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CHOICE CUTS
Cost-benefit analysis is often used to support industry
wish lists. Should we blame the method or the masters?
by Frank Ackerman, Kerry Smith and Lisa
Heinzerling
Article re-printed from The American Prospect
May 12, 2004
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.
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Kerry Smith
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.
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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.
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Smith
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.
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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.
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Smith
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.
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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.
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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.
Copyright © 2004 by The American Prospect, Inc.
Preferred Citation: Frank Ackerman, "Choice Cuts",
The American Prospect Online, May 12, 2004. This article
may not be resold, reprinted, or redistributed for
compensation of any kind without prior written permission
from the author. Direct questions about permissions
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