyond the congressional mandate and add discretionary components to a rule, as in CPSC’s phthalates rule. The CPSIA permanently banned several phthalates (chemicals that give plastic its desirable properties) from children’s products. As noted in the article, the benefits in terms of improved health outcomes for children due to the ban were questionable. A significant issue was that fetal exposure due to mothers’ ingestion of the chemicals through diet during pregnancy was believed the major source of health impacts. Thus, removing these chemicals from toys would occur too late in the exposure chain to have much effect on children’s health outcomes. Despite the questionable benefits of banning the chemicals required by law, CPSC expanded the list of banned phthalates beyond those specified in the legislation. These discretionary elements of the rule-imposed costs on industry that may have been avoided without harm to consumers had they been subject to a benefit cost test.

Subjecting a rule to benefit cost analysis need not unnecessarily slow the process. While the CPSC conducted no analysis of the economic impacts of the phthalates rule, the agency missed the deadline for publication by nearly three years and completed the rulemaking only after being sued. Industry complaints about the underlying scientific data and beliefs that the agency lacked transparency were key factors that delayed the rule. As an organizing framework, regulatory benefit-cost analysis can reveal places where evidence it is lacking and may help anticipate problems for stakeholders. But even if conducting a thorough analysis adds time to a rulemaking procedure, this can be time well spent when there are unresolved questions pertaining to economic burden, especially when a mandatory rule is expected to yield small or questionable benefits.

It is not always easy to convince policymakers or even ourselves of the merits of benefit-cost analysis in the case of a statutory mandate. The mandate, by its very nature, can place an economist in a contrary position. Congress is not obligated to consider whether regulation is necessary for, or the best approach to, addressing a hazard, or how the benefits of an intervention or any of its alternatives compare to costs. While this can add to the temptation to avoid or otherwise short shrift the analysis of a mandate, it is precisely the reason economic input is needed.

Disclaimer: This article presents the author’s personal reflections and observations, and the U.S. Department of Transportation has neither approved nor disapproved its content. Any views or opinions expressed are the author’s and should not be considered to represent the official position of the Department of Transportation or the U.S. Consumer Product Safety Commission.

Deborah Aiken is the Director of Regulatory Analysis in the Office of the Secretary at the U.S. Department of Transportation. Her prior positions include: Supervisory Economist at the U.S. Consumer Product Safety Commission, Senior Economist at Navigant Consulting/LECG and Economist with the U.S. Department of Labor, Occupational Safety and Health Administration (OSHA) and the U.S. Environmental Protection Agency.

Note: This article is currently available and can be accessed on “First View.”