In 1987, the Reagan administration signed onto one of the most important international environmental treaties of all time, the Montreal Protocol. This was an agreement for all of the countries of the world to phase out the use of substances that are responsible for ozone depletion.
Twenty-five years later, the Obama administration rejected a new proposed regulation to control ozone at the same time that it supported a regulation to control mercury.
For those readers who are savvy political analysts, you might be scratching your head. Why would the conservative Reagan administration bullishly take on new environmental regulation while the liberal Obama administration rejected it?
While a lot of factors came together to influence these decisions, there is one that had an especially large impact on both of them: administrative use of cost-benefit analysis.
Cost-benefit analysis is the gold standard for applied welfare economics. What does this mean? It means that the best way for us to forecast the economic impacts of a given policy is cost-benefit analysis.
The federal government has been using cost-benefit analysis for over a century now, starting with the Army Corps of Engineers using it to help design infrastructure projects during the Great Depression. A Democratically-controlled Congress first endorsed cost-benefit analysis in its 1969 National Environmental Policy Act and Ronald Reagan first instituted centralized executive cost-benefit analysis in 1969. This original executive order has persisted, with minor changes, through the H.W. Bush, Clinton, W. Bush, Obama, and Trump administrations.
Cost-benefit analysis is carried out by systematically identifying the economic costs and benefits of regulatory or tax and budget policy proposals then estimating these costs and benefits in dollar terms. Costs and benefits are then discounted to account for the opportunity costs of the dollars used and “sensitivity analysis” is performed to show how accurate the estimates are.
Policymakers find cost-benefit analysis to be valuable because it allows them to measure very different policies, ranging from tax to education to health, against each other quantitatively, giving them an idea of the magnitude of economic impacts these policies will have and who they will impact. Cost-benefit analysis is also helpful because the process unearths an important insight—what will actually happen when a policy is implemented.
Despite cost-benefit analysis’s popularity and long history at the federal level, states and local governments have been slower to adopt this valuable tool. A 2013 study by the Pew Charitable Trusts estimated that the average state only conducts two cost-benefit analyses per year. Ohio was on the higher side, conducting about four on average.
Use of cost-benefit analysis is on the rise, though. Leading the way are states like Washington, which has created a center at Evergreen State College, the Washington State Institute for Public Policy, to systematically analyze and catalogue cost-benefit studies for the state legislature.
Ohio has dipped its toes in cost-benefit territory legislatively and administratively. The Ohio Legislative Service Commission is a well-funded analytical agency supporting the Ohio General Assembly. The Legislative Service Commission does not conduct full cost-benefit analyses, but it does project direct and indirect accounting costs for the state for bills before the legislature.
The Ohio Common Sense Initiative is an embryonic form of the original Reagan Administration executive order centralizing executive cost-benefit analysis. The Common Sense Initiative does not conduct full cost-benefit analyses, but it does mandate “business impact analyses” aimed at estimated the impact of regulations on firms in the state.
As a social enterprise, Scioto Analysis works with policymakers directly to give them the analysis they need but is also committed to improving the quality of analysis in state and local government as a whole. In order to serve this second goal, Scioto Analysis will be releasing a series of studies and resources over the next several months around cost-benefit analysis, its prevalence, and its application, specifically in the state of Ohio.
Better analysis means better public policy. I, for one, am looking forward to seeing how much more effective, efficient, and equitable state and local government will make its policies as they continue to increase their use of cost-benefit analysis. Who knows: it might even be a place for a meeting of minds in our increasingly polarized political landscape.
Rob Moore is the principal for Scioto Analysis, a public policy analysis firm based in Columbus, Ohio.