The Regulatory Budget in Theory and Practice: Lessons from the U.S. States

Abstract

This article provides a novel theoretical basis for a regulatory budget and compares the theory of regulatory budgeting with the implementation of these programs in U.S. states and the federal government during the Trump administration. The first half of the article is devoted to explaining how the cost analysis accompanying some regulatory budgets can be understood as measuring a form of allocative efficiency that corresponds with long-run social welfare. This welfare measure is different from what cost-benefit analysis measures, which is also sometimes confusingly characterized as a measure of efficiency. The second half of the paper evaluates real-world regulatory budgets implemented in U.S. states and compares them to the theoretical basis for a regulatory budget discussed in the earlier part of the article. A theoretically attractive regulatory budget will prevent regulations from being adopted unless they are cost saving (i.e., have negative costs), but states’ regulatory budgets have typically been based on much simpler metrics than cost, and therefore fall short of this theoretical benchmark. At the same time, states’ regulatory budgets have been more comprehensive than, for example, the incremental cost budget adopted during the Trump administration. The article concludes that governments should consider the tradeoffs inherent in regulatory budgeting. The simpler regulatory budgets found in states have had more success constraining the overall volume of rules, but without cost analysis, their theoretical basis is less compelling and the full scope of what reforms are accomplishing is not as transparent as it could be. In general, both the states and the federal government have much to learn from one another about the blending of theory and practice in regulatory budgeting.

Keywords: regulatory budget, cost-benefit analysis

JEL Classification: D61, H61, I31, K20, L51