Commentary

Costs? Benefits? WTF?

Good lord, could the EU be getting something right while the US is punting? The Economist has a nice article on how the EU is picking up the use of cost-benefit analysis of regulations just as the US starts to be suspicious of it. Article here–sorry, subscription needed, but here are some highlights. A number of critics doubt the worth of the techniques [cost-benefit analysis] and distrust the motives of the practitioners. They say that America’s current administration is guilty of “regulatory underkill” and that cost-benefit analysis is its weapon of choice. . . [Skeptics object] to two features in particular: the “translation of lives, health, and the natural environment into monetary terms” and “the discounting of harms to human health and the environment that are expected to occur in the future”. . . . As the critics allege, cost-benefit analysis works like a kind of universal solvent. It breaks qualities down into quantities, differences of kind into differences of degree, gold into base metal. A safe childhood, a breathtaking view, a clean pair of lungsââ?¬â??all are reduced to fungible “dollar-equivalents”. In doing so, the method forces into the open trade-offs that many would rather not face too squarely. Should taxpayers’ money be devoted to keeping grandmother alive for an extra month in an intensive-care unit? Or would it be better spent reducing the risk of asthma faced by deprived children in the polluted inner city? Such comparisons may seem crass. But they are democratic. . . . [E]conomists are charged with under-pricing the future as well. Most practitioners of cost-benefit analysis assume that gains in the hereafter are worth less today than gains in the here-and-now. They discount future benefits, including lives saved, in much the same way that they discount future profits or costs. But are lives saved 12 months’ hence really worth less than lives saved this year? To say so, the critics argue, is to make a false analogy between financial resources, which can be borrowed from, or invested for, the future, and human life, which cannot. By discounting future lives, economists also further an anti-regulatory agenda, the critics allege. After all, the costs of most health and safety regulations arrive upfront. The benefits can take time to emerge. . . . Cost-benefit analysis does not always argue for less regulation. It weeds out regulations that do not pay their way, but it can also identify measures not on the statute books, that should be. You can get a good sense of the debate by looking at In Defense of the Economic Analysis of Regulation and at Pricing the Priceless: Cost-Benefit Analysis of Health, Safety, and Environmental Protection. It is irksome how tools always wind up being debated as if they are policies themselves. CBA gives policymakers information about the merits of regulations. It is not complete, it is not all of the info needed, but it is useful. For crying out loud, as much as regulators whine about how complex things are, while too much to hope they will realize the real limits of their knowledge, they ought to embrace a tool that helps makes sense of tradeoffs. But then, as the Economist article puts it, “A safe childhood, a breathtaking view, a clean pair of lungsââ?¬â??all are reduced to fungible “dollar-equivalents”. In doing so, the method forces into the open trade-offs that many would rather not face too squarely.”

Adrian Moore

Adrian Moore, Ph.D., is vice president of policy at Reason Foundation, a non-profit think tank advancing free minds and free markets.