The Empty Call for Benefit-Cost Analysis in Financial Regulation

The call for benefit-cost analysis in financial regulation is a category mistake that misunderstands the origins and utility of benefit-cost analysis as a guide to administrative rulemaking. BCA has its core metaphor an omniscient social planner who can calculate costs and benefits from a “natural” system that generates prices (cost and benefits) that do not change (or change much) no matter what the central planner does. For example, the toxicity of chemicals, the health hazards of emissions, the statistical value of life — these do not change in response to health and safety regulation. For the financial sector, by contrast, the system that generates costs and benefits is “constructed” by financial regulation itself and by the subsequent processes of adaptation and regulatory arbitrage. An important new rule will change the system beyond our calculative powers. Instead of a weighing of costs and benefits, financial regulation necessarily is based on a series of trade-offs of normatively-derived values, which may entail principles of pragmatic design