Dodd-Frank Regulators, Cost-Benefit Analysis, and Agency Capture

Abstract

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) has raised the stakes for financial regulation by requiring more than twenty federal agencies to promulgate nearly 400 new rules. Scholars, regulated entities, Congress, courts, and the agencies themselves have all recognized — even before Dodd-Frank — the lack of rigorous cost-benefit analysis in the context of financial rulemaking. The D.C. Circuit has struck down several financial regulations because of inadequate cost-benefit analysis, with three more challenges to be decided this summer. Members of Congress have introduced legislation to address this problem, including a call for the President to intervene to require more exacting economic analysis. Regulated entities and investor protection groups are vigorously debating whether (and how) financial regulators should engage in cost-benefit analysis, as are a variety of policymakers, academics, and commentators. Absent from these debates, however, is a serious discussion of the importance of cost-benefit analysis in promoting good governance and democratic accountability. This Essay seeks to fill that void. The lack of attention to accountability is particularly troubling in the Dodd-Frank context, where most regulators are independent agencies and thus less democratically accountable via presidential oversight. In particular, independent agencies are not required to submit proposed rules and accompanying economic analyses for presidential review. Nor are their high-ranking officials subject to plenary presidential removal authority. Without another means of accountability — e.g., a robust cost-benefit analysis embedded in notice-and-comment rulemaking — independent agencies are more vulnerable to agency capture. This Essay argues that Dodd-Frank regulators should consider more seriously the democratic accountability concerns at play when regulating the financial markets. And those who regulate the regulators (via statutory command, executive order, or judicial review) should pay more attention to the good governance rationales for cost-benefit analysis when deciding whether and how to encourage Dodd-Frank regulators to engage in more rigorous and transparent economic analysis.