How Much Do New Policies Really Cost Us?

-- By EliKeene - 13 Mar 2015

The Case Before the Court

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.

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.

An Obsession with Costs

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.

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.

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.

The Trouble with Monetization

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.”

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).

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.

The Value of Money is Subjective

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.

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.

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.

Asking the Right Questions

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.

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.

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.

A note:Our crim law reading for next week is an entire unit on law and economics. As I'm reading it, I couldn't help but come back to this essay. For example, Professor Gary Becker writes: "[T]he cost of an imprisonment is the discounted sum of the earnings foregone and the value placed on the restrictions in consumption and freedom." He then goes on to briefly discuss differential incomes and differing sentences before giving us a formula which he claims represents the "total social cost of punishments". Yet nowhere does he question whether his baseline assertion for calculating the cost of imprisonment is correct. While my essay focused on environmental issues, the more I read and the more I think about it, the more it becomes a problem of law and economics as an entire branch of thought.

Comment (Matt Burke): Below is a link to the story I mentioned in class today. It provides an interesting, if at times tangential, commentary to your paper.

http://www.radiolab.org/story/what-dollar-value-nature/

For those looking on, here's the story's lede:

"Back in 1997, a team of scientists slapped a giant price tag on the earth. They calculated the dollar value of every ecosystem on the planet, and tallied it all up: 142.7 trillion dollars. It's a powerful form of sticker shock — one that could give environmentalists ammunition to protect wetlands and save forests. But some people argue it actually devalues something that should be seen as priceless. Then the apple farmers of Mao county in central China turn this whole debate upside down and make us question the value of understanding nature in terms of dollars and cents."