The murder of 20 school children and six adults at Sandy Hook elementary School in Newtown CT has produced a torrent of real and virtual ink, much of it directed at what are described as (or perhaps hoped to be) regulatory remedies. With considerable trepidation, we weigh in with discussion and analysis of how to proceed.
As difficult as it is in times of crisis or emotional trauma, the discipline of benefit-cost analysis provides some important insights.
1. A well-posed problem is essential for devising a solution.
Devising an effective regulatory solution requires first defining the problem clearly. If our objective is to determine what would have prevented Sandy Hook, or what would prevent similar future events, we must understand the problem we want to solve, think creatively about potential remedies, then subject each one to rigorous and objective analysis. We need do none of these things if all we want to do is simply feel good about having done something.
A good starting point may be to define the problem in terms of having prevented Sandy Hook. However, any such historical problem definition has at least two obvious defects. First, it is an academic exercise; Sandy Hook did occur and there is no going back. Second, Sandy Hook may have characteristics that are unique. By definition, unique problems cannot be prevented except by unique solutions, and the design of unique solutions is beyond the skill of any regulator.
A slightly more sophisticated problem definition would be to prevent similar future events. Inevitably, this begs the question as to what qualifies as “similar.” Does it include all schools? Only elementary schools? Only elementary schools in small towns? Only elementary schools in small towns located in states with strict gun control laws? What about locations other than schools? On December 12, just days before Sandy Hook, a 22-year old man killed two shoppers and wounded a third at the Clackamas (OR) Town Center, and subsequently committing suicide. Should we include shopping malls within the problem definition? What about movie theaters?
There is no obviously “right” answer for the problem definition. Nonetheless, clarity about the problem definition is essential for rational regulatory analysis, design, and decision making. Some regulatory proposals deserve special scrutiny, for example if the problem definition is left unstated or if it has no rational relationship to the regulatory alternatives proposed.
2. Not all problems have regulatory solutions.
As frustrating as it may be to accept, not all problems can be solved. Worse, only some problems can be solved through regulation. Some problems might be solved by regulation only if governments were given extraordinarily coercive powers. For example, future massacres by firearms could, in principle, be prevented by the confiscation and destruction of all firearms. But that would require transferring to government unlimited police power and relying on it to exercise this power responsibly. Even so, regulation would almost certainly fail. Regulations prohibiting the possession or use of firearms cannot prevent possession or use by those committed to doing so. )The weapon Adam Lanza used is defined by Connecticut law as an “assault rifle” and he committed a Class D felony merely by possessing it; see Connecticut Statutes Chapter 943 Sec. 53-202a.)
3. There is more than one way to skin a cat.
A serious effort to prevent massacres such as Sandy Hook, or future events of a similar nature, requires the identification of an array of options and to subject them all to objective, rigorous analysis — before deciding how to proceed. This is an axiom in regulatory analysis, and while regulatory agencies and political officials often endorse this principle in theory it is often breached in practice. More typically, agencies and their leaders decide what they want to do, then direct their technical staffs to “prove” that analysis supports their predetermined decision.In response to Sandy Hook, President Obama has promised to propose regulatory remedies before the end of January, which deadline suggests that regulatory analysis, if any is conducted, will be performed to support rather than inform.
When regulatory decisions precede analysis, it can be inferred that solving the stated problem is not the goal. Rather, some other (often unstated) agenda or objective function is controlling. Analysis may be useful to help identify the undisclosed agenda, if indeed it is genuinely hidden, and then to ascertain whether the proposed regulation might help advance it. (Ironically, a lack of transparency about one’s true intent may frustrate the achievement of an unstated objective because it means the rigorous analysis needed for effective regulatory design must be conducted sub rosa.)
4. Estimate benefits and costs for each alternative.
Every regulatory alternative has both benefits and costs, and both should be objectively and rigorously estimated. This includes unintended consequences, which are far more predictable than is typically believed.
The conventional wisdom among non-economists is that benefits are more difficult to estimate than costs. For at least two reasons, this is false: Costs are harder to estimate than benefits. First, cost properly understood consists of the value of benefits foregone. Rarely, however, do government agencies estimate cost this way. For convenience, they estimate compliance costs, not benefits foregone. Compliance costs are always less than benefits foregone, and they are often borne by different people or entities. Second, compliance cost estimates rarely (if ever) include the value of lost liberty that necessarily results when decision making authority and responsibility are transferred to governments. Liberty has value, and its loss is one of the few effects that are guaranteed to result from regulation.
5. Establish effective quality controls over benefit and cost estimates to ensure objectivity.
Advocates for regulation focus inordinately on benefits and treat costs dismissively. Opponents of regulation have opposite biases. For this reason, regulatory analyses prepared by both advocates and opponents tend to be suspect. What to do?
The best path forward appears to be remarkably straightforward: Advocates should estimate both benefits and costs, but be subject to rigorous review by opponents with respect to their cost estimates. Opponents should estimate both benefits and costs, but be subject to rigorous review by advocates with respect to their benefit estimates. Neutral parties should be empowered to choose among competing estimates, but they should not be authorized to seek consensus or compromise, for that way leads to analytic corruption. Final offer arbitration removes each side’s incentive to exaggerate in search of strategic advantage.
As essential as neutral parties are in determining which cost and benefit estimates are most valid and reliable, much care must be invested to ensure that the arbiters of analytic quality are fully separated from decision making. Like baseball umpires, those given the authority to pass judgment on analytic quality must have no interest in which team “wins.”
6. Be transparent about your decision rule.
Normative benefit-cost analysis requires selecting the alternative that maximizes net social benefits. Except where Congress has established a different decision rule, this principle has been federal government policy since President Reagan issued Executive Order 12291 in 1981. Section 2(c) states:
Regulatory objectives shall be chosen to maximize the net benefits to society.
In 1993, President Clinton established a similar principle in Executive Order 12866. Section 1(a) states:
[I]n choosing among alternative regulatory approaches, agencies should select those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity), unless a statute requires another regulatory approach.
In 2011, President Obama reiterated his support for the Clinton-era text in Executive Order 13563, where this principle and several others are restated in Section 1(b):
As stated in [Executive Order 12866] and to the extent permitted by law, each agency must, among other things: (1) propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits and costs are difficult to quantify); (2) tailor its regulations to impose the least burden on society, consistent with obtaining regulatory objectives, taking into account, among other things, and to the extent practicable, the costs of cumulative regulations; (3) select, in choosing among alternative regulatory approaches, those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity); (4) to the extent feasible, specify perform- ance objectives, rather than specifying the behavior or manner of compliance that regulated entities must adopt; and (5) identify and assess available alternatives to direct regulation, including providing economic incentives to encourage the desired behavior, such as user fees or marketable permits, or providing information upon which choices can be made by the public.
Of course, there are other principles besides maximizing net social benefits that might be cited as the basis for decision making. Those who would advocate a different decision rule should be expected to be transparent about it.