Improving Economic Analysis by Reorganizing Agencies’ Economists

This article was authored by Jerry Ellig, research professor at The George Washington University Regulatory Studies Center.

This article first appeared in the Regulatory Review's series on "Seeking to Improve Administrative Transparency and Expertise" that focuses on the ACUS Recommendations adopted at the December 2019 Plenary Session. Reposted with permission. The original may be found here, and the Regulatory Review's entire series may be found here.

It is a truism in management that organizational structure can affect results by altering information flows and incentives.

The Administrative Conference of the United States (ACUS) recently retained me to produce a report that examines how the organization and management of economists in federal regulatory agencies can affect the quality and consideration of economic analysis that is intended to inform decisions about regulations. Based on the report, ACUS adopted a multi-part recommendation to help regulatory agencies assess how the organization and management of their economists can best promote objective analysis and effective communication of the results to decision-makers.

Executive orders require executive branch agencies to conduct regulatory impact analyses to inform decisions about significant regulations. Some agencies not covered by these executive orders, such as the U.S. Securities and Exchange Commission, produce similar economic analyses due to statutory requirements or because they believe such analyses provide helpful input for making their decisions.

The organizational structure for economists responsible for producing economic analysis of regulations typically takes one of three forms: divisional organization, under which the economists are located in and supervised by the program office that develops the regulations; functional organization, under which the economists are located in an economic analysis office separate from the program office and supervised by other economists; or hybrid organization, under which the economists who conduct economic analysis of regulations are located in the program office, but additional economists are located in a central office that reviews regulations and accompanying analysis.

The report I prepared for ACUS summarizes relevant organization theory, published interview research, case studies, and an econometric study finding that functional organization of economists is associated with higher-quality regulatory impact analyses. The report also includes the results of interviews I conducted with both economists and non-economists who work on regulations in six cabinet agencies and two independent agencies.

Organization theory, previously published research, and the new interviews conducted for this study tell a consistent story about the advantages and disadvantages of the different organizational structures for economists who conduct regulatory analysis. Choosing an organizational structure often involves a tradeoff between the quality and objectivity of economic analysis, and the extent to which policymakers consider the economic analysis in their decisions. Decision-making authorities, operating procedures, and practices can be developed to mitigate the disadvantages of the chosen organizational structure.

Functional organization of economists, for example, can improve the quality and consistency of economic analysis. This structure allows senior economists to exercise quality control over the analysts’ work, ensuring that economists are evaluated by other economists with the expertise to evaluate their work. It also facilitates the hiring of better economists, encourages the development of standardized analytical procedures, and better insulates economists from pressure to produce analysis that simply justifies decisions that have already been made.

On the other hand, functional organization can lead to less relevant economic analysis because economists are no longer working side-by-side with the personnel in the program office who are writing the regulations. Regulation-writers and decision-makers may also find it easier to ignoreeconomic analysis because the economists producing it are in a different part of the organization.

The disadvantages of functional organization, however, can be mitigated by including economists on interdisciplinary regulatory development teams from the outset. This ensures that the economic analysis reaches the ultimate decision-makers. It also gives the chief economist or other head of the agency’s economic analysis office sign-off authority on regulations.

Divisional organization avoids some of the disadvantages of functional organization. For example, placing economists in the program office that writes the regulations can promote more relevant analysis. Economists may be more conversant with key decisions that need to be made in developing regulations. Economists are also more likely to involve themselves in the early phases of regulatory development, before many decisions are made, if they are in the program office.

Divisional organization, however, also has its costs. When an agency’s regulatory economists are spread across multiple divisional organizations, they may have fewer opportunities to collaborate with each other and develop analytical procedures that are shared across the entire agency. In addition, economists who ultimately report to non-economists in a program office may feel more pressure to produce analysis that justifies decisions made in the program office. Economists’ analysis and recommendations may not even reach higher-level decision-makers.

These shortcomings of divisional organization can be mitigated with appropriate decision-making authorities, procedures, and practices. Some agencies ensure that economists in program offices are managed by other economists. Many departments with divisional organization also have a central economics office that reviews regulations and the accompanying analysis to provide a quality check, provides leadership in developing analytical procedures, and arranges for analytical research and development that serves as an input into analysis for future rulemakings. The head of the central economics office also typically has some degree of sign-off authority on a regulation or its associated economic analysis.

In effect, many agencies try to reduce the disadvantages of divisional organization by becoming hybrid organizations, which means including economists in both the program office and a central office that reviews regulations. A hybrid organization is not perfect, however, because economics staff in program offices can still be marginalized or face career disincentives for communicating with the central economics office when they see shortcomings in the program office’s analysis.

ACUS issued its multi-part recommendation based on these findings. Its recommendation consists of five actions agencies can take to assess and improve their organization of economics analysts.

First, and most fundamentally, ACUS said that agencies that conduct economic analysis to inform regulatory decisions should consider whether their existing organizational structure for economists facilitates the production of objective, consistent, and high-quality analysis.

Second, the recommendation urges agencies to consider a list of the strengths and weaknesses of each organizational structure when assessing how the current organizational structure affects the quality of analysis and the flow of that information to decision-makers.

Third, ACUS urges agencies that are starting up new economic analysis units or restructuring their existing economic analysis functions to consider the same factors.

Fourth, the recommendation lists the primary strategies that agencies can employ to mitigate the disadvantages of each organizational structure.

Finally, ACUS’s recommendation highlights three practices that can be helpful regardless of organizational form:

  • Develop and publish guidance clarifying that economists should be involved in regulatory development before major decisions about the regulation are made;

  • Involve economists in the development of the agency’s regulatory plans and regulatory budgets; and

  • Ensure that the agency’s regulatory policy officers or similar officials collaborate with the agency’s economists to develop relevant analytical methods and offer training and other assistance in economic analysis to others in the agency.

If agencies take the ACUS recommendation to heart, they can improve the economic analysis their staffs produce. Ultimately, adopting this recommendation should lead to higher quality and more efficient government regulation.