Many economists have long advocated the use of cost-benefit analysis and other economic tools to improve regulatory decision-making and cost-effectiveness. Some government agencies have adopted such measures. Have they worked? A new paper co-authored by Robert Hahn, one of the more prominent cost-benefit advocates, suggests the results have been mixed and recommends additional reforms. Here's the abstract:
In response to the increasing impact of regulation, several governments have introduced economic analysis as a way of trying to improve regulatory policy. This paper provides a comprehensive assessment of government-supported economic analysis of regulation. We find that there is growing interest in the use of economic tools, such as benefit-cost analysis; however, the quality of analysis in the U.S. and European Union frequently fails to meet widely accepted guidelines. Furthermore, the relationship between analysis and policy decisions is tenuous. To address this situation, we recommend pursuing an agenda that allows economics to play a more central role in regulatory decision making. In addition, we suggest that prediction markets could help improve regulatory policy and improve measurement of the impact of regulation.
What are legitimate non-economic concerns that should get some consideration in a cost-benefit analysis of regulation, and how do you weigh them?
For example, there could be a health care regulation mandating certain levels of care for premature babies. I'm sure that one type of cost-benefit analysis could show that the dollar amount used to keep a single critically ill baby alive could be used to save the lives of multiple work-capable individuals. On the other hand, we may have a public policy that values giving such a baby a chance at life over that of a much older person. Basically what I'm saying is that policy choices like this can come down to public morality that doesn't easily fit into an economic cost-benefit analysis.
How would this get weighed and counted?
In most regulators' minds, the benefits of the regulation always outweigh the costs. What we need is the most benefit for the least cost.
Einstein
How something like that (i.e. the relative value of a baby versus that of an older person) gets counted is less important than that it be counted at all. I'm highly skeptical of C/B analysis's ability to arrive at the "right" answers. But, the reason I'm a big advocate of C/B is that it forces agencies to make explicit the assumptions upon which they base their regulatory decisions.
Much of US administrative law is premised on the notion that agencies should explain the rationale for their decisions so the political (electoral and congressional) and judicial systems can exercise effective oversight. C/B, while far from perfect, causes agencies to actually say "we place a higher value on a young child than on an older person," or vice versa, so that premise can be held up to scrutiny.
Sounds like this guy wants to turn it all over to Ladbroke... and the London bookies.
And hey, when it comes to regulation, the bookies won't do any worse than your garden-variety federal agency!
It is based on the premise that there is some great benefit to keeping trees, songbirds and whales, for example. This, in turn, is premised on some god-given value in maintaining the human race, which, as far as I know, is a goal absent in all econ books.
If all those trees fall, and nobody is around to hear it, so what? Nobody alive has to worry about life without coal, life without uranium. For whose benefit then should we sacrifice present pleasure for distant future gain?
In my personal life I have voted against polluting the world with progeny. Why should my present pleasure be sacrificed for the gain of the progeny of the breeders? And, in particular, why the hell should the Brazilians maintain the Amazon rainforest or the riches of the Madeira river for the sake of the progeny of the Amerikan armchair environmentalists? Promotion of such a religious policy would be a clear call to terrorist war.
Indeed, if we were to do a REAL C/B analysis, we would conclude that it would be to the benefit of the vast majority of the world's species if we humans just disappeared!
I think one of the big reasons that applied cost-benefit analysis often fails is because people are very averse to putting quantitative values on certain goods. For instance if we are making decisions about health care we have to choose how much money it's worthwhile to spend saving someone's life. Of course if we refuse to place a numerical value on these outcomes we do so anyway but blindly and without careful thought. Additionally, and this is one of the great values of cost-benefit analysis, it forces us to reconcile conflicting intuitions. For instance our intuition that we should not spend less to save someone because they are elderly with the intuition that each year of human life (at a given quality) is worth the same (saving a young life saves more life years).
In fact contrary to jimbino I think environmentalism is one of the areas that could benefit most from through cost-benefit analysis. Either global warming isn't that big a deal OR carbon free wind power is more important than a few bird deaths. In fact the animosity between the environmentalists and ranchers is largely do to a failure to do cost-benefit analysis. Either we really think that the benefit of (insert endangered animal) to future generations is worth paying $X now to save it or it isn't worth that much. If it is worth $X we should be willing to compensate the ranchers up to $X in costs to protect the animal if not and we think it will incur more than $X in costs to protect then don't do it.
The fact that goods are abstract or morally charged simply doesn't mean you can't assign them a value. We do so implicitly every day with the choices we make.
Unfortunately doing real cost-benefit analysis is politically deadly. Making an implicit valuation through healthcare policy about the monetary value of a life or the trade off between saving elderly lives and teenagers lives doesn't get anyone's hackles up. Assigning numerical values to these two goods is bound to have people demanding your head. So long as the public insists on avoiding the tough questions by pretending we can't value these things despite the fact that we do so implicitly when we make our decisions cost-benefit analysis by governmental organizations is going to focus on uncontroversial economic effects. Unsurprisingly when you leave out the real things we value from the analysis it won't be that useful.
Skyscraper: since my benefit (rent) goes by by square foot, say, but my costs in the form of 9/11 type disaster go up with the wage of inhabitant and his degree of familial complications, I'm would be a fool to have tenants who are high-earners, pregnant, married, or breeders. C/B analysis would drive me to favor anyone who earns poorly and who is male, single and childfree, or, in the alternative, to charge the high-risk prospective tenant more rent to cover my potential losses.
The same holds for a camping or rafting trip. Nobody in his right mind would participate nowadays in any risky activity with a breeder or pregnant woman, or, especially, with another person's child. There are almost NO special benefits to it, but lots of potential costs. The same holds in employment: in view of FMLA rules alone, no sensible employer would hire an employee who is not orphaned, single, sterile or male, and childfree.
Of course, the greatest abuse of C/B analysis is represented by our Amerikan public education. The costs are astronomical and the benefits negative, when you consider that we could close all the schools and get ready, willing and potty-trained workers from Mexico, China, ....
"Politicians, in particular, tend to be more concerned with distributional issues than efficiency"
LMAO! Now that was well delivered line.
How else can we understand the Republican failure to do anything about regulatory reform, despite rather clear insights and improvements suggested by Breyer, Stewart and the like?
Governments and influence peddlers like more power, not less, so it seems rather naive to expect the Dems to undertake significant regulatory reform.