This post was originally published on Legal Planet. Reprinted with permission.
Cost-benefit analysis is required for all major regulations. It's also highly controversial, as well as being a mysterious procedure unless you're an economist. These FAQs will tell you what you need to know about how cost-benefit analysis (CBA) fits into the regulatory process, how it works, and why it's controversial.
Q: Let's start with a basic question. Exactly what is cost-benefit analysis?
A: The term cost-benefit analysis is sometimes used to mean any comparison of pros and cons, which is something we all do every day in ordinary life. For present purposes, though, it means a very rigorous way of balancing pros and cons, using economic analysis to quantify the costs and benefits of an action. Basically, everything gets converted into dollar equivalents in this process.
Q: Why do agencies conduct cost-benefit analyses?
A: A few laws explicitly require cost-benefit analysis or at least something along those lines. Those laws are a minority. However, since Ronald Reagan's first days in office, presidents have ordered agencies to make cost-benefit analysis for major regulations a major part of their decisions. There are a few laws that actually prohibit agencies from considering costs, but agencies do cost-benefit analysis when implementing those laws for informational purposes.
Q: What role does the White House play in the process?
A: There's a White House agency called the Office of Information and Regulatory Affairs (OIRA) that reviews major regulations at least twice — before the regulation is even proposed and again before the final regulation is issued. (Two small asides: The agency is part of the "Executive Office of the President," but it's actually next door to the White House. Also, OIRA is pronounced "O-I-Ra.") The head of OIRA is often called the regulatory czar. If OIRA wants to kill or modify a regulation, the agency head can appeal to the president or the White House chief of staff, but that's a card that can't be played very often.
Q: How does an agency determine the cost of a regulation?
A: Normally, the agency focuses on the cost for industry to comply with the regulation. In environmental cases, that's often an engineering issue — what steps will the company take to comply, and how much will it cost? Another cost may involve foregone use of resources; for instance, lost profits from logging or mining that can't take place. In principle, less direct regulatory impacts can also be counted, but they're often difficult to assess.
Q: What counts as a regulatory benefit?
A: Historically, OIRA has told agencies to count everything they can quantify. This has become controversial recently. A regulation may have side benefits that don't directly relate to the purpose of the regulation. For instance, EPA has required pollution controls that dramatically slash emissions of carbon monoxide from vehicles. It turns out that one major benefit is that a lot fewer people commit suicide by gassing themselves in their cars. (Some simply use another method, but apparently some simply don't bother.) Economists, as well as OIRA, would count that as a benefit of the regulation. Conservatives argue that these incidental benefits (often called co-benefits) shouldn't count.
Q: How do agencies determine the number of lives saved or health benefits of regulations?
A: This can be very tricky. We may know that air pollution helps cause deaths from respiratory conditions, but it's more difficult to estimate the number. That's basically a job for scientists, typically toxicologists or epidemiologists. In some situations, there's a large range of plausible estimates, introducing a lot of uncertainty into the cost-benefit analysis.
Q: How do agencies place a dollar value on reductions in mortality?
A: Economists do this by assigning a monetary amount to each death and multiplying that by the number of deaths. The monetary amount is called the "value of a statistical life." That sounds like they're putting a cash value on a human life. They determine this value by studying employment statistics in occupations with different levels of risk and asking how much you have to pay workers in exchange for a higher level of risk. So you can see that what's really being valued is risk, not the inherent worth of a human life. The answer is in the ballpark of $10 million per life, meaning that it's worth $100,000 to reduce the risk of death by 1 percent.
Q: What about placing a value on an endangered species or a wilderness area?
A: There are several ways of doing this, but the most common is a survey technique called contingent valuation. This basically involves asking people how much they would pay to save the endangered species or wilderness in question. Doing this in a rigorous way is an art. Contingent valuation is now pretty broadly accepted, but some don't believe the answers are that meaningful.
Q: Agencies "discount benefit to present value." What on earth does that mean?
A: I've written several articles about this, so I'm having to really stifle the impulse to go into detail. In general, people seem to prefer to put more weight on effects that are closer in time. They prefer immediate benefits but want to defer costs. Discounting is a technique for quantifying this preference. In a cost-benefit analysis, the amount of weight placed on the future is calibrated by something called the "discount rate." Unfortunately, there's considerable disagreement among economists about choosing the right discount rate. In addition, some people (even economists) think that discounting is morally suspect when harms to future generations are involved.
Q: Is the agency supposed to ignore everything it can't quantify?
A: OIRA says unquantifiable costs should be discussed and given weight. Many people suspect, however, that they get short shrift in decision-making compared with the seemingly precise quantitative results.
Q: Why are conservatives unhappy with cost-benefit analysis?
A: A cynic might say they're unhappy because it turns out a lot of regulations are supported by cost-benefit analysis. To be less cynical, conservatives think that cost-benefit analysis leaves out the human impacts of lost jobs, ignores the loss of individual autonomy caused by regulations, and fails to take into account the cumulative impact of regulations on the economy as a whole.
Q: Why are progressives unhappy with cost-benefit analysis?
A: A cynic might say they're unhappy because it turns out a lot of regulations they like aren't supported by cost-benefit analysis. To be less cynical, progressives think that cost-benefit analysis ignores the inherent value of human life and the environment, leaves out issues of social justice and human dignity, and undervalues the interests of future generations.
Q: So who favors cost-benefit analysis?
A: Probably four main groups, in decreasing order of political importance: (1) Presidents, because it gives them a tool to control agency rulemaking; (2) moderate liberals and conservatives, because they like the idea of objectively balancing costs and benefits; (3) other liberals and conservatives who see it as a way of validating their regulatory preferences; and (4) technocrats, such as economists, policy analysts, and OIRA staff, because it's data-driven and analytic.
Showing 2,821 results
Daniel Farber | October 25, 2021
Cost-benefit analysis is required for all major regulations. It's also highly controversial, as well as being a mysterious procedure unless you're an economist. These FAQs will tell you what you need to know about how cost-benefit analysis (CBA) fits into the regulatory process, how it works, and why it's controversial.
Amy Sinden | October 19, 2021
In the actual work of crafting the regulatory safeguards that protect our environment and health, cost-benefit analysis has been largely ineffectual and irrelevant. Indeed, its ineffectiveness has been so profound as to prompt even its most ardent practitioners and proponents to question whether it has any impact on agency decisions at all. Meanwhile, it plays at best a minor role in the legal standards that actually govern agency decision-making. Despite all this, a certain cost-benefit orthodoxy has become remarkably entrenched in environmental policy circles. Especially in an era when so many progressive ideas are in ascendance, why does the idea of regulatory review based on cost-benefit analysis have such staying power?
James Goodwin | October 14, 2021
Over the last 40 years, the U.S. regulatory system has played an increasingly influential role in redefining our political and economic relationships in fundamentally neoliberal terms. A key but often overlooked institutional force behind this development is the peculiar form of cost-benefit analysis that now predominates in regulatory practice. Building a new regulatory system befitting our vision of a post-neoliberal America requires a formal rejection of prevailing cost-benefit analysis in favor of a radically different approach -- one that invites public participation, permits open and fair contestation of competing values at the heart of policy debates, and recognizes and honors our social interdependencies.
Jorge Roman-Romero, Melissa Lutrell | October 11, 2021
Cost-benefit analysis (CBA) is inherently classist, racist, and ableist. Since these are foundational problems with CBA, and are not simply issues with its implementation, they can never be fixed by mere methodological improvements. Instead, the ongoing modernization of centralized regulatory analyses must focus on "moving beyond" CBA, and not on fixing it or improving it. Thus, in implementing President Biden's memorandum on Modernizing Regulatory Review (the Biden Memorandum), the Office of Management and Budget (OMB) should make explicit that regulatory review no longer requires CBA, even—as will be true in the typical case—when regulatory review does demand economic analysis as part of a holistic, multi-factor regulatory impact analysis.
Robin Kundis Craig | October 1, 2021
Mississippi v. Tennessee is not only the Supreme Court’s first oral argument of the 2021-22 term, but it is also the first time that states have asked the court to weigh in on how they should share an interstate aquifer. The court’s decision could fundamentally restructure interstate groundwater law in the United States for decades -- or the case could be dismissed immediately on the grounds that Mississippi has failed to allege the proper cause of action.
Clarissa Libertelli | September 30, 2021
Stormwater is growing problem in the Chesapeake Bay watershed, creating toxic runoff and flash flooding. The Maryland Department of Environment has the opportunity to protect people, but it hasn't yet.
Lisa Heinzerling | September 30, 2021
President Biden has made climate change and racial justice central themes of his presidency. No doubt with these problems in mind, he has signaled a desire to rethink the process and substance of White House review of agencies' regulatory actions. On his very first day in office, Biden ordered administrative agencies to ensure that this review does not squelch regulatory initiatives nor brush aside "racial justice, environmental stewardship, human dignity, equity, and the interests of future generations." At the same time, however, Biden reaffirmed the "basic principles" of a Clinton-era executive order on White House regulatory review, subjecting agencies' major rules to a cost-benefit test. These twin inclinations -- toward acting boldly on climate change and racial justice, and toward judging regulation using cost-benefit analysis -- are trains racing toward each other on the same track. Two entrenched, perhaps even inherent, features of cost-benefit analysis practically ensure that the benefits of regulatory measures addressing climate change and racial injustice will be diminished and deformed in the process of "valuing" them.
Marcha Chaudry | September 29, 2021
A recent Maryland law requires the state's Commissioner of Labor and Industry, in consultation with its Occupational Safety and Health Advisory Board, to develop and adopt regulations that require employers to protect employees from heat-related illness caused by heat stress. Those standards are due by October 2022. The law also requires the state to hold four public meetings to collect input from residents. This month, the Maryland Occupational Safety and Health Division (MOSH) scheduled those meetings, and I testified at the September 20 session.
Joel A. Mintz | September 23, 2021
Addresses by national leaders to the United Nations General Assembly are often broad expressions of lofty ideals, and President Joe Biden's speech Tuesday fell squarely into that category. It covered an extraordinary panoply of global challenges and policy concerns, including controlling the COVID-19 pandemic, rebuilding and strengthening global alliances and regional initiatives, curbing terrorism, protecting human rights (including the rights of women and workers) and lifting up democracy. Biden also committed the United States to advancing human dignity, combating corruption and seeking peace in areas of conflict around the world.