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On Balance: Don't Undervalue Life

by: W. Kip Viscusi, Vanderbilt Law School
Category: 2018 Archive
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Apr
11

Proper application of the value of a statistical life (VSL) is essential to preventing the systematic undervaluation of life throughout the world. The values used by U.S. federal agencies to monetize prospective risk reductions formerly were too low but have increased over time and are now in a range consistent with the economic literature. However, the values agencies assign to fatalities in setting regulatory sanctions are extremely low—often a fraction of the current estimates for VSL estimates used in regulatory contexts. Further, other countries still monetize risk reductions using techniques that undervalue life relative to VSL estimates. 

 

The origin of monetizing mortality risks in the United States and other countries can be traced to application of the human capital approach, which some agencies termed the “cost of death.” In the view of agency officials, life was too sacred to value, so instead they assigned a monetary value to the deaths. When I introduced the VSL in 1982 to resolve the dispute between the Occupational Safety and Health Administration (OSHA) and the Office of Management and Budget over the proposed hazard communication standard, the shift to the VSL as the measure of mortality benefits boosted benefits by a factor of 10. The bolstering of benefit assessments through the use of the VSL reflects the historical role of the VSL in providing an economic efficiency rationale for benefit assessments, making regulations more stringent than if set based on cost-of-death values.

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On Balance: Teachable Moments in Benefit-Cost Analysis: From Obama to Trump

by: Elisabeth Gilmore, Clark University
Category: 2018 Archive
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Mar
07

As a teacher of benefit-cost analysis (BCA), the review by the current administration of the Clean Power Plan (CPP), a cornerstone of the Obama era climate change regulations, presents what we often call “teachable moments.” Specifically, how could the CPP produce benefits that exceed costs in the Obama administration and then costs that exceed benefits in the Trump administration? 

 

In 2015, the Environmental Protection Agency (EPA) announced the CPP , which set standards for electricity generating power plants and guidelines for state-level plans, with a goal of reducing carbon dioxide (CO2) emissions by 32 % by 2030 compared to 2005. As an economically significant regulatory action, the CPP was subject to a benefit-cost analysis (BCA) as required under Executive Order No. 12866  and Circular A-4  from the Office of Management and Budget. The analysis indicated that the benefits of regulation outweighed the costs. 

More recently, however, in keeping with the views of the current administration, EPA proposed to repeal the CPP . In October 2017, the EPA published a BCA for this proposal, indicating that the benefits may no longer outweigh the costs. Why the difference between the earlier and more recent analyses? 

Both the earlier and later analyses include benefits of reducing climate change impacts associated with lower emissions of CO2. However, a key difference is the value ascribed to these benefits. 

The social cost of carbon dioxide (SC-CO2) represents the monetized value of the benefits of abating one ton of CO2. The SC-CO2, estimated by the US Government Interagency Working Group on Social Cost of Greenhouse Gases , encompasses both direct and indirect costs from climatic damages. These damages include adverse human health effects from higher temperatures, lost value of agricultural productivity due to changes in temperature and precipitation, and infrastructure damages from sea-level rise. 

However, by altering the discount rate for climate damages and the choice of “whose damages count” (global damages or only those to the United States), the BCA for the proposed repeal  calculates that the SC-CO2 (for emissions in the year 2015) could be as little as $1 (2011$). By contrast, the Obama administration calculated and adopted a value of $36 (2007$) in the BCA for the CPP . 

Each year, many students in my class question the usefulness of BCA in promoting good policy, often asking whether the BCA framework is too flexible, and therefore meaningless. Does this example support their skepticism? I am anticipating some tough questions from my students and here’s how I plan to answer them.

Question: One key difference between the values used for the SC-CO2 comes down to whose benefits and preferences should be included in the analysis. Who makes this decision?

Answer: The short answer is that BCA alone cannot guide us as to who has standing. While there is consensus that climate change is a global problem and that the most efficient policy would internalize the global social cost of CO2 emissions, there is less agreement about whether it is appropriate for the US government to consider damages to those living outside the United States. Two recent papers – the first by Gayer & Viscusi (2016) and the second by Howard & Schwartz (2016) – present divergent views and raise questions about precedent, legal authority, international reciprocity, and altruism towards inhabitants of other countries. 

Practical constraints are also important; the Interagency Working Group in 2010 estimated a domestic value of between 7 to 23% of the global value, but termed that value “approximate, provisional, and highly speculative .” Consequently, it is recognized that an improved domestic estimate would be needed to support its use in future BCAs. That being said, the question of who has standing is as much ethical and political as it is legal or practical.

Question: The SC-CO2 was calculated by the Interagency Working Group using three discount rates, 2.5%, 3% and 5%. For the BCA for the CPP rule, the results for a 3% discount rate were selected. In the review of the rule, the results are presented for 3% and 7%. The discount rate is critical for climate change policies where the benefits may not be observed until the middle of the century. So, who “picks” the discount rate?  

















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On Balance: Bringing Benefit-Cost Analysis to Policing Practices

by: Barry Friedman
Category: 2018 Archive
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Feb
12

The Journal of Benefit Cost Analysis and the Policing Project at New York University School of Law teamed up to host a symposium on the use of benefit-cost analysis in a domain in which it is all too absent: policing. (Policing tends to have many definitions, but generally we mean it here to refer to any use of force or surveillance of the populace for reasons of achieving public safety.) The goal of this Symposium on Benefit-Cost Analysis of Policing Practices, and the conference that preceded it, is to interest more scholars in working in this vital field, and to identify and begin to tackle some of the methodological challenges the field faces.

 

The past few years have seen constant turmoil in the country around policing. This is true of street policing, like stop-and-frisk or the use of force, particularly against brown and black men and boys. It is equally true of policing surveillance: tactics such as location tracking and Stingray cell phone location devices, facial recognition and predictive analytics.

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On Balance: Nobel Laureate Richard Thaler, Behavioral Economics, and Benefit-Cost Analysis

by: David L. Weimer, University of Wisconsin–Madison
Category: 2017 Archive
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Oct
26

Rational action lies at the heart of neoclassical economics. Sovereign consumers make choices that maximize their utilities. By observing the tradeoffs implicit in actual choices, or eliciting tradeoffs for hypothetical choices, benefit-cost analysts impute willingness to pay for desirable policy impacts and willingness to accept undesirable ones. Yet, it appears that sometimes consumers seem to make mistakes. The field of behavioral economics seeks to provide a more realistic psychological model of consumers and other economic actors that helps us understand apparent deviations from neoclassical rationality. The 2017 Nobel Memorial Prize in Economic Sciences recognizes Richard H. Thaler’s pioneering contributions to behavioral economics.

 

A handful of Nobel prizes have gone to scholars who have mounted fundamental challenges to the assumption of rational action––Hebert Simon with satisficing, Robert Schiller with irrational exuberance, and, most fundamentally, Daniel Kahneman with cognitive limits and judgmental biases. Whereas Kahneman is a psychologist who exported these ideas into economics, Thaler imported them into economics, extended them, and in the process helped create the new field of behavioral economics, which treats apparent deviations from individual rationality as the subject of systematic study rather than just anomalies that can be ignored. 

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On Balance: [Not] Lost in Translation -- International Perspectives on Benefit-Cost Analysis

by: Lynn A. Karoly, RAND Corporation
Category: 2017 Archive
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Oct
11

Since its founding in 2007, the Society for Benefit-Cost Analysis (SBCA) has sought to engage scholars and practitioners from across the world. The Society’s current rolls count members from 35 countries. In support of expanding the Society’s international scope, the SBCA co-sponsored a workshop on September 20, 2017—together with the University of Milan and the Centre for Industrial Studies (CSIL)—titled “The Role of CBA in Government Decisionmaking: International Perspectives.” The workshop was held in conjunction with the annual Milan Summer School on Cost-Benefit Analysis of Investment Projects organized by SBCA board member Massimo Florio and CSIL. 

 

Overall, the international forum assembled nearly 90 institutional stakeholders, civil servants, academics, and practitioners representing more than 25 countries to share their experiences with economic evaluation in varied sectors.  In addition to presenters from academia, various public-sector institutions were represented, including the European Commission (EC), the European Investment Bank (EIB), the European Court of Auditors, the JASPERS (Joint Assistance to Support Projects in European Regions) initiative of the EU, the EU Innovation and Networks Executive Agency, and government agencies from Italy, Lithuania and Poland.

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On Balance: Review of "Behavioral Economics for Cost-Benefit Analysis" by David L. Weimer

by: Don Kenkel, Cornell University
Category: 2017 Archive
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Sep
18

Behavioral economics finds that under predictable circumstances people sometimes fail to act rationally and in their own best self-interest. In these circumstances, public policies can nudge people towards better choices. For example, people can be nudged to save more, smoke less, lose weight, and buy more energy efficient vehicles and appliances. In addition to providing new insights about how to design public policies (see Chetty 2015), behavioral economics also has implications for how we conduct benefit-cost analysis (BCA). After all, BCA is built on the foundation of neoclassical welfare economics and rationality. This topic has been explored over the years in the Journal of Benefit-Cost Analysis, notably in a March 2016 Special Issue on [Ir]rationality, Happiness, and Benefit-Cost Analysis. 

 

In his new book, "Behavioral Economics for Cost-Benefit Analysis" (Cambridge University Press, 2017), David L. Weimer (University of Wisconsin – Madison) pulls together the insights of behavioral economics to provide “useful guidance for those actually doing BCA.” Because behavioral economics has wide-ranging implications for almost any policy, members of the Society for Benefit-Cost Analysis will very likely find Weimer’s book of interest. 

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On Balance: Consumers Guide to Regulatory Impact Analysis

by: Susan Dudley, George Washington University Regulatory Studies Center
Category: 2017 Archive
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Aug
14

In the United States and elsewhere, government agencies are required to conduct regulatory impact analyses (RIAs) to weigh the benefits of regulatory proposals against their costs. These RIAs are invaluable tools for informing decision makers about the effects of regulatory choices; even regulatory decisions that are ultimately made on political, legal, ethical, or other grounds will benefit from the structured evaluation of tradeoffs and alternatives that a good RIA provides.


However, dense or complex RIAs can be challenging for policy officials and interested parties to comprehend and interpret, making it difficult to evaluate the evidence presented and to understand the likely consequences of alternative policy choices.

Consumers Guide to Regulatory Impact Analysis

While numerous guidelines are aimed at people responsible for developing RIAs, none are geared toward non-specialist policymakers and interested stakeholders who will be reading RIAs as consumers. To address that gap, the George Washington University Regulatory Studies Center gathered a diverse group of regulatory analysis experts with a goal of helping policy makers and others appreciate the value of RIAs, ask appropriate questions of them, and judge their implications for regulatory policy. The group’s final product, a “Consumers Guide to Regulatory Impact Analysis: Ten Tips for being an Informed Policymaker,” appears in the latest issue of the Journal of Benefit-Cost Analysis. The short, open access article is available without a subscription. Here is a brief summary of each of the ten tips.


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