(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Jan 3 Should federal government
agencies have to prove the benefits of new regulations outweigh
the costs before introducing them?
It sounds like a simple question with an obvious answer. But
the role of cost-benefit analysis in writing federal regulations
(and even laws) is shaping up to be one of the biggest battles
between the Obama administration and business groups in 2012.
On one side are business groups such as the U.S. Chamber of
Commerce and the International Swaps and Derivatives Association
(ISDA), backed by conservative lawyers such as Eugene Scalia
(son of Supreme Court Justice Antonin Scalia) and a group of
judges on the U.S. Court of Appeals for the District of Columbia
Circuit who oversee most federal rule-writing.
On the other is the White House, the Treasury and a host of
agencies stretching from the Securities and Exchange Commission
(SEC) to the Commodity Futures Trading Commission (CFTC).
QUEST FOR QUANTIFICATION
What was once an esoteric legal dispute is turning fiercely
In September, Senator Richard Shelby, the senior Republican
on the Banking Committee and a key ally of Wall Street,
introduced the Financial Regulatory Responsibility Act (S 1615).
If approved, the bill would prevent federal agencies from
introducing any rule until they have completed a "quantitative
and qualitative assessment of all anticipated direct and
indirect costs and benefits" (Section 3(a)(4)).
Crucially, "an agency may not publish a notice of final
rulemaking if the agency .. determines that the quantified costs
are greater than the quantified benefits" (Section 3(b)(4)(A)).
Last week, the Wall Street Journal weighed in with an
editorial blasting the Obama administration for the poor quality
of its regulatory rulemaking.
In language that mirrors the Shelby bill almost exactly,
revealing the coordinated lobbying effort, the Journal wrote:
"Quality refers to a deliberative process: defining the problem;
measuring the costs, benefits and risks; weighing alternatives,
making trade-offs, avoiding duplication; and giving the public
opportunity to comment" ("Badly Written Bad Rules", Dec 28).
Describing the rulemaking process to implement the
Dodd-Frank Act, the Journal observes "Of the 10 rules that were
discretionary, the agencies assessed costs and benefits in
seven, which might be good enough for government work except
that in only two of those cases did the regulators monetize
Shelby's cost-benefit bill has obviously been drafted with
input from K-Street lobbyists and conservative lawyers.
It will not progress in the present Congress, where it will
be blocked by Senate Democrats and the White House. But the bill
reveals much about the approach to regulation ascendant in
conservative circles. And the ideas could come much closer to
becoming law if the Republican Party makes gains in the 2012
The conservative and pro-business push back on federal
regulations is starting to draw a response. Last month, Treasury
Secretary Timothy Geithner hit out at what he called "a
determined effort to slow and weaken reforms that are critical
to our ability to protect Americans from another crisis".
"The forces working against reform are trying a range of
different strategies, including ... efforts to use cost-benefit
analysis as roadblocks to reform," Geithner said ("The
Macroprudential Toolkit: Measurement and Analysis", Dec 1).
THE BATTLE IN THE COURTS
Efforts to require formal quantitative cost-benefit analysis
have already made headway in the U.S. courts, especially in the
District of Columbia Circuit Court of Appeals, which is
dominated by appointees of the Reagan and Bush administrations,
and has been at the heart of the conservative legal revolution.
In July, the court blocked a proposed new SEC regulation on
proxy access because the Commission failed to meet its statutory
obligations to determine the economic effects of the new rule.
Writing for the court, Judge Douglas Ginsburg noted testily
"the Commission acted arbitrarily and capriciously for having
failed once again ... adequately to assess the economic effects
of a new rule" (Business Roundtable versus SEC, 10-1305, 2011).
"The Commission inconsistently and opportunistically framed
the costs and benefits of the rule; failed adequately to
quantify the certain costs or to explain why those costs could
not be quantified; neglected to support its predictive
judgments; contradicted itself; and failed to respond to
substantial problems raised by commentors," Ginsburg scalded.
The three-judge panel which ruled against the SEC included
Ginsburg and Chief Judge David Sentelle. Lead counsel
challenging the rule on cost-benefit grounds was Eugene Scalia.
The arguments and actors were familiar. Two years earlier,
Scalia prevailed in a similar case before Sentelle and Ginsburg
blocking an SEC rule regulating fixed index annuities under the
Securities Act ("American Equity Investment Life Insurance Co
versus SEC, 09-1056, 2009).
The court also struck down that rule for violating the
Administrative Procedure Act (APA), which requires the courts to
set aside any agency action, findings and conclusions found to
be "arbitrary, capricious, an abuse of discretion, or otherwise
not in accordance with law" (5 USC 706(2)(A)).
POSITION LIMITS UNDER FIRE
Now Miguel Estrada, Scalia and other business lawyers are
going for a triple by launching an unprecedented challenge to
the CFTC's new rulemaking on position limits, in a case filed
before the district court and the court of appeals for the
District of Columbia.
The complaint cites five separate errors by the CFTC in its
rulemaking. Much of the public comment has focused on whether
the Dodd-Frank Act requires the CFTC to impose limits, or only
do so if it finds them necessary (Count 1).
But four other objections centre on violations of Section
706 of the APA (Counts 2-5) specifically whether the CFTC failed
to collect sufficient data to quantify the costs and benefits of
Having never sued anyone previously, ISDA takes aim at the
decision-making process: "There really was no cost-benefit
analysis. We've seen this before and it is very unsettling,
especially when this is also required by law," ISDA complained
on its blog ("Why ISDA has resorted to the courts", Dec 6).
"We felt the final rule was not only negative in and of
itself; it also made a terrible model for position limits for
other products and for developing other rules. We would very
much like to see a good faith cost-benefit analysis of other
rules as they are finalized. We point to our paper on electronic
execution as the type of analysis that should be done".
The complaint against the CFTC is not just about position
limits but about the whole way the federal government writes
QUANTITATIVE OR QUALITATIVE?
The CFTC denies its largely qualitative approach is flawed.
It claims to have quantified costs and benefits were feasible,
and relied on qualitative assessments where it is not. The CFTC
also observed (correctly) the industry's own comments on the
rulemaking provided little quantitative data on costs and
benefits, perhaps because there is none.
The study ISDA cites with approval, which was about
electronic execution, quantified the costs of the rule under
consideration quite precisely. But it failed to measure its
benefits, dismissing them as "very modest relative to the added
costs of execution," which is precisely the objection of
selective and imprecise measurement ISDA is making against the
In principle, subjecting regulations to cost benefit
analysis is an excellent idea. In practice, quantifying costs
and benefits objectively is notoriously difficult. The result
tends to depend on who is doing the measuring.
But the string of court challenges, and Shelby's bill, are
not really about cost benefit analysis at all in the narrow
sense. The standard they seek to enforce would be impossible to
meet. As Geithner observed, the unstated aim is to beat back
Whether quantitative cost benefit calculations are required
by the law is unclear. The Administrative Procedure Act does not
explicitly require them, but conservative jurists on the DC
Circuit and lawyers like Scalia have stretched the requirements
through case law, and may use the CFTC case to try to push them
Ultimately, it will fall to the Supreme Court to decide how
far Section 706 requires a quantified calculation before new
rules are introduced. Even if a Supreme Court showdown is
avoided in this case, cost-benefit is scything a path through
federal regulations, making a final confrontation inevitable
some time soon.