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> | Weighing the Benefits of Regulation |
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< | How Much Do New Policies Really Cost Us? |
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> | -- By EliKeene - 4 May 2015 |
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< | -- By EliKeene - 13 Mar 2015 |
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> | Cost-benefit analysis (CBA) has been the cornerstone of environmental regulatory decision-making since 1981, when President Reagan ordered federal agencies to adopt regulatory impact assessments. While weighing monetary costs and payoffs has become an appealing weapon in the arsenals of both regulators and the regulated, it is also strikingly inadequate in its objectivity and scope. If federal agencies are to develop effective and progressive regulations to meet growing environmental challenges, they should seek to lessen the role of monetary costs in their analyses and reframe regulation as a device for enhancing social welfare. |
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< | The Case Before the Court |
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> | The Need for Efficient Regulation |
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< | On November 25, 2014, the Supreme Court granted cert to hear a challenge to the EPA’s new standards for regulating mercury emissions from power plants (the MATS Standards). In particular, the Court will ask whether the agency’s determination that the regulations were “appropriate and necessary” – as required by the Clean Air Act – should impliedly require the agency to consider costs to industry. |
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> | The theory behind regulatory CBA is simple: when the monetary cost of implementing a regulation exceeds the value of preventing a harm, that regulation’s utility to society decreases. While agencies are accorded some degree of deference on how costly is too costly, the act of weighing costs itself is thought to be essential for two primary reasons. |
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< | While cost-weighing is a daily personal finance task for most of us, at least four Justices appear poised to insist that balancing costs is essential to all government action. This stance is tremendously problematic for law and policy and results in two false conclusions. First, it advances an assumption that we can reduce every policy option into a dollar amount. And second, it leads us to believe that the value of money is entirely objective. |
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> | First, cost weighing is thought to provide a quantitative, rational foundation on which agencies can base their decisions. By this logic, without an understanding of what is to be expended and what is to be gained, a regulation is merely an arbitrary stab in the dark at preventing a harm of unknown magnitude. |
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< | An Obsession with Costs |
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> | Second, cost-benefit analyses are perceived to put a check on the diminishing returns of regulation. To some extent, even those who have challenged the indispensability of CBA recognize this, admitting that it would “make no sense to require [power] plants to spend billions to save one more fish or plankton.” Weighing costs, in this sense, allows agencies to determine the optimal amount of regulation. |
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< | What is unusual about the MATS case is not the Court’s consideration of costs, but the fact that the EPA has stuck to and even prevailed on its position that “cost-effective” and “appropriate” mean two different things. Today, when national debt is soaring, the idea that no policy is worth undertaking unless it saves more money than it costs is stubbornly entrenched in American consciousness. |
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> | Although these arguments in favor of cost-benefit analysis address real concerns about regulatory efficiency, they fail to address the shortcomings of CBA itself. |
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< | The debate over the Affordable Care Act provides a stark example. From liberals’ assertions that the ACA is fueling the American economic recovery, to conservatives’ claims that Obamacare will cost $1.5 trillion and kill 2.5 million jobs – the ACA’s economic implications have completely displaced its social impacts in public discourse. |
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> | The Inherent Subjectivity of CBA |
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< | The natural development of our cost-obsessiveness has been repeated attempts by government agencies and academic institutions to monetize human life. Recent studies have placed this value at $9.1 million, $3.6 million, and the more flexible figure of $129,000 per year (1). These figures are plugged into algorithms, producing fantastical estimates of how we monetize policy (such as the estimate provided by the EPA, without prejudice to its stance on the Clean Air Act, that the MATS Standards will produce between $37 and $90 billion a year in benefits). Armed with the mathematical certainty that only a $53 billion cost-range can provide, legislators and courts know which policies are “worth it” and which ones get cut. |
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> | The most glaring shortcoming of CBA is that it can only accurately measure one side of the equation. While the cost to industry of adopting an extant technology are usually clear, the benefits often elude monetization. |
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> | In conducting cost-benefit analyses, agencies must affix dollar amounts to qualitative aspects of life. Commonly factored into the “benefits” side of the equation are offsets to healthcare costs, missed work, and premature death, which is itself the product of a number of factors such as lost wages and the price workers attach to assuming increased risk of mortality. |
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< | The Trouble with Monetization |
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> | The result of such monetization is not the “objective basis” that CBA seeks to provide. Instead, it is a subjective measure resulting from arbitrary values attached to human life. These values vary depending on who is running the numbers. For example, in the DC Circuit’s hearing of White Stallion Energy v. EPA, the court grappled with two dramatically different “benefits” estimates for proposed emissions standards. While petitioners claimed the standards would produce benefits of $4-6 million a year, the EPA cited a benefit range of $37 to $90 billion in health benefits alone. |
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< | Imagine yourself in a hospital room. You have just watched your child lose a protracted battle with leukemia. Enter God from the heavens with a proposition. “I can bring your child back,” he tells you, “or I can pay you $3.6 million.” |
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> | The staggering range of estimated benefits represents not merely a disagreement about impact, but a fundamentally different understanding of what should be measured. In these situations, where the dispute concerns what the benefits actually are, weighing the value of those benefits merely begs the question. |
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< | The hypothetical is as meaningless as it is hackneyed, and that’s the point. There is no monetary value to life, because God is not going to descend from the heavens to give you the choice. Moreover, if he did, few among us would take the money (or, at the very least, admit to it). |
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> | What CBA Cannot Measure |
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< | This issue does not simply disappear when we put on our policy glasses. A government estimate that implementing Policy X will save us $100 billion at a cost of $10 billion tells us nothing about the actual impact of the policy. The truth of the matter is that our most advanced algorithms have no idea what they’re measuring. Projected lifetime earnings do not reflect the cost of watching your child die. Our most advanced computers cannot accurately model the long-term effects of current environmental stressors. And no one can put a dollar amount on what it means for a generation to grow up understanding that cheap power production was more important to us than forever tainting our drinking water and local food sources. |
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> | CBA, however, is not just arbitrary; it is detrimental to regulatory goals. |
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< | The Value of Money is Subjective |
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> | The need to monetize every output means that benefits that are unmonetizable, even by subjective estimation, fall out of consideration. Most important among these are regulation’s effects on social psychology. What, for example, is the monetary value of a generation growing up with the expectation that tap water will be potable? Such effects on collective psychology can induce sweeping changes in political engagement, public morality, and social cohesion. But while increased civic activity is undeniably a social benefit, it is not a benefit with a dollar value. |
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< | Even if we accept that we can assign a numerical dollar value to everything on earth, we must address a second problem – namely, that the value of money is not objective. |
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> | These factors may, of course, be weighed separately, but this raises another question: are these benefits somehow less valuable than monetary benefits? And if they are not “second-class benefits,” how can an agency possibly conduct a CBA without them? |
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< | In its simplest form, we can understand this proposition as follows: the beggar who is given a $20 bill may ward off hunger for several days; the lawyer who is given a $20 bill likely exhibits no change whatsoever. Dollars give diminishing returns, and the more money we have, the less each dollar affects us. |
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> | CBA also fails to take into account questions of social equity. Many objects of environmental regulation present threats specifically to poor and disenfranchised communities. Failure to properly regulate these activities, therefore, has an inordinate negative impact on vulnerable communities. |
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< | The MATS case illustrates why this concept makes cost-weighing a disaster when applied to law and policy. Coal-fired power plants are concentrated not in the backyards of the multimillionaires who own them, but in poor communities populated largely by people of color. The mercury emitted by these plants falls locally, contaminating local water sources and animal life. In this situation there are two different types of costs – the costs to industry of implementing new standards, and the costs to the communities of not implementing them. But it is also clear that there is no scale that can weigh these costs, as they are not on the same plane of existence. What a dollar means to an industry bears no resemblance to what a dollar means to the impoverished family already struggling to make ends meet. |
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> | The current centrality of CBA, however, wrongly equates the cost to these communities with cost to industry. Even where costs to industry drastically outweigh benefits to the community, the industry may be able to bear those costs, whereas the community may not be able to forgo the benefit. By justifying regulations with monetary costs and benefits, agencies invite challengers to attack the financial burden with their own calculations while dodging the regulation’s implications for social equity. |
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< | Asking the Right Questions |
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> | Adjusting the Equation |
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< | The compulsion to weigh costs is not going to go Modern society inculcates this idea into all of us, and our judges and politicians are no exception. |
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> | Despite its shortcomings, doing away with cost weighing in regulatory decision-making altogether would be neither ideal nor practicable. CBA should continue to play a role in helping government agencies produce effective regulations, but only after it is repositioned and reformulated. |
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< | However, if we are forced to live in a world where every cost must be weighed, we should at least be asking the right questions. |
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> | Fixing the role CBA will play in regulatory decision-making means allowing it to cede ground to broader considerations of long-term goals and social equity. Recognizing that so much of the “benefits” side of the equation is economic fiction, agencies should be free to ask simpler questions. Questions like “can industry reasonably bear this cost?” and “will this regulation produce substantial social benefit?” provide agencies with a rational basis upon which to formulate regulations, without resorting to fruitless attempts to monetize the benefits of implementation. |
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< | First, instead of asking how much something costs versus how much benefit it produces, we have to start asking whether something can be accurately monetized. This forces us to grapple with a new level of complexity – examining social, moral, and personal aspects of every action
Second, when we do make a cost comparison, the question must be what the costs are as subjectively measured by the group that bears them. This is essential to understanding that an economic burden is not always accurately portrayed by a dollar amount.
It is these questions, better questions, that will allow us to move beyond thinking of costs-benefits in the context of numbers on a spreadsheet and toward an understanding of how policy-based change actually affects society.
(1) Figures provided by EPA, OECD (for OECD-European countries), and a 2008 Stanford-Wharton study, respectively.
I think the best way to improve the essay is to step back from its structure a bit.
You are using Michigan v. Environmental Protection Agency only as a convenient hook to hang a general argument on. You could save time and space by omitting it, unless it becomes the point of the next draft, rather than an occasion.
Your real effort is to argue against cost-benefit analysis in regulatory decision-making, not to discuss whether it should be required at all stages of a regulatory proceeding, which is the "issue" at stake in Michigan v. EPA. Your reasons are well-enough known, don't constitute a surprising set of criticisms, but also don't seem to have taken account of the usual responses. So the next draft should go up that next level, by dealing with the explanations predictably given when the arguments you are raising are raised. Obviously no one supposes that there is "a" value of a human life, whether in quantitative or qualitative terms. But how does abandoning the effort to force entities to internalize the social costs of their behavior by giving up on assigning values to intangible social harms provide us with better policy outcomes? Why is an indeterminate value superior to one assigned for the purpose of requiring entities in society to manage, individually as well as collectively, socially significant risks?
How does requiring certain forms of policy analysis to be made by government agencies prevent either agencies or the legislature from supplementing their view with analyses derived by other means and other parties? In a complex mass democracy, one should expect diversities thought-modes to follow from the diversity of participation. This by no means implies that the resources allocated by the public for development of policy internal to government should or could reflect all the thought-modes of participants in the public debate. Showing that cost-benefit analysis is incomplete seems to me only a partial response to the question you claim to be answering.
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> | Further, agencies should refocus support for their regulations on community impact. Emphasizing that regulations are often a tool to promote social welfare will help to reframe the issue and weaken challenges from industry that rely primarily on complaints of financial burden. |
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> | CBA is attractive in its promise of an optimal level of regulation. But in an era of growing environmental challenges, CBA is too weak a tool. Only by elevating the importance of social and qualitative considerations can government agencies ensure that regulations meet society’s needs. |