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Prospective Costs & Rome / Chicago

The U.S. Supreme Court has spoken in Michigan v. EPA: Regulators must conduct cost-benefit analysis. Specifically, this is unquestionably great news for many accounting professionals Рtraditional and forensic Рand some lawyers, especially those with administrative and regulatory practices. Generally, this seems good news for taxpayers, industry, consumers, etc. In brief, it raises the cost burden for regulators, which may intimidate them into docility, which could soon transform the appearance of good news into an amoral miasma of asleep-at-the-switch regulators accompanied by the practice of racing to the bottom.

Some may be surprised that cost-benefit analysis is not routinely performed. The primary weaknesses of the application of cost-benefit analysis in the context of regulation and rule-making include the following:

  • Expert accounting (and economics) professionals are expensive (cf. the mantra of doing more with less).
  • These experts use variable assumptions and estimates, preparing more or less speculative reports (e.g., sensitivity analyses).
  • The experts are not operating in the hard science disciplines where the future more or less flows practicably from laws the primary effects of which have been empirically observed and accurately measured in the past; i.e., there would likely be battles of experts where economically threatening rules are proposed.
  • The administrative and judicial arbiters of the soundness of the cost-benefit analyses are generally not expert accounting (and economics) professionals; i.e., the process is dominated by lawyers.

None of these weaknesses demonstrate conclusively that cost-benefit analysis is not a social good (and it should support interest in my discipline). Just remember that where Rome / Chicago burn, the intelligent and caring individual’s first call would not likley go to the lawyers (or accountants / economists).