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University of Chicago Law School
Chicago Unbound
Coase-Sandor Working Paper Series in Law and
Economics
Coase-Sandor Institute for Law and Economics
1996
The Cost-Benefit State
Cass R. Sunstein
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Recommended Citation
Cass R. Sunstein, “The Cost-Benefit State” (Coase-Sandor Institute for Law & Economics Working Paper No. 39, 1996).
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T C-B S
Cass R. Sunstein *
I
Gradually and in fits and starts, the American regulatory state
is becoming a cost-benefit state. By this I mean that government
regulation is increasingly assessed by asking whether the benefits
of regulation justify the costs of regulation.
My goal in this essay is to argue, on both economic and
democratic grounds, on behalf of this transformation. I attempt
to bring those arguments to bear on concrete debates over the
appropriate nature of the emerging cost-benefit state. I will also
urge a point that is not easily contested: regulatory legislation has
diverse legitimate purposes, not limited to economic efficiency
alone. This point does not argue against cost-benefit analysis, but
it has important implications for the uses and limits of that
technique. I will also argue against efforts to drown the
administrative state in paperwork through excessive procedural
requirements.
A. Transformative Developments
For many years, those attempting to assess the performance of
the regulatory state have been interested in statistical measures.
Gross Domestic Product helps capture economic performance;
can something similar be used for regulatory initiatives? The use
of cost-benefit analysis can be understood partly as an effort to
overcome the interest-based and anecdote-driven nature of
contemporary regulation in favor of an approach that examines,
in a readily understandable way, the real-world consequences of
regulatory initiatives.
Within the national government, the cost-benefit principle
received its most prominent initial recognition via Executive
Order , issued by President Reagan in . At least at the
* Karl N. Llewellyn Distinguished Service Professor of Law, University
of Chicago, Law School and Department of Political Science.
CFR ().
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symbolic level, the movement in the direction of cost-benefit
analysis was much accelerated in with the issuance of
Executive Order , requiring that cost-benefit analysis
inform the annual regulatory plan to be issued by all executive
agencies. These initiatives were quite controversial insofar as they
threatened to delay regulatory requirements and perhaps to
transfer authority from individual agencies to OMB. But
Presidents Reagan and Bush, among many others, believed that
they provided a crucial mechanism by which the White House
might coordinate and centralize regulation, —and ensure against
measures that would do more harm than good.
Many people doubted whether President Clinton would
endorse the idea that regulatory judgments should be made with
close reference to cost-benefit balancing. But despite pressure
from some environmental organizations, President Clinton’s
Executive Order , issued in , firmly embraces costbenefit analysis as a central ingredient in regulatory choice. The
new Order does make some departures from the Reagan-Bush
initiatives; but with respect to cost-benefit analysis, the change
consists principally in references to “equity” and “distributional
impacts” as relevant factors. These are modest changes. Thus the
Executive Branch has endorsed cost-benefit balancing for over
fifteen years, and it seems reasonable to suppose that insofar as
the White House is overseeing the federal regulatory process,
cost-benefit analysis will continue to play a central organizing
role.
The executive branch has not acted alone. In reviewing
regulatory decisions, courts have also enforced a form of costbenefit balancing, at least where Congress has authorized them to
do so.4 Judges have invalidated regulatory action that imposes
high costs without significant benefits,5 and they have policed
CFR ().
CFR ().
See, e.g., Corrosion Proof Fittings v. EPA, F.d (th Cir. );
Competitive Enterprise Institute v. NHTSA, F.d ().
American Petroleum Institute, US (); Corrosion Proof
Fittings v. EPA, F.d (th Cir. ); AFL-CIO v. OSHA, F.d
(th Cir. ).
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agency action to ensure at least a rough kind of proportionality
between costs and benefits. Sometimes courts have been quite
aggressive in requiring proportionality as part of their function in
reviewing agency action to test whether it is “arbitrary, capricious,
or an abuse of discretion.”
These developments have not meant that the regulatory state
is now routinely subject to scrutiny for conformity with costbenefit criteria (a vague notion, as we shall see). In fact it is not.
Presidents and courts of course have sharply limited authority;
they must act consistently with federal statutes, which often
forbid cost-benefit balancing. Consider, for example, the Clear Air
Act, the Clean Water Act, the Occupational Safety and Health
Act, the Delaney Clause, and the Safe Water Drinking Act, many
of whose provisions ban agencies from balancing costs against
benefits. It is partly for this reason that the American regulatory
state contains many regulations imposing costs not justified by
benefits. From existing evidence it is possible, moreover, to
conclude that in spite of the recent executive orders, efforts at
cost-benefit balancing within the executive branch have been
sporadic and episodic, and that the highly publicized executive
orders have served a largely symbolic and aspirational function.
Hence much of the contemporary interest in regulatory reform is
directed toward Congress.
It is important to say that the national legislature has not
uniformly rejected cost-benefit balancing. Some statutes enacted
by Congress appear to contemplate a form of cost-benefit
analysis. More recently, the Unfunded Mandates Act contains
two potentially relevant “sleeper” provisions, both receiving almost
no public attention even from specialists, and both growing out of
the Contract With America. First, significant regulatory actions
must be accompanied by a statement that includes “a qualitative
and quantitative assessment of the anticipated costs and benefits
USC .
See W. Kip Viscusi, Fatal Tradeoffs ().
See id.
See Toxic Substances Control Act, USC -y; Fungicide,
Insecticide, and Pesticide Act, USC -.
C W P L E
of the Federal mandate.” Under the second provision, all
agencies must “identify and consider a reasonable number of
regulatory alternatives and from those alternatives select the least
costly, most cost-effective, or least burdensome alternative that
achieves the objectives of the rule.” There is an exception if these
steps are inconsistent with law or if the agency explains why it has
not chosen that least burdensome alternative; but this provision
could have significant consequences.
In , Congress nearly enacted a new statute that would
amend all regulatory statutes to contain a cost-benefit
“supermandate.” If this statute had been enacted, laws now
calling for various forms of absolutism, or indifference to cost,
would call for cost-benefit balancing. The failure to enact a new
reform statute in has spurred fresh interest in solutions to
modern regulatory problems.
B. Democracy, Efficiency, and Excessive Procedural Demands
Cost-benefit requirements are of course most easily justified
on economic grounds, as a way of promoting economic efficiency
and thus eliminating unnecessary and wasteful public and
private expenditures. But cost-benefit requirements also have
strong democratic justifications. Indeed, they can be understood
as a way of diminishing interest-group pressures on regulation
and also as a method for ensuring that the consequences of
regulation are not shrouded in mystery but are instead made
available for public inspection and review. Some of the strongest
arguments for cost-benefit requirements are not so much
economic as democratic in character.
The economic and democratic arguments for the emerging
cost-benefit state should be qualified by reference to three points,
and I urge that these points should be kept in mind during the
process of regulatory reform. First, cost-benefit analysis ought not
to be taken to impose undue procedural requirements on agencies.
Government inaction has costs of its own; it may allow severe
USC (a)().
USC (a)()-().
See Cass R. Sunstein, Congress, Constitutional Moments, and the
Cost-Benefit State, Stan L Rev ().
T C-B S
problems to continue; and some forms of cost-benefit analysis
actually fail cost-benefit analysis. They impose extensive
informational demands on agencies. They create excessive delay.
They obstruct desirable regulation. Thus efforts at regulatory
reform should avoid the pervasive risk of excessive proceduralism.
The second point stems from the fact that some of the most
promising strategies for regulatory reform require a shift from
command-and-control regulation to economic incentives. In
these circumstances, cost-benefit analysis should not be taken as
a modest, procedural step designed to engraft new informationgathering requirements on top of existing regulatory tools. On the
contrary, it should be part and parcel of a more ambitious and
thorough-going effort to move toward new and better tools, often
replacing federal command and control with disclosure remedies
and with economic incentives. The shift from command-andcontrol to more flexible methods of obtaining regulatory goals
should, in short, be a central part of the cost-benefit state.
Third, any transformation of the modern regulatory state
should recognize that by itself, the bare idea of cost-benefit
analysis lacks a theory of how, and how much, to value social
goods. Balancing all relevant variables is of course sensible; but
which variables are relevant, and how should they be valued?
Economists have some instructive answers, and I will discuss
some of those answers below. But in its most rigidly economistic
forms, cost-benefit analysis raises serious problems, since it values
all regulatory consequences under the rubric of private
“willingness to pay.” The willingness to pay criterion has many
uses, and sometimes it should indeed be the foundation for
decision. But that criterion does not capture all of the values that
underlay modern regulation, and sometimes it should be used
only to provide information, and not as the foundation for
decision. I attempt to explain below how this point bears on
regulatory reform.
I. T N D I A: A V B T
Emerging national enthusiasm for cost-benefit balancing
should be understood against the backdrop set by Franklin
Delano Roosevelt’s New Deal, which was of course a substantial
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reformation of the original constitutional structure. The New
Deal qualifies as a substantial reformation above all because it
refashioned the three basic cornerstones of that structure:
federalism; checks and balances; and individual rights.
To compress a long story: In the s the powers of the
national government were expanded in an extraordinary way, to
the point where the nation exercised something close to general
authority to control whatever problems it sought to address. The
framers’ original understanding of a sharply constrained central
government was therefore repudiated by the nation. There were
simple grounds for this repudiation. State autonomy seemed an
obstacle to democratic self-government, not a crucial part of it—
especially in the midst of the Depression, when states were
generally perceived as ineffectual entities buffeted about by private
factions. (Of course we have come to see that the national
government may suffer from the same problem.) As a result of the
New Deal, state autonomy was very different in from what it
had been in .
During the New Deal, the system of checks and balances also
came under sharp criticism. To many observers, especially during
the Depression, that system seemed dysfunctional for modern
society. Good businesses do not operate through checks and
balances; why should good governments paralyze themselves in
this way? Responding to such questions, Congress delegated
enormous, often open-ended policymaking power to the President
and also created a large number of powerful executive and
independent agencies. Crucially, Congress attempted to design
these agencies so as to limit the consequences of the system of
checks and balances by allowing a high degree of administrative
autonomy. Thus the new agencies had a large degree of
discretionary authority under open-ended statutory standards.
They also combined traditionally separated powers of
See B. Ackerman, We the People vol. () (discussing New Deal as
creation of third American constitutional regime). I borrow in this and the
following section from Sunstein, Congress, Constitutional Moments, and the
Cost-Benefit State, supra note.
See James Landis, The Administrative Process (), for the classic
statement.
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adjudication, execution, and legislation. Certainly they were not
limited by requirements of cost-benefit analysis.
These institutional shifts resulted from a central national
judgment made during the Depression: that individual rights,
properly conceived, included not merely the common law
catalogue of private interests but also governmental protection
against many of the harms and risks of a market economy. The
common law was a regulatory system enjoying no special status. It
should be evaluated pragmatically in terms of its consequences for
the human beings subject to it. Here it often seemed to fail.
An astonishing feature of the New Deal was its relative
rapidity. Many of the changes came in the brief period from
through . Rapid change was possible partly because it is a
relatively simple step for a legislature to create a range of new
bureaucratic institutions, at least if the legislature does not specify
their duties in advance. The New Deal entities in fact operated
pursuant to little statutory guidance; Congress usually contented
itself with open-ended delegations of authority.
The New Deal reformation was the foundation for the basic
orientation of the national government until the election of
President Ronald Reagan, and possibly since then. One development has been of special importance: the “rights revolution” of
the s and s. During that period, many New Deal
tendencies were largely reinforced through the creation of a
remarkable array of new agencies. These agencies were designed
mostly to protect against threats to life, health, and safety from
consumer products, workplaces, and above all the environment in
general. Hence this period saw the creation of the
Environmental Protection Agency, the Occupational Safety and
Health Administration, the Consumer Protect Safety
Commission, the Council on Environmental Quality, and more.
It is notable that during both the New Deal and the rights
revolution, no mechanism was created to evaluate regulatory
performance. There was no system to assess whether agencies
were making things better or worse. In the New Deal, any such
system might have seemed peculiar in light of the widespread
national enthusiasm for the President and for the possibilities of
See Cass R. Sunstein, After the Rights Revolution ().
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benign administration. Of course cost-benefit thinking was quite
foreign to political actors, and hence cost-benefit analysis—which
in any case had not been “invented” in anything like its current
form—played little or no role in the public debate.
An especially striking feature of the period since is that
the New Deal reformation has been subject to sustained national
criticism, often as a result of a form of “national performance
review” in which cost-benefit analysis plays a prominent role. It is
worthwhile to pause over the constitution-like character of recent
challenges to the current regulatory arrangements. Often it is
suggested that the national government has far exceeded the
appropriate limits of its authority, and that a return to the
original structure would make a great deal of sense.
In this way there is a wholesale attack on the existing
allocation of authority between the national government and the
states. But “horizontal” issues of government structure are
receiving similar attention. Many people have expressed concern
about the extent of policymaking discretion given to regulatory
agencies. In their view, Congress should reassert its
constitutional prerogatives by narrowing administrative
discretion. Hence it is urged that the New Deal’s enthusiasm for
independent bureaucracy, and for a large lawmaking role by
executive agencies, should be revisited, and that Congress should
make the fundamental choices of policy.
Finally, and perhaps most fundamentally, pre-New Deal
principles of private right have enjoyed a rebirth with the
suggestion that modern regulatory programs violate liberty, rightly
conceived. Thus the movement for deregulation has called for
far more sweeping changes than were urged in the Reagan period
itself. Thus the takings clause has become a rallying cry for a new
enthusiasm for the protection of private property—a rallying cry
that has been brought by way of challenge to such wellestablished federal programs as the Endangered Species Act and
the Federal Water Pollution Control Act’s protection of wetlands.
David Schoenbrod, Power Without Responsibility ().
See Richard Epstein, Simple Rules for a Complex World ().
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Some of the criticisms of regulatory performance have been far
more pragmatic in character, and it is here that cost-benefit
balancing, accompanied by risk analysis, has played a special role.
As I have noted, the New Deal period was accompanied by no
mechanism for monitoring regulatory performance. But it is now
suggested that national government has failed adequately to
perform the tasks assigned to it and that it …
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