Americans’ daily lives are governed by both laws and regulations, the former enacted by Congress and the latter issued by the numerous regulatory agencies in the federal government’s executive branch. These agencies are collectively known as the administration state, the deep state, or pejoratively, “the swamp.”
Few Americans realize the extent of federal regulations and the costs they impose on everyone. The United States Constitution makes no mention of regulatory agencies, nor did the Founders ever anticipate the growth of what might be considered the fourth branch of the federal government.
Regulatory growth, moreover, has flourished with major bursts of government statutory expansion during the 1930s’ New Deal, 1960s’ Great Society, mid-2000s’ financial crisis, and the early 2020s’ virus panic. Undeterred, the Joe Biden administration continues its regulatory onslaught, destined now to far overshadow that of previous administrations.
Congress versus the Executive Branch Administrative State
When drafting legislation, Congress often glosses over the details of regulation and enforcement, instead delegating these tasks to executive branch agencies. Often the most comprehensive laws (sometimes called “Christmas tree bills” with many riders and amendments) require laborious regulatory interpretation and enforcement.
Dozens of separate executive agencies assume this role: the Internal Revenue Service handles regulation and enforcement of tax law, the Environmental Protection Agency handles climate legislation, Homeland Security Department handles immigration legislation, the Department of Health and Human Services handles healthcare legislation, and so forth.
Agency Regulation, Benefit-Cost Analysis, and Interest Rates
By executive order, federal regulatory agencies must perform benefit-cost analysis (BCA) when proposing regulations. Since the costs of regulation may occur in the present, but benefits (often including avoidance of estimated future costs) often occur far off in the future, regulators must convert future value (FV) to present value (PV) terms in order to compare benefits and costs. This conversion is done by applying a suitable interest rate, known as a discount rate in the context of BCA.
Discount rates are expressed in real terms, removing the effects of expected inflation. Even with zero inflation, the “time value of money” always exists because a dollar today is inherently worth more than a dollar tomorrow, since today’s dollar can buy something to be consumed, or can be saved and invested to yield a return.
Discounting future benefits and costs to PV terms is done by dividing the presumed future costs and benefits by the discount rate, as in the equation
PV = FV / (1+ r)
where r is the discount rate and (1 + r) is taken to the nth power, where n is the number of years into the future.
This can be done using a programmable calculator, with Excel using the net present value function, or by using an online PV calculator.
What It Means to Discount the Future
The choices that individuals or societies make between their well-being today versus that in the future reflect the rate at which they discount the future. For example, individuals who love to consume and find it difficult to save for retirement or other future events are said to discount the future at a high rate, willing to trade off the future for the present.
On the other hand, individuals who live modestly, perhaps believing based on family history that they will live to very old ages, anticipating long years in retirement, discount the future at a low discount rate and are willing to trade off the present for the future.
Similarly at a societal level, high discount rates mean that a society is willing to trade off the future for the present, preferring policies that benefit it now over policies with long-term benefits that won’t be realized immediately. Low discount rates mean that a society is willing to make investments today that won’t be realized for a long time.
Federal Benefit-Cost Analysis Uses Prescribed Discount Rates
The US Office of Management and Budget, an executive branch agency reporting to the president, periodically publishes Circular No. A-4, which sets discount rates to be applied when government regulators make policy decisions that require BCA. This rate is generally equivalent to long-term US government bond rates.
The Biden administration published an updated Circular on November 9, 2023, to take effect March 1, 2024, replacing the previous version dated September 17, 2003. Among changes to BCA—greater emphasis on inherently qualitative values like social justice, environmental stewardship, and human dignity—the revised Circular also reduces recommended discount rates for BCA.
The 2003 Circular had set two discount rates: a 7 percent rate reflecting the expected growth of capital investments, and a 3 percent rate representing the social rate of time preference (the rate at which society is willing to trade current consumption for future consumption). The higher 7 percent rate was applied when costs or benefits affected capital, and the lower 3 percent rate when the costs or benefits affected consumption.
The new 2023 Circular specifies a single 2 percent discount rate reflecting an updated social rate of time preference. This represents a dramatic reduction from the previous 7 percent and 3 percent rates, effectively rendering regulatory proposals with speculative future benefits much more likely to be cost-justified than they were under the previous 2003 Circular.
Thus, the lower 2 percent discount rate means that future-oriented projects that did not pass a BCA at a 3 percent or 7 percent discount rate may now pass at the new 2 percent rate. The Biden administration, in mandating a low discount rate for federal agency BCA, introduces a bias in favor of government regulation of private enterprise, distorting the allocation of capital between private investment and that driven by regulatory requirements.
A lower discount rate for BCA does not align with what many economists believe to be prevailing interest rate trends looking ahead. After many years of very low or near-zero interest rates, a consensus now forecasts a normalization of rates, implying that the rate should be increased rather than reduced. In fact, the Biden administration’s decision to lower BCA-prescribed discount rates is counterintuitive and disingenuous and can only be ascribed to a political agenda consisting of larger government and programs such as more rapid decarbonization.
A Case Study: Environmental Protection Agency Tailpipe Emissions
On March 20, 2024, the Biden Environmental Protection Agency announced the final new tailpipe emissions rule that applies to light-duty vehicles—cars, sport-utility vehicles, and most pickup trucks—for model years 2027 through 2032. From the perspective of climate strategy, the rule is clearly an integral part of coercing Americans to transition to electric vehicles.
If implemented as written, these new rules will be costly. Douglas Holtz-Eakin, former director of the Congressional Office and current president of American Action Forum, calculates that using the old discount rate, the cost is $450 billion and benefits are $1.7 trillion. But using the new lower discount rate raises the costs to $870 billion (a large 93 percent PV cost increase) and benefits to $2.1 trillion (a smaller 24 percent PV benefit increase).
Reducing the discount rate from 7 percent to 2 percent means that the further out from the present one goes, the weaker the discount effect becomes year over year. Since rules often impose up-front costs but produce benefits well into the future, higher benefit totals put the BCA in a more favorable light.
Conclusions about Biden Policies, BCA, and Regulations
The Biden administration has had a love affair with regulatory activity since its first days in office. Thus far in its tenure, the administration has imposed regulatory costs of $1.37 trillion, compared to $30.1 billion from the Trump administration in the same amount of time. Note that these costs represent expenses for taxpayers—all Americans—in the form of additional paperwork and compliance costs, excluding outright federal spending that adds to the current $35 trillion federal debt.
Whether leaving office after four or eight years, the Biden administration will leave on the country its regulatory legacy, both in terms of burdensome regulations, and a regulatory review process biased to add even more such regulations after it is gone, by lowering the threshold for cost-justified regulatory actions.
Of course, future administrations with a different agenda can always update and reissue the US Office of Management and Budget Circular No. A-4, since these changes require no congressional authorization via statute. Higher future discount rates seem entirely predictable and reasonable as interest rates normalize after years of near-zero levels.
