Thank you for the opportunity to comment on the Office of Management and Budget’s (OMB) proposed updates to Circular A-4 on “Regulatory Analysis.” The proposed updates represent a significant overhaul of the current Circular A-4, which comes as little surprise considering the approximately 20-year gap between the two documents. Indeed, the new document is nearly double the length of the current government-wide guidance on regulatory analysis. The associated preamble includes even more material and solicits input on a wide array of issues. While all the issues therein are worthy of careful deliberation, I will focus my attention on a select number of items I believe merit special attention.

CONTEMPLATING ALTERNATIVE BASELINES AND OUTCOMES

In the preamble’s section on “Developing an Analytic Baseline,” OMB considers the potential for a more robust exploration of alternative baselines in an agency’s regulatory analysis that even includes an illustrative hypothetical example of what such analysis may look like. This would be a welcome change in that undertaking the exercise of further interrogating the implications of alternative baselines could help agencies develop a deeper framework for estimating alternative outcomes in their regulatory analysis while also providing a useful amount of transparency to the public in how they arrived at a given decision in formulating a given rule.

Regardless of the exact form this analysis takes, whether in the hypothetical table included or in a more narrative format, the main priority should be to engage more forcefully with the substance of potential considerations. Following the overall spirit of Section 2 of Executive Order 14,094, the development of alternative baselines is an area that could benefit from meaningful engagement with stakeholders early in the process. The draft Circular A-4 currently contains no mention of an “advanced notice of proposed rulemaking” (ANPRM). Further institutionalizing the expanded use of ANPRMs within the confines of Circular A-4 could go a long way toward improving how agencies gain the insight needed to formulate potential baselines. Such input could also better inform agencies’ consideration of alternative outcomes, which the draft Circular A-4 already covers more extensively.

DEVELOPING AND PUBLISHING COST AND BENEFIT ESTIMATES

In the preamble’s section on “Developing Benefit and Cost Estimates,” noting the relative paucity of guidance in the estimation of costs in the current Circular A-4, OMB solicits input on a series of items related to how agencies can better contemplate the nature and degree of costs. There are important considerations posed here, and the updated Circular A-4 would do well to expand upon this topic in the following ways:

First, in response to the specific inquiry regarding the inclusion of language similar to that found under the “How do I value time?” section of the 2011 Circular A-4 Frequently Asked Questions, such considerations should be included in the updated Circular A-4. The opportunity cost of time lost to increased regulatory compliance (or gained due to fewer requirements) is an important dynamic in determining a regulation’s effects. According to the most recent data, the cost (including the costs of expected non-wage benefits) of a typical civilian employee is $42.48 per hour. Contemplating the monetized opportunity costs for non-wage-earning individuals (retirees, volunteers, etc.) is more complicated, but examining consumption patterns could be a useful proxy. Additionally, where possible and relevant, the Circular A-4 should direct agencies to further consider the effects on productivity, given that time spent complying with regulatory requirements is almost always inherently time not spent on more productive economic activities.

Second, regarding the issue of “the length of time allowed for compliance…between issuance of a regulation and the date(s) when regulated entities must comply,” such effects are an important consideration. The “rule of thumb” here should be relatively intuitive: Giving entities a longer “runway” for compliance will generally reduce their costs because items such as training staff or incorporating new practices can be spread out across a longer time horizon. Conversely, forcing affected entities to make a sudden change will impose more dramatic costs. This is an area where expanding agencies’ consideration of alternatives could yield useful conclusions. It is possible, in a hypothetical situation, for, say, a six-month or one-year extension of the compliance window to reduce compliance costs while having a relatively limited effect on eventual benefits. Such considerations ought to be institutionalized in an updated Circular A-4.

Finally, while acknowledging that different agencies’ rulemakings affect different kinds of entities and activities and thus may have significant variance in the economic issues considered, more can be done to standardize how agencies present their cost-benefit analysis to the public. The sample “Accounting Statement” and accompanying instructions to agencies found at the end of the draft Circular A-4 stand as a useful baseline. Potential improvements to these instructions include a similar presentation of the lifetime and/or present value costs and benefits alongside the annualized accounting statement; clear citations and/or links to the underlying Regulatory Impact Analysis or Economic Analysis the agency undertook to arrive at these calculations; and similarly structured summary tables of the implications for all alternatives considered.

UPDATING DISCOUNT RATE ASSUMPTIONS

One of the most notable aspects of the updated Circular A-4 is OMB’s proposed revisions to the discount rate agencies should use in their analyses. The current Circular A-4 directs agencies to utilize rates of 3 and 7 percent, representing the “social rate of time preference” and “the average before-tax rate of return to private capital in the U.S. economy,” respectively. OMB now seeks to establish the primary regulatory analysis discount rate at 1.7 percent. While the methodology OMB utilizes to arrive at this new rate comes from a defensible position in terms of essentially updating a decades-old calculation, concerns remain that – especially going forward – such a rate may not be an accurate representation of the real-world experience entities affected by regulation may face.

Per the preamble, the updated Circular A-4 would “retain the existing method for calculating the social rate of time preference and updating the 30-year average using data from 1993 to 2022, except that the 10-year Treasury Inflation-Protected Securities (TIPS) yield would be used for the years it is available (2003 to 2022).” For the past two years, however, the country has experienced appreciably higher and persistent inflation that represents a sharp departure from the rate pattern generally captured in this 30-year average. This dynamic, and the Federal Reserve’s subsequent response in particular, has also driven interest rates substantially higher.

While there is, of course, no way to know how long this macroeconomic situation will last, there is reason to believe it will be persistently and markedly different than the one captured in the methodology used to arrive at the 1.7 percent discount rate. For instance, a recent study finds that: “Looking forward, with labor market slack still below sustainable levels and inflation expectations modestly higher, we conclude that the Fed is unlikely to be able to avoid slowing the economy to return inflation to target.” If such a situation were to continue for another five years, then taking the 30-year average would likely be noticeably different as an academic matter. More importantly, however, that would be five years in which agencies utilized a 1.7 percent discount rate in their analysis when such a rate did not match the actual experience of those affected by the regulations promulgated over that span.

Thus, OMB should seriously reconsider whether the methodology used here accurately captures the situation. At the very least, the updated Circular A-4 needs to include: 1) an acknowledgment of the present – and likely ongoing – inflationary period, and 2) a meaningful adjustment to this estimate to account for the potential implications of this inflationary pressure moving forward. Additionally, similar to the plan to adjust the threshold of “Section 3(f)(1)” significance under Executive Order 14,094 for inflation every three years, OMB should consider allowing for a regular, periodic adjustment to its discount rate – especially to account for dramatic macroeconomic adjustments that occur over a relatively short time period.