The Unlikely Story of American Regulatory Socialism
Abstract: The conventional wisdom has it that US Democrats and those on the American left support incremental steps in the direction of socialism, if not an all-out endorsement of the concept. However, in at least one area—regulation—Republicans and the American political right have also, albeit unwittingly, spread the seeds of socialism not just in Washington, DC, but all across the world. This article reviews the history of federal regulation in the United States, and in particular the arcane, technical history of cost-benefit analysis (CBA), a tool that has become increasingly central in battles over regulation between the Left and the Right. Although right-wing political operatives latched on to CBA in the late 1970s and early 1980s, the tool has a long, complicated history, aspects of which could even be called socialist in nature.
JEL Classification: B14, D61, D71, I31, K23, L51
James Broughel ([email protected]) is a senior research fellow at the Mercatus Center at George Mason University and an adjunct professor of law at the Antonin Scalia Law School. The author is grateful to Kyle Precourt and an anonymous reviewer for helpful suggestions and comments.
The conventional wisdom has it that US Democrats and those on the American left endorse a powerful central government, are skeptical of business, and, perhaps now more than ever, support incremental steps in the direction of socialism, if not an all-out endorsement of the concept. But this conventional wisdom is misleading in the sense that the American political right and Republicans have also, albeit unwittingly, spread the seeds of socialism not just in Washington, DC, but all across the world. In at least one area—regulation—this unlikely turn of events seems to be precisely what has happened.
To understand why, one must review the history of federal regulation in the United States, and in particular the arcane, technical history of cost-benefit analysis (CBA), a tool that has become increasingly central in battles over regulation between the Left and the Right.1 CBA’s origins are in the United States, and although initially controversial, the tool came to be a widely accepted part of regulatory analysis, eventually adopted by European Union member states and countries all over the globe (Lianos, Fazekas, and Karliuk 2016).2
CBA was primarily advanced in the US federal government by the political right. Although the tool’s roots in federal policy trace back as far as the 1930s, including early use by the Army Corps of Engineers (Tozzi 2011), CBA’s place in government wasn’t cemented until the 1980s and the Reagan Revolution. In one of his first acts as president, Ronald Reagan signed executive order 12291, which required that executive branch regulatory agencies prepare a cost-benefit analysis for their major regulations.3 The order also required that rules and their accompanying analysis undergo a review process overseen by the Office of Information and Regulatory Affairs (OIRA), which had recently been set up to manage paperwork burdens across the government.
Reagan’s executive order stirred controversy at first. Some on the left viewed it as a radical step aimed at deregulation.4 Many Democrats wanted the order repealed and OIRA review of regulations suspended. To them, cost-benefit analysis interfered with the discretion of publicly interested regulatory agencies, and OIRA unduly politicized rulemaking by acting as an access point for special interests and political interference from the president. Moreover, those who had pushed hardest for CBA in the late 1970s and early 1980s had come largely from the political right. In particular, the so-called law and economics movement, which consisted of many free-market leaning economists and legal scholars, promoted CBA for its ability to make policy more evidence based and efficient.5
However, when a Democrat, Bill Clinton, was eventually elected to the presidency more than a decade after 12291 was signed, he responded in a somewhat unexpected way. Although Clinton did repeal executive order 12291, he replaced it with an order of his own that left intact the core elements of Reagan’s order.6 Cost-benefit analysis would still be required for the most significant federal regulations, and OIRA review would continue. Minor modifications were made beyond this, but they paled in comparison to the broader shifts in the federal administrative apparatus that Reagan’s order helped usher in and which Clinton’s order reaffirmed.
Despite this development, many on the left continued to resist the cost-benefit state, even while the analytical tool became institutionalized in American government and even started to be adopted by the fifty states and by other countries. Those on the left were critical, for example, of the CBA practice of assigning dollar values to societal benefits, most notably the practice of putting a dollar value on a human life or on aspects of the environment (Heinzerling and Ackerman 2002). They were also skeptical of discounting, a practice that seemed to treat benefits and costs, including human lives, as akin to money that can be invested in an account and earn interest.
Those on the left who opposed CBA lost these battles over discounting and the value of life, in academic debates as well as in policy settings, as these are now standard parts of cost-benefit analysis. Although the exact discount rate to use in analysis remains controversial, and there are still those scholars who argue that life is priceless or that its value is at least significantly higher than most current estimates used in CBA (Friedman 2020), by the time the Obama administration came into power in the late 2000s, many on the left had moved on from these early controversies, which largely centered around the ethics of cost-benefit analysis.
Instead, left-wing academics began to argue that the American left should embrace cost-benefit analysis, especially by emphasizing the benefits that regulations can bestow upon the public (Revesz and Livermore 2011). The Obama administration harnessed CBA to promote its aggressive regulatory program in a way that previous Democratic presidents had resisted. Harvard law professor and Obama OIRA administrator Cass Sunstein went so far as to dub Obama “the cost-benefit president.”7
By contrast, in recent years, some see former President Trump as having downplayed the significance of CBA, in stark contrast with the Obama years.8 The Trump administration even developed an entirely new scheme of regulatory accounting that emphasizes financial costs and cost savings, downplaying nonmarket benefits such as those environmental outcomes so cherished by the Obama administration (Sunstein 2020). In short, roles have reversed in recent years, with the American left emerging as the newest champions of CBA.
THE DICTATORIAL ORIGINS OF COST-BENEFIT ANALYSIS
Nothing about the Left’s eventual shift toward embracing cost-benefit analysis, nor the Right’s eventual retreat from it, should be surprising. CBA’s academic origins trace back long before right-wing political operatives latched on to the tool in the late 1970s and early 1980s. Aspects of these academic origins could even be called socialist in nature.
As discussed above, crude versions of CBA were used in the federal government as far back as the 1930s. However, CBA’s academic foundations had yet to be fully developed at that point, making those early years a kind of analytical Wild West. That began to change around the middle of the twentieth century. One critical moment in CBA’s history came in 1950, with the publication of the article “A Difficulty in the Concept of Social Welfare,” which was written by a young, up-and-coming economist by the name of Kenneth Arrow (1950). Economists at that time were trying to answer a simple question: What should policy aim to do? Arrow, in a now famous article, was looking for a “social welfare function.” He sought a decision rule that could be applied consistently to a broad range of social problems—a logical framework from which one could rank policies (or any other outcomes, for that matter) to determine which best promote societal well-being.
Arrow set certain ground rules in his endeavor. For example, he wanted the decision rule to be based on the preferences of the members of the community being governed (as opposed to being imposed arbitrarily). After establishing a further set of seemingly reasonable restrictions for the social welfare function, he reached the surprising conclusion that the only rule satisfying his criteria is to have the same person in society always decide for everyone. Any other attempts to turn individual preferences into a group decision-making formula will at some point lead to paradoxes, contradictions, or anomalies.
Yet Arrow was clever about how he structured his argument. Rather than prove that the only rational form of collective decision-making is to anoint a dictator, he proactively ruled out that possibility in the assumptions of his theorem. So, what might have been called a “dictatorship theorem” came instead to be known as an “impossibility theorem,” on the grounds that it seemed to prove that generating a consistent, rational, and broadly applicable social welfare function from the ordinal preferences of the individuals comprising society is impossible.
Right-wing economists in particular interpreted the impossibility theorem as generally ruling out a social welfare function as the normative basis for CBA. Instead, they focused on a simpler welfare measure: economic efficiency. To paraphrase this line of thinking, social welfare is simply too nebulous, too difficult to measure, and too riddled with subjective value judgments. These right-leaning economists latched on to a notion of efficiency that had first been proposed in the late 1930s, known as Kaldor-Hicks efficiency. According to the Kaldor-Hicks criterion, a policy increases efficiency if those who benefit from the policy gain by enough to compensate the people who lose. In theory, everyone could be made at least as well off as (or better than) they were before the policy. The critical catch, however, is that the compensation need not actually happen. Thus, this “potential compensation test” makes no guarantee that a policy will increase present citizens’ welfare—only that it will increase aggregate wealth.
To those on the right, focusing on wealth seemed the most scientific way forward, by stripping out most value judgments from the analysis. But this was not the lesson that Arrow himself took from his own work. He was critical of the potential compensation test and of Kaldor-Hicks efficiency for failing to satisfy all of his criteria about what constitutes a rational decision rule (Arrow 1951, 1963).9
Arrow never said that constructing a social welfare function is impossible. On the contrary, Arrow based CBA on a mathematical social welfare function. Sometimes he used another name for it, such as a “criterion function” (Arrow and Kurz 1970), or a resource allocation problem that a “social planner” is tasked with solving for society (Arrow et al. 2014). But it was a social welfare function nonetheless. The specific equation he supported for this purpose was (perhaps not surprisingly given his theorem) a single individual’s utility function—an individual who looks a lot like a dictator.
Now few, if any, proponents of Arrow equate their support of his ideas with support for actual dictatorship. The “dictator” in question is a benevolent figure whose aim is maximizing the well-being of the members of the community he is charged with planning. In fact, sometimes the dictator i
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