The Costs and Benefits of Regulation

As Congress prepares to roll back regulation of the financial sector this week and the SEC continues its tap dance toward doing the same for securities regulation, compliance theorists might want to read two recent reports about measuring the costs and benefits of regulation.

First is a draft report published Feb. 23 by the Office of Management and Budget. That study found that regulations issued over the last 10 years have had a decidedly positive effect — that is, the benefits of regulation exceeded the costs.

The report examined more than 600 “major” rules (those with an impact on the economy of more than $100 million in at least one year) published from 2006 through 2016. It then compiled the annualized costs and benefits of major rules across eight large government agencies. The results are below.


Cost and benefits in millions, 2015 dollars. Source: OMB


OMB had to estimate a range of probable costs and estimates, given how complex this sort of analysis is. Still, across 133 major rules, the average annualized cost (in 2015 dollars) was $92.8 billion, average annualized benefit $554.8 billion. Benefits were six times larger than costs.

Now, the idea that regulation might actually be a net good to society is politically incorrect among conservatives and the Trump Administration. So the OMB report falls all over itself to say that it isn’t sure its analysis is accurate, or that prior estimates of regulatory costs were rigorous. Take a look.

It is important to emphasize that the estimates used here have limitations. These estimates reflect the current state of science and information available to agencies. Insufficient empirical information and data is a continuing challenge to agencies when assessing the likely effects of regulation. In some cases, the quantification of various effects may be speculative and may not be complete.

The OMB even invites others to submit their own ideas for how to measure regulatory costs and benefits.

OMB is specifically requesting comment on how best to provide the information required by law in this Report. New circumstances provide an opportunity to take a fresh look at how each of these analyses is conducted, and whether OMB is providing the public with the optimal level and scope of information, given the current status of these final rules covered in this draft Report.

OMB then goes on to say it will “seek input from peer reviewers with expertise in areas related to regulatory policy or cost-benefit analysis” and incorporate that comment as it prepares a final version of this report.

That strikes me as a giant neon sign screaming, “Conservative think tanks! Please submit your proposals explaining why OMB’s prior conclusions were all wrong, and actually if you consider things our way, regulation is a net drain on society.”

Something to ponder as Congress rolls back Dodd-Frank oversight of the financial sector this week, and SEC chairman Jay Clayton continues his methodical quest to roll back investor protections under the Sarbanes-Oxley Act in the name of juicing IPO stats for U.S. capital markets. Who benefits, indeed.

On the Pace of Regulation

Meanwhile, two professors of public policy based at George Washington University just published a paper exploring another subject: why do regulators take so long to adopt new rules, anyway?

Professors Christopher Carrigan and Russell Mills examined more than 200 major rules adopted from 2007 to 2010, and looked at the job functions of people at regulatory agencies assigned to write the rules. Their conclusion: how an agency structures those teams can have dramatic effect on how quickly rules get written, and how complex those rules are.

The key, they found, was the diversity of skills among people assigned to a rulemaking team. Teams with more “breadth of competencies” (one subject matter expert, one lawyer, one economic analyst, one regulatory affairs specialist, and so forth) tended to write rules more quickly and keep them simpler.

In contrast, teams with depth of competency (a whole bunch of lawyers, or policy analysts, or subject matter experts) tended to take more time and, as the authors wonderfully phrased it, “elongated the resulting rules.”

In the same way that a group of like-minded people can obsess over small details and get lost in an ideological echo chamber, the professors said—

our analysis reveals that the diversity of representation of those closest to a rulemaking can have similar effects on regulators’ outcomes. The design of the rulemaking process can both increase the pace with which rules are promulgated and reduce the level of detail in which they are presented, but only when care is taken to ensure the individuals intimately involved have greater breadth – relative to depth – in the competencies they bring to the endeavor.

So a better regulatory regime, we might want to think about the process agencies use to create rules in the first place.

Let’s hope that point isn’t lost on the Office for Information and Regulatory Affairs, currently on a jihad to repeal every regulation it possibly can. Can a regulation sometimes be misguided? Yes. Can a regulation sometimes have very different groups that pay the cost and reap the benefit? Also yes. That’s how we get into the political food fights, such as repealing Dodd-Frank regulation for mid-sized banks, when failure to govern banks properly in the 2000s led a financial crisis that cost millions of jobs and trillions of dollars to the public.So maybe, just maybe, we focus on how to make smarter regulation, rather than more or less of it.


  1. Lock Nelson on March 12, 2018 at 11:11 pm

    In concept, smarter regulation can achieve public policy goals while selectively placing the cost and burden of regulation on those who engage in businesses and activities that expose public interests at risk, freeing others from burden.

    Of course, a complicating issue, most particularly in the financial services arena, is inter-connectivity and interdependence of trading parties, resulting in systemic risk. At the center of systemic risk is the concept of “trust”. Transactions only flow easily when both parties trust one another to perform. This often involves a “trusted” intermediary, most commonly a financial institution.

    Of course, the promise is that as technology progresses, innovations such as blockchain will add trust to how business is done, increasing trust among trading partners and minimizing the need for a financial intermediary. If this is more than a pipe dream, then regulatory oversight and regulations will need to evolve rapidly.

    Hopefully the regulatory evolution can keep pace with change and result in “smart” regulation that places its burden on those engaged high risk activities, effectively reducing regulatory burden and complexity for others.

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