Daniel Farber on CPRBlog {Bio}
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The Lost World of Administrative Law

The regulatory process has become more opaque and less accountable. We need to fix that.

Every year, thousands of law students take a course in administrative law.  It’s a great course, and we wish even more students took it.  But there’s a risk that students may come away with a vision of the regulatory process that is increasingly disconnected with reality.  Worse, the leading judicial opinions on the subject suggest that judges may suffer from a similar disconnect.

The Administrative Procedure Act is based on the premise that Congress delegates the power to address a problem to an agency, which then applies the statute to formulate a regulation.  Policy is driven by the statute along with the views of the agency head, who is appointed by the President and confirmed by the Senate.  But the realities are often different.  Policy is often driven, not so much by Congress, as by Presidential orders requiring the use of cost-benefit analysis.  The final decision about whether to regulate, and even the details of the regulation, may be decided by a White House office called OIRA.  The head of the agency is frequently a temporary appointee, generally a lower level agency official who may not have much clout within the executive branch.  The regulatory system as it actually operates is much different from the world envisioned by administrative law.

In a recent paperAnne Joseph O’Connell and I document this disconnect and discuss its consequences.  We think it likely that something like the current system will persist.  Administrative law aims to make the regulatory process more open and transparent, more faithful to statutory mandates, and more attentive to scientific expertise - all while respecting the primary role of the executive branch in issuing regulations.  To further these goals given current realities, OIRA process must become much more transparent and accountable.  Transparency will help ensure that an agency’s statutory mission and its scientific expertise don’t get submerged by OIRA staff who care only about their own policy goals and lack deep expertise.  Regardless of whether you share OIRA’s passion for cost-benefit analysis or revile it, we should all be able to agree on the need for improving the process.

This blog is cross-posted on Legal Planet.  

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Carbon responsibility - producers versus consumers

Has the U.S. "exported" its carbon emissions to China by relying on China to manufacture so many of our goods?  There seems to be growing support for the idea that carbon emissions should be tied to consumption of goods rather than their manufacture, as the NY Times reported recently.  There is a grain of truth to the idea.  But consumer responsibility should be considered secondary.  The primary responsibility rests with producers.

Most of the debate has been about climate change.  But it may be easier to think through the issue in a less contentious context.  Consider the problem of water pollution in the Mississippi River, which results in the infamous dead zone in the Gulf of Mexico.  Agricultural runoff in the Midwest is a big part of the problem.  A significant portion of the U.S. corn and soybean crops are exported to Asia.

Does this mean that Asians have a responsibility to help us solve our water pollution problem, maybe by paying Midwestern farmers to adopt more sustainable practices?  Have the Chinese "exported" their agricultural pollution problem to the U.S.?  This idea seems dubious.  It seems obvious that it is Americans who have the primary responsibility for reducing the water pollution caused by our own agriculture runoff, regardless of where the crops are sold. The same logic seems to apply to carbon emissions.

Some people might argue that the two situations aren’t comparable because of the economic disparity between the two countries.  But it’s not as if we’ve somehow forced the Chinese to produce cheap goods for us or blocked them from controlling their carbon emissions.  China is very much an autonomous actor into today’s world.

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Rethinking "adaptation"

 I’ve spent a lot of time and energy talking about the need to adapt to climate change, but I’ve also become increasingly uneasy about “adaptation” as a way to think about the situation.  One of the things I don’t like about the term “adaptation” is that it suggests that we actually can, at some expense, restore ourselves to the same position we would have been in without climate change.  For any given amount of climate change, we can do things that decrease the resulting harms (at a cost), but we can’t eliminate those harms.  Adapting to climate change is like “adapting” to a serious chronic disease — you can get by, with luck, but it’s still not like being healthy.

But there’s also an important conceptual issue.  The idea of adaptation assumes that the world will go along more or less as it always has, except that we’ll take some specific actions due to climate change to neutralize its effects. This makes sense if we think global warming is just a marginal change.  But given our current trajectory, climate change, adaptation, and mitigation may go beyond marginal impacts. Climate change may well have wide societal effects, and mitigation efforts themselves could be major enough to shift the economy.  Moreover, both mitigation efforts and actions to address climate-based risks will have environmental impacts of their own.  ”Adaptation” suggests a marginal quality to climate change that may be quite misleading.


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Denial As a Way of Life

As it turns out, many of the same people who deny that climate change is a problem also deny that government default would be a problem.  No doubt there are several reasons: the fact that Barack Obama is on the opposite side of both issues; the general impermeability of ideologues to facts or expert opinion; a general suspicion of elite views.  But I’d like to suggest that there is also a deeper belief about the invulnerability of systems to outside shocks, either on the view that the system is very loosely linked or has a very strong tendency to return to equilibrium. These are actually a bit contradictory since strong corrective forces imply tight linkage, but most people don’t notice that.

For example, you might think that changing one atmospheric gas wouldn’t really have much impact on the world or that counteracting forces like increased use of CO2 by plants would come into play.  Or, you might think that making a few bondholders wait a bit to get paid wouldn’t be a big deal, or that it wouldn’t really happen because Treasury would come up with a response to avoid it.

There are actually some strong common elements here.  Both climate change and a significant U.S. default are unprecedented historically, so we can’t rely directly on past experience.  Both involve systemic risks, which by their nature are less frequent and less easily understood than an action’s immediate impacts. And in both cases, the deniers are not merely saying that the outcome is uncertain — which would still lead to serious precautions because the potential harm is so great — but denying that there’s any possibility of a bad outcome.

That means that all the experts are either incompetent or lying, but once we’re willing to leap over that problem, it’s not hard to reject their views. If you’re going to reject the views of nearly all climate scientists, why not reject the views of nearly all economists?  In for a penny, in for a pound.


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The Strange World of the Small Business Administration

When you say “small business,” most people probably imagine a mom-and-pop corner grocery.  Actually, the federal Small Business Administration’s concept of small goes well beyond that.  For instance, it includes a computer business that does up to $25 million per year in business. A convenience store can do $27 million and still be considered “small,” while a grocery store can go up to $30 million. If you’re in parts of the financial sector, you can do $175 million in business a year and still be a “small business.”

In many other areas, the size requirement is set in terms of numbers of employees—usually 500, but sometimes 1000 or more.  There are wonderfully detailed sub-categories such as “Motor Vehicle Steering and Suspension Components (except Spring) Manufacturing” and the nostalgia-inducing “Carbon Paper and Inked Ribbon Manufacturing.”  (Couldn’t find a heading for buggy-whip manufacturers, however.)  Anyway, each and every one of these businesses is, for some mysterious reason, entitled to the special care and solicitude of the U.S. government.

But the Small Business Administration seems remarkably attentive even to firms that exceed even this generous definition of small business. The Office of Advocacy also is willing to go the extra mile for big business groups like the American Chemistry Council.

It no longer seems to focus on the special needs of smaller (or maybe I should say “less large”) businesses. Instead, studies by the Center for Progressive Reform and the Center for Effective Government shown, the SBA now acts as a mouthpiece for the business community as a whole, often echoing the views of Big Business. For instance, it pressured the EPA not to regulate arsenic, fine particles, and lead emissions from coal power plants. It has also opposed regulations of formaldehyde, styrene, and chromium, as well as arguing that EPA should not regulate greenhouse gases (apparently on grounds that the Supreme Court had already rejected in a previous case). It also shows up at meetings flanked by major corporations like ExxonMobil to argue in favor of watering down regulations.

Of course, the business community is entitled to advocate their viewpoints to regulators, and they spend many millions of dollars to do so.  But why should the U.S. government hire people to act as back-up lobbyists for the well-funded efforts of the Chamber of Commerce, major trade associations, and Fortune 500 companies?

Cross-posted from the environmental law and policy blog Legal Planet.

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WARNING: Individual Research Findings and Economic Models May Not Be Fully Grounded

Reposted from Legal Planet.

A couple of weeks ago, a major paper on the economics of government deficits turned out to have huge flaws. Matt Kahn and Jonathan Zasloff have already had something to say about this, but I’d like to add some thoughts about the implications for environmental issues.“Interesting,” you say, “But what does that have to do with the  environment?”  

I see two big lessons.  The first lesson is about the danger of overreacting to a dramatic research finding, especially when you really want to believe it because it confirms what you thought all along.  The second lesson is about how little economists know about the functioning of the economic system as a whole, as compared with their understanding of how individual pieces of the economy work. This is really important for large-scale issues like climate change.  I’d suggest use of the warning on the left by journals in the future. More about all of this after the jump. 

The paper in question purported to show that there’s a kind of deficit cliff — when government debt hits 90% of GDP, the bottom drops out of economic growth.  As a new paper showed, that finding had fatal flaws.  Due to a spreadsheet error, five countries were left out of the analysis.  Also, the results were pretty much driven by a single bad year in New Zealand, when government debt was very high and the economy was doing very badly.  (This was partly because the researchers only included that one year out of New Zealand’s history, maybe due to data availability, and also weighted each country equally no matter how many episodes of high debt they had or how they lasted). An additional problem is that the paper appeared in the American Economic Review, a very distinguished, peer-reviewed journal — but it turns out that the specific issue containing conference papers isn’t peer-reviewed, unknown to many of us.

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An Energy No-Brainer

Reposted from Legal Planet, by permisison.

There are a lot of things to disagree about in terms of energy policy.  One thing that ought to be common ground, as discussed in a Washington Post column, is increased research in energy R&D.  As this chart shows, federal support for energy R&D is smaller than it was under Ronald Reagan:

The economic argument for supporting R&D is simple.  Private firms don’t have enough of an incentive to engage in basic research because intellectual property law doesn’t allow them to capture the full benefits of the resource. For that reason, government support for the research is necessary.  Moreover, really new ideas have a high risk factor that may make them unattractive to private investors (a problem addressed by the ARPA-E program.)

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The Precarious Legality of Cost-Benefit Analysis

Cross-posted from Legal Planet.

Cost-benefit analysis has become a ubiquitous part of regulation, enforced by the Office of Management and Budget. A weak cost-benefit analysis means that the regulation gets kicked back to the agency. Yet there is no statute that provides for this; it’s entirely a matter of Presidential dictate. And reliance on cost-benefit analysis often flies in the face of specific directions from Congress about how to write regulations. There are a few exceptions, such as regulations involving pesticides, bans on toxic substances, and thermal water pollution, where Congress called for EPA to balance costs and benefits equally. But almost all environmental laws direct agencies to use some standard other than cost-benefit analysis. The statutes generally place a greater weight on environmental quality and public health than on cost.

For example, it’s fairly obvious that Congress did not contemplate much of a role for cost-benefit analysis when it passed the Clean Air Act. Some key provisions of the Act are based completely on health risks and do not allow consideration of costs. When costs are a factor, Congress carefully specified factors to be taken into account and provided different standards for different situations. All of the fine distinctions in the table below would be erased if all regulations are simply based on the same cost-benefit standard.

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D.C. Circuit Denies Rehearing in Endangerment Case

Cross-posted from Legal Planet.

Six months ago, the D.C. Circuit upheld EPA’s finding that greenhouse gases endanger human health and welfare, triggering coverage under the Clean Air Act.  On Thursday, the full court denied rehearing to the three-judge panel’s decision.  There were only two dissents, which obviously were hoping to set the stage for a cert. petition to the Supreme Court.  The dissents provide a preview of the kinds of arguments that will be made to the Supreme Court.

One key point is that neither dissent questioned the scientific basis for EPA’s finding.  It is clear that the climate skeptic positions advanced by the state of Texas have no traction even with very conservative judges.

The strongest arguments raised by the dissents involve a technical statutory issue.  The case involves provisions of the Clean Air Act that apply to “any air pollutant.”  The dissent argues that this means “any criterion air pollutant” (meaning the six pollutants that are most extensively regulated by the statute.”  I discussed this issue extensively in a post about the original decision, so I won’t go into the details here, but I think EPA’s position on this issue is sound.  It’s notable than only two of the conservatives on the D.C. Circuit were willing to endorse the attack on the EPA’s interpretation.

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Mayans! Apocalypse! Climate Change!

Cross-posted from Legal Planet.

Mayan apocalypse: panic spreads as December 21 nears

Fears that the end of the world is nigh have spread across the world with only days until the end of the Mayan calendar, with doomsday-mongers predicting a cataclysmic end to the history of Earth.

That’s from a British newspaper, the Telegraph, but you only have to Google “Mayan Calendar” to find lots of similar items. There seems to be no basis at all for the idea that the Mayans thought the world would end at this point, let alone that it actually will. But it’s certainly gotten people excited.

Ironically, people seem to be much less excited about climate change. That’s ironic for two reasons. First, it’s at least conceivable that the climate will hit a tipping point with catastrophic (though probably not apocalyptic) consequences. And second, what destroyed the Mayan civilization wasn’t some supernatural event tied to their calendar. It was probably climate change, according to archaeologists.

As the NY Times reports,

The early classic Maya period — about A.D. 450 to 660 — “was remarkably wet,” said an author of the study, Douglas Kennett, a geo-archaeologist at Penn State. “There was a proliferation of population, an increase in agriculture and a rise in divine kings that became prominent leaders.”

But then things dried up. The researchers compared the climate record with an existing “war index” — a log of hostile events based on how often certain keywords occurred in Maya inscriptions on stone monuments — and found a strong correlation between drought and warfare between cities.

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