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Revesz on Rehabilitating Cost-Benefit Analysis:

NYU Law Dean Richard Revesz has written an interesting essay for Grist arguing that environmentalists should reconsider their opposition to cost-benefit analysis of regulations. It is based upon his new book, Retaking Rationality: How Cost Benefit Analysis Can Better Protect the Environment and Our Health, co-authored with Michael Livermore. While CBA is largely viewed as an "anti-regulatory" tool, Revesz argues cost-benefit analysis, if conducted properly, can support a pro-regulatory environmental agenda. In his view, environmentalists have been wrong to oppose the use of CBA in regulatory review, and should now seek to mend, not end, its use in regulatory policy.

Since Ronald Reagan placed cost-benefit analysis at the center of his deregulatory agenda in 1981, environmentalists have developed a strong allergy to economic analysis. They rarely participate in the debates over how cost-benefit is conducted, and do not place economic analysis at the center of their arguments for new and stronger regulation. On the other hand, antiregulatory groups like trade associations representing industrial polluters and conservative think tanks have embraced cost-benefit analysis. They argue that economic analysis shows deregulation is a good thing.

The asymmetry of participation has had several negative consequences. First, proregulatory interests consistently lose ground before the courts and OBM, which for nearly three decades has reviewed all "significant" regulations. Because OMB and the courts look to cost-benefit analysis, groups that cannot frame their arguments in economic terms are bound to lose.

Second, cost-benefit itself has become biased against regulation. It has been shaped by antiregulatory interests with little input from proregulatory interests, resulting in the adoption of several flawed techniques that tend to underestimate regulatory benefits and overestimate regulatory costs.

Finally, proregulatory interests have lost public approval as they have allowed themselves to be portrayed as extremists in pursuit of "big government." This loss of public support saps political will for new and updated regulatory programs.

Environmentalists made a particularly grave error by failing to advocate for more neutral cost-benefit analysis during the Clinton administration. When Bill Clinton took office, many expected him to drop cost-benefit analysis from the process of regulatory review. Instead, he embraced it, and took some steps to make it more transparent and fair. Environmentalists had eight years to try and remove the antiregulatory biases from cost-benefit analysis, but they let the opportunity pass. I served on an EPA committee charged with making recommendations about cost-benefit analysis to the agency, and during all of our meetings -- which were always well attended by industry groups pushing an antiregulatory agenda -- environmentalist never came. When negotiations are conducted with an empty chair in the room, it is hardly surprising when the results come out skewed.

The environmentalist antipathy to cost-benefit analysis is somewhat ironic because environmentalists once championed the use of CBA for public works projects. Applying cost-benefit principles to dams, reclamation projects, and the like, they argued, would reveal these projects to be as economically wasteful as they were environmentally harmful. This idea worked for a time, until the Bureau of Reclamation, Corps of Engineers, and other agencies hired their own economists and learned to use the process to their advantage.

Revesz is certainly correct that CBA, neutrally applied, is not inherently "anti-regulation." During the Bush Administration, the reliance upon CBA led OMB to issue several "prompt letters" urging agencies to adopt additional regulatory measures that appeared to be cost-justified. True CBA devotees follow the numbers, not their own preference for or against regulatory interventions. While CBA is often used to criticize regulations, in some instances CBA methodology has an inherently pro-interventionist bias, insofar as it elevates collective net welfare maximization over consideration of individuals' subjective value preferences. Just because a given project or regulation is "net-beneficial" does not mean it makes for good policy. We also must be wary of overly precise cost-benefit calculations that understate uncertainties or gloss over the difficulties of quantifying important variables.

There is little doubt that more complete information about the likely consequences of government action should improve government decision-making. Just as the National Environmental Policy Act (NEPA) can foster improved public decision-making by forcing government agencies to consider the environmental consequences of their actions, CBA requirements can foster a more complete consideration, and public accounting, about the pros and cons of regulation. CBA can inform public debate, but it cannot resolve all regulatory policy disputes. Even the best CBA is no substitute for discussion and debate over competing policy agendas and the normative preferences upon which they rest.

p. rich (mail) (www):
The environmentalist antipathy to cost-benefit analysis is somewhat ironic...

Not really. True Believers operate by a simplistic code:

Supports my position, good.

Doesn't support my position, not good.

Rationality and factuality are irrelevant, and always have been. As cost-benefit analysis is no longer a supportive and one-sided tool, it poses a threat and will be rejected.

Activist arguments depend heavily upon anecdotal emotional appeal (It's the polar bears.). Objective economic considerations don't make for tear-jerkers, and at the end of the True Believer's day it's all about how they feeeeel. CBA only ever played a convenient minor support role in the narrative.
5.11.2008 12:39pm
b.:
"liberal" CBA arguments can easily be made by those willing and able to challenge and redefine the scope of the posited cost/benefit.

this is seldom done, however, because, as everyone knows, hippies can't count.
5.11.2008 12:46pm
Malthus:
If the USSA were to promote limitation of procreation (a la China) as a way to reduce our carbon footprint and pollution, how would you do the "cost-benefit" analysis?
5.11.2008 12:57pm
ithaqua (mail):
"Revesz is certainly correct that CBA, neutrally applied, is not inherently "anti-regulation.""

Not *inherently*, no. But the costs of regulation, to the entity being regulated, will always outweigh the benefits; if the benefits outweighed the costs, they'd be following the regulation (whatever it might be) already. And, of course, a cost-benefit analysis that that adds third-party externalities - ie, benefits to people who don't pay - to the 'benefit' side, so attempting to justify regulation, is illogical, socialistic and abhorrent to all decent people.

Besides, as was pointed out so wisely above, hippies can't count. Liberals in general, and especially the environmental Earth-mother types, are incapable of logic and rational thought - it's all about emotion and feelings and faith in Darwin - whereas cost-benefit analysis requires the sort of rational consideration of evidence and rejection of faith-based policy you find almost in conservative thought, particularly neoconservative foreign policy and the ID movement.
5.11.2008 1:11pm
Bender (mail):
"Conservationists" used to be Zen masters of CBA. I remember a standard anti-nuke "cost" of building nuclear reactors in the 1970s. It was the enormous legal cost of overcoming the political opposition to siting and building new nuclear plants which the anti-nuke folks created and then shamelessly incorporated into their CBAs of nuclear power. These "costs" helped the anti-nuke forces suggest that nuclear power plants were not cost-beneficial.

Today France derives over two-thirds of its electric power from nuclear plants and is far more energy self-sufficient than the USA. The USA has not constructed a new, commercial nuclear power plant since the 1960s and is still in denial about the neccessity of nuclear power.

"Conservationists", embrace the power of CBA!
5.11.2008 1:14pm
Al Goreski:
Just wait till they lefties start throwing in the cost of a human life argument. Can't wait to hear the Ford Pinto cba argument again.
5.11.2008 1:31pm
ithaqua (mail):
"Just wait till they lefties start throwing in the cost of a human life argument. Can't wait to hear the Ford Pinto cba argument again."

Ironically, if we added the cost of an unborn human life to the cost-benefit analysis of an abortion, they'd scream bloody murder :P
5.11.2008 1:49pm
CDU (mail) (www):
Today France derives over two-thirds of its electric power from nuclear plants and is far more energy self-sufficient than the USA.

I'd argue that France is a lot less self sufficient in terms of energy than the United States. They generate a lot of their electricity from nuclear power, but they still use substantial amounts of petroleum and natural gas. Since France has no significant reserves of either, virtually all of their fossil fuels are imported. This lack of any domestic fossil fuel sources is a big reason France has chosen to go heavily nuclear for their electricity generation, but France still has to rely almost completely on imported oil and natural gas for applications other than electricity generation.

The United States, on the other hand, is much more dependent on fossil fuels, but we also have large reserves of oil, coal, and natural gas. We produce about 40% of the oil, 80% of the natural gas, and 100% of the coal we use in this country. These resources, particularly coal, mean there isn't as much incentive for the U.S. to build nuclear plants as there is for France.

In fact, I'd say pointing to nuclear power as a way to energy independence is a bit of a red herring. Nuclear power is not going to help make us significantly more energy independent, because we're not importing very much of the fuel used to make electricity. Most of our electric power already comes from domesticity available resources (coal, natural gas, nuclear, and hydropower). Oil accounts for just 1.5 percent of our electricity (about a tenth of what we get from nuclear power right now).

If you want to argue for nuclear power, I think you need to be arguing on the basis of carbon emissions, rather than energy independence.
5.11.2008 1:55pm
EH (mail):
The USA has not constructed a new, commercial nuclear power plant since the 1960s and is still in denial about the neccessity of nuclear power.

Diablo Canyon went online in the mid-80s.
5.11.2008 2:04pm
EH (mail):
Ironically, if we added the cost of an unborn human life to the cost-benefit analysis of an abortion, they'd scream bloody murder :P

So you're saying you support tax deductions for each incident of masturbation.
5.11.2008 2:06pm
L. Ron Paul:
Ironically, if we added the cost of an unborn human life to the cost-benefit analysis of an abortion, they'd scream bloody murder :P

I assume "they" here means pro-lifers, right? After all, they're the ones who are ideologically opposed to ending fetal life, regardless of costs and benefits, aren't they?
5.11.2008 2:24pm
seadrive:
What do you know? Here is a thread with even fuzzier thinking that the Obama threads.

In this age of advanced quantitative analysis, cost/benefit analysis is inescapable is some contexts. For example, there has to be some threshold level of the various pollutants that can be released in 'clean' water.

On the other hand, there are situations where the cost and/or benefit can't be expressed in monetary terms. What is the benefit (in dollars) to NYC of Central Park?
5.11.2008 2:43pm
Steve2:

And, of course, a cost-benefit analysis that that adds third-party externalities - ie, benefits to people who don't pay - to the 'benefit' side, so attempting to justify regulation, is illogical, socialistic and abhorrent to all decent people.


Addressing impacts to all people, rather than a limited subset, is illogical and abhorrent? To paraphrase a Spaniard, I do not think those words mean what you think they mean.
5.11.2008 2:56pm
Elliot Reed (mail):
I don't know much about this issue but what about the possibility that environmentalists have analyzed the issue and decided that it is not worth it? As you mention, CBA is a preferred methodology of business interests who oppose environmental regulation out of self-interest &of conservatives who oppose it on principle. Accepting CBA as a legitimate methodology thus amounts to accepting the opposition's preferred terms of debate. Instead of just doing CBA they'd have to start by fighting and winning a meta-argument about what costs CBA should try to account for and how they should be measured.

The environmental activists have lots of smart people on their side, so I think their tactical judgments about what would help them are probably more credible than those of third-party commentators. And the fact that they embraced it previously also tends to indicate that their objection to CBA is tactical, rather than ideological. Like other political interest groups, they'll embrace whatever arguments get them the conclusions they want, consistency be damned.
5.11.2008 3:03pm
_Google_:
So, how much will be grand total for storing those nukes at Yucca for the next 400 million years?
5.11.2008 3:30pm
A. Zarkov (mail):
"If you want to argue for nuclear power, I think you need to be arguing on the basis of carbon emissions, rather than energy independence."

This becomes a less valid argument as our domestic sources of oil become depleted. There are a number of options. 1. Increase domestic exploration and drilling. 2. Go strong on synfuels. 3. Convert to hydrogen for transportation, and build reactors to create the energy that goes into the hydrogen.

The environmentalists think we can make up the use of fossil fuels with a combination of conservation and alternative energy. I don't believe that. We get 90 exajoules of energy from petroleum, but currently 2.5 EJ from alternative. It's hard to believe that we can expand alternative that rapidly while being affordable. At this point synfuels looks like the best way to go. Everything else is too expensive.
5.11.2008 3:53pm
A. Zarkov (mail):
"So, how much will be grand total for storing those nukes at Yucca for the next 400 million years?"

Why would anyone care about a time scale that long? The high level radioactive wastes actually decay pretty quickly. Remember the longer the half life the less radioactive something is.

On a time scale of even a million years, we far more risk from other geophysical hazards than some leakage from Yucca Mountain. For example earthquakes and volcanoes. On a time scale of 100 million a planet busting asteroid could hit the earth. It's even silly to worry about 100k years.
5.11.2008 4:11pm
Rock On (www):
Speaking as someone who has done a fair amount of regulatory analysis on environmental issues, I can say that a CBA consistently comes out saying... whatever the EPA higher-ups want it to say. As is correctly stated above, any environmental CBA that ignores externality costs will come out heavily tilted toward the cost end. I would disagree with that poster that incorporating externalities is "socialistic", since externalities are the only justification for environmental regulation in nearly all cases. It is, however, total horse sh*t. You can make a benefits analysis say virtually anything you want it to say.
5.11.2008 8:09pm
plutosdad (mail):
Accepting CBA as a legitimate methodology thus amounts to accepting the opposition's preferred terms of debate
No, it's accepting a way of making decisions we all make in our own lives. How many times have we analyzed the pros and cons of a decision. That's all CBA is.

If someone refuses to even think about "cons" or that they even exist, they are just burying their heads in the sand and make themselves impossible to reason with. Of course there are cons, there are cons to everything.

The bigger problem is as someone said you can make the stats say anything. But that's why we have argument and rigorously try to define those costs that are hard to quantify.
5.12.2008 1:24pm