New Web Article Exposes the Pseudoscience of Cost-Benefit Analysis

James Goodwin

Oct. 29, 2020

This week, I’m posting a new web article documenting the arbitrariness and subjectivity that cost-benefit analysis injects into regulatory decision-making, the latest installment in CPR’s Beyond 12866 initiative. Specifically, the piece explains how cost-benefit analysis deploys a wide variety of methodological techniques that can be clumsy, unscientific, ethically dubious, and, too often, downright absurd. As a result, the “information” that cost-benefit analysis generates is so lacking in credibility and rigor that it is arguably worse than useless. In many cases, agency decision-makers would be better off if the analysis had never been performed at all.

It is particularly important to understand the inescapable subjectivity and irrationality of cost-benefit analysis, since defenders of the methodology like to claim that it is necessary to ensure that objectivity and rationality guide regulatory decision-making. The web article offers several recent case studies unequivocally demonstrating how cost-benefit analysis consistently fails in serving this purpose, however. They include the Environmental Protection Agency’s “higher IQ penalty” for protecting children’s brains from drinking water poisoned with lead and the Department of Justice’s horrific attempt to reduce the prevention of prison rape to dollars-and-cents terms.

The article draws a straight line between the pseudoscience of cost-benefit analysis as practiced to the methodology’s controversial theoretical foundation in welfare economics. For the analysis to work, practitioners must convert to monetary terms as many regulatory impacts as they can. This imperative in turn leads the practice to stray well beyond the boundaries of common sense and broadly shared ethical commitments.

But does it have to be this way? After all, as the web article notes, there are any number of alternative approaches to regulatory analysis that provide useful information to decision-makers while steering clear of the risible failings of the “monetize everything” version of cost-benefit analysis.

The good news is that it is possible to restore scientific integrity and methodological rigor to regulatory analysis. I close the article by laying out a game plan for accomplishing just that. In particular, I urge progressive advocates to join together to call for the repeal of Executive Order 12866 and fight for a new executive order that advances a progressive vision of regulation. Among other things, such an order should bar the practice of the monetize-everything version of cost-benefit analysis and instead direct agencies to use the context-specific methods specified in their authorizing statutes for considering costs and benefits.

In addition, the web article urges a future White House Office of Information and Regulatory Affairs (OIRA) administrator to change the anti-regulatory culture that now prevails there. One important step to take in this regard is to diversify the economist-heavy OIRA staff by hiring individuals with expertise in other disciplines, such as sociology, public health, law, environmental sciences, and communications.

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