Today, the Office of Information and Regulatory Affairs (OIRA) is issuing revisions to Circular A-4, the government-wide guidance on regulatory analysis. These revisions will help ensure that agencies analyze the consequences of regulations using the most up-to-date economic and scientific understandings. While much of Circular A-4—which was originally issued in 2003 and which has not been revised since—has continued to provide helpful guidance for agencies, advances in economics and science have prompted important revisions. This updated guidance will help agencies more accurately estimate the impacts of their regulations and thereby enable them to craft better regulations which, in turn, means lower costs for consumers; cleaner food, air, and water; less fraud and exploitation; increased workplace safety; more innovation; and a stronger economy.
Revising Circular A-4 is part of a larger effort to modernize regulatory review, responding to President Biden’s Day One Memorandum and Executive Order 14094 of April 6, 2023 on Modernizing Regulatory Review. In April, OIRA issued proposed guidance on reforms to improve OIRA’s meetings with the public. In July, OIRA issued guidance on broadening public participation in the regulatory process. In August, OIRA proposed guidance on accounting for ecosystem services in benefit-cost analysis. And just last month, OIRA issued guidance to help agencies better account for competition when designing and analyzing regulations. These efforts to modernize regulatory review are consistent with—and facilitate—OIRA’s ongoing efforts to reduce administrative burdens and improve regulations through the interagency review process.
Within this larger effort, revising Circular A-4 is particularly significant because it covers an array of important topics—the valuation of future consequences, the distribution of a policy’s effects, the scope of effects to analyze, and the best way to account for effects that are difficult to monetize—that are at the core of determining the benefits and costs of regulations. That is why OIRA published a proposed revision to Circular A-4 in April for public comment, and established an independent peer review process. OIRA benefitted enormously from this public input, and the final version of Circular A-4 is better for it.
In addition to the revisions to Circular A-4, the Office of Management and Budget is finalizing revisions to Circular A-94, which was last revised in 1992. Circular A-94 provides guidance on benefit-cost analysis in the context of federal investments. The revisions to Circular A-94 also reflect the latest scientific and economic advances and knowledge, helping ensure that federal funds have the greatest possible impact, from building levees to protect communities to constructing transportation infrastructure to connect them.
In order to promote transparency and inform the public of the reasons underlying OIRA’s decisions, OIRA has published a detailed explanation and response to public commenters and peer reviewers in a separate document.
Today we’re announcing revisions related to:
Estimating the Default Discount Rate
Regulatory effects unfold over time. To assess the value of regulatory actions, analysts need a method to translate the value of regulatory effects that occur at different times into common units. This method is called discounting: determining how much less the same effect, whether a cost or a benefit, is worth when it is experienced further into the future.
Determining the appropriate discount rate can seem like a tall order. There is, however, a relatively straightforward approach. As the 2003 version of Circular A-4 noted, the real (inflation-adjusted) return on long-term government debt is a good measure of the discount rate. It is an essentially-risk free rate of return on savings observed in a widely traded market. This approach—using market data to value benefits and costs—is at the core of benefit-cost analysis.
The discount rate that Circular A-4 recommended be used in 2003 to capture this value, namely 3%, has not been adjusted as the data evolved. Indeed, one common measure of this rate has not just averaged less than 3% since 2003, it has been lower than 3% in every single quarter since 2003.
The revised Circular A-4 takes an almost identical approach to estimating the discount rate as was taken in 2003 using up-to-date numbers; the only differences are the use of a new, more-accurate data series—known as TIPS— and an alternative inflation index, both of which raise the estimate of the discount rate relative to the approach taken in 2003. The result is a new default estimate of 2%, down from the default estimate of 3% in the 2003 version of Circular A-4. As a comment by over one hundred economists noted, “[g]iven the long-standing decline in real interest rates and market projections, this modification is well justified.” And to ensure that this estimate does not fall out of date over time again, it will now be updated every three years, evolving with changes in the economy.
Accounting for Capital and Systematic Risk
The 2003 version of Circular A-4 advised agencies to use a 7% discount rate as well as a 3% discount rate. The 7% discount rate is dropped from the revised Circular A-4 to reflect advances in the economics literature.
The 7% discount rate in the 2003 version of Circular A-4 had generally been justified on one of two grounds: accounting for effects on investment and accounting for aggregate risk. But it is now clear both these considerations can be better dealt with in other ways, which is what the revised Circular A-4 does.
The 2003 version of Circular A-4 assumed that regulations have negative effects on investment in productive activities and that this effect therefore called for a higher discount rate than the one based on the real return on government debt (now 2%). That is true for some regulations. But other regulations are beneficial for such investments: for example, regulations that incentivize investment in clean energy sources or semiconductors. In those cases, a discount rate lower than 2% is appropriate. Accordingly, the revised Circular A-4 clarifies that rather than always discounting at a higher rate to account for the impact of regulation on investment, agencies should address such effects using a method known as the shadow price of capital approach. OMB has consistently noted that this approach is “analytically preferred” since 1992 and advances in the economic literature now make this more-accurate approach clearly preferable.
With respect to aggregate risk, the 2003 version of Circular A-4 assumed that regulations deliver greater net benefits when the factors affecting everyone—the economy, public health, or other conditions—are better, thereby justifying a discount rate higher than the rate based on the real return on government debt because additional resources are less valuable to people who are better off. But for many regulations, the opposite is true, as they are most helpful to people when times are toughest. For such regulations, which act like insurance, a lower discount rate would instead be appropriate. As a result, how to account for this correlation (known technically as systematic risk), and by how much, depends on the particular regulation. The revised Circular A-4 encourages agencies to consider the systematic risk of particular regulations, rather than relying on a one-size-fits-all upward adjustment.
One additional discounting update to Circular A-4 that brings it in line with advances in economics is accounting for how discount rates change over the long run. As many prominent economists noted, uncertainty in long-run discount rates provide compelling justification for the use of declining discount rates. Circular A-4 now provides default long-term discount rates to use, based on prominent models in the economic literature. These rates gradually fall, from 2.0% for effects in 2023 to 2079, to 1.1% for effects in 2164 to 2172. Just like the default discount rate, these default long-term rates will be updated every three years.
Together, these improvements to discounting will—as a group of distinguished economists noted—“substantially improve US regulatory analysis” by “modernizing discounting guidance.”
Regulations have different effects on different people. That is why Executive Order 12866 and Executive Order 13563 have long-directed agencies to consider “distributive impacts” when assessing the net benefits of regulations, why the 2003 version of Circular A-4 urged analysts to describe “distributional effects . . . so that decision makers can properly consider them,” why President Biden’s Day One Memorandum directed OIRA to “propose procedures that take into account the distributional consequences of regulations,” and why Executive Order 14094 reiterated and built upon that directive by underscoring the importance of taking such consequences into account. Despite this, regulatory analyses have rarely analyzed the distributional effects of regulations. The revised Circular A-4 addresses this issue by providing more detailed guidance for agencies in developing these analyses.
First, the revised Circular provides expanded guidance for agencies on how to determine the distributional effects of regulations. Of course, conducting distributional analyses of regulations can be challenging even with this guidance, and the Circular notes that in some cases it is appropriate for agencies to consider conducting a qualitative distributional analysis, or not conducting one at all. As a group of economic experts put it, “the draft A-4 guidelines are appropriately nuanced about the use of distributional analysis in [regulatory impact analyses] and the form it might take, if it is used.” OIRA looks forward to working with agencies to create more, and higher-quality, distributional analysis of regulations in appropriate cases.
Second, the revised Circular clarifies that distributional analysis is important not just for its own sake, but also because it can directly improve estimates of a regulation’s benefits and costs. For example, a regulation that reduces exposure to a toxin by the same amount in two different otherwise-equivalent communities may result in different benefits if the communities have different cumulative exposures to the toxin. Or, alternatively, communities could also benefit differently if their populations have differences in underlying health factors.
Third, the approach of the revised Circular allows agencies to better tailor their approaches in light of their particular statutory mandates. If a statute expresses particular concern with low-income populations or populations that are particularly sensitive to a certain risk, understanding the distribution of the consequences of different regulatory alternatives allows agencies to better further such a statutory directive.
Fourth, the revised Circular provides a methodology that agencies may choose to measure the effects of regulations on welfare, if they choose to take account of distributional consequences quantitatively instead of qualitatively. Gaining or losing $1,000 means a lot more to someone who is in the middle-class than to a billionaire. But how much more? Based on a meta-analysis of over 1,500 estimates in the empirical literature, OMB has provided agencies with an estimate of the income elasticity of marginal utility: how much less a dollar is worth (in welfare terms) as income goes up. Such an approach can complement or supplement qualitative approaches to considering distribution in regulatory analyses. As a comment by a number of expert economists put it: “the approach and rationale articulated in the revised Circular A-4 is quite reasonable.” This approach is also well-established: the United Kingdom adopted a similar one twenty years ago.
Spatial Scope of Analysis
Circular A-4 has always addressed the appropriate scope of an analysis, but the guidance needed to be clarified. For example, previous guidance contrasted “benefits and costs that accrue to citizens and residents” with “effects beyond the borders of the United States.” But at any given time, some citizens and residents of the United States are not within the borders of the United States. And effects occurring beyond the borders of the United States can result in benefits and costs that accrue to U.S. citizens and residents.
The revised Circular keeps the focus of analysis primarily on effects experienced by citizens and residents of the United States. It notes, however, that there are a variety of situations where analyzing regulatory effects experienced by noncitizens residing abroad may be relevant, even when focusing on U.S. citizens and residents. For example, when the United States regulates—or fails to regulate—a global externality, other countries may respond. In other cases, U.S. military installations, diplomatic initiatives, or other national security interests may be affected by regulations in a way that mirrors the effects on noncitizens residing abroad, making such effects useful proxies for effects that would otherwise fail to be fully captured in an analysis. And consistent with Executive Order 13609, the use of a consistent scope of analysis can be key in securing international regulatory cooperation that can reduce, eliminate, or prevent differences in regulatory requirements that harm U.S. citizens and residents.
The considerations of such impacts is particularly appropriate in these instances because of the longstanding practice of accounting for certain costs accruing to noncitizens residing abroad. In particular, many regulated firms have owners (e.g., stockholders) who are noncitizens residing abroad, but the costs borne by those individuals was not excluded in analyses of benefits and costs that accrue to citizens and residents.
Executive Order 12866 is clear: agencies should assess “qualitative measures of costs and benefits that are difficult to quantify, but nevertheless essential to consider.” And the 2003 version of Circular A-4 cautioned that when it is not “possible to express in monetary units all of the important benefits and costs,” the most net-beneficial regulatory option “will not necessarily be the one with the largest quantified and monetized net-benefit estimate.” But despite this guidance, agencies have at times conflated what cannot be monetized with what is insignificant, speculative, or unimportant.
The revised Circular A-4 emphasizes that some effects will not come with a dollar figure. For example, a regulation that requires accommodations for individuals with disabilities has dignity benefits. Even when an agency cannot put a dollar value on dignity, it is still a real and important regulatory benefit. To capture these kinds of effects, Circular A-4 now advises agencies to include a summary table of all important non-monetized effects, and a brief description of why they are important. By advising agencies to present this in a prominent place, Circular A-4 can help ensure that policymakers and the public give appropriate consideration to important non-monetized effects. And the revised Circular A-4 provides much more guidance on how agencies can analyze the monetized and non-monetized effects of a regulation in a structured fashion.
OIRA has revised Circular A-4 because OIRA is committed to ensuring that benefit-cost analysis keeps pace with the best understanding of economics and science. By providing agencies with better analytic guidance, OIRA is helping agencies to produce higher-quality analyses of regulations. And better analysis will lead to regulations that better enhance public health and safety, protect the environment, grow the economy, and lay the groundwork for a better future.