Richard L. Revesz on Balancing the Costs and Benefits of Federal Regulations

In this episode of Lehigh University’s College of Business ilLUminate podcast, we are talking with Richard Revesz, Administrator of the U.S. Office of Management and Budget's Office of Information and Regulatory Affairs (OIRA).

Revesz, one of the country's leading voices in environmental and regulatory law and policy, is on public service leave as the AnBryce Professor of Law and Dean Emeritus at the New York University School of Law, as well as from the Institute for Policy Integrity, which he founded in 2008. He was at Lehigh Business for this spring's Year of Learning lecture to speak on managing the regulatory process.

Revesz spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.

Below is an edited excerpt from that conversation. Read the complete podcast transcript [PDF].

Jack Croft: I think it's safe to say that OMB's Office of Information and Regulatory Affairs is not exactly widely known to the general public. So if we could start by you telling us a little about what the office's main responsibilities are and what role it plays in the federal regulatory process.

Richard L. Revesz: Sure. You're right. When the media writes about us, they often call us obscure. And on good days, they call us obscure but important. Bad days, just obscure.

The agency does a number of things, and I'll focus on the regulatory components of what we do. We do a number of other things, which we could explore as well. So on the regulatory side, for any major federal regulation-- this could be health and safety regulations, environmental regulations, homeland security regulations, regulations protecting families and children, transportation regulations, safety standards across the federal government, cybersecurity standards across the federal government. For any regulation of this sort that is significant, we run a centralized review process.

So we don't write any of these regulations. The various agencies, the EPA—Environmental Protection Agency, the Department of Transportation, Department of Homeland Security, the Department of Health and Human Services, they write the regulations. Often, these things are packages that are hundreds, sometimes thousands of pages long. Then they come to us, and we do two main things.

One is we ensure that the benefits of the regulations justify the costs. And we do this pursuant to an executive order that dates back to the Clinton administration, although the Clinton executive order was a replacement of a Reagan administration executive order that wasn't actually all that different. So this system has been around for more than 40 years. We make sure that the American people get sufficient benefits from this regulation to justify the cost.

The second thing that we do is we run an interagency review process. So the government is a complicated place, and lots of different agencies have interests in regulations. And we need to make sure that the government doesn't work across purposes. For example, if there was an environmental regulation that impaired the reliability of the electricity grid, that would be a problem. And the Department of Energy will be sure to tell us this. And so those sorts of things come up in the interagency review.

And we actually run it not only with respect to every agency in the executive branch, but also every policy council at the White House. The White House has lots of policy councils, like the National Economic Council, the Council of Economic Advisors, the Domestic Policy Council, the Office of Science and Technology Policy, the Climate Policy Office, the Gender Policy Council, many more.

And these have intense interests in regulatory policy because they are basically carrying out the priorities of the administration. And you want to make sure that the regulation is aligned with the administration's priorities and does not interfere with other agencies' missions and doesn't inadvertently have pernicious consequences.

So this is kind of a complicated process where we send these regulations out. We get comments. We compile all this. Often disagreements arise. And when there are disagreements, we try to work it out, sometimes find a compromise, sometimes explain to an agency that their disagreement is misplaced, and so on. But all this has to happen before the regulation sees the light of day. And if it seems like a lot, it's actually twice as much because we do this both for proposed rules and then again for final rules.

Croft: You had mentioned the costs and benefits, and that this has been a part of the office's responsibilities over the last four decades. And I'm wondering if the approach you've brought, how it differs from what your predecessors have done in terms of how you calculate those costs and benefits.

Revesz: The main difference is that OIRA has a guidance, and it's a guidance to agencies on how they're supposed to determine the costs and benefits of regulation. And the guidance under which OIRA operated until this past year dated back to 2003. It was kind of a comprehensive document put out in 2003. And it was a good document, but it had become obsolete.

It had become obsolete because relevant market conditions had changed and also because there had been significant advances in the economic and scientific literature. One of the things that President Biden called for on his first day in office was to modernize regulatory review.

And an important component of that was to update the guidance. We call it Circular A-4. Talk about something obscure. That tells agencies how they have to compute the costs and benefits of regulation. We completed this work in November of 2023. So our new guidance is brand new. It went through a very extensive process of public comment and peer review. We benefited from the best scientific and economic minds in the country in putting this together. And it's now out and doing its work.

Croft: One of the areas in particular - and again, this goes to one of the areas of your expertise even before you took your current job - is the effects of climate change on the potential future health and well-being of future generations. How has the calculation changed to figure out what those impacts will be on people in the future?

Revesz: It's a very important issue. It was significantly affected by the change in the guidance. Most regulations have some consequences in the future, not just climate change regulations. And typically, although not always, the costs are dispersed in the near term, and a lot of the benefits accrue in the longer term.

For example, if we have a regulation protecting the quality of drinking water, public water systems are going to have to buy technology, change their production processes. That obviously costs money. But the benefits are going to accrue over a long period of time. People are going to drink better quality water and are going to be less likely to get illnesses of different kinds, including very serious ones, as a result of, for example, removing carcinogens from drinking water.

One of the challenges of cost-benefit analysis, and this has to be done, is to figure out a metric under which future consequences are compared with current consequences. So we have these benefits in the future. And how do we basically compare them to money that's spent now for this equipment? And economics has developed a technique for that, which is to calculate the net present value of it, which involves using a discount rate.

One of the things we did was to update the discount rates. Basically, in 2003, the guidance suggested that agencies use a discount rate of 3%, a discount rate of 7%. The discount rate of 3% was trying to do something that if you did exactly the same thing now, the number would be 2% because of changes in the real return of 10-year government bonds. The 7% discount rate was trying to do something that can be better done in a different way, not through the discount rate, and had essentially become discredited in the economics literature.

So we basically replaced those two rates with a 2% rate. And there's also a separate economics literature, a very highly regarded economist, explaining why for real long-term effects, the effective discount rate that one should use is lower. And we embrace that literature. And if something happens in the pretty far future, we're using a 1.1 discount rate. So those were significant-- and it's not that we just picked numbers out of a hat. I mean, it's kind of significant scientific and economic support for what we did.

Croft: One of the criticisms regarding the changes and formulas that the government is looking at now comes from particularly the fossil fuel industry and others who say that it will kill the fossil fuel industry, that it's going to create economic harm for businesses and for employees. So where does that balance lie in terms of-- and a lot of this does fall under that umbrella of the effects of climate change, a lot of which we're seeing now. Where does that fall in terms of the future of energy in the country and the things that you're looking at?

Revesz: The beauty of benefit-cost analysis is that it looks at all the consequences. So an environmental regulation doesn't just look at the benefits that might accrue to either the current generation or future generations. It looks at the costs that are being imposed on whoever costs are being imposed on.

It's not always a kind of like imposed costs on industry to help breathers. Often it's different winners and losers among producers of a product. None of these regulations are going to reduce the amount of electricity in this country. We have no danger of losing our power. What some might do is they might shift from some forms of producing energy to others. And that'll create some winners and some losers. All of that needs to get accounted for and is accounted for.

And if there are losses of jobs, that is part of the analysis. But there might also be jobs gained in the part of the industry that is now capturing a bigger share of the market. That's also part of the calculation. And if there are broader economic impacts of some sort, those are considered as well. So that's the beauty of our process. It doesn't look at just one of the consequences of regulation. It looks at all of the consequences of regulation, positive and negative. And it makes sure that the positive consequences outweigh the negative ones.