The Biden administration’s Office of Management and Budget’s (OMB) has recently proposed a new rule revising “Circular A-4,” a document outlining standards for regulatory cost assessment, the new version of which would integrate ideological and subjective diversity, equity, and inclusion (DEI) and environmental, social, and governance (ESG) criteria into regulatory actions. This has triggered significant concern from the few critics who have identified the relatively under-the-radar rule.
In the proposal, the OMB emphasizes the use of ‘distributional weights’, which apply to the costs and benefits experienced by different demographic groups. This shift is intended to produce a more equitable regulatory landscape, however, it raises several critical issues. The proposed changes aim to introduce greater subjectivity into the evaluation of regulatory burdens, drawing criticism for its potential to increase the scope of regulatory authority without adequate discourse.
The implementation of distributional weights risks creating inefficiencies and distortions in cost-benefit analyses. This could lead to the adoption of regulations where costs exceed benefits, or overlook potential regulations with positive net impacts. The theoretical base of the weights, which assumes that income redistribution increases overall welfare, is inconsistent with economic theory.
Additionally, the proposal threatens to diminish transparency in the rulemaking process. This complexity could complicate public understanding of policy decisions, weakening democratic accountability.
Overreliance on these weights may overshadow the need for nuanced judgment in policy decisions, promoting a formulaic approach that fails to account for the complex effects of regulations. Critics argue that the OMB’s proposal overlooks the significant indirect costs of regulation, such as stifled innovation, productivity losses, and reduced competitiveness due to compliance burdens.
The exclusion of opportunity costs, the economic opportunities lost when resources are directed towards compliance, is also seen as problematic. Both indirect and opportunity costs can significantly impact economic growth and efficiency, and their omission may lead to an underestimation of the true costs of regulation, thereby encouraging over-regulation.
Research suggests that every dollar spent on direct regulatory costs can lead to indirect opportunity costs as high as $19. This implies that traditional cost-benefit analysis may significantly underestimate the actual costs of regulation, potentially contributing to an excessive regulatory burden that impedes economic growth and efficiency.
However, the OMB’s proposed changes show no inclination to address these shortcomings. The proposal was open for public comment until June 6, which has already passed.
