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Also from James Goodwin: Restoring Scientific Integrity to the Regulatory System Means Overhauling Cost-Benefit Cost-Benefit Analysis Is RacistOverview: Beyond 12866: A Progressive Plan for Reforming the Regulatory System |
In cost-benefit analysis, small government ideologues and corporate interests have fashioned a powerful weapon for attacking regulatory safeguards and undercutting landmark laws. Much of that power derives from the elaborate mythology that its proponents have woven around the methodology over the course of the past four decades. Depending on how the story is told, cost-benefit analysis either serves as a modest, “neutral” tool for evaluating the quality of regulations or, more ambitiously still, it provides the sole objective means for revealing the “best” regulatory solutions. This framing has the salutary effect of casting as sloppy, naïve, or even dangerously irrational those who might have the audacity to prefer laws written to protect health, safety, and the environment to actually be protective.
For its supporters, the real genius of the cost-benefit analysis myth is that it distracts from the fact that the methodology is in fact neither neutral nor objective. On the contrary, it surreptitiously privileges certain subjective values (i.e., a preference for corporate profit over health and safety) to the exclusion of others that might favor stronger safeguards (e.g., fairness and equity). And, while its methodologies are malleable enough to make it an effective advocacy tool, cost-benefit analysis nevertheless remains intrinsically biased against protective regulations, leaving defenders of stronger safeguards waging one uphill battle after another. What’s more, far from being rigorous and systematic, those methodologies are shockingly unscientific, arbitrary, and at times even bizarre. Consequently, the results that cost-benefit analysis produces are typically unmoored from reality and completely devoid of the credibility and legitimacy its supporters have sought to cultivate for it.
A ‘They,’ Not an ‘It’
One reason supporters have found it so easy to muddy the debate over cost-benefit analysis is that the term connotes several different but conceptually distinct analytical approaches. Each has different theoretical foundations, practical weaknesses, and, ultimately, purposes they are fit to serve. The failure to observe these distinctions – or, to be more accurate, the strategic disregard of them – has put cost-benefit analysis supporters in the enviable position of defending what amounts to a nearly omnipotent phantom.
One common conceptualization of cost-benefit analysis is that of Benjamin Franklin’s “prudential algebra.” This approach involves drawing a line down the middle of the piece of paper and listing the pros and cons of a given decision in the resulting two columns. Simple and elegant but decidedly unsophisticated, the modest purpose of this exercise is to help the decision-maker organize her thoughts in an intuitive and visually compelling manner that enables her to make a gut determination about whether or not to proceed. This approach only works for binary decisions (e.g., “yes” vs. “no” or “red” vs. “blue”). Also, there is no pretense that it produces anything like an “optimal” decision or reflects “comprehensive” knowledge of the world. Instead, good enough is good enough. Prudential algebra is often fairly equated with “common sense,” and one would be hard-pressed to find anyone who would regard the approach as “controversial.”
In stark contrast to Franklin’s prudential algebra is the conceptualization of cost-benefit analysis favored by economists. Grounded in the conceit that a “good” society is one that myopically focuses on maximizing the size of its economy, the economists’ pseudoscientific cost-benefit analysis aspires to promote regulatory decision-making that achieves “perfect” economic efficiency. In the parlance of economists, it seeks out “optimal” regulatory decisions by identifying the point at which the marginal costs of a given level of regulation are equal to its marginal benefits.
At its worst, cost-benefit analysis allows polluters to induce a certain number of asthma attacks in a certain number of children, provided the polluter can make lots of money doing it. At its best, cost-benefit analysis may limit the cases of pollution-induced asthma to a number that somehow squares with the costs of preventing some of that pollution. |
The theoretical foundation of the economists’ pseudoscientific cost-benefit analysis raises all kinds of serious ethical concerns. For one thing, growing the economic pie was certainly not the only goal the Founders had in mind when they set out “to form a more perfect Union.” For another, this supposed pursuit of economic efficiency ignores something that is vital to all Americans: The issue of distributional fairness that arises when costs and benefits are borne by different actors. At its worst, cost-benefit analysis allows polluters to induce a certain number of asthma attacks in a certain number of children, provided the polluter can make lots of money doing it. At its best, cost-benefit analysis may limit the cases of pollution-induced asthma to a number that somehow squares with the costs of preventing some of that pollution. In neither case are the kids with asthma or their parents consulted or their interest in health seriously weighed. Instead, someone first cooks up a dollar-cost for an asthma attack that ignores parents' preference for health, then multiplies by the number of attacks, and finally compares the product to the cost polluters would pay to clean up their mess. The result is considered an economically optimal regulation, which must be cold comfort to parents pacing an emergency room waiting area knowing that their children’s health has been sacrificed to achieve an economically optimal number of asthma attacks.
Beyond these kinds of ethical outrages, the theoretical grounding for cost-benefit analysis also sets up the methodology for all kinds of intractable practical problems as well. Of course, identifying such “optimal” solutions to a problem assumes the kind of comprehensive knowledge that could never be achieved in reality. It also requires converting every element of the analysis into a common metric – namely, dollars and cents – to allow for direct comparison. For many regulations, that means putting a monetary value on things are not sold in the marketplace, such as protecting human lives or preventing an endangered species from going extinct. Cost-benefit analyses practitioners nevertheless try to put a price on these benefits, resorting to techniques that could hardly be described as scientific, rigorous, or credible. These include divining the price of a human life by extrapolating from the slight increases in pay that some workers earn for doing dangerous jobs, and using arbitrary public surveys to assign a monetary value to an acre of undamaged wetland.
Taken together, this version of cost-benefit analysis looks vastly different from Franklin’s prudential algebra. Rather than applying to an inherently binary decision, it purports to select from among literally an infinite number of possibilities. In so doing, it pretends to bring to bear infinite knowledge to identify the perfect solution. Cast in these terms, this doesn’t strike the same notes of “common sense” or relative harmlessness that Franklin’s prudential algebra does. Rather, as a decision-making aid, it sounds fundamentally misguided and worse than useless.
Opponents of regulation, of course, prefer the economists’ version of cost-benefit analysis. The practical difficulty involved in performing the analysis alone serves their needs by endlessly delaying new rules and wasting scarce agency resources. More importantly, though, it also discourages agencies from pursuing stronger regulations and affirmatively pushes them to adopt weaker ones.
Yet, when challenged on the obvious theoretical and practical flaws of the economists’ version of cost-benefit analysis, its supporters quickly, and predictably, move to portray the methodology as indistinguishable from Franklin’s prudential algebra. All they are doing, they claim, is trying to ensure that regulatory decisions do more good than harm. Who could be against that? But later, when it comes time to challenge the rule in the courts or with relevant policy officials, opponents of regulatory safeguards just as quickly – and just as predictably – return to cost-benefit analysis as their weapon of choice. In these venues, they put forward whatever arguments they can contrive that purportedly demonstrate how the particular safeguard at issue fails to achieve the Holy Grail of economic optimality. Unfortunately, all too often, these venues have proven themselves to be sympathetic to such arguments.
The Executive Order-ification of Cost-Benefit Analysis
Considering the privileged position that cost-benefit analysis has come to enjoy in the regulatory universe, it rests on a legal foundation that is remarkably precarious. No act of Congress or binding law compels its use. Rather, it is the outgrowth of an anti-regulatory executive order issued by America’s first anti-regulatory president.
The order charged the White House Office of Information and Regulatory Affairs (OIRA) with supervising agency development of new rules and the supporting analyses. In practice, that meant agencies had to submit copies of their draft proposed and final rules along with the accompanying cost-benefit analyses for a closed-door review by OIRA’s cadre of political operatives and economists. |
Issued early in President Ronald Reagan’s first term, Executive Order 12291 directed executive branch agencies to perform cost-benefit analyses for all their biggest rules and to base their decision-making on these analyses “to the extent permitted by law.” More specifically, the order directed agencies to estimate in “monetary terms” the costs and benefits of their draft regulations and to use those estimates to make a “determination of the potential net benefits.” It also sought to ban agencies from issuing any new rules for which the benefits did not “outweigh” the costs, and instead directed agencies to design their regulations to “maximize the net benefits to society.” In other words, the order sought to replace the time-tested process for how agencies had been making regulatory decisions – following the directives set forth in statutes like the Clean Air Act, for example – with the economists’ version of cost-benefit analysis.
To ensure agency compliance with these cost-benefit analysis requirements, the order charged the White House Office of Information and Regulatory Affairs (OIRA) with supervising agency development of new rules and the supporting analyses. In practice, that meant agencies had to submit copies of their draft proposed and final rules along with the accompanying cost-benefit analyses for a closed-door review by OIRA’s cadre of political operatives and economists. The agency couldn’t proceed with the rulemaking until the drafts and supporting analyses received OIRA approval. This gatekeeping role empowered OIRA staff to demand changes to agencies’ rules and cost-benefit analyses, and indeed to even block them altogether.
Executive Order 12291 generated significant controversy and was eventually repealed by President Bill Clinton. Significantly, though, Executive Order 12866, which President Clinton issued as a replacement, retained much of the earlier order’s framework, including its mandates for OIRA-centralized review and cost-benefit analysis procedures that applied to executive branch agencies’ biggest rules. One notable difference was that the Clinton order directed agencies to show that the benefits merely “justify” their costs, rather than requiring that benefits “outweigh” costs. While later executive orders have made some modest technical changes, the cost-benefit analysis framework established in Executive Order 12866 still remains in effect today. At least on paper.
Cost-Benefit Analysis in the Trump Era
The arrival of the Trump administration made it clear that as powerful a tool as the economists’ cost-benefit analysis can be for advancing anti-regulatory goals, even it has its limits. To support their aggressive assault on safeguards, the Trump administration’s agencies have desperately sought to show that its individual rollbacks can pass a cost-benefit analysis test. But, finding that the extreme nature of these policies exceed even the standard anti-regulatory tricks of cost-benefit analysis, agencies have resorted to analyses that are ham-fisted, riddled with errors, or dependent upon leaps of logic that defy all human reason and experience. Even then, there have been a few rollbacks for which the rulemaking agency was still unable to reverse-engineer an analysis that produced a finding of net benefits.
One such bit of thumb-on-scale methodology is at work in the administration’s push to exclude from consideration so-called co-benefits of safeguards. The Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standard, issued during the Obama administration, is a prime example. When power plants are forced to reduce mercury emissions, it turns out they also reduce the amount of fine particulate matter they emit, a significant source of heart and lung disease, saving both lives and money. That’s undeniably a benefit of the rule. But in their zeal to leave polluters free to pollute, the Trump administration would bar the inclusion of such benefits on the grounds that reducing particulate matter emissions wasn’t the objective of the provision of the law under which the EPA was regulating. The Trump argument makes no attempt to square that approach with the quest for economic “efficiency” that undergirds the entire cost-benefit enterprise. How could it? Instead, the EPA simply intends to blot out massive benefits with a tiny bottle of white-out.
Whatever trust one may have held towards the objectivity and credibility of cost-benefit analysis before the Trump administration, it should have been all but dispelled by now. The last few years have revealed once and for all what critics of the methodology have long asserted: Cost-benefit analysis is a political tool of arithmetic advocacy, pure and simple. Some are just more artful in wielding it than others. |
Whatever trust one may have held towards the objectivity and credibility of cost-benefit analysis before the Trump administration, it should have been all but dispelled by now. The last few years have revealed once and for all what critics of the methodology have long asserted: Cost-benefit analysis is a political tool of arithmetic advocacy, pure and simple. Some are just more artful in wielding it than others.
In retrospect, such flagrant abuses of cost-benefit analysis shouldn’t have been surprising. One of President Trump’s first official acts was to issue Executive Order 13771, which established the now-infamous “2-out, 1-in” cap on new regulations, as well as a strict regulatory budgeting system that requires executive branch agencies to ensure that the incremental cost increases from new regulations are at least fully offset by the incremental cost savings achieved from repealing the existing regulations. The inevitable consequence of this cost-only focus is that cost-benefit analysis is rendered irrelevant by definition. Any new regulation – no matter how large the net benefits it produces – is prohibited unless and until the issuing agency repeals at least two existing regulation and ensures the resulting cost savings at least fully offset the new costs of the new regulation. In this way, the pretense of rational regulatory decision-making that cost-benefit analysis sought to promote has become yet another victim of the Trump administration’s aggressive anti-safeguards agenda.
There is an irony here, of course. When it comes time to write the epitaph on the regulatory policy of the Trump presidency, he won’t just go down as the most anti-regulatory in history; he will also be remembered as the most anti-cost-benefit analysis, as well.
Restoring Integrity to Regulatory Analysis
The economists’ pseudoscientific version of cost-benefit analysis that has carried such sway in the U.S. regulatory system over the last 40-plus years should be more properly regarded as an aberration or an unfortunate detour. Progressives can and should work to get the practice of regulatory analysis back on the proper track, one that better accords with constitutional principles, legal requirements, and scientific integrity.
As a first step, we need to recognize – or re-recognize – that Congress has already determined the proper approach for weighing the pros and cons of individual regulatory decisions. They are right there in the statutes themselves, in plain sight, if ignored by the anti-regulation crowd. It is unnecessary to create a new approach out of whole cloth, and it is self-defeating for progressives to uncritically follow an approach that was specifically invented to block the kind of protective safeguards we support.
Rejecting cost-benefit analysis doesn’t mean turning a blind eye to the effects of regulations, as the methodology’s supporters have misleadingly claimed. To the contrary, it means paying careful attention to the specific instructions that Congress provided to agencies in the statutes that it adopted. Tellingly, in drafting these statutes, Congress has frequently considered but rarely ever adopted the economists’ cost-benefit analysis as the relevant decision-making standard. Instead, these statutes have consistently included standards that specifically prohibit the use of this version of cost-benefit analysis or for which the methodology is completely irrelevant. These include the broad range of technology-based standards included in many environmental, public, health, and safety laws. Each is designed to prioritize public protections, while still providing a reliable check on regulatory costs that is tied to the availability of certain technologies and the economic position of affected industries. Considering that members of Congress are – at least in theory – democratically accountable while OIRA economists and industry lobbyists are unquestionably not, the usurpation of those statutory standards by economists’ cost-benefit analysis represents a direct threat to both our constitutional system of governance and the democratic legitimacy of our regulatory system. Moreover, while the president in whose White House OIRA’s economists serve is democratically accountable, he or she is not empowered to ignore statutory mandates. Laws mean what they say, and presidents are bound by them.
Improving regulatory analysis should thus begin with a focus on ensuring meaningful attention to the decision-making factors and criteria embedded in statutory standards and effectuating the values and policy goals they represent. OIRA can support this effort by affirmatively assisting agencies to develop internal policies and practices to strengthen and systematize such standard-focused analyses. One focus of this effort should be improving communications with the general public regarding how these analyses are conducted and how final decisions were affected by them. Likewise, agencies should also explore how they can better tailor their outreach to the public – particularly among marginalized communities – to ensure they are receiving the input they need to properly account for regulatory costs and benefits in a manner that is consistent with their authorizing statutes.
Progressives should also demand that regulatory analysis be cleansed of its accumulated methodological irregularities and other evaluative techniques that lack a firm scientific grounding. These might include the arbitrary disregard or discounting of “co-benefits,” the attempt to assign monetary values to regulatory impacts that are not already monetized in the marketplace, and the use of inappropriately large discount rates for measuring future regulatory impacts.
Finally, progressives should urge that agencies reorient their analyses so that they better account for important but easy-to-overlook values that are central to the American identity, including justice, fairness, and equity. In light of the growing public concern for economic inequality and systemic racism brought on by George Floyd protests and the Black Lives Matter movement, agencies should strive to use these analyses to better understand the distributive impacts, both good and bad, that their regulations can have.
Learn More About Cost-Benefit Analysis and the Need for a Progressive Overhaul of the Regulatory System
CPR Member Scholars and staff have researched and written extensively about cost-benefit analysis, its long reach, and its many abuses and misuses. Read the most recent posts here. You may also want to read their reports and op-eds on cost-benefit.
Visit our clearinghouse page on cost-benefit analysis, OIRA, and the need for reform of the regulatory system.
