Circular A-4, issued by the Office of Management and Budget (OMB), provides detailed guidance to federal agencies regarding the methodological attributes of sound regulatory impact analysis. The Biden administration has proposed modifications to Circular A-4 that were recently peer reviewed in preparation for the finalization and public release of a modified Circular A-4, perhaps by the end of this calendar year.
The proposed modifications are substantive and far-reaching. If finalized, they will drastically alter the process used for decades by the federal government to evaluate the cost effectiveness of proposed regulations and do so in ways that will raise serious questions about the analytical soundness, and the constitutionality, of that process.
Regulation, by its nature, restricts the actions and impacts the property rights of the regulated entities. It forcibly allocates private resources. As a result, there is virtually universal agreement that the economic benefits produced for a society by regulation should justify the overall economic cost of its imposition.
Every president since Jimmy Carter has sought to effectuate this conceptual consensus by issuing executive orders and memoranda that direct regulatory agencies to review and consider the economic costs and benefits produced for society by proposed regulations. The OMB issued Circular A-4 in 2003.
Progressives have long complained that the methodologies used in traditional regulatory review impose inappropriate restrictions on agency rulemaking because they give far too much weight to quantifiable factors and fail to adequately credit qualitative benefits such as those that result from the advancement of social justice and racial equity.
These progressives have argued that regulatory review should not just evaluate the economic benefits and costs of a proposed regulation for society as a whole but should, instead, be conducted to advance regulations that favor historically disadvantaged racial groups by distributing benefits and costs in a way that will reduce and ultimately eliminate the economic disparities that have been created by the structural racism they claim pervades the current regulatory system. On his first day in Office, President Biden issued a Memorandum on “Modernizing Regulatory Review” that fully reflects this progressive point of view.
The memorandum declares that America’s “serious challenges” include “systemic racial inequality.” It calls for changes to the regulatory review process to ensure that it “fully accounts for regulatory benefits that are difficult or impossible to quantify.” It directs the OMB to work with executive departments and agencies to produce a set of “concrete suggestions on how the regulatory review process can promote . . . racial justice . . . [and] . . . equity . . . [and] . . . ensure that regulatory review serves as a tool to affirmatively promote regulations that advance these values.”
The memorandum further directs respondents to “propose procedures that take into account the distributional consequences of regulations . . . [and] . . . as part of any quantitative or qualitative analysis . . . ensure that regulatory initiatives appropriately benefit and do not inappropriately burden disadvantaged, vulnerable, or marginalized communities.” And it specifically directs the OMB to revise Circular A-4 to ensure that the regulatory review process promotes policies that reflect the directives contained in the memorandum.
On April 6, 2023, the OMB issued proposed revisions to Circular A-4 to comply with the directives set forth in the memorandum. These directives were reiterated in Executive Order No. 14094, also issued on April 6. Section 3(a) of the Executive Order specifically states that “Regulatory analysis, as practicable and appropriate, shall recognize distributive impacts and equity . . . .”
When discussing the regulatory analysis to be conducted to recognize the distributive impacts of a proposed regulation, the revisions to Circular A-4 state that the proposed regulation may be needed for “remedying inequitable conditions that exist in the baseline” and that, when conducting the regulatory analysis, “demographic categories such as those based on race . . . may be relevant to a particular [proposed] regulation.”
The memorandum, Executive Order No. 14094, and the proposed changes to OMB Circular A-4 raise serious constitutional issues. The equity sought—the mitigation of “systemic racial inequality” through the distribution of regulatory benefits and burdens to address “inequitable conditions” by favoring some racial groups over others—is utterly antithetical to the principles and institutions of our constitutional system.
Equality under the law requires that people be treated equally and judged impartially as individuals. Equity, as sought by these regulatory initiatives, requires that people be treated differently and judged as members of a group to achieve equal outcomes. The initiatives do not merely ask agencies to take account of the distributional consequences of regulation; taken together, they direct agencies to craft regulations that create race-based distributional consequences.
Federal courts have struck down a number of equity initiatives of the Biden administration on equal protection grounds and have made it clear that when the government distributes burdens or benefits on the basis of racial classifications, that action will be reviewed under strict scrutiny.
If the modifications to Circular A-4 are finalized in their present form, and OMB conducts its regulatory impact analysis to promote the equity called for, the rulemaking process could well become entangled in costly and time-consuming litigation. This can be avoided.
Executive Order No. 14094 and the modified Circular A-4 contain scattered statements that regulatory analysis should promote equity “to the extent permitted by law.” Such statements are inadequate. They can easily be read not as a limiting caution, but as an invitation to push the constitutional envelope.
Before it is finalized and published, the text of Circular A-4 should be further modified to make it absolutely clear throughout the guidance document that regulatory impact analysis and agency rulemakings must, in every instance, be conducted in a way to ensure that benefits and costs of regulation are distributed across society in strict accordance with the bedrock constitutional requirement that every citizen is to be treated equally under the law.
That is the only equitable thing to do.
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