Economic analysis, risk regulation, and the dynamics of policy regret

In the wake of a crisis, a common refrain is “Why didn't we do more to prevent this terrible disaster?” All too frequently, ex-post analysis suggests that policy did not sufficiently account for extreme events, or that the level of regulation imposed or enforced was insufficient. For example, after Hurricane Katrina a bipartisan commission found that the levee system had been designed for “standard” hurricanes and not for the most severe storms (US House of Representatives 2006). The bipartisan commission investigating the Deepwater Horizon oil spill found that inspections and regulations were insufficient to prevent an oil spill of that significant magnitude (National Commission 2011). Similarly, the Financial Crisis Inquiry Commission found that “widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets” (Financial Crisis Inquiry Commission 2011). For the sake of simplicity, I will refer to this phenomenon as “policy regret.” Policy regret is characterized by a post-crisis sentiment that decision-makers had not sufficiently identified the probability or seriousness of risks before the onset of crisis and so had insufficiently acted to prevent it. This sentiment tends to be strongly correlated with an impulse to engage in significant post-crisis policy reforms. One of the key features of policy regret seems to be the belief, ex-post, that the problems with the current regulations should have been known and corrected in advance. This characteristic implies systematic failures in the regulatory process that hinder implementation of programs and policies that would actually have been welfare enhancing. The focus of this chapter is on the role of economic analysis in the regulatory process and what role, if any, these analyses play in reducing or fostering policy regret. Economic analyses of risk regulations of some form have been required since the Nixon administration (Copeland 2011). However, most people associate requirements for economic analysis, and particularly benefit-cost analysis, with Executive Order 12291 issued in 1981 by President Ronald Reagan. This executive order required benefit-cost analysis for all regulations with an annual cost of $100 million or more (Copeland 2011). More specifically, it required agencies to monetize all benefits and costs and to choose both regulatory objectives and regulatory alternatives (levels) that maximized net benefits to society. This executive order was maintained by President George H.W. Bush and was replaced by a similar executive order (EO 12866) by President Bill Clinton.

Duke Scholars

Author Lori Snyder Bennear Environmental Sciences and Policy