John Podesta: Welcome, I'm John Podesta, President of the Center for American Progress. We appreciate your all being here, quite a turnout for a very important book. This is the latest of our breakfast forums and we're here to discuss Lisa and Frank's book about putting a price on human life, the Costs and Benefits of Cost Benefit Analysis. I'm going to turn this panel over. We're going to get Frank up here I think and I'm going to turn the panel over to Sally Katzen in just a moment, but by way of introduction I'd just like to say that many of us that are on this panel and have been working on this issue for many years.
I guess I first met Jim Tousey in the 1970s, and want to thank him for being here today. We probably go back to the day when Ralph Nader was still trying to make cars safer rather than taking a second run for President. Some things get better, some things get worse. The environment, work place safety get better, some things get worse. But it really is important to discuss this. We've got a long history of trying to improve the regulatory process.
I think by any measure of rough justice I think we can see that regulation does work in this country and around the world. We've got cleaner water, we've got cleaner air then we had back in those days when we first started working on these things. And I think by any fair analysis I think the benefits far accede the costs that have been imposed on the country. Yet I also think there is opportunity to learn, to try to improve, to try to use new technology, to try to improve our understanding and analysis of how we regulate, why regulate and the kinds of tools that we use to provide the most effective regulation for the American public=
This book, I think, is an extremely important contribution to that, so I'm not going to stand up here and speak for a long time. Lisa Heinzerling and I are colleagues on the Georgetown Law faculty so in that context I welcome her, but my duties are really to introduce Sally who again has been at the forefront of trying to make sensible policy and platform in this country, was the head of OIRA at the OMB and the Deputy Director of the Office of Management and Budget during the Clinton administration where we worked closely together. She now is a visiting professor at the University of Michigan Law School and has taught at Smith College and is probably one of the people in Washington who I think is respected on all sides of the debate on improving regulatory tools. So with that let me turn it over to Sally, Sally Katzen.
Sally Katzen: Good morning. Thank you all for coming this morning. I'd like to first thank John and the Center for convening this program on this subject. The fact that all of you were able to get out of bed this morning and get here is testament to its importance. In fact cost benefit analysis which is at the heart of what we're talking about today has clearly become increasingly more important in the field of public policy, but to be precise, the courts do not employ cost benefit analysis in reaching their decisions or justifying their decisions. And, the Congress rarely, if ever, considers, cost benefit analysis in enacting legislation or in even drafting legislation.
The cost benefit analysis has been playing an increasing role in the development of the regulations that implement that legislation at least by executive branch agencies. I have to put aside the independent regulatory agencies which play by their own rules sometimes. How has this come to be? Well, summarizing thirty odd years in three minutes, let me say that cost benefit analysis began to be used in a few rule making proceedings in the ‘70s under Nixon, Ford and Carter. There were a few scholars who wrote about the subject, a few fans of the approach in the agencies and most importantly in office of the President and a few critics, primarily among the public interest groups. A significant step occurred under Regan and his regulatory executive order, which constructed the agencies to maximize the net benefits and used other words to that effect, and a place where responsibility for reviewing the agencies work in the hands of the OMB. Under Clinton continued this general scheme all be it emphasizing that costs and benefits that could not be quantified none the less had to be considered and also worked to increase the transparency of the process so that there was greater understanding of what was happening in the review by OMB and greater accountability.
President Bush kept President Clinton's executive order yet revised the guidelines for agencies conducting regulatory analysis, what were once guidelines, are now requirements. He issued, this is John Graham, in the office of Information and Regulatory Affairs issued new standards for data quality and threatened to impose peer review on agencies analysis. Throughout this history there has been debate- sometimes polite and civil, sometimes not so polite, not so civil. Questions such as whether there is in fact a level playing field, whether both sides of the equation- costs, benefits- are equally and readily able to be quantified and monetized or whether there is an inevitable tilt- whether the product of all of this effort, the results, are informative or dispositive and whether it is all worth the effort in terms of staff time and resources because cost benefit analysis is not cost free. Do the costs of cost benefit analysis justify- I got it backwards, do the benefits justify, let alone outweigh, the costs of cost benefit analysis. In short, is this the silver bullet or is this a misguided, possibly immoral folly.
We are fortunate to have together today people who have worked extensively and thoughtfully in this field. I'm looking at the audience now before I even get to the panel. I thank you all for coming and we will be hearing from you shortly, but first we want to hear from our panelists who are well worth listening to. In order of appearance, I bring you Lisa Heinzerling, who is a professor of law at Georgetown Law Center as John had mentioned. She comes to us from Princeton and then the University of Chicago law school where she was editor in chief of the law review. She clerked for Judge Posner and then Justice Brennan and has worked in the field for over twenty years as an expert in administrative – She's the vice president at the Center for Progressive Regulation, where she is working extensively in the area. Our next big speaker will be her co-author of the book, Frank Ackerman who is an assistant professor in the Department of Urban and Environmental Policy at Tuffs University. He comes to us from Swathmore College and has a PhD in economics from Harvard and a BA in mathematics and economics, actually that was the Swathmore piece but I wanted to stress the mathematics because that always intimidates me. He is the author of many books including, Why do we Recycle?, Markets, Values and Public Policy and has worked extensively in this field from the perspective with emphasis on the environmental issues. Our third speaker is Jim Tozzi, a living legend in his own time. He did his undergraduate at Carnegie Tech, University of Pittsburgh and has a PhD in economics and business administration from the University of Florida. He spent over twenty years, twenty plus, in the federal government and in 1996 started the Center for Regulatory Effectiveness. Most significantly for present purpose he was instrumental in establishing the Office for Information and Regulatory Affairs at OMB in the Regan administration. Without further ado I'd like to turn it over to Lisa.
Lisa Heinzerling: Thanks for coming this morning and thank you to the Center for American Progress for organizing the event. It's a mystery there's a lot of discussion about cost benefit analysis in policy circles today, a lot of the talk as if it's the ascendant, the dominant way of making decisions in health, safety, environmental policy. Just want to open by stressing something Sally actually referred to earlier a little bit, which is that in our law actually cost benefit analysis makes very few appearances. In our health, safety and environmental statutes, really among them there's only one that specifically contemplates a formal cost benfit analysis, in which costs and benfits are quantified and monetized, which is the decision making framework we talk about in our book.
Many other statutes, most other statutes in these field require the consideration of costs in setting standards but they do not require, or in my view, even allow, formal cost benefit analysis of the kind we're talking about today. Some statutes, most prominently the air quality standards program of the Clean Air Act forbid the consideration of costs in environmental standard setting. There's a bit of a puzzle. There's a lot of talk about cost benefit analysis.
A lot of talk as if it's the predominate decision but yet in our laws there's a small role that Congress has passed. And what a lot of people are saying is that all that should change. We should do things differently, we should make decisions based on the methods of cost benefit analysis rather than methodologies that have developed over the past three decades and I think that here the underlying claim is that somehow health, safety and environmental laws have failed us and failed us severely. The conventional complaint that I think that we would hear would be that they're too expensive, they're too cumbersome. Economics is more important than the laws these laws protect but if we are good students of Frank Luntz, we know that that's not the way that we should talk about these matters and the way that we should talk is to say that we really like regulation, we're in favor of saving lives, we like nature, but we just want to do it better and smarter than we've done it in the past and so a lot of critique of current regulation and a lot of defenses of cost benefit analysis aim to show that our system is mixed up and that the way its mixed up is that we're spending too much money and we're spending too much money on the wrong things. And the aim is to show that if we rearranged our priorities we could save more lives or more money or perhaps both and so what I want to do this morning for just a few minutes is to talk about a couple of the stories that have developed along these lines. That is stories that about how our regulations has failed and why we need a better system.
The most famous of these stories is based on, and you're all familiar with this area. There are charts that show how much we spend on to save a life here and here in the United States. They are stunning documents. They show that the cost of life range from something around 100 or 200,000 to all the way up to tens of billions of dollars per life saved. Some of the charts even that we spend almost 100 billion per life year saved so they're fantastic and arresting documents and they're suggesting that we're spending a huge amount to save lives and life years in the United States and the immediate conclusion one might draw from charts is that if we spent our money differently think of the good we could do if we weren't spending 72 billion dollars for example to save a life through formaldehyde regulation.
Now, John Graham, before he became head of the office of Information and Regulatory Affairs was the author of one of these famous tables showing different interventions and how much they cost. He also went on then with a person named Tammy Tangs (ph) to author another study in which he purported to show how, if we did reallocate the money from the less effective programs to the more effective programs, how many lives could we save every year, and the answer's about 60,000. And so this was a stunning result, once again the idea that our current regulatory system is not just expensive, it's not just cumbersome, but in the words of John Graham himself, it's committing statistical murder – we're killing people because we're saving them in the wrong way, in the most expensive ways.
There are lots of problems with these claims; I'm going to just discuss a couple of them. One problem is that the tables that I'm talking about contain lots of regulations that were never, ever implemented by any agency in the United States. They also contain regulations that were never even proposed by any agency in the United States. The first study by John Graham and Tammy Tangs for example, included regulations that were simply hypothetical, that someone, somewhere had managed to dream up and attach a number to, and were never, ever proposed by anyone. In fact the most famous of the rules, the one that John Graham had widely publicized as showing the flaws in current regulation, a 99 billion dollar per life year regulation of chloroform was never proposed by any administrative agency. And so, the studies do show that you could, if you really wanted to, if you thought there was a point in it, just describe a set of regulations that would be real expensive if they were ever proposed, but it doesn't seem like there's a lot of point in that kind of exercise.
Second, these studies also, in a very important way, beg the conclusion they set out to draw – that is, they beg the question they set out to answer – which is that people have been asking, "well, if we're going to save lives through regulation, is there a way we can do it most cost effectively?" And the conclusion of these studies is: the way to do it is through safety regulations – make people wear bicycle helmets and safe, use car seats and .safety belts and so forth – things that produce life saving benefits immediately. As opposed to environmental regulation for example, which regulates toxic chemicals, which cause things like cancer which has a long latency period, and people aren't saved for quite a few years from the date from which regulation takes hold. Well it turns out these tables also employ a technique called discounting, which you may be familiar with for financial decisions, the idea is that a dollar in the future is worth more than a dollar today. Well it turns out Graham and his co-authors believe that a life saved in the future is worth less than a life saved today. And, if you discount lives in the future over any appreciable period, at any appreciable discount rate, it turns out they get trivial, very small, very quickly. And so in fact, when these analysts looked at cost per life saved, they looked at cost divided by a number that was rapidly approaching zero. That is, if you're saving lives in the future and discounting them, then the numbers are getting smaller and smaller in the analysis. And so the important point is, we can talk about discounting if you'd like in the question answer, but right now I just want to point out the conclusion that these studies reached which was that environmental regulation was the most expensive of the kinds of life-saving interventions we could enact, was built into the tables from the start, through discounting. Built in through, from the start.
Alright, another point about these tables and the current critiques is that most people, most people outside this room really won't understand them. They don't understand when somebody says, in a little footnote, lives were discounted at a 7% rate to arrive at these numbers. People don't understand that. And one of the things Frank and I think cost-benefit analysis manages to do, and we're not sure that this is unintentional by the way, it manages to cut people out of the process of decision making – to make them think that these decisions about the environment, about their own health, about their own lives, are things that they can't understand, they can't really talk about. They don't know about discount rates. They don't know about wage premiums. And so, one of the critiques that we would raise is not only, in addition to the technical problems and the problems about question begging, is the fact that the cost-benefit analysis tends to speak in this language that most people understand. Don't understand. It also tends to rely on a critique of people's understanding of risk itself. And this is another of the stories that circulates in these policy circles, which is that people are real confused about risk. They're more scared of power plants – nuclear power plants than they are of x-rays. And so what we need, is we need a decision making framework that will essentially take out the emotions, take people out of the process and put in people who will look really just at risk, the probabilities of harm and the magnitude of harm and that's that.
Let me point out a couple of figures to you to test your agreement with this: ‘bout more people die in the United States every year, and that is every year, from ulcers and viral hepatitis than died in the September 11th attacks. That's every year. Alright, we haven't remade American society because of ulcers and viral hepatitis. Right, we regard those kinds of risks as different, and they're different, not because the numbers are different, the numbers of dead are actually even larger so far from ulcers than they are from terrorism. One of the differences in these kinds of risk is obviously, they're frightening for a lot of ways, terrorism and a lot of kinds, similar kinds of risks. One of the differences is that we really don't know the best, worst case. We don't know the worst, upside number that could be hurt by something like terrorism. And so I think most people agree that we should treat risks differently by looking at the context in which the risk arises – terrorism is different from ulcers. And one of the points that we make in the book is that it is only rational to consider, what's the worst thing that could happen? This is what a lot of people do when they make real big decisions; they ask what's the worst thing that can happen. In fact we point out that there's a fancy economic theory behind this, which is always nice if you have a fancy economic theory that proves what everybody knows to begin with, which is authored by among others, Kenneth Arrow (ph), and the idea is that when you really don't know the probabilities, when you really don't know the probabilities, then the best thing to do, the most rational thing to do is to look at the best case and the worst case – look at the extremes. Don't pretend you can have some precise number in the middle that'll tell you the reality, look at the extremes. And in our case, what we're saying is we should look at the extremes. What if there turns out to be no risk from the threats we're talking about? What if the risk turns out to be catastrophic? Look at those extremes and think about which one you're prepared to live with if you turn out to be wrong. Want to spend a little bit more money on regulation – want to have the polar ice caps melt and the Gulf Stream shut down? Alright? So if you look at those extremes, and I just want to close by pointing out the Pentagon is actually pretty good at this.
I don't know if you've seen the news accounts, they're just beginning to seep out in the United States now, although European papers have been all over it in the last few days, Pentagon, last fall, completed a secret study of the, what they call the Abrupt Climate Change Scenario – a plausible but extreme case, they called it, of what would happen if climate change occurred over the next five to fifteen years rather than over the next century. And, it's not good if it happens, it turns out, over the next five to ten years rather than over the next century, and the authors of this study, who are no wild – wide eyed environmentalists, they're just regular old Pentagon kind of analysts, decided, said that we could expect food, water and energy shortages leading to massive political instability and violent conflicts. Now why do I raise this point in this, in this context? Because, what they did is they looked at what they regarded as a credible worst-case scenario and told us what they think the results, might be of that, of that situation. And that's what we're arguing for, in environmental cases we should look at a credible worst case scenario and not pretend that we can pick some arbitrary, mid-level estimate of what the consequences might be. So in the end I would just say maybe the Pentagon should talk to OMB and the EPA about what it's found. Thanks a lot.
(Clapping)
SK: Thank you Lisa and as Frank, as Frank moves to the podium, could I get the people at the back steps to move to chairs to make room for other late-comers? There are spaces down here. We won't call on you if you sit in the first few rows. In fact, it's more likely we'll call on you if you stay where you are. There are seats – particularly on this side – lots of seats. There's one right down here. We welcome you… good morning… thank you. Excellent. And now
Frank Ackerman: OK
SK: talk about fancy economic theories, I give you…
FA: Exactly. Well, supposing that we were to put aside all the very important doubts the Lisa talked about, and try to plow ahead with a cost-benefit analysis. Moving into the territory of all these numbers that intimidate people, and one wonders how much that's the point sometimes but, supposing that we said we were going to evaluate the costs and benefits of regulation.
The first thing you notice is that the costs and benefits are very different. The costs tend to be things like: how much does it cost to put some kind of filter on a plant for instance. They're often hardware costs; engineers know a tremendous amount about these costs. There are problems, costs are routinely overestimated in advance, there have been a couple of interesting studies that show that costs of environmental protection go down after implementation much more often than they go up, so there's a little bias there that you could correct for. But, those costs are meaningful, monetary costs. They're properly denumerated in dollars. To make the cost-benefit analysis do anything for you, the benefits have to also be denominated in dollars; they have to be meaningful figures for the benefits. That's the engine that makes the whole thing go. And, what if you looked under the hood and there's nothing there? What I want to talk about, what happens as you look at what is done to produce dollar figures for benefits.
The benefits of environmental protection, of health and safety regulations, are almost never monetary. A small part of them are naturally monetary, avoided health care costs, most of them are avoided deaths, avoided serious illnesses, avoided environmental destruction, avoided loss of wilderness or species, and cost-benefit analysis absolutely requires that we put dollar values on those. And, I don't know, nature abhors a vacuum; numbers have rushed in, but they are not terribly sensible numbers. So let's start talking about the value of life. Many regulations have their principle benefit of avoiding a certain number of deaths. What's it worth to not die? What's it worth for society to avoid a certain number of deaths? Well, this has been viewed as a technical question and the answer in the EPA under Clinton, was 6.1 million dollars, under Bush it's 3.7 million. Where do these numbers come from? The Clinton number, which I don't know if one can refer to one of these number as less absurd than the other, but the number which was at sometimes quoted as 5 million per life early in the 90's, carefully adjusted for inflation, as if nothing had changed but inflation, so it reached 6.1 million by the end of the 90's, is based on studies of more and less risky jobs and the wage differentials, comparing the wage premium that you get for doing a more risky job.
Economists did studies of huge numbers of workers, it's as if you compare two jobs that have the same skill requirements, they're the same in every way, except one is more risky than the other and you say, "if you're paid a little bit more for the risk, let's pretend that that is precisely the value of that risk." Try to picture two jobs that seem the same: working on the docks on a fishing, unloading a fishing boat, versus going out on the boat where you might be lost at sea. What if workers faced a completely voluntary choice if they were perfectly well informed about the difference between those two jobs, if nothing differed but the risk and, if the workers who made that decision precisely expressed society's value of risk as they made their workplace decisions, then you could read from that exactly how society values risk. That's all you have to assume. Almost all deaths on the job are male, blue-collar workers, and in fact, they're a minority of male, blue-collar jobs. My guess is that nobody here has ever worked in a sawmill, on a commercial fishing boat, I'm not sure about piloting a small plane, you know those are the kind of jobs that are dangerous, roofing? Anybody here worked on a, as a roofer in construction? I mean, much more – one hand for roofing, OK, uh, we're not quite shut out here – but, even most blue-collar workers have never done that.
The fact that a few people will take risks for a certain amount, the fact that people value individual risks at a certain rate, the fact that they take jobs under economic duress, not knowing what the risks are, you know, and the fact that an individual decision in the workplace might not be how we decide about carcinogens being released into the environment. For all of us, all of that totally invalidates the notion of why should our prospective regulation of air and water regulation be based on what it took to get somebody to work on roofing rather than ground level construction? And, the studies are, in many cases, twenty years old, so it's what did it take twenty years ago, carefully adjusted for inflation, of course.
The Bush Administration, possibly looking for a lower number, but in any case coming up with a lower number, decided they didn't like that. They preferred surveys that are done where you get people to go to a computer center and spend hours answering questions about abstract, hypothetical scenarios which differ slightly in the risk, and what would you pay to be in this imaginary world instead of that imaginary world that has a different level of risk? You know, you pay people 25 dollars to spend the morning doing it, you could use, have already selected for people who have time on their hands and are susceptible to small monetary incentives, who may not be typical of the rest of us. Anyway, you come up with this 3.7 million number. One study that did this tried to separately ask these questions of older people and one got 2.6 million for older people. So you know, a lot of people who die from air pollution are older, so, they ran with that number for a while and the author of the study disowned that calculation. That's the value of a life – that's the lynchpin of most cost-benefit analyses of environmental protection.
The studies of health effects other than that are, if anything, worse. They're wonderful scales of the costs of different illnesses, looking at quality adjusted life year, disability adjusted life years, there are a number of different systems that have been proposed. Let's arrange all problems on a scale from zero to a hundred. The problem is if you put death and headaches on the same scale, as these things do, then you can calculate a certain number of headaches are worth a death – almost no one who suffers from chronic headaches feels that way. The arsenic cost-benefit analysis, which first got me into this field, had to evaluate not only a death, that was easy, that was 6.1 million dollars because it was done under Clinton, but it, they also had to evaluate non-fatal cases of bladder cancer because a lot of people get bladder cancer from arsenic don't die of it. And they said, ‘we don't have a clue what the value of a case of bladder cancer is, we can't find anyone who's ever done one of these wonderful studies of a case of bladder cancer.' As luck would have it, somebody studied the value of chronic bronchitis 15 years ago and that's apparently close enough to bladder cancer for government work. (Laughter) So, aside form not wanting to go to those particular people for your health care, (Laughter) you look closely at, how was chronic bronchitis valued 15 years ago in this wonderful study.
Economists who were at Duke, so they found, they hired a survey team to go to a shopping mall in Greensboro, North Carolina and again, you know, corral shoppers there and ask them hypothetical questions about, ‘what if you could live in your neighborhood versus another neighborhood that had a slightly lower cost of living but a higher risk of chronic bronchitis, which would you prefer?' And varied the numbers on how much lower the risk of chronic bronchitis was, versus how much, you know, the cost of living of living was. And 2/3 of the people were able to answer this, 1/3 got bounced for not being able to play this game. (Laughter) That number produced a estimated value for avoiding a case of chronic bronchitis, carefully adjusted for inflation for 15 years, and then schmeared into the, the value of a case of non-fatal bladder cancer. Try to imagine, the engineers meanwhile, evaluating the costs, said, ‘well there are 13 different technologies for removing arsenic if you, depending on the water system, the geology of your area', you know, imagine if one of the engineers said, ‘well, we don't actually know the price of that pump, but we can get the price of the wrong piece of equipment from a shopping mall in Greensboro, North Carolina 15 years ago and we'll adjust it for inflation." (Laughter) The benefit numbers are absurd. They are not monetary figures; they are not reasonable approximations of what society believes.
Now, in making this critique, I often feel like a dissident in the economics profession, there aren't that many other economists who think this, you may have noticed, and, there, the more sympathetic version of let's do cost-benefit analysis, let's value these – externalities economists call them – effects that are outside the market, the sympathetic version of this says, ‘what if we could come up with really big numbers? What if we could do the studies better and find that there's a really dollar big value to the environment so there must be a really big value of protecting it? Cost-benefit analysis could become a force for good rather than what it in fact always seems to be.' The examples of this, the big values that come up are mostly values of nature.
This is a little bit complicated point we talk about in chapter 7 of the book, but there are the values of using nature and the values of the existence of nature, and economists think about them separately. And, the really big numbers are always the value of the existence of nature. The use of nature, the number of, you know, what do people pay going to parks, what is it actually mean in your life that you use it, is different from what is the existence of it mean. I've never been to the Grand Canyon, right? But it, even if I never get there, it actually, its existence means something to me. Almost no one has ever been to Prince William Sound, where the Exxon Valdez spilled and yet that meant something to people all over the country. It meant something like 30 times as much as the direct value of what was lost to the fisherman and tour boats in Prince William Sound. So the big numbers are always the existence values, the use values are in fact quite small. And, aside from the fact that they're often rejected in cost-benefit studies, they're so large that nobody believes them, the, you know, the existence of the animals protected by the Endangered Species Act some economists calculate it's about 48 times the fines that are levied under the Endangered Species Act, so you could say, "well, we need to make the fines 48 times larger," but that, my guess is that's a non-started in the discussion on the Endangered Species Act.
Right now, no one will pay attention to something that says they should be 48 times larger. And these existence values, they get at something important, something very important about the way people think about health and the environment, but they are not actually anything like prices. A study was done saying that the value of the existence of the species of humpback whales to the American public was 18 billion dollars, this was a few years ago and I didn't adjust it for inflation so it's be even bigger now, but, let's just go with 18 billion. The existence of the species of humpback whales the American people tell – you know, do a survey; get the average household value, multiply by the number of households, and it's worth 18 billion. So try this thought experiment: supposing some crazed billionaire somewhere offers to pay 39 billion dollars – twice the price, maybe even adjusted for inflation – for the right to kill all the humpback whales in the ocean. Is that a bargain? Now, say, if you just bought a car for 20 thousand dollars and somebody offers you 40 thousand for it, you might- you know, good chance you'd take it, even if you didn't take it you're not offended. But my guess is that if you're somebody who cares about whales and you contributed to this calculation that the humpback whales are worth 18 billion dollars and someone offers to pay 36 billion for the species, it doesn't sound like a good deal, you're probably offended by the offer. And, so, these existence values, the fact that something you don't touch has a value to you, it doesn't just have to be for inanimate objects, wilderness doesn't just have to be for other species, I mean, the lives of people who work in sawmills and roofing and fishing boats far away from me have a value to me, you know, as well as nature and so on. That, what we say in the book is that these existence values are real but they are not really numbers.
They tell us that people value things, but in all of these cases there is a complete failure to come up with meaningful numbers that express this. So, if you can't put a dollar value on the benefits in any meaningful way, the cost-benefit enterprise falls apart – you're left only pointing at the costs which, I have to say, is what some studies claiming to be cost-benefit analyses have started to do. There is no hope of completing the agenda of cost-benefit analysis because the benefits are not really monetary. Thank you.
(Clapping)
Jim Tousey: Good morning. I must say that the first time I read in the newspaper that there was going to be a new Center in Washington, and it was going to be headed by John Podesta, I knew that we're going to have a new force in Washington. I look at this crowd on this subject, is a living testament that there's going to be a new power center in the public policy area in Washington, headed by John. Sitting here, Sally picked out the seating orders and I must say, it's the first time I've been to the left of Sally, Frank and Lisa. (Laughter)
In musical terms, this gig would be, you would call the panel we have here the warm-up band. And years ago I was a wanna-be musician in New Orleans and, you're really the big event as Sally said, because we want to hear your comments. Years ago when I was a, in the music business in New Orleans and I was in a warm-up band, and, you know, the second band always, you always wonder who's in the first band. And they said, "oh don't sweat it," and I said, "what's the cat's name?" and they said, "well, Harry Connick." (Laughter)
I feel in the same position now after I follow Lisa and Frank today. I want to discuss this book and I really think it's a very interesting book. And one could comment in the abstract, as one book, but I think its, it might be appropriate to look at it in terms of the spectrum that have been written on benefit-cost analysis. And I must say that the articulate comments of Frank and Lisa today, don't completely do justice to the book because the book is at a level a lot higher than their comments in terms of macro policies that govern benefit-cost analysis, and I urge you to read it if you haven't read it. And look at, if you look at the spectrum of benefit-cost analysis and what they've addressed, and if you've looked at the number of books written over time on this, is that they're done mainly by economists and they get into very arcane topics such as the social discount rates versus the opportunity cost of capital and a lot of other things.
This book, I think, goes after benefit-cost analysis in an entirely different vein, some is on ideology, some are extremely basic principles and I think this book, how its written, the shelf-life of the criticisms will probably be a little longer than others because, as Lisa said, people will be able to understand the criticisms of this when you really get into the book. Now let me just give a – you know, Sally's a tough task-master, so I got my watch up here – let me just give you a, some of the books and then the continuum and see how this fits in.
If I had to pinpoint an area where benefit-cost analysis started in the government, it was a result of the 1936 Flood Control Act – no, I wasn't there then, I'm just reading a book, OK (Laughter) – and the 1936 Flood Control Act directed to Corps of Engineers to build only those projects to whomsoever the benefits exceeded the costs. So, from 1936 up to the early 60's, the majority of benefit-cost analyses in the government was done by the Corps of Engineers. And, some of you might question those analyses, in any event, the outputs of those products were somewhat vendible. You had flood control, you had water supply, things that could be measured. And there was a host of book written on benefit-cost analysis – John Cutilla (ph) from RFF, Arthur Moss (ph) from Harvard, uh, Bob Haveman (ph) from Grinnell and a number of others. Then what happened is, in 1969, the first paper that I have seen written on applying benefit-cost analysis to regulations, was a colleague of mine, I was systems analyst in the Department of Defense – under McNamara – and a guy named Alan Schmid, S-C-H-M-I-D, wrote a paper of how the government should move from benefit-cost analyses of capital projects to regulations. That paper is on our Center's website if you want to look it up, or just put his name in Google and you'll find it. And if there's one paper that I would state that was seminal in leading to the review of regulations by Office of Management and Budget, I was in Defense then, was that particular paper.
Now, if you take then, this series of books the big jump was, when we start reviewing regulations, the outputs of regulations are somewhat different than the outputs of capital investment projects. And a lot of the problems that you hear in this book, of criticisms of benefit-cost analysis, result from that transition from capital improvement projects to regulations that have more social dimensions. And, this is one of the first books that doesn't address per se, that timeline, but most certainly the concern, and the jump from capital evaluation of projects to regulations that have social outputs. Now, let's address this point – first thing, if you read the book in its entirety, their basic point, and as Lisa and Frank both said, if you get too mired in the details of benefit-cost analysis, the general public will think experts of the world said, "this is not worth it, don't do it, and I defy very many people to go through one of these analyses, including practitioners in the field."
So, to the extent that people use benefit-cost analyses as determinative, I agree with the thrust of that portion of the book – mainly that it's one thing to look at, it's certainly not determinative. Now let's get to the two basic points I think the authors state: one, it says and I'll quote, "the basic problem with narrow economic analysis of health and environmental protection is that human life, health and nature cannot be meaningfully, described meaningfully in monetary terms – they are priceless." That's one point and I will get to that in a second. Says, "resources of course, ultimately are limited but there is no evidence that we have approached the limits of what is possible. There is no evidence that these corporate burdens are, or are about to be, unaffordable. Furthermore, even if this constraint is real, benefit-cost analysis is incoherent." Let me discuss those two points because I think those two points, and the authors are right up front in the book, that are the thrust of the book. With respect to the first statement, namely that it's narrow, I would say, "yes, but."
Obviously there are a number of deficiencies in benefit-cost analysis and they're documented by a number of scholars and those in the economics profession that tend to make these determinative I think are overstating, most certainly the thrust of the tool. However, cost-benefit analysis is one thing that should be looked at with all of its constraints. The problem is, in some areas, it's becoming determinative. And that I think is a management problem, not one of economics. It's putting these tools in their appropriate light when they're looked at decision making processes. To the extent they become determinative, I don't think you throw out the tool, because there's a management inefficiency in the system, or a system of perception that you can't control, either overly aggressive economists – or in some cases, overly aggressive attorneys. So, in any event, I think that section, that question of Frank and Lisa wrote, could be done by, appropriate management and the proper use of benefit-cost analysis.
Now, I think the second term, core, point they have is, I don't know, it might have been written before but it sure didn't stand out in critiques of benefit-cost analysis, really what they're saying, they're not saying we're not resource constrained, they're saying in the box of where we're analyzing now, resource constraints are so, available resources are so great, we're working in a box where there's really not any economic scarcity. Now that's a, somewhat ideological. That is a point that I am not in a position to prove or disprove – however, neither have the authors. That's one point I think – fundamental point they made in the book. I haven't seen any data to back that point up or citations. Anything I think they would make on that at this point would be somewhat anecdotal, as well as what I would give you on the other side of that point might be somewhat anecdotal. But, in the last quarter, the Price-Waterhouse Cooper's conducted a survey of CEO's, not in the United States, throughout the world, and the conclusion of the report was that quote, unquote, "Overregulation as, is the single greatest threat to their businesses – greater than any other single risk including global terrorism." This is not me speaking; this is a thing of CEO's from the most develop- developing countries to developed countries and it's, at Price-Waterhouse site. Now, let's look at that concern.
Let's look at the, couple of other statistics. The gross domestic product of this country is 10 billion plus. The federal budget is 2 billion plus, it depends which economist you look at. The cost of regulation's around a billion plus. I would say that the scrutiny given to budget expenditures is considerably higher than that given to regulatory expenditures. Why? Because there's competition in the agencies, competition in the Bureau, there's competition through OMB for that dollar. They don't employ formal benefit-cost analyses but, most certainly, there is a very strong competition for the buck. And, they're subject to OMB review, subject to Congressional review. I don't see that type of review in the, in regulations. I think the agencies do some benefit-cost analysis, I think OMB does a very good job in reviewing it – OMB has a couple dozen people working on this and a bazillion in the federal agencies.
So I don't think benefit-cost analysis, in that sense mayn't be as prohibitive as it is, now, as stated. But I do, as I said before, to the extent that it become determinative I think it's a overuse of the tool. Now where does this leave us and the authors? The authors say that one of their basic premises is that they believe a holistic approach should be utilized, and they say this, that in it's, as an alternative benefit-cost analysis, they say, "in its place we offer an attitude rather than an algorithm – one that trusts collective, common-sense judgments, and is humble in the face of uncertainty, steadfast in confronting urgent problems and committed to fairness within and beyond the generation." I think that's a good start and, what I would think that the authors should consider writing the sequel to this book. And, and the sequel to the book, I think would not be, with all these nice little economic concerns of discounting and senior discount and – did you see that thing where that, there's an older lady, grey hair, that said 30 percent off, I mean, whoever wrote that, I mean is really, really, right on the ball – but in any event, let me go to the sequel.
I think the sequel is this: I think that when President Reagan signed Executive Order 12291, another one followed right after that, where it said that every agency in the government had to send the totality of all its regulations, and there was an Act passed to put it in law, of its regulatory agenda and regulatory calendar. Those are published every year, every 6 months of all agencies across, it's on the CRE website –very easy, just press a button and the agencies come up – and I think that a holistic approach to looking at regulations would be for people to review and have a public debate on those regulations – look at the benefits, look at the benefit-cost analysis, in essence, use somewhat of a regulatory budget without numbers. And I think if their next book would look at that as a basic organizing mechanism, and transpose on that a lot of their concerns, where there is this aberration and a jump from capital evaluation to regulations; it would be a great service. And again, I really recommend that you, that you read this book because its criticism is a lot more macro than a lot of the other ones that have been written. Thank you.
SK: Thank you Jim.
(Clapping)
SK: Before we turn, open the floor for questions, I wanted to give Lisa and Frank an opportunity to respond to anything that Jim said – although there seems to be violent agreement that there are, deficiencies in, well now he calls it benefit-cost, they call it cost-benefit. Do you see any pattern here? Do we need a psychologist to understand why one side is using the benefits first and the other side is using the costs first? But, we seem to agree there are deficiencies in the basic analysis and that it should not be dispositive, but there are other differences that remain. Lisa, Frank, would you like to comment?
LH: Yeah, I just, I want to disagree with what you just said (Laughter) Which is, which is also to disagree with something that Jim said, which is that, the idea that it shouldn't be dispositive and this is what people always say in the abstract, when we're at sessions like this, they always say, ‘oh no, no, no, no, no, nooo. Cost-benefit analysis is not determinative, it's just something that we think about – it's just a tool to be used in decision-making. It's not dispositive and that would be a bad thing.' But when it comes time to evaluating rules, when it comes time to write that op-ed piece on the arsenic rule or the mercury rule or any other rule you care to mention, then it turns out yes, cost-benefit turns out to be dispositive and all we hear about are the hard numbers. And so, in theory I think we are in agreement, in practice I don't think so. What I see is it being determinative in a lot of people judgments about, about important policies.
FA: Let me just respond briefly too. I mean I was pleasantly surprised at our agreement here, or maybe the speaker who was going to criticize us couldn't make it, I (Laughter) I'm not sure, but yeah, there are some subtler points of disagreement on this. I think in terms of the costs of regulation, I've found a lot of people, imagine when they hear about costs of regulation that there's a budget and that there's some allocation process that's going on whereby, if good project A doesn't get the money, then good project B will get the money instead and so we have to decide whether A or B is better. Most of the costs that are identified in cost-benefit analyses are not federal budget costs. I mean, you may know this; people I talk to in Boston are always astonished at this, most of the costs are the costs that will be imposed on private companies. What's the, it's essentially, what's the cost of doing business? You know, and sure, regulations impose some kind of cost. You could figure out, what's the cost of not being allowed to use child labor? Probably costs something to some businesses, but, you know, we've decided that not having child labor is one of the minimum standards for doing business in the United States and so you're not allowed to do that. And, you know, I think the question about environmental regulation, what should be the minimum standards for being in business, doing things that pollute the air or water, is a similar kind of question.
If we say the costs of water pollution controls at a particular plant are so enormous that we can't afford it and we roll back that regulation, what happens to that money that would have been spent cleaning up that river? There's no process that automatically transfers that money to another river where it can be cleaned up cheaper, it just stays on the bottom line of the company that didn't have to clean up the first river. So, there might be something to it if we were mostly talking about allocating a fixed budget, which is the image that everyone imagines. If we're talking about what's the minimum standard for this company to be allowed to be in operation on that river and this company to be in operation on the other river, there's no common fund there. What you do over here and over here are the minimum standards or operating in two places and there is no fund which is used up by doing one and isn't available for the other.
SK: Let me just throw out one thing, there was a OMB study that looked at the total costs and the total benefits of regulation and they found that the costs of regulation – this is for 10 years, '92 to 2002 – of 107 major regs – all the biggies – the cost was 36 to 42 billion dollars. The benefits was 146 to 230 billion dollars. Wow. Now this was s study done by OMB under the Bush Administration, it's in the 2003 Report to Congress of the Costs and Benefits. Some have thought, well some were surprised that it came out, some observed that when it did come out a number of the critics of regulation were somewhat quieted and were at least less vehement in their objection to regulation. And some thought, "wait a second, we can use this methodology to debunk the myth" that Lisa and Frank start with, which is the critics say "there is all this horrific, expensive regulation, something's wrong with the system." And now those who believe in regulation and the salutary effect on our lives can say, "there's nothing wrong. We have benefits that so greatly exceed the costs, out of the words of the Bush Administration, out of their own number crunching." So I would ask whether maybe there is a role for economics in public policy and that two can play the same game, and I can ask the panelists to comment on that or we can begin to ask people in the audience. Anyone here want to comment? Lisa and then we'll throw it open.
LH: The most of those benefits in that study, a lot of them for environmental regulation, something like 90 percent of them came from programs under the Clean Air Act. Most of them due to reduced premature mortality. It, the same time that OMB was writing that report it was also busily approving rules to relax important requirements in the Clean Air Act that would've saved those same lives that were being valued in that report and so, it leaves me with a puzzle: if the benefits of the Clean Air Act are so enormous, why are we busily relaxing it?
SK: Because maybe there's a political will, or lack of political will. Jim?
JT: Oh, I think that report doesn't make no, anyone's point. (Laughter) That analysis was done, it is not an OMB number. If we did that on the budget side, the deficit would be bigger than 500 trillion it is now. That report was a compilation of agency estimates – it was not scrubbed by OMB and OMB served as a stapler of their reports and put it together. So any resemblance to, is, I don't know where the numbers are and I most certainly couldn't quote that in favor of regulation or against regulation because OMB simply doesn't have the staff to generate those kind of numbers.
SK: Yes.
JT: They do have a stapler though.
(Laughter)
FA: One more point on this. These huge benefits of the Clean Air Act came from studies done by the EPA in the 90's – I've heard from consultants at Industrial Economics, it's a major consulting firm in Cambridge, that they've been hired to do a new study, reanalyzing that and improving the methodology. So, I think this is a process you keep doing until you get the answer you want.
SK: Please, would you identify who you are?