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:
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.
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Rena Steinzor | March 31, 2009
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 […]
Yee Huang | March 30, 2009
Rivers, lakes, and other water bodies across the country – including those that provide our drinking water – are contaminated with an eclectic cocktail of pharmaceuticals, fertilizers, and nutrients. Genetic mutations thought to exist only in the realm of science fiction are now readily observed in fish and other aquatic species. Overall, the EPA estimates […]
Rena Steinzor | March 27, 2009
Dangerous consumer products just can’t seem to stay out of the news lately. The newest revelations are on drywall imported from China. Time reports the horrifying story of a 67-year-old dance teacher named Danie Beck whose two-story townhouse was lined with Chinese drywall. Beck smelled horrific odors shortly after moving in, and then began experiencing […]
James Goodwin | March 26, 2009
More than 100 groups and individuals have accepted the invitation from the Office of Management and Budget (OMB) to comment on the new Executive Order on Regulatory Review that the Obama Administration is currently considering. The extended submission deadline is March 31. So far, the comments reflect a strikingly wide dividing line between regulatory opponents, […]
Matthew Freeman | March 25, 2009
Late last week, the EPA sent over to the White House a preliminary “finding” that greenhouse gas emissions are a threat to public health, and therefore subject to regulation under the Clean Air Act. It’s a simple conclusion, not hard to justify in terms of the science or the statute. But it’s momentous, in its […]
Ben Somberg | March 24, 2009
CPR President Rena Steinzor and Member Scholar Wendy Wagner authored an op-ed in Monday’s Austin American-Statesman and Cleveland’s Plain Dealer with recommendations for President Obama’s initiative for “science integrity.” On March 9, the President had instructed John Holdren, the Director of the White House Office of Science and Technology Policy (OSTP), to develop a plan to achieve […]
Holly Doremus | March 23, 2009
This item is cross-posted by permission from Legal Planet. Demonstrating once again the importance of presidential elections and appointments, the 9th Circuit has upheld the National Marine Fisheries Service’s policy on considering hatchery fish in listing Pacific salmonids. (Hat tip: ESA blawg.) Hatchery fish can be a boon or a bane to salmon conservation. Because […]
Matt Shudtz | March 20, 2009
In his appearance on Jay Leno’s show last night, President Obama argued (video, transcript) for financial regulations by making a comparison between credit cards, mortgages, and toasters: “When you buy a toaster, if it explodes in your face there’s a law that says your toasters need to be safe. But when you get a credit […]
Rena Steinzor | March 20, 2009
The financial cataclysm gripping the country is often (and rightly) blamed on a lax system of public and private oversight of financial institutions. On the private side, investors trusted huge auditing companies like Arthur Anderson to rate multinational corporations for fiscal soundness. Meanwhile, Arthur Anderson also took handsome fees from the same corporations to conduct […]