The New Challenge to Cost-Benefit Analysis. How Sound Is the Opponents' Empirical Case?
Carlin, Alan, Regulation
FOR MORE THAN TWO DECADES, BOTH Republican and Democratic presidential administrations have supported the use of cost-benefit analysis (CBA) in the review of federal regulatory decisions. And for three decades, both Republican and Democratic White Houses have supported the use of some sort of cost analysis for such decisions. But that consensus appears to be ending. The growing partisan divide over CBA is beginning to reflect the Red Team-Blue Team battles that have become common in other aspects of government.
The history of bipartisan support for CBA is probably well known to readers of Regulation, but it is largely unknown to most of the rest of the population. Although there has been some debate among economists concerning the strengths and limitations of CBA for analyzing regulatory decisions, that debate has taken place largely in economic journals and gray literature. But few, if any, of the involved scholars have argued that such analyses should not be undertaken.
In the last few years, however, outright opposition has appeared to the use of CBA in reviewing or formulating environmental regulations. This has major potential implications for regulatory decision-making in future administrations, particularly Democratic ones.
Most of the opponents of CBA have been lawyers; those defending CBA have been economists. The debate originally revolved primarily around articles by John Morrall of the Office of Management and Budget and Robert Hahn of the AEI-Brookings Joint Center for Regulatory Affairs. Both scholars attempted to show that the cost-effectiveness of federal regulations varied greatly. CBA opponents have gone beyond disputing Morrall's and Hahn's analyses by making much broader arguments that CBA has inherent problems, that it is being administered with an anti-environmental bias by OMB's Office of Information and Regulatory Affairs, and that it largely helps only the regulated industries by delaying and weakening new regulations.
Most of the opponents' arguments have appeared in various law journal articles, Web sites and Web publications, and books, but not in economic journals. A recent issue of OMB Watch in March 2005 contains a concise summary of the opponents' arguments. The proponents have not been inactive either; Hahn's extensive 2005 monograph In Defense of the Economic Analysis of Regulation summarizes many of their arguments.
Recently, CBA critics Frank Ackerman of Tufts University, Lisa Heinzerling of Georgetown University, and Rachel Massey of the Environmental Research Foundation have taken the argument against CBA to a new level. The three carried out their own original empirical study of several environmental decisions from the 1960s and 1970s. They conclude that CBA would have yielded results that history shows would have been undesirable. In effect, instead of attacking the supporters of CBA and their analyses, Ackerman, Heinzerling, and Massey have attempted to make a "positive" empirical case that CBA would have resulted in "adverse" environmental decisions in cases that they believe everyone would agree were "good" environmental decisions.
In July of 2004, the three critics released a paper examining three significant historical environmental decisions to which CBA was or could have been applied. Their paper asks, "If today's methods of cost-benefit analysis had been applied in the past, would it have given its blessing to the early regulations which now look so successful in retrospect?" Ackerman, Heinzerling, and Massey answer that question negatively, claiming:
We have compiled three case studies in coming to this conclusion: the removal of lead from gasoline in the 1970s and 1980s, the decision not to dam the Grand Canyon for hydroelectric power in the 1960s, and strict regulation of workplace exposure to vinyl chloride in 1974. The technique would have gotten the answer wrong in all three cases. …