Earlier this month, the Office of Information and Regulatory Affairs (OIRA) released their first ever proposed revisions to Circular A-4, the document that outlines exactly how cost-benefit analysis is supposed to be conducted at the federal level. Because this defines how cost-benefit analysis needs to be done for federal agencies, any changes to this document will have massive policy implications going forward.
This document is still open to public comment, so none of these changes are official yet. Academics, professionals, and other stakeholders can still give their thoughts and change some of this official guidance. For now though, let’s take a look at the proposal. What changed, what stayed the same, and what the policy implications might be.
Analytic Baseline
When we make projections as part of CBA, we often compare the potential future under a particular policy alternative compared to the current day status quo. This requires the assumption that if we do not go down this policy path, the world around us will stay exactly the same.
If you think this sounds like an unreasonable assumption, then congratulations because OIRA agrees with you.
Going forward, the proposed guidance will be to establish an analytic baseline. In other words, if we are forecasting what will happen with a policy proposal, we need to compare it to a status quo forecast.
This might strengthen the case for preventative policies such as carbon taxes or green energy subsidies where we will expect the status quo situation to get worse over time. Another side effect of this change is that CBA is going to become more analytically intensive going forward.
The researchers doing these analyses are going to be asked to make more assumptions about the world around them and justify those assumptions empirically. With policies like this, the question is whether the added complexity of the model adds enough useful information to be worth the additional time and uncertainty introduced by the complexity.
Distributional Analysis
In CBA, distributional analysis is the process of exploring how the benefits and costs of a policy are distributed across a society. The question distributional analysis is trying to answer is as follows: who is actually going to be paying the costs and who is actually going to be receiving the benefits of the policy in question?
In the current proposed revisions, OIRA has decided to not require agencies to include distributional analysis as part of their work, but instead gives agencies the discretion to choose to include it should they expect significant distributional differences.
The primary reason behind this decision is that Circular A-4 applies to a wide range of government agencies that all have different goals. Specific guidelines on how to perform distributional analysis may not be appropriate for the range of agencies performing CBA.
The most important implication of this is that federal CBA is going to continue to largely carry the assumption that costs and benefits are uniformly distributed across the country. For some policies, this might be an appropriate assumption and performing distributional analysis would be a waste of resources. However, policies that specifically target distributional outcomes such as anti-poverty policies should certainly include distributional analysis.
The onus is on individual agencies to determine whether or not they need to perform distributional analysis. Hopefully they are able to identify when it is appropriate and implement it.
Discounting
As we’ve talked about before, the question of which discount rate to use still inspires a lot of debate within academic cost-benefit analysis circles. As such, the proposed revisions ask for a lot of comments about the best path moving forward, but for the most part avoid suggesting one specific path is best.
What OIRA did say that was concrete is that interest rates are likely going to continue to be calculated from financial data going forward. This is in contrast to just choosing a discount rate out of thin air, which they claim is ethically problematic.
One interesting change to discount rates is how OIRA is going to handle discounting for future generations going forward. Under a normal discounting framework, we would expect benefits that accrue for future generations to essentially have no net present value because they get discounted by so much over time.
This raises a lot of ethical concerns about our society's responsibility to future generations that are inherently unable to participate in the current decision making process. As a result, OIRA is proposing to release a table that lists the proper discount rates on a 150 year time horizon, taking into account the fact that we care about the benefits of future generations.
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None of these changes are final yet. These proposed changes will be open for public comment until the first week of May, and it seems like some of these changes might look very different then depending on the input OIRA gets.
Still, this is the most significant change to federal CBA ever and it will dramatically change the way policy analysis is done. Hopefully these changes improve the quality of policy analysis and in turn, lead to better policy making decisions.