Still Your Grandma’s Cost-Benefit Analysis: Well-meaning Effort by Resources for the Future Falls Short of the Mark

Two years ago, a pair of well-meaning economists, Richard Morgenstern and Winston Harrington, who work at the moderate think tank Resources for the Future (RFF) got a large grant from the Smith Richardson Foundation to convene a group of well-credentialed academics to consider how to improve “cost-benefit analysis” (CBA). Unfortunately, their long-awaited report, released at a briefing today is a mouse that tries to roar, but doesn’t quite. The reforms proposed in the final chapter – and that are never endorsed by the report’s contributing experts – are your grandma’s version of cost-benefit analysis. Rather than presenting bold ideas that might somehow have transformed the cost-benefit methodology into something that, if adopted, would not hamper – and eventually embarrass – the Obama Administration, it instead offers up only modest tweaks.

Cost-benefit analysis, or “CBA,” is a controversial method of regulatory analysis invented by economists, and it relies on the belief that it is possible and reasonable to translate every “commodity”—including life, health, and nature – into money. Notice that I said “translate into money” rather than “reflect market realities in money.” As the recent economic meltdown has taught us, whatever sage and superior wisdom the economists claim to possess in comparison to the rest of us, their discipline is as much an art as a science, and is subject to extreme mistakes, even though cost-benefit analyses are expressed in numbers down to the decimal point.

CBA takes the costs of a regulation—how many dollars companies estimate they will have to pay to clean up their pollution—and weighs that amount against the benefits that the regulation will achieve—fewer fatal cancer cases, children with impaired IQs, destruction of ecosystems. The catch is that these benefits are also translated into dollars. That requires some uncomfortable conversions. The going rate for a single human life is about $6.1 million, and the going rate for an IQ point is $8,800. The result of a traditional cost-benefit analysis is an apparently precise—and deeply misleading—set of numbers that purport to determine whether it is worth the money industry would spend to save the lives of the bystanders who are harmed by their pollution.

Rivers of ink, entire forests in the Northwest, and a significant, if virtual, cul de sac in the worldwide web have been devoted to debates over the ethics and wisdom of this approach. Economists are irate that law professors like us condemn it on such squishy grounds as the ethics of monetizing the value of a life, an IQ point, an illness, or a broken limb. The great promise of the RFF project was its method of analyzing the details of three prominent, real-life cost-benefit analyses for the purpose of figuring out how to save the methodology from itself, because, as the editors cheerfully announce at the outset, “cost-benefit analysis is here to stay.” They admit that “cost-benefit advocates, both within and outside government and academia, have been content to expand the methods … largely ignoring the opponents.” RFF, on the other hand, was going to get the two sides talking to each other, in order to find a middle ground.

The three case studies involve botched efforts by the Bush Administration to characterize the costs and benefits of preventing the destruction of 3.4 billion fish and shellfish annually by cooling water intakes at power and manufacturing plants across the country, reducing mercury pollution from coal-fired power plants, and controlling nitrogen oxide and sulfur dioxide emissions from 3,000 power plants on the eastern side of the country. Three of the authors, Catherine O’Neill, Wendy Wagner, and Douglas Kysar, are CPR Member Scholars. Here is a sampling of their findings:

• Cooling Water Intakes. The problem addressed by this rule is that power plants and other industrial facilities need to manage excess heat generated during their production processes by sucking up as much as 50 million gallons of water per day per plant from nearby lakes and rivers. As the water enters the plant, fish and shellfish are “impaled” or “entrained” against the cooling water intake structure, suffering exhaustion, starvation, asphyxiation, and de-scaling. EPA’s final rule, dealing with existing facilities, as opposed to new ones, would achieve only a 30-59 percent reduction in the destruction of fish and shellfish, which is in turn justified on the basis that relatively few of these fish would be caught and eaten by human beings. The problem with that calculation is that it ignores the long-term impact of killing so many of a fish species that the fish disappears forever, an outcome that will be irreversible by the time our children pick up their fishing rods. The Supreme Court is now considering whether EPA has any legal authority to conduct and depend on such tortured analyses, which the economists say must be undertaken regardless of what the statute says.
• Mercury. The problem addressed by this rule is that as many as 15.7 percent of women of childbearing age in the United States have mercury levels in their bloodstreams that could cause neurological damage to their children. Native American populations are affected quite severely—one study showed that the average child born to the Leech Lake Band of Chippewas in the Great Lakes, where mercury pollution collects, could suffer IQ losses as high as 6.2 to 7.1 points, more than enough to push a child over the borderline between able to support herself and mentally disabled. Yet EPA’s cost-benefit analysis for its extraordinarily weak rule (since overturned by the courts) controlling mercury emissions from power plants washed these figures out by averaging in the effects on the total population of American children. When the Native American numbers are thrown into this pot, the damage to their children appears negligibly small.
• Clean Air Interstate Rule. The problem addressed by this rule is that emissions from upwind states like Ohio, where many outmoded “big dirty” power plants are located, flow downwind to states like New Jersey, Maryland, and Delaware, worsening their air pollution. The cost-benefit analysis conducted for the rule, which in this case had only a marginal impact on how tough the rule turned out to be, completely ignored the effects of sulfur dioxide and nitrogen oxide emissions on crops, forests, water supplies, and fisheries because those benefits are too hard to quantify in money. (Perhaps the economists on this rule should have talked to their colleagues working on the cooling water intake rule, who did not seem to have much trouble putting a monetary value on the unforeseen consequences of wiping out entire aquatic species.)

Despite these severe problems in how cost-benefit analysis has worked in practice, the final chapter in the report contains only tepid recommendations for its reform. Perhaps the most significant one is that EPA increase the time and effort it spends on conducting such analyses by, for example, sending them to its Scientific Advisory Board for peer review and establishing “baselines” for comparisons, whether or not such baselines previously exist (e.g., if ozone causes asthma attacks, we must find out how many asthma attacks there were before there was any ozone). Or, in other words, the way to cure the manifest problems of forcing economists to develop numbers that are wrong is to get them to draw scientists into this myopic and time-consuming exercise. And the solution to the very serious problem of delaying decisionmaking by endless crunching of numbers is to require more crunching of numbers.

Another significant proposal is that agencies should express monetized health benefits in terms of “detailed descriptions of expected consequences or natural units.” But this added verbiage would not replace the old practice of reducing items like lost IQ points to money. Rather, the new approach would, presumably, explain what an IQ point is, and then would value it at $8,800.

There’s one other problem with Executive Branch reliance on cost-benefit analysis that goes largely unaddressed in the RFF report: it’s usually not what the law calls for. The Office of Management and Budget can conduct cost-benefit, or press regulatory agencies into conducting it, if they so choose. But in the vast majority of statutory provisions from which spring the nation’s health, safety, and environmental regulations, Congress specifies that some other method of regulatory analysis should drive regulatory decisions. In only 2 of the 31 statutory provisions does Congress direct that cost-benefit analysis be used; in 6 provisions Congress permits it; in the remaining 23 Congress explicitly mandates the use of some other method of analysis. (See CPR’s chart, laying it all out.)

It’s no surprise that Resources for the Future, an organization founded by and still dominated by economists, would craft a final report that calls for economists to play a dominant role in regulatory decisionmaking. What is surprising is that the report would ask lawyers who are admitted skeptics of the methodology to critique it so effectively and would then, in effect, ignore what the critics said. The result is a series of “reforms” considerably to the right of another analysis of the same topic written by New York University Law School Dean Richard Revesz and Michael Livermore, Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health, and CPR’s own work on the subject.

The upshot is that a “rational” person can accept that cost-benefit analysis may well be here to stay without whistling past the graveyard of the very severe harm it causes for real people. We can only hope that the Obama Administration understands how harmful and embarrassing business as usual in this area could become.