Break-evens, Justifications and GIPSA

Published on: 09:07AM Sep 19, 2011

Anybody who has ever done a break-even projection on cattle knows how much the assumptions affect the outcome. If you assume corn is cheap and fed cattle will bring $1.50 next spring, you can justify about any price you want to pay for feeder cattle.

That won’t necessarily make your projection right, but if you have an agenda—say you’re an order buyer trying to justify the price you’re asking—you might suggest that a potential buyer assumes just such a scenario.

I fetch the analogy because of testimony at last week’s House of Representatives Committee on Oversight and Government Reform. John D. Graham, dean of the Indiana University School of Public and Environmental Affairs, carried the committee through an example where regulators with the Department of Transportation and Environmental Protection Agency changed enough "assumptions" to justify aggressive new fuel efficiency standards for the auto industry.

You’ll recall that agriculture’s own GIPSA has a controversial regulation languishing somewhere in regulatory limbo awaiting a cost-benefit analysis.

One of the witnesses was the administration’s boss regulator, Cass Sunstein. He said that President Obama is serious about eliminating unnecessary and burdensome regulations. He said Obama’s directive to federal agencies:

  • "requires agencies to consider costs and benefits, to ensure that the benefits justify the costs, and to select the least burdensome alternatives.
  • "requires increased public participation. The order directs agencies to promote an open exchange with state, local, and tribal officials; experts in relevant disciplines; affected stakeholders; and the public in general. Attempting to bring rulemaking into the 21st century, the order requires use of the Internet to promote such an exchange. It also directs agencies to act, even in advance of rulemaking, to seek the views of those who are likely to be affected.
  • "directs agencies to take steps to harmonize, simplify, and coordinate rules. The order emphasizes that some sectors and industries face redundant, inconsistent, or overlapping requirements. In order to reduce costs and to promote simplicity, it calls for greater coordination within and across agencies.
  • "directs agencies to consider flexible approaches that reduce burdens and maintain freedom of choice for the public."
     

Do you want to argue that those are sound goals? I don’t. We all like "flexible" and "freedom of choice" and "least burdensome alternatives." But there is that pesky matter of which assumptions you base all those decisions on.

Graham, who worked at Sunstein’s job in the Bush administration, listed six "concerns" about the way Obama’s group changed assumptions to justify the new standards.

They "assumed" a 3% discount rate instead of the traditional and more defensible 7% discount rate when calculating the present value of annual fuel savings over a vehicle’s life—a move that gives fuel efficiency a much higher value to consumers.

They "assumed" oil prices will certainly rise.

Their "assumptions" deflated the size of the rebound effect (the extra miles driven in fuel-efficient vehicles).

They "assumed" a new category of "social" benefit from tighter mileage standards, a savings of $21 to $45 for each ton of carbon dioxide that is not emitted into the atmosphere due to higher-mileage vehicles.

And their assumptions don’t include "careful consideration" of engineering impacts on vehicle size, performance and safety.

And so we see how administrators with a policy in mind can manipulate assumptions to justify the policy they want.

This is of interest to the cattle industry because that GIPSA rule has been so long hidden from view, awaiting the results of the cost-benefit analysis Congress forced onto USDA. Three independent studies have indicated the costs will far outweigh the benefits. But, of course, those are all based on "assumptions" too.

USDA Secretary Tom Vilsack recently told the National Farmers Union that "we will need your help" when the final rule is announced. NFU is a big supporter of the GIPSA proposal. It makes you wonder what assumptions USDA is working with.