Business Roundtable Letter in Response to Updates to Circular A-4

A PDF of this letter can be viewed HERE.

June 6, 2023

 June 6, 2023 

The Honorable Richard L. Revesz 


Office of Information and Regulatory Affairs 

Office of Management and Budget 

725 17th Street, NW 

Washington, DC 20503 

Filed at 

Re: Updates to Circular A-4: Regulatory Analysis 

Docket ID: OMB-2022-00141

Dear Mr. Revesz: 


Business Roundtable has long advocated for a wide variety of reforms to improve the regulatory process, including improvements in how agencies conduct cost-benefit analysis (CBA or BCA).2 We believe the cornerstone of sound, smart regulation is a careful and systematic evaluation of the costs and benefits of proposed and final rules, using the best science available, and clearly disclosing the results of this evaluation, including any inherent uncertainties. CBA is not a perfect tool. But by presenting a careful accounting of how a rule would likely affect innovation, and other economic considerations, a well-conducted CBA is the best way to ensure that the rule will provide net benefits to society. 

We applaud the Biden Administration’s reaffirmation of the core principles espoused in Executive Orders (EOs) 12866 and 13563, and we support the principles that underpin OMB’s efforts to update Circular A-4, the primary document that instructs regulatory agencies on how to conduct a CBA. The longevity of these EOs is a testament to their importance and continued relevance, and we are pleased that this administration remains committed to requiring federal agencies to develop high quality analyses that accurately reflect the benefits, costs (including opportunity costs), uncertainties, and overall economic impacts associated with proposed rules. OIRA’s emphasis in revised Circular A-4 and the accompanying preamble on the importance of transparency, specifying appropriate baselines, focusing on areas of market failures, and conducting uncertainty and sensitivity analyses are all positive developments that are directionally consistent with Business Roundtable’s “Smart Regulation” philosophy.3 Just as importantly, the administration’s rejection of various fringe ideas that would weaken agency CBAs will better position federal agencies to develop higher quality rules that accomplish their regulatory intent while minimizing negative impacts on innovation, job creation, and economic growth.4

Business Roundtable is an association of more than 200 chief executive officers (CEOs) of America’s leading companies, representing every sector of the U.S. economy. Business Roundtable CEOs lead U.S.-based companies that support one in four jobs and almost a quarter of GDP. Through CEO-led policy committees, Business Roundtable members develop and advocate directly for policies to promote a thriving U.S. economy and expanded opportunity for all Americans. As major employers in every state, Business Roundtable CEOs take seriously the responsibility of creating quality jobs with good wages. These leaders join with communities, workers and policymakers to build a better future for the nation and its people.

For 50 years, the membership of Business Roundtable has applied CEO expertise to the major issues facing the nation. Through research and advocacy, Business Roundtable advocates policies to spur job creation, improve U.S. competitiveness and strengthen the economy.

Executive Summary 

Business Roundtable’s comments focus on three main topics: (1) how agencies should discount future costs and benefits; (2) how agencies should account for the opportunity cost of capital; and (3) how agencies should assess the distributional impacts of proposed rules. In addition, our comments discuss several other topics that OIRA should emphasize or clarify as it works to finalize revised Circular A-4. 

(1) The proposed discount rate of 1.7% is too low and should be raised. 

  • OIRA’s methodology, while consistent with previous efforts, suffers from two technical problems that result in a value lower than it should be. o The market for U.S. Treasuries is sometimes affected by “flight to safety” periods that can drive the Treasury Inflation Protected Securities (TIPS) rate to near-zero or even negative values that are well below any reasonable level for the social rate of time preference. These distortionary periods can be mitigated through the use of a 1% lower bound for the TIPS rate. 
  • OIRA should use the personal consumption expenditures price index (PCE) rather than the consumer price index to estimate the value of an inflation-protect Treasury security for the period predating the advent of TIPS. The PCE, which is the Federal Reserve’s preferred measure of inflation, more accurately captures how consumers’ purchasing decisions are affected by price changes. 
  • Once these technical problems are addressed, the recommended discount rate rises to 2.25%. 
  • OIRA should also revisit the social discount rate every three years, subject to the above methodological tweaks, to ensure it accounts for any structural economic changes that may lead to a higher or lower social rate of time preference. 

(2) As proposed, OIRA’s approach to using a “shadow price” to account for the opportunity cost of capital is likely to result in agencies undervaluing this critical consideration. 

  • The revised Circular suggests that regulatory displacement of capital investment occurs infrequently, raising the likelihood that agencies may ignore or “assume away” opportunity costs. This is highly problematic, as the opportunity cost of capital is a key aspect of any regulatory impact assessment. Surveys and academic studies illustrate that opportunity costs, including lost investment and innovation, are both real and substantial. 
  • The range of shadow prices OIRA suggests that agencies consider (1.0 – 1.2) is lower than the range recommended by the key studies on which OIRA heavily relies. Business Roundtable believes that a credible, evidence-based shadow price would be between 1.2 – 1.3. 
  • While the extent to which regulatory compliance costs will result in capital displacement will depend on the specific regulation, experience suggests that compliance costs are far more likely to displace future investment than augment it. Accordingly, OIRA should emphasize the importance of agencies fully accounting for the potential for capital displacement in their cost estimates. 

(3) The methodology OIRA uses to develop equity weights for assessing a regulation’s distributional effects is flawed. 

  • OIRA’s proposed equity weight of 1.4 depends heavily on an outlier study conducted 35 years ago that produced an estimate more than twice as high as other studies OIRA reviewed. Moreover, OIRA’s calculation methodology ignores quality differences in the studies it reviews. 
  • We recommend that OIRA forego altogether the use of quantitative equity weights in agencies’ distributional analyses. OIRA can and should encourage agencies to conduct distributional analysis more frequently and with more analytical rigor, but the current proposal is likely to produce misleading and potentially flawed results.

In addition to these three main topics, we make the following additional observations related to EO 14094, revised Circular A-4 and the accompanying preamble, and related efforts to promote Smart Regulation: 

  • OIRA should hold independent regulatory commissions to the same standards as other federal agencies. The Biden administration should require all agencies to conduct cost-benefit analysis of major rulemakings and to make this requirement explicit in the updated Circular. 
  • OIRA should direct agencies to improve retrospective review planning. Agencies rarely reassess existing regulations to determine whether they are still necessary, and revised Circular A-4 contains little new information on the importance of retrospective review. OIRA should require agencies to develop retrospective review plans for high impact rules before they are finalized. 
  • OIRA should encourage agencies to perform “back of the envelope” analyses early in the rulemaking process. Agencies should conduct a meaningful but less complex assessment of various policy options earlier in the regulatory process. Such analyses would encourage regulators to use CBA as a tool to inform a regulatory approach rather than to justify a regulatory decision that has already been made. 
  • OIRA should direct agencies to target and engage relevant stakeholder groups early in the rulemaking process. The Small Business Regulatory Enforcement Fairness Act (SBREFA) creates special outreach requirements for rules from designated agencies that are likely to have a significant impact on small entities. OIRA should encourage all agencies to experiment with an expanded SBREFA-like process that encompasses a broader set of rules and stakeholders to help identify optimal regulatory approaches. 
  • OIRA should apply additional scrutiny to rules that rely heavily on ancillary benefits to achieve a positive benefit-cost ratio. OIRA should advise agencies that, when a rule depends heavily on ancillary benefits to meet a cost-benefit test, they should carefully consider alternate regulatory approaches that produce positive net benefits in a more direct fashion, at a lower cost, and/or in a manner that is more consistent with statutory intent. Agencies should also continue to report ancillary benefits separately from direct benefits. 
  • OIRA should require agency analyses to be presented in a more transparent and accessible fashion. Regulatory impact assessments are often lengthy and highly complex. Final rules should contain a concise, standardized, and digestible summary table in the final rule that includes “bottom line” information on the most important costs and benefits and describes key assumptions, uncertainties and limitations. The accounting statement included in the revised Circular is an improvement over the previous version, but could be further improved.  
  • OIRA should require agencies to develop proper baselines and coordinate with one another to avoid the potential for double-counting benefits across multiple rules. Recent examples of regulatory overlap illustrate the need for OIRA to closely monitor the potential for regulatory duplication and ensure agencies follow the updated guidance in Circular A-4 regarding baselining and interagency coordination. 

Read the full letter HERE.