Traditional cost-benefit analysis is sometimes equated with “wealth maximization,” but the equation is a mischaracterization: traditional cost-benefit analysis’s “sum of compensating variations” test ignores the deadweight loss of redistribution, even though the deadweight loss of redistribution reduces society’s total wealth. Thus, the traditional test measures a regulation’s effect on a quantity other than wealth—what we might call “schmealth” (i.e., wealth minus the deadweight loss of redistribution).
The distinction between the traditional test and wealth maximization takes on renewed relevance in light of the Biden administration’s November 2023 revision to Circular A-4, the framework document for regulatory analysis across federal executive agencies. The new framework encourages (but does not require) agencies to account for distributional benefits in their regulatory analyses—an approach that is intended to capture a regulation’s effect on welfare. But much like the traditional “sum of compensating variations” test, the new framework ignores the deadweight loss of redistribution, even though the deadweight loss of redistribution reduces social welfare. Thus, the new framework measures a regulation’s effect on a quantity other than welfare—what we might call “schmelfare” (i.e., welfare minus the deadweight loss of redistribution).
This Article introduces the distinction among wealth, “schmealth,” welfare, and “schmelfare” with the goal of elucidating the reasons why regulatory policymakers might choose one of these standards over the others. “Schmealth” and welfare are symmetrical standards: they treat the costs and benefits of redistribution equally—ignoring both in the former and accounting for both in the latter. Wealth and “schmelfare” are asymmetrical standards: they account for either redistribution’s costs or its benefits but not for both. The Article articulates the normative case for symmetry—and thus for either the traditional “schmealth” standard or a welfare standard. It goes on to show how the choice between “schmealth” and welfare depends upon political conditions and political values, including considerations of electoral accountability and the separation of powers. Ultimately, the conflict between traditional cost-benefit analysis and welfare analysis turns less on different understandings of microeconomics than on different visions of the macro-structure of public law.
