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The Scales of Weighing Regulatory Costs

Technology, Geography, and Time

Jamison E. Colburn

This book examines the calculation and evaluation of regulatory costs by regulators in accordance with a legislative mandate. A serious limitation in that enterprise, the possibility of technological change and innovation, often compromises those efforts and has long been under-appreciated in standard ‘cost-benefit analysis.’ Regulators who study the inducement of innovation and the avoidance of regulatory costs by the regulated often find significant cost-saving opportunities, leading to more stringent and more effective risk governance. Ultimately, the weighing of costs in this more elaborate model is more than simple welfare maximization. It views regulatory costs as important to society for a range of reasons, some grounded in fairness and some in deliberative process values, as a society seeks to minimize all costs over time.
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Jamison E. Colburn

To move forward sometimes you must go back. An approach pioneered in US law almost 50 years ago viewed regulation’s costs through a very different lens from that of regulatory cost-benefit analysis today. In those days, weighing the costs of a regulatory action was a task undertaken for a variety of reasons, some grounded in welfare economics and utilitarian balancing and some not. Rarely was the claim even heard that regulation should only proceed when it was net-on-net “efficient.” Today that pervasive substrate is everywhere and rarely unearthed for critical examination. When it is expressed it becomes as polarizing a principle as those it was meant to replace.

This monograph focuses on the measurement and evaluation of regulation’s costs across three detailed case studies—cars, electricity, and freight trains. The aim is to regain a little common ground on weighing costs. There is no pretense that they are a representative or comprehensive selection. But what is lost there is hopefully made up in the contextualization of examining calculation methods and principles that have evolved over time, how subtly the relevance of monetized values can morph as a result of that evolution, and why costs of compliance can be so hard to estimate ex ante.

The economic concept of “cost” implies within it some end which is being pursued despite the pull of considerations—reasons—to the contrary. It implies there is a good that entails a bad. Paired with authority to tailor legal rights, duties, powers, and immunities, this conception implores us to “optimize”: to get as much good for bad as we can. Environmental protection has been its chief focus. As Professor Daniel Cole once put it, “that property regime is best which, in the circumstances, would achieve exogenously set societal goals at the lower total cost, where total cost is the sum of compliance, administrative, and residual pollution or consumption costs.”1 I argue in what follows that this too often simplifies the insights being developed beyond their real usefulness.

Too often what the public and practitioners hear about regulatory costs is a bare number (or range) attributed to a discrete governmental choice. It is at least implicitly (and sometimes explicitly) insisted that costs to regulated parties are somehow fixed. Some progression of regulatory steps over years or decades and the social costs that are measurable across that progression are rarely the subject of any talk at all. Much of that analysis would be retrospective and probably more accurate for it. But it would also reveal that we are ingenious at avoiding costs. Economists know this and usually expect it. Finding the unavoidable costs of regulation, in short, is the more worthwhile pursuit, even taking economic cost at face value.

But that is the other core premise in what follows. Economics’ conception of regulatory costs really ought not to be taken at face value. For it is built on troubled foundations; foundations that professional economists have acute incentives to ignore or to obscure. This is not to impugn anyone’s integrity. Foundational troubles are hardly unique to economics. They are matched and even exceeded by those of other social sciences. But troubles of the kind should almost never go unnoticed, especially given what is at stake in today’s talk of regulatory costs.

With cryptocurrencies the rage today, it seems worth recalling our money’s origins and practical value. Americans’ founding fears of central government long kept them bound to local- and state-based currencies—bank notes backed by actual gold and silver which, when spent far from the issuer, invariably drew ad hoc discounts from those who accepted them in payment. By the twentieth century, these costs—forgone benefits of a common currency—had brought most Americans around. Among disadvantages in that common currency, though, were unpredictable liquidity shortages. Partly in response, commercial lawyers fashioned what, for a time, was a handy form of liquidity: the negotiable instrument. It worked well enough if the party accepting the note had confidence it would be paid. Eventually, negotiable instruments lost much of their utility in the growth of fractional reserve banking, credit card markets, and other sources of liquidity. For that particular flaw of centrally issued currency essentially vanished.

I think this tale is more prevalent in contemporary risk regulation than in the economics done surrounding its supposed costs. There was no magic to negotiable instruments (payment systems students’ frustrations notwithstanding!). They were fit for a purpose. But negotiability became more trouble than it was worth because markets simply moved on. What makes regulatory constraints costly can be just as fleeting in the intersection of competition, collective action, and technical change. We would do best to remember always that these things are constantly and dramatically influencing one another.

A final caveat is worth mentioning. There is an inherent arbitrariness in a focus on regulation’s costs. The distinction between benefits and costs is obviously perspectival: limiting costs can be a benefit and cutting benefits can be a cost. But practical people must suffer such indignities occasionally when trying to clarify or improve applied concepts. That is what this monograph aims for in the weighing of regulation’s costs. It is a work of practical reasoning. My thanks for conversations, comments on earlier drafts, and other help go to Todd Aagaard, Mark Aldrich, Dan Farber, John Lopatka, Michael Vandenbergh, the librarians at Penn State Law, the members of a Villanova Law faculty workshop in Spring 2017 and members of a Penn State Law faculty workshop in Fall 2017.

Jamison Colburn

State College, Pennsylvania

March 2018

1   Daniel H. Cole, Pollution and Property: Comparing Ownership Institutions for Environmental Protection 17 (2002).