Last week, the Public Company Accounting Oversight Board released its staff guidance on economic analysis in PCAOB standard setting. According to PCAOB Chairman James Doty, "[t]he Guidance should give those who are interested in the PCAOB's standard setting a better understanding of the analysis that staff plan to conduct to ensure effective and efficient rulemaking." The PCAOB guidance is an important departure from the historical reluctance of federal financial regulators to conduct economic analysis in connection with their rulemaking. In response to this aversion to pre-regulatory analysis, Abby McCloskey and I released a paper this week exploring the merits of a statutory requirement applicable to all the federal financial regulators.
Rather than something to be feared, economic analysis helps a regulator identify the problem it is trying to solve and think through potential solutions. Yes, it is a difficult, time-consuming, and costly exercise. It is true that there are hard to quantify benefits and costs, uncertainties, data gaps, and indirect effects. Despite these problems, most regulators are required by executive order to conduct economic analysis. Given the far-reaching effects that federal financial regulations have, the benefits of ascertaining what your rule will do before you adopt it outweigh the costs of doing a reasonable analysis. The PCAOB guidance embraces a form of analysis similar to that required under the executive orders. The other federal financial regulators should do the same. A clear, statutory requirement applicable to all of the financial regulators would ensure that thinking about whether and how regulations will work and what their likely consequences will be is not optional.