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On Balance: Regulatory Benefit-Cost Analysis--Advice for a New Presidential Term

In January, SBCA organized its first panel as an affiliate society for the Allied Social Sciences Association/American Economic Association annual meetings.1 The session, titled “Regulatory Benefit-Cost Analysis -- Advice for a New Presidential Term,” featured a panel dispensing advice to the incoming administration on improving and expanding the use of benefit-cost analysis.SBCA Vice President Glenn Blomquist chaired the panel discussion that included three former SBCA presidents (Susan DudleyDon Kenkel, and Clark Nardinelli) as well as Professors Michael Greenstone and Howard Shelanski. Dudley (the George Washington University) and Shelanski (Georgetown University) served as administrators of the Office of Information and Regulatory Affairs (OIRA) in the Bush and Obama administrations. Kenkel (Cornell University) and Greenstone (University of Chicago) served on the staff of the Council of Economic Advisors in the Trump and Obama administrations. Nardinelli served as the Senior Economist at the Food and Drug Administration.

 

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On Balance: Extending Executive Order 12866 to Independent Regulatory Agencies

The Department of Justice recently released an opinion on “Extending Regulatory Review Under Executive Order 12866 to Independent Regulatory Agencies.”1 The memorandum, dated October 8, 2019, concludes that “The President may direct independent regulatory agencies to comply with the centralized review process prescribed in Executive Order 12866.” The opinion means that the President can require the independent agencies to perform benefit-cost analyses of all significant regulations and submit the regulations for review to the Office of Information and Regulatory Affairs in the Office of Management and Budget. The opinion is the latest development in a 40-year-old debate over whether executive orders on benefit-cost analysis of administrative rules could or should be extended to rules issued by the independent regulatory agencies. A typical independent agency differs from executive agencies in that it is headed by a commission or a board appointed by the President. Their members have staggered terms and cannot be removed except for cause, such as (in the case of the Federal Trade Commission) “inefficiency, neglect of duty, or malfeasance in office.” 

 

The question is: Do the constraints on the president’s ability to remove members mean their regulations must be exempt from requirements of presidential executive orders? The statutes establishing the agencies did not indicate any independence beyond “for cause” removal. Indeed, although the President cannot remove commissioners and board members, he can remove other employees of independent agencies.2 

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On Balance: Publication Selection Biases in Stated Preference Estimates of the Value of a Statistical Life

International studies valuing mortality risk changes often rely on stated preference estimates of the value of a statistical life (VSL). Because labor market data in most countries are not as reliable as the fatality rate statistics in the United States, stated preference evidence for the VSL provides a popular research strategy for obtaining country-specific estimates. Unfortunately, this article finds that this literature is subject to rampant publication selection effects, leading to huge biases in the estimated VSL levels.

 

Publication selection biases may arise at different stages of the research process. If, for example, researchers and editors use U.S. estimates of the VSL as the reference point for reasonable estimates of the VSL, the U.S. value will influence which estimates researchers choose to submit to journals and which estimates are accepted for publication and ultimately published. Previous research has found that publication selection effects plague the VSL literature overall (Stanley and Doucouliagos, 2012), but do not significantly affect labor market estimates of the VSL based on the Census of Fatal Occupational Injuries data (Viscusi, 2015). 

This article examines the potential presence of publication selection effects using a sample of 1,148 stated preference estimates of the VSL from throughout the world. If there are no biases, estimates of the VSL should be symmetrically clustered around the true VSL level. In the case of the stated preference data, the distribution is highly skewed, with many precisely estimated values being near zero, and with a long tail of imprecisely estimated high values of VSL. Using standard statistical tests to adjust for publication selection effects, the article finds that the mean VSL level is reduced from $8.5 million (in 2015 USD) to a bias-adjusted value of $3.2 million. The extent of the publication selection biases is not uniform. High international VSL estimates are most seriously affected. At the 90th percentile of the distribution of VSL estimates, the mean estimate is $15.8 million, but the bias-corrected value is $4.2 million.

Similar biases also affected the labor market estimates in the U.S. literature. However, in that case, it was feasible to identify a subset of studies not significantly affected by such biases. To explore whether international stated preference studies similarly have a set of studies that is not distorted by publication selection effects, the authors also considered ten different subsamples of studies, such as stated preference studies published in peer reviewed journals, estimates pertaining to health risks or environmental risks, and estimates from lower and medium income countries. All these groups were subject to substantial publication selection biases, which sometimes reduced the estimated VSL by up to 80%.

What then are researchers and policy analysts to do when valuing mortality reductions outside the U.S.? The approach advocated by the authors is to use the U.S. estimates based on the CFOI data as the baseline, and then to extrapolate these values to other countries using their estimated international income elasticity of 1.0. Tables of such estimates appear in Masterman and Viscusi (2017) and Viscusi (2019). Notwithstanding the downward adjustments for income relative to the U.S., the projected VSL levels generally exceed the VSL amounts currently used outside the U.S. (Viscusi, 2018).

Using an average international income elasticity value has the advantage that the procedure is readily transferable and is based on income differences, which are a principal driver of variations in the VSL. The international elasticity value of 1.0 is also robust, as it is reflected in both stated preference and revealed preference estimates. However, the procedure ignores elasticity differences that may arise because of international differences in attitudes toward risk, such as religious and cultural factors (Hammitt and Robinson 2011).

The evidence of biases in the stated preference literature on the VSL does not imply that stated preference studies have no valid policy role. Other health risks that have been the focus of stated preference studies may not be subject to biases such as those that arise from anchoring on the revealed preference VSL estimates. There are many health risks such as risks of cancer for which reliable stated preference evidence is not available. Stated preference studies can continue to serve a complementary role (Alberini, 2019; Viscusi and Dalafave, 2020).

On Balance: Costs and Benefits of School Shutdowns

In Volume 11 of The Journal of Benefit-Cost Analysis, Thunström, Newbold, Finnoff, Ashworth, and Shogren presented their findings on the national benefits and costs of physical (or social) distancing measures. Their benefit-cost analysis shows a net benefit of $5.6 Trillion to the US economy over 30 years. However, work on the economics of education and family by Hanushek, Boyd, and others suggests that the long-term impacts on present and future productivity of one aspect of physical distancing policies, virtual learning and school shutdowns, may be more severe than this initial model supposes. 

 

There are two forces that, ceteris paribus, would seem to be eroding productivity, and thus diminishing future economic growth: the quality of K-12 education and maternal workforce participation. For both mothers interrupting their careers to meet the educational needs of their children during the pandemic and those children, these forgone earnings represent a loss of future productivity to the economy at large. 

A comprehensive assessment of the costs—and benefits—of a virtual K-12 education rather than a face-to-face education in 2020-2021 will take years to fully study and appreciate, but we know that teacher quality, even for just one year, can have profound impact on students’ future earnings. Despite teachers’ unquestioned hard work, it seems reasonable to suppose that a rapid implementation of a completely novel medium of instruction will reduce teacher quality during the transition. 

For a back-of-the-envelope calculation of the educational costs associated with virtual learning, let us suppose that the effect on students’ future earnings, is analogous to the difference between having a teacher who is 1.0 standard deviation above average compared to an average teacher. If that supposition is correct, that will mean that students in online classes this year will have $12,263 lower lifetime earnings in net present value (2020 dollars; Hanushek estimated $10,600 per student in 2011 dollars). Multiply this impact across 54 million K-12 students, and we can expect a decline in earnings of over $662 billion, net present value, over the course of the next 30 to 40-odd years. 

Second, early evidence indicates that women’s careers are being disproportionately affected by the pandemic generally, but school closures in particular. To the extent that this scenario is analogous to women interrupting careers for motherhood in general, it is reasonable to expect that working mothers’ earnings will also be diminished if and when they return to the workforce after schools reopen. Based on a model for maternal time off for child rearing from the Center for American Progress, an estimate of the effects on lifetime earnings is likely between $100,000 and $150,000 for most women (e.g. a 30-year-old woman working since age 22 and earning $44,000 who leaves the workforce for one year would lose $130,564 in total lifetime income; the model isn’t transparent, but I’m assuming it’s adjusted to net present value). 

Estimates of how many women have or will temporarily leave the workforce due to school closures are conflated with the high numbers of layoffs generally. However, in 2018, the Census Bureau reported that there were 23.5 million mothers of children under 18 working full-time; if we assume 1.0% of those mothers left the workforce voluntarily due to school closures, that would conservatively be a decrease of $2.35 billion in lifetime earnings for this group.

Combined, these two effects could decrease the net benefit of lockdowns by approximately $0.665 trillion—roughly 12% of the Thunström estimate—if lockdowns include closing K-12 education. These back-of-the-envelope calculations are intentionally conservative, so it is not surprising that others have found potentially larger costs to school closures in the U.S. and elsewhere. Even more concerning, the long-term rate of GDP growth of 1.75% used by Thunström, et al. is likely overly optimistic for scenarios in which schools are primarily remote or virtual for one or more years because it does not include probable decreases in future productivity and growth, further attenuating the net benefits of lockdowns. This analysis does not address the costs of daycare closures or virtual college learning. Nor does it address the racial and wealth disparities associated with all of these costs, which are undoubtedly substantial. 

I am not advocating that we abandon all physical distancing policies. A 12% decline in the net present value of these wages losses is quite impactful, but it does not change the results of the analysis: physical distancing policies have a net positive economic benefit; especially in the medium term. Rather, I am arguing that the policy mix within the umbrella of physical distancing matters. The closure of restaurants and bars (for example) has a very well-appreciated immediate impact on the economy, but the closure of schools, on the other hand, will have much larger long-term effects than is often appreciated. Even a small change in future productivity can and will have very long-lasting costs, indeed.

On Balance: Revealed Preference Methods for Nonmarket Valuation: An Introduction to Best Practices

For over 50 years, economists have developed and refined methods to value environmental and other nonmarket goods to provide benefit estimates that are commensurate with goods that are exchanged in markets. Without these estimates, benefit cost analysis of environmental regulations risk erroneous conclusions regarding the net benefits of a regulation. The methods can be broadly categorized into revealed preference (that infer values from behavioral clues) and stated preference (which directly elicit values through surveys). Despite their longer history and the many documented shortcomings, revealed preference methods have not been subject to the intense validity and reliability challenges as their stated preference counterparts. And, unlike stated preference methods (see Johnston et al.2017), there has not previously been an effort for scholars of the approaches to develop a set of “best practice” guidelines for the implementation and reporting of these analyses.

 

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On Balance: A New Rationale for Not Including Certain Impacts in Benefit-Cost Analysis

This post is a summary of a paper I’ve written called “What’s in, what’s out? Towards a rigorous definition of the boundaries of benefit-cost analysis,” forthcoming in Economics and Philosophy. Students are typically told that benefit-cost analysis is an application of the potential Pareto criterion, which defines net benefit as the difference between the willingness to pay of winners for their gains from a policy and the willingness to accept of losers for their losses. If the difference is positive, the policy is a potential Pareto improvement, and we say that it generates positive net benefits. Economic philosophers have presented many objections to this definition, but none of these objections refutes the basic logic.

 

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On Balance: The Persistence of Appraisal Optimism in Benefit-Cost Analysis

In my paper for this journal earlier this year (Abelson, 2020), I discussed how seven official guides to benefit-cost analysis (BCA) and the leading international text on BCA (Boardman et al., 2018) deal with eight contentious issues: the issue of standing, core valuation principles, the scope of CBA, changes in real values over time, the marginal excess tax burden, the social discount rate, the use of benefit-cost ratios, and the treatment of risk. I did not discuss, however, arguably the most potent cause of poor BCA studies: appraisal optimism, which is sometimes referred to less courteously as appraisal bias. Indeed, appraisal optimism receives little attention in most BCA textbooks and official guides. I will attempt here a partial rectification of these omissions.

 

I start with some substantial evidence for appraisal optimism in project evaluations. I then discuss the alleged two main drivers: cognitive biases and incentives in government appraisal processes.  Finally, I discuss some remedies. But I am not optimistic that the virus will entirely disappear. 

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On Balance: Recent Developments in the Market for Vaping Products and the Implications for Benefit-Cost Analysis

Since electronic cigarettes were introduced, in 2007, they have presented controversial public health tradeoffs. E-cigarettes provide users with the addictive chemical nicotine but without exposing them to the harmful combustion-generated toxicants in cigarette smoke. On the one hand, because smoking combustible cigarettes is estimated to lead to almost 500,000 deaths each year, e-cigarettes have great potential as a harm reduction strategy. In particular, evidence from randomized clinical trials shows that vaping e-cigarettes helps adult smokers quit. On the other hand, the growing popularity of vaping among teens raises concerns about nicotine addiction, the possibility that vaping is a gateway to smoking, and unknown future health consequences. More teens now vape e-cigarettes than smoke cigarettes. In the National Youth Tobacco Survey, the fraction of high school students reporting vaping within the past 30 days increased from 11.7 percent in 2017 to 27.5 percent in 2019, before dropping to 19.6 percent in 2020.  Some public policies – increasing the legal purchase to 21 and banning e-cigarette flavors popular with teens – try to target teen vaping. Other policies, most notably e-cigarette excise taxes, discourage both adult and teen vaping.

 

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On Balance: Should We Believe Willingness to Pay to Remove Novel Environmental Threats?

Novel threats call us to action. Witness the response to the 9/11 attack and more recently to the coronavirus. Such risks may be particularly compelling if citizens do not understand how to deal with the harm or because of ambiguity around the probability that the threat will be realized. 

 

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On Balance: Professional Principles for Benefit-Cost Analysts

Benefit-cost analysts essentially ask for a lot of trust. They look to inform policy decision-making by using a tool that boils very complex choices down to a seemingly simple comparison of the relative values of benefits and costs. If an analyst’s work is to be taken seriously, the decision makers must have confidence that the analyst is objective and competent, that the results being provided accurately capture what is known about any choice’s implications. The decision makers may have their own biases and interests and many choices will require decisions from a wide array of people with varying perspectives. But through the whole policy-making process, decision makers do not want to have to worry about hidden agendas, skewed data, or sloppy analysis in the information intended to inform their decisions.

 

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On Balance: New Editor, Same Mission

What a year it has been. Between the unfolding of a global pandemic and nationwide protests around the topic of police brutality, 2020 has already been a jam-packed year for public policy, and we haven’t even made it into election season.

 

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On Balance: COVID-19 Benefit-Cost Analysis and the Value of Statistical Lives

Reducing COVID-19 risks requires making extraordinarily difficult decisions that trade-off saving lives and economic damages. Benefit-cost analysis is well-suited for investigating these trade-offs and informing these decisions. However, interpreting and using the results requires understanding the framework and addressing its limitations, including the uncertainties in the value of mortality risk reductions and the distribution of impacts across those who are advantaged and disadvantaged. For related information, view JBCA Editor Tom Kniesner's conversation with W. Kip Viscusi.

 

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On Balance: Matthew D. Adler, Measuring Social Welfare: An Introduction, Oxford University Press, 2019. Review by James K. Hammitt, Harvard University

Benefit-cost analysis (BCA) is loosely interpreted as a method for determining whether a policy is ‘in the public interest’. More formally, BCA measures the effect of a policy change on each individual’s wellbeing as a monetary value and sums these values over the population. If the sum is positive, the policy change is declared a potential Pareto improvement, meaning the change plus some set of cost-free money transfers would be Pareto superior to the status quo (or other comparator).

 

BCA is described as evaluating efficiency or the size of the social pie. It does not depend on how the pie is distributed. Recognizing that the public interest depends on distribution as well as efficiency, policy-evaluation guidance routinely calls for analysis of the distributional effects of a policy. Moreover, out of concern for distributional effects, BCA in practice sometimes departs from its textbook foundation by substituting population-average values for individual-specific values. For example, although an individual’s value per statistical life (VSL) depends on her income, age, and other characteristics, BCA in  practice almost always applies the same value across the population.

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On Balance: Evaluating Policy Responses to the Opioid Epidemic

More than 450,000 Americans died of an opioid overdose between 1999 and 2018. There were fifteen fatal opioid overdoses for every 100,000 individuals in 2018, a ratio five times greater than in 1999. While public health researchers and policymakers have rightly turned their attention toward remedying the global coronavirus pandemic, the U.S. opioid epidemic continues to take lives. In my dissertation, An Empirical Analysis of Policy Responses to the Opioid Epidemic, I analyzed the effect of various state and federal interventions to reduce opioid abuse and overdoses. This analysis can contribute to the benefit-cost analysis of policies that aim to decrease opioid consumption and overdose deaths.

 

State responses to the opioid epidemic have taken a variety of forms. Among the most controversial have been naloxone access laws, which make it easier for individuals to acquire the drug that reverses an ongoing opioid overdose. From 2006 to 2016, most states enacted one or more different laws to make naloxone accessible to opioid users and others so that they can administer it to individuals experiencing an overdose. Laws that let individuals purchase naloxone directly from a pharmacist without a patient-specific prescription from another healthcare provider decrease overdose deaths by about ten percent. Three thousand fewer fatal overdoses would occur annually if every state enacted such laws (relative to a world in which no states have such laws). Using a VSL of $10 million, those lives saved amount to approximately $300 billion in monetized benefits between 2006 and 2016. In contrast, laws that immunize prescribers, pharmacists, or naloxone administrators from civil or criminal liability arising out of naloxone provision or administration had no statistically significant effect on overdose deaths. The benefits of naloxone access laws were concentrated in white users, heroin overdoses, and urban areas. Accordingly, the results indicate that making naloxone even more widely available, particularly as an over-the-counter medication, would save a significant number of lives.

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On Balance: We Need a Proper Analysis of the Economic Costs of Social Distancing and Other COVID-19 Containment Measures

Economic management in Australia has effectively been outsourced to health experts. Political and business leaders are deferring exclusively to public health advice about how to contain the COVID-19 virus with no serious public discussion of the economic costs.

 

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On Balance: How Cost-Effectiveness Can Help People Hear Our Message

On the 26th of March, the Associated Press reported that, "Gov. Andrew Cuomo of New York has said that if all of his sweeping, expensive measures to stem the coronavirus saved one life, it would be worth it." This surely must be hyperbole, but he has also said, "We’re not going to accept a premise that human life is disposable… And we’re not going to put a dollar figure on human life." At the same time, it seems that there is an increasing call in public discourse for a sensible weighing of the pros and cons of "lockdown" measures, which I suspect anyone reading this blog would agree is a necessary component of good decision making. If Cuomo's sentiment about the value of life is shared among decision makers and the public, how do we get our benefit-cost message across in an effective way, that can actually improve the quality of public decision making, at this particular moment, in this particular context? 

 

In my view, the crucial takeaway from Cuomo's public statements isn't that there are decision makers out there who actually think that every single life should be preserved at any cost, but that he finds the explicit assignment of a dollar value to a human life is abhorrent. And, in the sense that Cuomo is thinking of. it is abhorrent. We know that the value of a statistical life (VSL) isn't the dollar value to society of saving a human life, but rather the dollar value of an amount of risk reduction sufficient to save one life, which we know is not the same thing, and captures only a portion of the value society places on human life.  The usefulness of the VSL for the purposes of measuring the welfare impacts of regulation is undeniable.The trouble is, explaining what it really is, to non-economists, is challenging at the best of times, and probably more or less impossible right now. People don't want to hear it, and there seems to be a real risk that at this very particular moment in time, some may simply disregard any analysis that involves monetization of human life.

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On Balance: Reflecting the State of the Science: Updating EPA’s Guidelines for Preparing Economic Analyses

The U.S. Environmental Protection Agency (EPA) has a long history of providing comprehensive guidance for conducting economic analyses, including benefit-cost analyses for environmental regulations. Much of that guidance is distilled in the EPA’s Guidelines for Preparing Economic Analyses, which was first released in 1983. The Guidelines are a mix of theory, empirical evidence, and practical recommendations and directives for ensuring the agency is providing the best available economic science for policy makers to consider when making decisions about regulatory actions.

 

The primary audience for these Guidelines is EPA analysts, including economists, who are charged with conducting the analysis and writing the technical materials to accompany regulatory text. However, their impact and use extend far beyond an internal, bureaucratic document that collects dust on a shelf. Indeed, many university professors and other federal agencies turn to these Guidelines for use in teaching benefit-cost analysis and understanding the state of the science for conducting economic analysis.

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On Balance: Benefit-Cost Analysts Step Forward to Inform COVID-19 Policymaking

Being in the SBCA is great because it connects me with so many very smart people who care about public policy and benefit-cost analysis. This value was illustrated by the rapid rate at which the SBCA network began to exchange ideas and estimates about the benefits and costs of interventions to address the COVID-19 situation. As these ideas start to work their way into the more general media, I wanted to share a few observations with readers of On Balance about the challenges facing our community in conducting and interpreting these benefit-cost analyses.



First, given how little we know about COVID-19, the first set of analyses will be preliminary and reflect a higher level of imprecision than analyses of diseases and interventions where we have more history. Nevertheless, these initial responses are essential for informing public policy. Policy makers are going to have to make decisions. They should have the benefit of the best available analyses, even if those analyses will get more accurate as the underlying estimates and assumptions used to produce them. The key here is to inform current decision-making and to then update the analyses as more evidence becomes available in order to inform future decision making.

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On Balance: The Costs and Benefits of E-Cigarette Policy

Currently, e-cigarette supporters and opponents are passionately debating what regulations to impose on the products, if any. These debates have been playing out in legislative chambers across the United States, ranging from city halls to Congress, and in federal agencies including the Food and Drug Administration (FDA). Proponents who argue for no or little regulation maintain that e-cigarettes save lives by helping people quit smoking. Opponents, meanwhile, argue that e-cigarettes themselves are addicting teenagers to nicotine.

 

Both sides agree that smoking combustible cigarettes is dangerous: the Centers for Disease Control estimates that annually 480,000 individuals die from smoking, accounting for about one in every five deaths. Yet, there exists disagreement regarding the risks of e-cigarettes relative to combustible cigarettes. The two sides also disagree as to whether e-cigarettes are gateways to or exit ramps from other tobacco products. Ultimately, this debate centers around whether the benefits of e-cigarettes outweigh the costs; and the FDA’s regulatory impact analysis makes explicit use of such a cost-benefit analysis.

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On Balance: C-Bridge: Making CGE Compatible with CBA

How much impact is your economic appraisal leaving out?” This is the perennial question that CBA practitioners face when putting forward their results of, normally, a poorly performing project. In investment appraisal, my area of work, the question is often decisive. I presume the same applies to CBA practice in policy appraisal.

 

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