Whenever the Bush administration seeks to defang environmental regulations, officials cite the results of cost-benefit studies. Using cost-benefit analysis, economists have estimated the market value of everything from a case of bladder cancer to a point of IQ. In their new book, Priceless, Frank Ackerman and Lisa Heinzerling charge that cost-benefit analysis is a rigged, illogical procedure; proponents of the practice, such as resource and environmental economics professor Kerry Smith, defend it as an important source of data to judge possible governmental actions.
There is no escaping the tradeoffs implicit in each choice, whether in our private or our public lives. Consider a decision involving the Glen Canyon Dam some years ago: An adjustment in the water flow rate from the dam would dramatically improve conditions for trout below the dam, enhance vegetation for birds and other wildlife, and reduce the risk of erosion to Native Americans' sacred sites, but it would not reduce the risk of extinction for native fish -- and farmers and ranchers throughout the western United States would experience significant increases in their electricity costs, threatening the existence of small, family farms. How should we decide?
The U.S. Department of Transportation has limited the amount of time per day a commercial truck driver is allowed to drive. This rule constrains these drivers' ability to pay for health insurance for their families -- but it also means that drivers may be more alert and some of us may experience safer road conditions, provided these drivers sleep more and do not use their free time for work at other jobs. How should we decide?
The National Park Service may soon consider whether snowmobiles are allowed in Yellowstone Park. These regulations may also limit cross-country skiers' and snow coaches' use of the park. These users do not generate the noise, air pollution, and disruption associated with the snowmobiles, yet some of them will need to be turned away. How should we decide?
Cost-benefit analysis offers information for these types of choices. It is not intended, even by its most ardent advocates, as an exclusive basis for public decisions; rather, it provides one type of information. It assumes that when a choice affects a group of people beyond the individual who bears responsibility for the decision, it is desirable to have information about what the affected people want. In short, how would each of them make the tradeoffs involved?
It is not an ideal method for summarizing peoples' choices -- but it is the best one we have. Cost-benefit analysis requires that the tradeoffs be expressed in monetary terms. Gains experienced by each person are measured by the amount of compensation he or she would accept to give them up. Similarly, losses are measured by the amount of compensation required for a person to accept them. Cost-benefit analysis is not free-market economics. It does not require that we accept a process where “the market makes these choices for us.” Indeed, the analysis itself does not make any choice. It provides information that can be used to evaluate the implications of different choices. When applied to health or environmental policies, cost-benefit analysis does not “price” life or nature. Cost-benefit methods summarize the tradeoffs that people make in giving up time, money, or other goods to get something else. The logic and procedures used to summarize these tradeoffs consistently can seem complex, but so is driving a car until you learn how to do it.
Why then is there so much controversy about cost-benefit analysis? In my view, the reason is simple: It forces those with alternative agendas to place their cards on the table. The rationale for each proposed decision must be made explicit. Holistic, moral, safe, and fair criteria must be translated into specifics. Once this is done, the tradeoffs among alternative outcomes implied by these decisions can be compared with the wishes of the affected people and any deviation from those wishes must be explained.
Frank Ackerman & Lisa Heinzerling
The administration of George W. Bush is the most hostile to environmental protection of any in recent memory. It is also the most enthusiastic about the use of cost-benefit analysis to screen proposed regulations. Perhaps this is only a coincidence. Perhaps a process of carefully summarizing people's preferences has found that the American public wants to weaken the Clean Air Act, drill for oil in the Arctic National Wildlife Refuge, ignore the dangers of global warming, allow more polluting snowmobiles into national parks, use cheaper and less effective safeguards against SUV tire blowouts, accept high levels of mercury in our food and water, and so forth.
But we don't believe it. Gamblers know that dice that always roll snake-eyes are loaded. The same holds true for a decision-making method that repeatedly tells us to do less about environmental protection, even when public opinion polls tell us that the American people want to do more. The problem, as we explain in our recent book, Priceless, is that cost-benefit analysis is incapable of making meaningful choices about things that matter to most people.
Almost no one attaches a price to the things they care most about. How much is your family worth to you? Or your religion? Or your health? By arguing that good decision-making requires monetary equivalents for environmental goals, the advocates of cost-benefit analysis degrade priceless values to the level of cheeseburgers and fries. Government activities that the administration wants to pursue are never subject to this test; when is the last time that a cost-benefit analysis was required before sending troops overseas, or, for that matter, undoing an important environmental program?
Without cost-benefit calculations, we are not helpless or indecisive; without help from economists, ordinary people think profoundly and come to reasoned judgments about threats to life, health, and nature, and about our obligations to future generations. These are among the most important issues of public policy, and the record of environmental improvement over the last 30-odd years is one that we can all be proud of. Our history of great successes has not been built on monetary valuation of regulatory benefits. People who want clean air may not be able to tell an interviewer what price they place on the reduction in health risks. People who care deeply about the extinction of species may not be able to (or even want to) translate that concern into a dollar price per whale, wolf, or spotted owl. People who want to reduce the threat of climate change for future generations may not be able to resolve the arcane paradox of intergenerational discounting.
Even if a person could do all these things, one person acting alone can't clean the air or save the whales. Collective action -- the kind of action for which government is best equipped -- is what's required. This is the famous problem of “public goods,” and one completely unresolved by the unrelenting self-centeredness of cost-benefit analysis.
Cost-benefit analysis does not summarize real choices made by real people. Instead, it offers a narrow, stylized picture of how economists imagine people could or should make choices. When it disagrees with actual public opinion -- as it does so often on environmental issues -- we'd rather let the people decide.
Ackerman and Heinzerling do not believe people want to weaken the Clean Air Act, drill for oil in the Arctic National Wildlife Refuge, allow polluting snowmobiles in Yellowstone, or accept high levels of mercury in our food and water. Neither do I! In fact, no cost-benefit analysis has supported any of these choices. On the contrary, EPA's most recent cost-benefit analysis of the Clean Air Act Amendments found substantial net benefits each year from these protections. The Agency's central estimate for the excess of benefits over costs was 52 billion dollars for 2000 (in 1990 dollars). The National Park Service's recently sponsored analysis of policies restricting snowmobiles in Yellowstone and the Grand Tetons found that relaxing a proposed ban would lead to negative net benefits. That is, the costs exceeded the benefits for several proposals that would allow snowmobiles in these parks. Moreover, the evaluation did not attempt to measure the effects that snowmobiles might have on buffalo or on water quality in the parks. Including these effects reinforces the conclusion derived from what could be readily measured.
I also agree that people do not assign monetary values to the things most important to the quality of their lives. However, people do make choices. They give up time and money to assure their children can go to college or to care for an elderly parent. Few parents of college-age children are driving new cars or making the best-dressed lists in their local communities. They have decided to use their resources in more important ways. These types of choices involve defining tradeoffs between the possible alternatives: four years of a unique college experience for a son or daughter, or perhaps a new sports car for mom or dad?
When it comes to public actions, it is the very fact that individuals' choices define the minimum compensation they would require to give something up that allows a response to the “public good” problem Ackerman and Heinzerling pose. People do not have to act alone! We all gain when the air is cleaner, so we pool our individual tradeoffs. If we had to pay individually, we could never hope to make a difference; taken together, we can! This conclusion is exactly what nearly all cost-benefit analyses of environmental programs have shown. The conclusion arises from the very “publicness” of the outcomes of these programs.
There are many important and conflicting needs. We cannot address them all at once. Ordinary people have profound but varied concerns about “threats to life, health, and nature, and our obligations to the future.” Because of the differences in our individual concerns, decisions can be improved if those charged with making them have as much information as possible. Cost-benefit analyses provide a better understanding of the tradeoffs people are collectively willing to make to ensure that our environment is protected and the most important risks to health are reduced first. A recommendation that policymakers should ignore this valuable information is in no one's best interests.
Ackerman & Heinzerling
Cost-benefit analysis is not just an abstract theory. It is a political tool used to undermine regulation, hardly ever to strengthen it. As Smith notes, cost-benefit analyses have occasionally supported environmental protection, as in EPA's retrospective analysis of the Clean Air Act. In such cases the Bush administration -- populated by the most ardent defenders of cost-benefit analysis in executive branch history -- has pressed ahead in exactly the opposite direction, attacking rather than defending key provisions of the Clean Air Act, without mentioning the cost-benefit results. Yet when cost-benefit analysis can be used to defeat or weaken regulation, the administration places it front and center. John Graham, the White House regulatory czar, has called his approach “smarter regulation;” in fact, it's just weaker and less honest regulation.
Could cost-benefit analysis play a constructive role in developing public choices in an administration less hell-bent on plundering the environment? We think not. The problem is that the “information” provided by cost-benefit analysis actually detracts from, rather than adds to, our understanding of public preferences.
Take the problem of air pollution. Whose preferences were counted in the EPA cost-benefit analysis of the Clean Air Act? The numerous deaths avoided by reducing air pollution were given a monetary value, around $6 million apiece in today's dollars. This was based on an average of the small wage increases that blue-collar workers in the 1970s and early 1980s supposedly received for accepting small risks of dying on the job. What do the wages of blue-collar workers decades ago, many of whom went to work out of economic necessity and without an explicit understanding of the risks they faced, have to do with our preferences, today, for cleaner air?
Some economists try to avoid this problem by asking people, in “contingent valuation” surveys, how much they would be willing to pay to avoid a hypothetical risk. But survey participants' answers are heavily censored by the surveyors, who discard some answers for internal inconsistency and others for asserting too high a value for protecting health and the environment. This isn't a summary of real people's choices; it's a contrived portrait of how economic theory imagines choices should be made. We do not learn more about public preferences toward air pollution by looking at wages paid decades ago, or by consulting loaded opinion polls.
The difficulties don't end there. The “public goods” problem is not solved, as Smith suggests, by adding up everybody's answers to the question of how much they are willing to pay to protect the environment. If people are asked, as individuals, how much they will pay to clean the air, many will answer “nothing,” since they are hoping that others will clean up for them and they will enjoy clean air without having to pay for it. As Nobel Prize-winning economist Amartya Sen has observed, if your willingness to pay for a large-scale public initiative is independent of what others are paying, then you probably have not understood the nature of the problem.
Thus, eliminating the distinctive input of cost-benefit analysis -- the monetary valuation of goods that have no market -- increases rather than decreases the information available to decision-makers.
Cost-benefit analysis is indeed a tool. It allows any observer to judge how well political choices align with what people want. When a policy decision is found to contradict its results, advocates for another position can ask why, as Ackerman and Heinzerling have done. When real losses are suffered, those impacted have a yardstick to demonstrate their importance. Pure rhetoric, without a recognition of the diversity in legitimate consumer interests and the limitations in our ability to meet them, does not lead to good policy. Characterizing a decision process as “hell-bent plundering” gets attention but does not offer the means to demonstrate why a decision is misguided. Even
the name critics insist on applying to the practice -- cost-benefit
analysis -- is designed to focus on the negative and, as a result, potentially
delegitimate the process; they recognize that phrasing it as benefit-
cost analysis, as the EPA and many economists do, would not provoke as
negative a reaction in the public mind.
We should not expect everyone to agree on the priorities for public policy. Ackerman and Heinzerling implicitly assume there is uniformity in public interests. It does not exist, even for issues associated with health and the environment. Each individual will attach different degrees of importance to any set of competing needs. For example, a decision to prohibit “plundering” of certain coastal wetlands, owned by retirees, may well respond to important concerns about managing nutrient loadings in coastal waterways to sustain vital habitats for marine species. However, it is unlikely to be viewed that way by those families who relied on these lands to meet their income needs in retirement.
Ackerman and Heinzerling may well argue that preservation of the coastal areas meets a higher goal. I agree! But then, we also need to consider whether the owners of this private property should be compensated for their genuine losses. To meet this need, something else must be given up. Perhaps it is the public R&D necessary to develop alternatives to fossil fuels as energy sources, so the dangers of global warming can be avoided. How should we decide?
We face outcomes that different people will think profoundly about and come to different, reasoned judgments. We cannot take all these laudable actions at one time. We could have Ackerman and Heinzerling make all the choices -- perhaps they know all the answers? They certainly seem prepared to dismiss information about what others want.
But wait -- if I asked prominent educators, who are training our children in primary and
secondary schools to meet the challenges of an increasingly competitive world, I think I might get a different answer about how to use the resources designated for compensating the retirees.
Hold it, we also just learned that the world's oceans are in bigger trouble than coastal waterways -- this should be the first priority! Experts in ocean science no doubt would confirm that conclusion.
No, the tropical rainforests are really the key. After all, if the Western Antarctic Ice Sheet shifts due to global warming, where will those retirees be?
I hope by now readers see the point. The cost-benefit yardstick does help to compare alternatives. Ackerman and Heinzerling have been a bit fast and loose with the details of how the estimates are developed -- but remember, cost-benefit analysis lays the cards are on the table, so we can see what gets counted and what does not. Cost-benefit analysis should never be the exclusive basis for public policy choices. It's not perfect; it's just the best we've got.
Ackerman & Heinzerling
We are delighted that Smith agrees with us that most people would reject a long list of Bush's anti-environmental policies. We think the description of the current White House as “hell-bent on plundering the environment” speaks for itself, and is documented, unfortunately often, by the daily news.
What should academic analysts do in this situation? Should we stress the need to curb our desires because we can't afford everything? Or should we fight to defend health and environment, and to force other changes in government priorities?
Smith says that we have limited resources and that we may have to trade one environmental or educational program against another. But why is it only good things that have to be traded against each other? What if we want both education and environmental protection, what if we want both protection of coastal wetlands and spending on climate change mitigation? Personally, we'd like to have it all, and finance it by giving up some useless missiles or tax cuts for millionaires. Scarcity is artificially contrived, in the midst of American affluence, by declaring such choices off-limits. Why should we throw up our hands and say that the richest country in the world can't afford to protect the environment and educate our kids? Cost-benefit analysis doesn't reflect preferences like ours because it does not -- and cannot -- take a large look at what our society spends money on and help us get the things we want most. For that, we have democracy, not made-up markets.
There is no solid evidence that environmental protection is, or is about to be, unaffordable. Almost all industries spend less than 2 percent of their revenues on environmental compliance costs. As economist Eban Goodstein has demonstrated, there are almost no documented cases of job loss due to environmental regulation. There is no fixed, overarching budget for the costs in cost-benefit analyses. Most of the costs are borne by polluting industries. If we use cost-benefit analysis to deregulate an industry, the reduced compliance costs don't get transferred to another industry where cost-benefit analysis favors regulation. The deregulated industry just keeps the money, emits more pollution, and records higher profits.
Are resources in some ultimate sense limited, so that we can't keep asking for more forever? Yes, of course. But there is no reason to think that environmental protection has approached this ultimate limit. There are theoretical limits so distant that they can in practice be ignored: We cannot exceed the speed of light, but automobile designers don't need to worry about this limit just yet.
Economists are fond of presenting big tables “proving” some environmental regulations to be horrendously expensive. In other work, we have demonstrated that these tables, based on just a few original studies, are invariably riddled with factual errors. Neither theory nor empirical evidence supports the need for painful tradeoffs among desirable activities -- not while we leave the worst of our government's tax cuts and spending priorities untouched.
Years ago, the cartoon strip Pogo included a caricature of a Soviet premier, who said, “In my country we have a saying: the shortage will be divided among the peasants.” The tradeoffs offered by Smith come dangerously close to reprising that cartoon. We agree that cost-benefit analysis is imperfect; we know that our society can do better.
Kerry Smith is the director of the Center for Environmental and Resource Economic Policy at North Carolina State University. He served as the first co-chair of the Environmental Economics Advisory Committee of EPA's Science Advisory Board.
Frank Ackerman and Lisa Heinzerling are the authors of Priceless: On Knowing the Price of Everything and the Value of Nothing. Ackerman is an economist at the Global Development and Environment Institute at Tufts University and Heinzerling is a professor of law at Georgetown University.