There is a growing disparity in regulatory agencies’ attention to social benefits and to social costs that could further undermine the public’s trust in Federal regulatory analysis. OIRA/OMB recently issued a report identifying major challenges in benefit-cost analysis (BCA) and recommending lines of research to quantify these effects better.[1] The report is framed as a direct response to President Biden’s 2021 memorandum which directed federal agencies to modernize analytical approaches along two overarching goals.[2] The first goal directs agencies to fully account for the effects of their actions, even when the effects are impossible to quantify. The second directs agencies to use the newest developments in scientific and economic understanding. The recent report, in turn, aims (1) to identify a set of effects that agencies find difficult to monetize; and, (2) to advance strategies to improve scientific and economic understandings of these effects.

The Administration’s report correctly identifies major issues that would improve social benefits estimates:

  1. Non-fatal health effects (e.g. liver disease, low birthweight, and mental health);
  2. Ecosystem services effects (e.g. climate mitigation and recreational uses);
  3. Wildfires and extreme weather effects (e.g. resilience-building efforts and risk reduction);
  4. Information and transparency (e.g. consumer information and information on public risks); and,
  5. Effects of public benefits programs (e.g. long-term benefits to recipients and cost-savings to government programs).

All the identified challenges relate to potential social benefits. While better benefit estimates are vital, OMB should devote some attention to limitations in agencies’ social cost estimates. There are major shortcomings in agencies’ typical methodologies that underestimate the monetary costs and ignore the non-monetary social costs of regulation.

Agencies typically approximate a regulatory action’s social costs by estimating the value of the real resources needed to comply. There are two fundamental problems with this approach:

  1. The real resources – e.g., cement, labor – must be pulled from other uses elsewhere in the economy to be used for regulatory compliance. Shifting resources within the economy has both opportunity and monetary costs.
  2. Government-directed shifts in the economy can reduce demand for labor in certain sectors, leading to unemployment. Temporary job loss has non-monetary costs for the workers and their families.

Fortunately, federal agencies have made some progress to quantify both issues. Now is the time to expand this work and to apply it to today’s regulatory decisions.

EPA has recognized that social costs extend beyond the real resource cost of compliance to other sectors in the economy. In 2015, EPA asked its Science Advisory Board (SAB) about the relevance of economy-wide modeling (or general equilibrium [GE]) for regulatory analysis. In its 2017 report, SAB endorsed GE modeling as an approach that “offers a more comprehensive assessment of the benefits and costs.”[3] In 2019, EPA concluded a study of the impacts of shifting capital and labor to regulatory compliance when existing market distortions increase social costs:

We find that even for small regulations both the output substitution and tax interaction effects are significant, and ex ante compliance cost estimates tend to substantially underestimate the social cost of regulation independent of the sector subject to regulation or the composition of inputs required for compliance. This result is robust across a large number of regulatory scenarios and a series of sensitivity analyses over parametric and structural assumptions.[4]

In future blog posts, I will discuss how EPA has – and has not – applied its own research to regulatory analysis and offer recommendations for EPA to improve its research and the application of these social costs. As a next step, EPA should continue this research and model development to incorporate additional features of the economy into the general model and to provide more realistic inputs of regulatory compliance. EPA should also apply these estimates more consistently in all its economically significant regulatory actions. More importantly, OMB should direct other major regulatory agencies to use EPA’s findings or to develop comparable models to include these social costs in their regulatory analyses.

In addition to economy-wide modeling of financial costs, economic change due to regulation shifts labor demand. We all know friends who have lost their jobs. Losing income or a job due to regulatory requirements leads to adverse effects that are not just financial, but are also reductions in good health.

The literature studying employment loss and adverse health effects has grown substantially in recent years, measuring the devasting financial and health effects of the 2008 Great Recession, the COVID global lockdowns and economic shocks, and the substantial rise of energy prices in Europe. For example, since OIRA released its report, researchers published an association between food insecurity and premature mortality in the United States.[5] Another recent study measured the association between a sudden, negative wealth shock and cognitive decline and dementia in middle-aged and older U.S. adults. Since job loss can lead to food insecurity and often causes a negative wealth shock, these studies hold relevance for regulatory analysis.[6]

I believe agencies are on the strongest methodological grounds by valuing the increased incidences of adverse effects to other people due to a worker’s job loss caused by regulation. These adverse effects include domestic violence, educational achievement losses by children of the worker, third parties injured in accidents caused by the worker, and other adverse effects.

In future blog posts, I will explore some of the available literature to estimate these non-monetary social costs from regulatory-induced unemployment and income loss. The strength of associations between job loss and income loss, the quality of these studies, and the plausibility of causality are at least as strong as some associations between pollutant exposure and adverse effects.

Finally, advocating for more attention to social cost does not mask a hidden agenda to stop all regulation. Advocates of BCA must work to improve both the benefit and cost estimation methodologies so that the approach can assist voters and policy officials today. An unbalanced pursuit to only find more benefits can fuel perceptions of bias. For example, if voters feel analysts spend more effort to estimate the global social benefits 300 years that accrue to residents in other countries yet ignore the total costs to today’s workers and to their families, voters will increasingly reject the information the tool provides. Our public policy will suffer if we cannot trust regulatory analysis and agencies’ even-handed efforts to improve both social benefit and social cost estimates.

[1] National Science and Technology Council. 2023. “Advancing the Frontiers of Benefit-Cost Analysis: Federal Priorities and Driections for Future Research.”

[2] Executive Office of the President. 2021. “Modernizing Regulatory Review.” 88 Fed. Reg. 7223.

[3] U.S. Environmental Protection Agency Science Advisory Board. 2017. “SAB Advice on the Use of Economy-Wide Models in Evaluating the Social Costs, Benefits, and Economic Impacts of Air Regulations.” iv.

[4] Marten, Alex, Richard Garbaccio, and Ann Wolverton. 2019. Exploring the General Equilibrium Costs of Sector-Specific Environmental Regulations. U.S. Environmental Protection Agency National Center for Environmental Economics, 2.

[5] Ma, Hao, Xuan Wang, Xiang Li, Yoriko Heianza, Peter Katzmarzyk, Oscar Franco, and Lu Qi. 2024. “Food Insecurity and Premature Mortality and Life Expectancy in the US.” JAMA Internal Medicine.

[6] Pan, Liulu, Bin Gao, Junpeng Zhu, and Jing Guo. 2023. “Negative Wealth Shock and Cognitive Decline and Dementia in Middle-Aged and Older US Adults.” JAMA Network Open