by Jeff Sovern
The American Banker had an article this week, Could the Fight Over Cost-Benefit Analysis Kill Reg Relief? that made some interesting points. After noting that Senate Banking Committee Chair Richard Shelby advocates more cost-benefit analysis, the author, Victoria Finkle, wrote:
"The idea of rigorous cost-benefit analysis is like motherhood and apple pie which means Democrats will have a hard time explaining why it should not be determinative," said Aaron Klein, director of the Bipartisan Policy Center's financial regulatory reform initiative. "Cost-benefit analysis is great in theory, and where practicable it should be implemented, but the challenge is to find where it works in the real world and where quantifiable analysis is not possible and cost-benefit analysis doesn't make sense."
I think that cost-benefit analysis can be a great idea, and that's why I applaud Congress for directing the CFPB and the CPSC to consider cost-benefit analysis in drafting rules. The FTC's very organizational structure, including a Bureau of Economics, seems designed to carry out cost-benefit analysis, see Jonathan Baker, "Continuous" Regulatory Reform at the Federal Trade Commission, 49 ADMIN. L. REV. 859, 874 ( 1997), while the statutory definition of unfairness applicable to the CFPB and FTC alike has been called "[b]asically a cost benefit test." See J. Howard Beales, III, Regulatory Analysis and the Independent Agencies, slide 4 (April 7, 2011).
But slavish adherence to cost-benefit analysis has costs of its own, as I argued here. It can slow down adoption of regulations so much that it may become a weapon used by opponents of regulation not because of its merit but because of the delays it generates. See, e.g., Editorial, Stuck in Purgatory, N.Y. Times, July 1, 2013 (noting that 72 draft rules had been under review for longer than the 90 days specified by executive order; 38 had been under consideration for more than a year; and three had been languishing since 2010);
Moreover, it is often hard to figure out how to value benefits to consumers. For example, how do we value privacy? Some people don't care about it at all, while others care greatly about it. How can we tell how much those who care about privacy value it? Do we pay attention to surveys or how people act--which seem to say very different things. If we focus on what people do, by, say, looking at how many opt-out of disclosure of their financial information under Gramm-Leach-Bliley, can we be sure that we are actually seeing how much they value privacy, or could it be that people don't realize from the privacy notices that their privacy is implicated and so discard the notices as junk mail? As Ms. Finkle wrote:
Critics of the push for greater cost-benefit requirements argue that such estimates can provide a false sense of precision when data is often based on assumptions or estimates.
So cost-benefit analysis can be a positive, but it shouldn't become an end in itself. The relevant statutes provide for just the right amount of cost-benefit analysis. Those who seek more should bear the burden of showing that more would provide more benefits than costs.