The FCC Sees the Value of Cost-Benefit Analysis

(Bloomberg View) -- In the last 35 years of U.S. regulatory policy, both Democratic and Republican presidents have agreed that cost-benefit analysis is an excellent idea.

For that reason, it was welcome news this week when the Federal Communications Commission, led by Chairman Ajit Pai, voted to create an Office of Economics and Analytics, and to incorporate its work into the agency’s decision-making. This development should have long-term benefits for communications policy in the U.S.

The background for the FCC’s decision was set by President Ronald Reagan, who issued an executive order in 1981 requiring federal agencies to catalog the costs and benefits of their actions, and to show that the benefits justify the costs. Despite the breadth and ambition of that order, Reagan made an important exception. He did not apply his directives to the “independent” regulatory commissions, such as the Federal Reserve Board, the Federal Trade Commission, the Nuclear Regulatory Commission, the Securities and Exchange Commission -- and the FCC.

Under the law, the heads of those commissions enjoy a measure of protection from presidential control; they can be fired only for cause (such as “malfeasance in office”). Some lawyers think that presidents lack the legal authority to direct independent agencies to use cost-benefit analysis. Reagan was alert to the legal dispute -- and also to the political dynamics. Any presidential effort to control the independent agencies could create an uproar in Washington.

At least with respect to executive-branch agencies, Reagan’s insistence on cost-benefit analysis has served the nation well. In some cases, careful analysis of the numbers shows that regulation doesn’t make a lot of sense, whatever your ideological convictions, because its benefits would be dwarfed by its costs. In other cases, the analysis shows that regulation is a terrific idea, because it would save a lot of money (or lives), and because it wouldn’t cost a whole lot.

Much of the time, disciplined investigation of costs and benefits quiets political noise by showing that big ideological cliches (about, say, the evils of big corporations or the virtues of the free market) are too abstract to tell us whether to embrace concrete proposals.

Unfortunately, some of the independent agencies have failed to engage in that detailed investigation, leading to judgments that are politically motivated, or the product of untested intuitions, or just stabs in the dark. To its credit, the FCC has occasionally used economic analysis to inform its decisions. But it hasn’t done so in a routine or consistent manner.

That’s a big problem. Suppose, for example, that the FCC seeks to address the problem of “bill shock,” which occurs when mobile phone users are surprised to find that they have exceeded their allowances. One possibility would be to require providers to inform consumers when they are near their limit.

That should help consumers to avoid overuse fees, which would be great -- but by how much, exactly? Economists will also worry that if overuse fees go down, providers might respond by increasing fixed fees and reducing allowances. Will they? And, if so, by how much? To know whether and how to respond to the problem, we need good answers to such questions.

Or suppose the FCC is thinking of changing its policies with respect to permissible and impermissible business mergers (as indeed it did a few months ago). If a company in a specified media market is permitted to own both a daily newspaper and a TV station, what would be the consequences for consumers? Would competition diminish? Would the number of viewpoints be reduced? Such questions cannot be answered without economic analysis.

Skeptics will observe that economists do not agree with one another. For some questions, the projection of likely effects, including benefits and costs, will greatly diverge, depending on which economists you ask. That’s true. But at the very least, the FCC’s new office will be focusing on the right questions, and its analysis will narrow the range of reasonable disagreement.

The critics might add that political leaders can interfere with the projection of both benefits and costs, leading to a kind of ideological skew. That’s also true. The best response is not to abandon the analysis, but instead to ensure, as FCC chairman Pai put it, “separation of economists from program offices (as we are doing today) so that functions like cost-benefit analysis could be carried out with integrity.”

Finally, skeptics might object that the FCC should be concerned with some values (such as access for the hearing-impaired) that are not easily made part of a purely monetary cost-benefit analysis. True again. But even when this is so, economic analysis can be indispensable. What strategies would be effective, and cost-effective, in increasing such access?

It would be absurd to say that economic analysis can always overcome partisan disagreements. But far more often than you might think, it can make such disagreements look pretty silly. The FCC’s new office, and careful investigation of costs and benefits, have the potential to improve its judgments, to the great benefit of American consumers. Let’s hope that other regulators follow chairman Pai’s lead. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Cass R. Sunstein is a Bloomberg View columnist. He is the author of “#Republic: Divided Democracy in the Age of Social Media” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”

  1. Disclosure: The FCC staff consulted with me and many others in the course of discussions about whether to create the new office.

  2. In providers, under pressure from the FCC, agreed to provide such messages on their own.

To contact the author of this story: Cass R Sunstein at csunstein1@bloomberg.net.

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