Taking costs into account.

Photographer: Paul Morigi/Getty Images

Thanks, Justice Scalia, for the Cost-Benefit State

Cass R. Sunstein is a Bloomberg View columnist. He is the author of “The World According to Star Wars” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”
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Last week's Supreme Court decision striking down a federal regulation on mercury and other pollutants from coal-fired power plants is a temporary setback for those who seek to reduce air pollution. At the same time, however, it should be welcomed as a ringing endorsement of cost-benefit analysis by government agencies. It's a kind of rifle shot, with potentially major effects on a host of future regulations that have nothing to do with the environment. (Disclosure: As administrator of the White House Office of Information and Regulatory Affairs from 2009 to 2012, I worked on the regulation that the court invalidated.) 

In fits and starts, the U.S. has been turning into a cost-benefit state. A pivotal year was 1981, when President Ronald Reagan ordered executive agencies to calculate the costs and benefits of their regulations and to proceed only if the benefits exceeded the costs. In 1993, to the disappointment of many progressives, President Bill Clinton essentially ratified Reagan's approach. 

In 2011, President Barack Obama went even further, calling for quantitative analysis of new regulations whenever possible and also requiring executive agencies to assess the costs and benefits of existing regulations (this is the "regulatory lookback"). 

But Reagan, Clinton and Obama declined to impose these requirements on the so-called "independent agencies," which are traditionally free from presidential control. These include some of the most important in the government: the Securities and Exchange Commission, the Federal Trade Commission, the Federal Communications Commission, the Consumer Product Safety Commission and the Federal Reserve Board. Many of their regulations (including very expensive ones) have not been accompanied by careful cost-benefit analysis. 

In addition, some executive agencies -- including the Environmental Protection Agency, which is responsible for the mercury rule -- have argued that certain laws prohibit them from making decisions on the basis of cost-benefit analysis, or at least allow them to refuse to do so. In recent years, lower courts have repeatedly been asked to decide when agencies may refuse to consider costs, and they've given conflicting signals. 

Enter the mercury case. Under the Clean Air Act, the EPA may regulate power plants only after it concludes that "regulation is appropriate and necessary." The question before the Supreme Court was whether the EPA had to consider costs in deciding if regulation was "appropriate and necessary." And its answer was a firm "yes."

Justice Antonin Scalia wrote: "One would not say that it is even rational, never mind 'appropriate,' to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits." He added, "No regulation is 'appropriate' if it does significantly more harm than good." 

Writing for the four dissenters, Justice Elena Kagan agreed with the broad principle that unless Congress specifies otherwise, "an agency must take costs into account in some manner before imposing significant regulatory burdens." Her central argument was that the EPA had acted reasonably enough, because it had considered costs at the stage when it decided how stringent the regulation should be. 

In the mercury case itself, Kagan's argument was convincing. But for the future, the court's decision is important for the larger principle on which Scalia and Kagan agreed. 

Congress enacts many laws that use words such as "appropriate" or "reasonable," or direct agencies to consider "efficiency" when taking action. After last week's decision, there is a good argument that, whenever Congress uses such words, agencies are bound to balance costs and benefits. 

This might well make a difference for the SEC, which has sometimes been reluctant to assess costs and benefits -- and has occasionally gotten into legal trouble for it. It may also change things for the Occupational Safety and Health Administration, which has said that its governing law (which contains the words "reasonably necessary or appropriate") doesn't require it to demonstrate that the benefits of its regulations justify the costs. 

More importantly, the court has now given a strong signal to independent regulatory agencies such as the FTC, the FCC, the Commodity Futures Trading Commission and the Federal Reserve. If they don't weigh costs against benefits, they might well find themselves in legal jeopardy. For those who seek rational regulation and who are concerned about unjustified economic burdens, that is a major step forward. 

Justice Scalia was careful to say that he wasn't insisting on "a formal cost-benefit analysis in which each advantage and disadvantage is assigned a monetary value." Some values are hard for economists to turn into monetary equivalents. Scalia added that the EPA is allowed, within the bounds of reasonableness, to decide how best to account for cost. 

That gives the agency appropriate flexibility, but the most significant ruling is that, as a matter of law, it is required to pay attention to "the advantages and the disadvantages" of its own decisions. What an excellent idea! The cost-benefit state has arrived.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Cass R Sunstein at csunstein1@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net