On Election Day, November 2000shortly before turning
attention to chads and dimplesthe U.S. Supreme Court heard
arguments in a case that pit health against commerce, and law
against economics: Should the government consider costs when
setting standards for clean air? The U.S. Environmental Protection
Agency (EPA) claimed that the Clean Air Act prohibited it from
considering costs when establishing national air quality standards.
The American Trucking Associations argued that to set standards
without accounting for the cost of attaining them would allow
regulators, in the words of a lower court, to send industry
"hurtling over ... the brink of ruin," and even to
In an unprecedented move, a nonpartisan group of 42 of the
nation's most prominent economistsincluding three Nobel
laureates and seven former chairs of the president's Council
of Economic Adviserssent a "friends-of-the-court,"
or amici, brief to the Court in support of American Trucking.
The economists suggested that establishing air quality standards
without contemplation of cost is tantamount to economic heresy.
"We believe that this Supreme Court case involving the
setting of National Ambient Air Quality Standards could be a
historic moment in the making of regulatory policy," stated
the economists' brief. "It would be imprudent not to consider
costs in the setting of standards."
But on Feb. 27, 2001, in what the New York Times called
"one of the court's most important environmental rulings
in years," a unanimous Court ruled otherwise: Costs don't
count. At least not in this context.
The ruling was a stark defeat for American Trucking and the
businesses that joined with it to defeat tougher air quality
standards. But it also was a setback for the role of economic
thought in regulatory policy. After all, the nation's top economists
had told its highest courtrespectfullythat they'd
be fools not to allow consideration of costs in the setting
of regulatory standards, yet the justices had disagreed, without
a single dissenting vote. Their verdict was clear. Economics
had fought the law and the law won.
But as time has passed since this historic ruling, its apparent
clarity and finality have diminished. Far from settling the
debate over cost considerations in regulatory decision-making,
the Court's ruling in Whitman v. American Trucking Associations
Inc. appears to have simply moved a long-lived dispute on
to its next stage. Those who celebrate the decision hope it
has permanently narrowed the role of economics in health, safety
and environmental regulation, but many others believe it simply
marks a new phase in a campaign to "rationalize" regulatory
policymaking by ensuring that costs, as well as benefits, are
given due consideration.
This conflict mirrors an ongoing debate among legal scholars
and an ambivalence among policymakers about the use of cost-benefit
analysis and similar economic tools in regulatory policy. While
a systematic balancing of costs against benefits is bedrock
belief in mainstream economics, the Court's ruling in American
Trucking seems to reflect the fact that many Americans are
far from convinced that such economic calculations must apply
to all spheres of life. Do costs always count? Must we put a
price on life itself? These are questions that hold significance
not only in the ongoing battle over clean air standards, but
in a host of other health, safety and environmental disputes,
ranging from the price we should pay to remove arsenic from
our water, to the cost of security measures at airports, to
the measures we should take to curb global warming.
The background: take a deep breath
The Supreme Court case emerged from a 1993 lawsuit in which the American
Lung Association (ALA) claimed that the EPA hadn't fulfilled its statutory
responsibility, under the Clean Air Act, to review National Ambient Air
Quality Standards (NAAQS) every five years. Courts ruled for the ALA,
and the EPA was given a tight timeline to complete its review. By November
1996, the EPA announced that not only was the assessment done, but it
was proposing to significantly tighten standards for two major pollutants:
ozone and particulate matter, known more familiarly as smog and soot.
The new standards were based strictly on health science, said
the EPA, not economics. "The Clean Air Act does not allow
EPA to consider costs at the critical public health stage of
the standard-setting process," wrote EPA administrator
Carol Browner. It "requir[es] instead that pollution limits
be based solely on health, risk, exposure and damage to the
environment, as determined by the best available science."
Utility, auto and manufacturing industries immediately attacked
the proposed standards, saying that their attainment would impose
crippling costs. Public health and environmental groups, in
contrast, generally praised the tighter standards, though they
suggested that the ozone standard might need to be a bit tougher.
A rancorous battle ensued, with industry claiming that the EPA
would force all Americans to give up their backyard barbecues
and environmentalists suggesting that asthmatic children could
never again spend a day in the sunshine if industry got its
An equally unpleasantif less publicfight broke
out within the White House, as other administrative agencies
protested the EPA proposals. The Department of Defense said
that meeting the new standards would cost it $1.36 billion annually.
The Department of Transportation said the standards "could
have significant economic impacts on industry and require lifestyle
changes by a significant part of the population." The Small
Business Administration claimed the proposal was "one of
the most expensive regulations, if not the most expensive regulation
faced by small business in 10 or more years." And a memo
from a member of the president's Council of Economic Advisers
intimated that the EPArequired by executive order to perform
a cost-benefit analysis for the new standardshad fudged
the numbers. EPA cost estimates, said the memo, written by economist
Alicia Munnell, "understate the true costs by orders of
Despite the widespread criticism, President Clinton backed
the EPA's tougher standards. "If we have higher standards
for protecting the environment," he said in June 1997,
"but we're flexible in how those standards are implemented
and we give adequate time and adequate support for technology
and creativity ... we can protect the environment and grow the
Days later, industry went to court.
The high court
As the case worked its way through the federal court system, two central
and intertwined questions emerged: Had Congress, in writing the Clean
Air Act, improperly delegated legislative authority to the EPA? And could
the EPA consider costs in setting clean air standards?
In 1999, addressing the first point, the District of Columbia
Circuit Court of Appeals ruled that the Clean Air Act, as interpreted
by the EPA, provided no "intelligible principle" for
setting air quality standards at one point rather than another.
In calling on the EPA to set each standard at the level "requisite
to protect the public health" with an "adequate margin of safety,"
the Clean Air Act gave the EPA too much discretion, said the
court, and thereby improperly delegated to the executive branch
the power to make law.
"It is as though Congress commanded EPA to select 'big
guys,'" wrote the appeals court, "and EPA announced
that it would evaluate candidates based on height and weight,
but revealed no cutoff point. The announcement ... is fatally
incomplete. The reasonable person responds, 'How tall? How heavy?'"
So when the EPA set ozone and particulate matter standards where
it didat a level greater than zero but less than unmistakably
fatal, it had overstepped its authorityit had made law,
rather than executed it.
But in 2001, the Supreme Court was not convinced by this argument.
In a complex and ever-changing world, it noted, Congress couldn't
be expected to spell out every last technical detail and specify
all decision-making mechanisms. Administrative agencies like
the EPA rightly assume decision-making authority, as long as
their process is consistent with statutes as written by Congress.
"'[A] certain degree of discretion, and thus of lawmaking,
inheres in most executive or judicial action,'" said the
Court, citing an earlier precedent. The Clean Air Act "fits
comfortably within the scope of discretion permitted" and
the EPA had acted properly.
Cost: the missing link?
But even if the EPA's action hadn't violated constitutional
divisions of authority, argued American Trucking, the standards
it set were arbitrary judgments based on uncertain science.
This was especially true because both pollutantscertainly
ozone and probably particulate matterwere "nonthreshold"
pollutants, meaning that there was no specific level at which
scientists could say definitively that they posed no health
risk. An intelligible principle for setting standards was therefore
necessary, and the most sensible principle was to weigh costs
against benefits. That balancing would demonstrate that the
EPA wasn't simply making a judgment call, a political decision.
Industry, of course, was certain that when costs were considered,
the standards would be loosened.
The question before the Court, then: Was the EPA right to exclude
consideration of costs when setting the standards? In oral arguments
before the Court, the attorney for American Trucking Associations,
Edward Warren, said that balancing costs against benefits was
"a common sense weighing of competing considerations,"
and he invoked the "prudential algebra" of Ben Franklin:
"Put on one side of the column, pros. One side of the column,
cons." Basic cost-benefit analysis is a most fundamental
form of reasoning, he argued, a way of informing a decision
that is both natural and necessary. If costs aren't considered,
said Warren, "I don't frankly know how, in a world of limited
resources ... how we can make these
The justices weren't impressed. The Clean Air Act seemed quite
expressly to forbid consideration of costs, they noted. It had
been successful in cleaning the air, and clearly the U.S. economy
had not been sent "back to the Stone Age." "You
say you don't know how we can live with this kind of a regime,"
said Chief Justice William Rehnquist. "Well, we have lived
with it for 20 years," referring to a 1980 lower-court
precedent affirming the act's prohibition on consideration of
Other justices hectored the attorney about his advocacy of
cost-benefit analysis. Justice Ruth Bader Ginsburg suggested
that its use would simply "create another morass, many
more things that can be attacked" by critics of any given
standard. And, said Justice Antonin Scalia, it won't provide
a clear answer: "If you're going to stop a cough, is $1,000
too much?" he asked. "What does it cost to stop a
cough$2,000? $3,000? It's just as indeterminate."
Justice Stephen Breyer, an expert in risk regulation and generally
an advocate of cost-benefit analysis, seemed equally doubtful
that it would settle the argument. "There's no scale in
heaven, or anything else other than judgment," he said.
And he later noted that if Congress had intended that the EPA
use cost-benefit analysis to establish standards, it would have
been explicit about it. "Cost-benefit analysis is a formal
discipline," he said. "It's very complicated. It's
very time-consuming. And if you were going to have that formal
discipline in this statute, why would they just use the words
The February 2001 decision, then, came as little surprise.
The EPA had not overstepped its authority, ruled the Court,
and it was right not to consider costs in setting standards.
It was surprising, however, that the opinion was delivered by
Scalia, a conservative jurist generally considered no friend
to environmentalists, and that the decision was unanimous in
a Court that has often been split.
In its discussion of cost considerations, the Court's ruling
doesn't dwell on the wisdom of cost-benefit analysis but rather
on the textual intent of the statute. What did Congress mean
when it wrote it? "Were it not for the hundreds of pages
of briefing respondents have submitted on the issue," Scalia
dryly observed in the written decision, "one would have
thought it fairly clear that this text does not permit the EPA
to consider costs in setting the standards." Where American
Trucking's attorney had noted that cost was frequently mentioned
in the text of the law, the Court responded that those provisions
applied to the application of standards, not their setting.
While the Clean Air Act provides latitude to consider costs
in the implementation stages, wrote Scalia, it "unambiguously
bars cost considerations from the NAAQS-setting process, and
thus ends the matter for us as well as the EPA."
The Court had spoken, rejecting industry's effort to import
cost into standard-setting and rejecting the idea that the EPA
had overstepped its authority, though returning to the agency
and to the Court of Appeals a number of more detailed issues.
It was, wrote Scalia, an "unusually complex" case,
but its resolution was relatively unambiguous.
Industry now says it will continue to fight the new standards,
but using different tactics and forums. "Our only recourse
now is principled decision-making based on sound science,"
said Robin Conrad, attorney for the U.S. Chamber of Commerce in
the Supreme Court case. "Our best shot is now on remand,
for the Court of Appeals to decide whether they were arbitrarily
and capriciously set." Since costs can't be considered,
Conrad hopes to prove that the EPA's standards lack scientific
credibility. "We may get a more reasoned and disciplined
standard-setting process, less onerous for the business community
... based on sound science and not arbitrary numbers that EPA
But while industry licks its wounds and prepares for the next
battle, others hope the Court's decision is a Waterloo for business
complaints about clean-up costs, and a fatal wound for the use
of cost-benefit analysis in health and environmental regulation.
"This was a huge defeat for industry," said Paul Billings
of the American Lung Association. "And a victory for people
who breathe." The Clean Air Act, he added, "is a very
complicated law but a very simple concept: That we set standards
based on what is necessary to protect public health with an
adequate margin of safety and those are based on what the health
science tells us, not based on cost or feasibility."
The nation's headlines trimmed it to the bone: "Court
Rules Cost Should Not Affect Action on Clean Air," said
the New York Times. "EPA Can't Weigh Cost of Clean Air
Rules," said CBS News on the Web.
The rise of cost-benefit analysis
Whatever its current status may be in the nation's highest court, the
role of economic considerations in regulatory policyand the role
of cost-benefit analysis in particularhas grown markedly in the
executive branch over the last 20 years.
Within a week of his inauguration in 1981, President Reagan
created a process for review of regulations through the Office
of Management and Budget (OMB). As outlined in his Executive
Order 12291, the process required all federal regulatory agencies
to perform a regulatory impact analysis, including cost-benefit
analysis, for all rules with expected annual costs exceeding
$100 million, and established the Office of Information and
Regulatory Affairs (OIRA) within OMB to review and approve the
analyses. Although cost-benefit analysis had been used to some
extent by the Ford administration, and in a limited degree by
Presidents Nixon and Carter, Reagan's order confirmed it as
a decisive White House tool.
President George Bush continued Reagan's executive order requiring
cost-benefit analysis of major regulations, but the Clinton
administration revoked Reagan's executive order and issued its
own, E.O. 12866. Because Republican support of regulatory cost-benefit
analysis had been widely viewed as a partisan effort to deregulate
social, health and environmental programs, observers were surprised
to see that Clinton's executive order sustained the executive
branch's commitment to cost-benefit analysis.
Indeed, the Clinton White House, under the guidance of Joseph
Stiglitz, then chairman of the Council of Economic Advisers,
issued detailed guidelines in 1996 to all agencies for improving
their analysis of the costs and benefits of major regulations.
Significantly, however, cost-benefit analysis was not a decision
rule: The adoption of a policy didn't hinge on being able to
show a positive net-benefit figure. Clinton's executive order
required not that benefits outweigh costs, but that they "justify"
costs. It placed great emphasis on distributional concerns,
and it acknowledged that some costs and benefits that should
be considered cannot be monetized.
In the current administration, President Bush's appointee
to head the OIRA, John Graham, formerly director of the Harvard
Center for Risk Analysis, was, in fact, a signer of the amici brief in American Trucking. Although he declined to comment
for The Region on whether the Bush administration was
likely to issue its own executive order regarding cost-benefit
analysis, he did note that "[t]he Supreme Court opinion
... explicitly supports use of cost-benefit analysis when federal
and state agencies are developing specific air pollution control
Moreover, in late September 2001 Graham issued a memorandum
to all executive branch agencies explaining how OIRA would implement
Clinton's executive order "until a modified or new Executive
order is issued." The implementation procedures stress
concepts of cost-benefit analysis, risk assessment and peer
review. (It's also worth noting that Graham's work is specifically
under the direction of President Bush's Chief of Staff, Andrew
Card, who in 1997, as president of the American Automobile Manufacturers
Association and a highly visible opponent of the EPA's new ozone
and particulate matter standards, said that President Clinton's
"administration lacked the courage to do what is right.")
Over the last two decades, then, cost-benefit analysis has
become a standard administrative tool to evaluate the impact
of regulatory initiatives. Advocates say that it has introduced
rationality to the regulatory process, by forcing agencies to
confront the costs of their policies. Costs had always been
considered, they say, but only implicitly. Cost-benefit analysis
makes costs and benefits explicit, introducing transparency
and reasonableness to the discussion. It should, hopefully,
lead to more efficient regulation.
Administrative law scholars, most notably Eric Posner at the
University of Chicago and Matthew Adler at the University of
Pennsylvania, have suggested that there is a more expedient
reason for the rise of cost-benefit analysis in the executive
branch: It minimizes what economists call "principal agency
costs." Requiring cost-benefit analysis, say Posner and
Adler, allows a president to keep close tabs on his staff by
forcing them to report on the perceived costs and benefits of
their work. An explicit numerical report on intended goals,
potential benefits and expected costs, suggests this theory,
helps to minimize the discrepancy between what the president
wants to accomplish and what his staff are actually doing.
Regardless of the reasons for its use, the actual practice of cost-benefit
analysis is fraught with complexity and obstacles to accuracy. Stiglitz's
guidelines helped to improve the practice during the Clinton administration,
but the technical difficulties inherent in calculating both costs and
benefits necessarily result in estimates that are widely acknowledged
to be uncertain. As one EPA document states: "Wide ranges of uncertainties
and omissions often exist within an analysis, especially within complex
studies of national scope involving forecasts over extended periods of
It was hardly surprising, then, that the EPA's estimates of
net benefits for its 1997 proposed air quality standardsprepared
as required by E.O. 12866, though the EPA maintained that the
standards were strictly health-basedwere subjected to
intense dispute by other analysts.
The Council on Economic Advisers, for example, estimated that
the new ozone standardsaid by the EPA to have annual costs
of $9.6 billion and benefits ranging from $1.5 billion to $8.5
billionactually had costs between $12 billion and $60
billion and benefits under $1 billion. By either estimate the
net benefits were thought to be negative, but the degree of
negativity, even within the administration, varied dramatically.
(While the EPA's negative net benefit estimate might have seemed
reason enough to revise the standard, the EPA accurately pointed
out that many benefits cannot be monetized.) Net benefits estimates
for particulate matter standards were positivesubstantially
so, according to the EPAbut the Council of Economic Advisers
estimates varied there as well.
Conservative think tanks came up with far higher figures than
did the EPA or the Council of Economic Advisers when calculating
the costs of the proposed air quality standards. Whereas the
EPA estimated the total cost of the new standards at $46 billion
per year, the Mercatus Center put the figure at over $100 billion
annually, and the Reason Public Policy Institute said the standards
would cost between $90 billion and $210 billion per year.
It's easy enough to conclude that analytical results will vary
according to one's political agenda. As noted by Stephen Polasky,
senior economist with the Council of Economic Advisers immediately
following the NAAQS controversy, EPA analyses were perceived
as being done not to inform a decision but to justify a decision
already made. Cost-benefit analysis is not immune from scientific
doubt, value judgment and political pressure. "It's not
arbitrary, but there is a huge range of uncertainty," said
Polasky, an applied economist at the University of Minnesota.
And that means that results can be shaped. "I've seen how
the sausage is made and it's not pretty." The simple fact
that results can vary so widely indicates that cost-benefit
analyses are less than perfect indicators, with outcomes resting
in large part on the assumptions one makes and the values attributed
to whichever factors are selected for inclusion.
The legal debate
Despite problems with cost-benefit, most economists agree that it's an
extremely valuable tool in setting regulatory policy. "I have always
been a strong advocate of cost-benefit analysis," said Stanford University
economist Kenneth Arrow, a Nobel laureate and co-signer of the amici brief. "With all its limitations, I think the best chance of getting
rational decisions is an attempt to be explicit about the benefits and
costs of any policy measure." In disputes over environmental policies
in particular, noted Arrow, cost-benefit analysis provides a systematic
discipline; otherwise, "it is easy to be overwhelmed by looking at
only [one] side, whether only costs or only benefits."
Another amici brief signer, Janet Yellen, professor
of economics at the University of California, Berkeley, and
chair of the Council of Economic Advisers when the EPA issued
the new air standards in 1997, said that the brief "was
a statement about the value of cost-benefit analysis as a guide
toward making reasonable regulatory judgments, and as a piece
of economics and public policy, I fully agree with that."
Maureen Cropper, professor of economics at the University of
Maryland, principal economist with the World Bank and chair
of the EPA Advisory Council on Clean Air Compliance Analysis,
also signed the amici brief. She remarked that "it's
important to lay this information out. [A cost-benefit analysis]
isn't necessarily the only basis for setting a standard, an
environmental standard, but you certainly do want a decision-maker
to know what different regulations would cost, or what different
degrees of regulatory stringency would cost."
While most economists support cost-benefit analysis in theory,
some are highly critical of the way it has been applied in practice.
Trinity College economist Amartya Sen, a Nobel laureate, strongly
objects to what he considers the "mainstream approach"
to cost-benefit analysis that applies market-centered valuations
to benefits and costs. "The very idea that I treat the
prevention of an environmental damage just like buying a private
good is itself quite absurd," he has written; efforts to
determine what people would be willing to pay to prevent ecological
harm are inherently worthless, in his view. "When all the
requirements of ubiquitous market-centered evaluation have been
incorporated into the procedures of cost-benefit analysis, it
is not so much a discipline as a daydream."
By and large, though, economists have achieved a high level
of consensus about cost-benefit analysisSen himself seems
to argue for an improved methodology. But it remains a topic
of heated debate within the legal community, and nowhere has
the dispute been hotter than over NAAQS.
One highly respected branch of legal scholarshipthe
law and economics school associated with the University of Chicagoviews
cost-benefit analysis as the natural means of promoting an efficient
legal and economic system. Another influential school of legal
thought considers cost-benefit analysis technically flawed,
morally suspect and philosophically untenable. And a third branch,
calling themselves pragmatists, says that cost-benefit, though
perhaps useful in some spheres, is basically irrelevant to the
real-world practice of regulation. The scholarly debate among
these wings of the legal world has been lengthy, fervent and,
one hopes, productive. And its links to economics are intimate.
Legal proponents of cost-benefit analysis in regulatory policy include
Richard Posner, former chief judge of the Seventh Circuit Court of Appeals
and a senior lecturer at the University of Chicago law school, and Cass
Sunstein, also a law professor at the University of Chicago. Posner, a
leader of Chicago's law and economics school and Eric Posner's father,
is a forceful advocate of cost-benefit analysis, especially as it uses
the Kaldor-Hicks concept of efficiency, that is, the idea that a policy
change is worthwhile as long as those who gain from that change can, in
theory, compensate the losers and still be better off.
"I have long argued that cost-benefit analysis in the
Kaldor-Hicks sense," Richard Posner recently wrote, "is
both a useful method of evaluating the common law and the implicit
method ... by which common-law cases are in fact decidedand
rightly so, in my opinion." Cost-benefit analysis "compel[s]
the decision-maker to confront the costs of a proposed course
of action," he noted. It is "after all, primarily
an effort to introduce market principles into government."
Sunstein also writes profoundly and prolifically on the application
cost-benefit analysis to law and economic policy. Cost-benefit
is the best means available of producing rational regulation,
he has argued, especially because people are prone to cognitive
quirks that inhibit rational evaluation of risks. Cost-benefit
analysis is "designed to assist people in making complex
judgments when multiple goods are involved."
Moreover, he argues, cost-benefit analysis has become the prevailing
means of evaluating policy in the administrative branch. "It's
ascendant, absolutely," he said in an interview this autumn,
well after the American Trucking verdict. And in a forthcoming
paper, he argues that despite the Supreme Court ruling against
consideration of costs in American Trucking, cost-benefit
analysis is likely to remain the default mechanism for the judicial
branch as well. "Indeed," he writes, "the most
reasonable reading of the opinion is that the Court has explicitly
embraced that principle."
Others beg to differ. "Especially after American Trucking,"
said Lisa Heinzerling, professor of law at Georgetown University. "I
don't see how he can argue that it's a default principle in the courts.
That point was specifically pressed to the Supreme Court: They were asked
to endorse the default principle in favor of cost-benefit and they clearly
Heinzerling, who represented Massachusetts and New Jersey,
parties to the suit with the EPA in American Trucking,
is a severe and articulate critic of cost-benefit analysis in
regulatory policy. Cost-benefit analysis is crippled by technical
flaws, she contends, and perhaps the most basic is its inability
to accurately measure the value of a human life.
To estimate the benefits of a new air quality standard, for
example, one has to estimate the number of lives that might
be saved if the standard were achieved and then multiply that
number by the value of each life. Cold-hearted though it might
seem, government agencies routinely perform such calculations.
But value of life estimates vary widely by agency: the Department
of Transportation says a human life is worth about $2.5 million.
The EPA says each life is worth $5.8 million. Similar variations
exist for benefits estimates for illnesses avoided by enacting
health and safety regulations. "We don't have good methods
for doing that," said Heinzerling, "and even where
we have methods that are fairly widely agreed upon by economists,
a lot of other people think that those methods are problematic
on ethical grounds or grounds of equity."
In an article titled "The Rights of Statistical People,"
Heinzerling argues that analysts have created the entity of
a "statistical life" in order to facilitate cost-benefit
analysis, but the concept essentially strips those lives of
their human rights. We don't allow one person to kill another
simply because it's worth $10 million to the killer to see that
person dead and because society may measure that person's worth
at less than $10 million, she argues; then why should regulatory
policy be based on a similar principle? "It makes a person's
freedom from harm, indeed her life, contingent upon the financial
profile of the life-threatening activity," writes Heinzerling.
Other technical and moral problems with cost-benefit analysis
include its difficulty in settling on a discount rate for measuring
present values of future costs and benefits (government analysts
use rates ranging from 3 percent to 10 percent, which radically
net-benefit calculations) and its inability to avoid the distributional
questions it claims to be independent of. Potential benefits
of a policy are often calculated on the basis of surveys of
people's willingness to pay for, say, a better view of the Grand
Canyon, an extra year of life or avoidance of cancer. But critics
argue that willingness to pay hinges, in part, on ability to
pay, so that cost-benefit analysis is fundamentally dependent
on the equity issues it professes to avoid. Indeed, critics
say, cost-benefit analysis is very poor at handling issues of
intergenerational equity when the consequences of environmental
harm involve an irreversible event, like death.
Estimates of costs are also fraught with uncertainty, since
industryfaced with regulatory pressureswill likely
develop technology to reduce costs. Indeed, Breyer, in his American
Trucking concurrence, said that the technology-forcing intent
of laws like the Clean Air Act makes determining costs of implementation
"both less important and more difficult. It means that
the relevant economic costs are speculative, for they include
the cost of unknown future technologies. It also means that
efforts to take costs into account can breed time-consuming
and potentially unresolvable arguments about the accuracy and
significance of cost estimates." In short, it makes cost-benefit
analysis itself less likely to pass a cost-benefit test.
Another skeptic, Robert Percival, professor of law at the University
of Maryland, points out that these many problems in the practice
of cost-benefit analysis can lead to paralysis by analysis.
While he tends to be sympathetic to the concept of cost-benefit
analysis, he said, "The real problem is that cost-benefit
analysis had gotten a bad name because it's been used for strategic
purposes by those who are opposed to environmental regulation."
Opponents of regulation will advocate cost-benefit analysis
because it can slow down the regulatory process, defeating the
decision-making it is intended to aid, and maintaining the lower-cost
status quo. "The American Trucking case is an excellent
case," he said, where industry threw in
cost-benefit because it thought "that 'If we require cost-benefit
analysis, we can keep these regulators tied up in knots for
Percival remarks that the economists' brief was "very
unusual. I don't know of any precedent for a group of economists
filing an amicus brief," but in an essay he complimented
the brief for its acknowledgment of "the danger that easily
quantified factors will dominate decision-making." Numbers
give the illusion of certainty and importance, a problem Heinzerling
calls the "peril of precise quantification." Percival
said this can be an incurable flaw: "Experience with the
few laws that explicitly require use of benefit-cost analysis
[suggests that] quantifiable factors tend to dominate the standard-setting
Another school of legal scholarship says that much of this ongoing controversy
over cost-benefit analysis is largely irrelevant. "The debate has
focused far too much on the initial regulatory stage in which standards
are created," said Daniel Farber, professor of law at the University
of Minnesota. "Much of the real action is elsewhere." Farber,
Sidney Shapiro at the University of Kansas and other prominent administrative
law scholars consider themselves pragmatists in that they're less interested
in the theoretical foundations of cost-benefit analysis than in its utilityor
lack thereofin real-world policy implementation.
"Standard-setting has absorbed far too much of our attention,"
writes Farber in a forthcoming article. "In the context
of the whole regulatory system, whether to limit EPA's discretion
with more detailed legislation or through cost-benefit analysis
is not a major problem." Shapiro adds, "We need a
more balanced approach, which is to stop trying to pretend that
we can perfect this by getting actually good estimates of costs
and benefits on the front end, and we ought to look for improvements
on the back end."
The real problems, say these legal pragmatists, lie in implementation
of policy at the state and regional level; this is where cost
and technological feasibility are truly significant. And indeed,
they argue, the Clean Air Act was written with this in mind.
"We have basically a two-step process," said Farber.
"Step one is we set goals. And in step two, during implementation,
cost starts being very important, so things that look excessively
costly either happen very slowly or don't happen at all, and
things that are more
cost-justified get done a lot more quickly."
In Farber and Shapiro's view, this is a reasonable and desirable
state of affairs. "It seems to me that it's not a bad idea
to say, as a statement about social values, that we really value
clean air," said Farber, even while implicitly acknowledging
that we might not be able to achieve that goal. And given "regulatory
slippage," it makes little sense for regulators to start
negotiating with industry by stating the societally optimal
level of pollution, since industry is likely to bargain it down
during the implementation phase. Better to start with the ideal,
and negotiate down to the realistic.
Moreover, said Farber, "given the way the implementation
process works, I'm not entirely convinced that early global
cost-benefit analyses at the time you do the regulation are
all that meaningful." Full implementation is never going
to happen, he says, and projected costs are highly theoretical.
So his biggest concern about requiring cost-benefit analysis
at the standard-setting stage "is not the abstract moral
issue" but rather "what I'm afraid would be further
snarling up a process that's already bureaucratic enough."
While critics like Heinzerling consider such pragmatism to be rather
cynical, cost-benefit advocates themselves stake a claim to pragmatism.
Echoing Winston Churchill's observation about democracy, they admit that
while cost-benefit analysis isn't perfect, it's better than the alternatives.
"My own justification for using cost-benefit analysis in common-law
decision-making," wrote Richard Posner, "is based primarily
... on what I claim to be the inability of judges to get better results
using any alternative approach." And he recommends that the acknowledged
moral inadequacy of the Kaldor-Hicks criteriaits neglect of distributional
equityshould be addressed by simply employing cost-benefit as a
tool for informing policymakers, not as a decision-making imperative.
"This may seem a cop-out," Posner admitted, "as
it leaves the government without a decision rule and fails to
indicate how cost-benefit analysis is to be weighted when it
is merely a component of the decision rule." But "I
am content to allow the usual political considerations to reinforce
or override the results of the cost-benefit analysis. If the
government and the taxpayer and the voter all knowthanks
to cost-benefit analysisthat a project under consideration
will save 16 sea otters at a cost of $1 million apiece, and
the government goes ahead, I would have no basis for criticism."
It is a position most economists would endorse. Recognizing
its deficiencies, its inability to monetize all values and especially
its emphasis on efficiency rather than equity, advocates would
say that careful cost-benefit analysis should be just part of
the decision-making process, a means of rationalizing the discussion
and making explicit the weights that various parties place on
involved factors. "Benefit-cost analysis does not provide the policy answer, but rather defines a useful framework
for debate," said the economists in their amici brief to the Court.
"At least this approach would enable you to put down
some explicit weights," observed Jagdish Bhagwati, professor
of economics at Columbia University and an amici signer.
"I'm in favor of quantifying, just to make the thing aboveboard.
Implicit criteria are not really good things. I do believe that
putting it downgetting people, pro and con, to say what
they think the relative weights ought to beis a good thing.
And once you've done that, cost-benefit analysis just naturally
Future of economics in regulatory policymaking
Just how naturally cost-benefit analysis will indeed follow in the coming
years is difficult to predict. Ben Franklin notwithstanding, cost-benefit
is a relatively recent tool, and givenas Amartya Sen has observedthe
frequently clumsy application of that tool, it shouldn't be surprising
that cost-benefit analysis continues to raise objections. In its current
form, it may be too ungainly, both technically and philosophically, to
be the silver bullet that some hope to find for rationalizing regulatory
Like cost-benefit analysis itself, the debates over its use
among lawyers, economists, environmentalists and business people
tend toward indeterminacy. Advocates and critics are able to
speak the same language but still can't communicate, and here
it seems that something more fundamental is in play. "To
some extent, they're like ships passing in the night, I think,"
said Shapiro. "They're each sort of talking about something
different." Heinzerling suggests that "there are two
different world views."
Skeptics of using economics in regulatory decision-making view
its proponents as hardhearted bean counters who, like Oscar
Wilde's cynics, know the price of everything and the value of
nothing. "The economists want to give you a very simple
equation and a balance sheet," said Billings of the American
Lung Association. "We decline to put a price on a human
life or a breath of fresh air, or a child being able to play
outdoors who has asthma." Cost-benefit supporters, on the
other hand, tend to see its critics as irrational zealots who
are, in the words of Robert Hahn, director of the AEI-Brookings
Joint Center for Regulatory Studies, "almost of necessity
religious in nature."
Government's application of economics in regulatory decision-making
mirrors this unsettled debate. Despite its ascendance in the
executive branch, the on-again/off-again status of cost-benefit
analysis in the courts seems to reflect Congress' own ambivalence.
Some environmental and health statutes are explicit in calling
for cost-benefit analysis, others are ambiguous, and others,
like the Clean Air Act, reject it altogether. Timing has something
to do with it: Environmental regulations adopted in the 1970s
tend to be
cost-blind, in tune with the public's growing apprehension over
environmental risks; whereas, later regulations reflect their
era's Zeitgeist of cost-benefit calculation. But Congress has
periodically revisited regulations adopted in the 1970s and
explicitly chosen not to amend them to include cost considerations.
And the House of Representatives' 2001 rebuff of President Bush's
delay of arsenic regulation tightening appeared to be a vote
for health ideals, rather than a reasoned cost-benefit balance.
Still, many advocates hope to convince Congress otherwise,
and several initiatives floated through Congress in the 1990s.
The 104th Congress considered a number of comprehensive regulatory
reform proposals that would have required cost-benefit or risk
analyses, including the 1994 Contract for America, but these
either failed to pass or were vetoed by President Clinton. A
later effort, the Regulatory Improvement Act of 1999, would
have allowed courts to invalidate rules promulgated by agencies
that failed to subject them to sufficient cost-benefit analysis.
It, too, failed to become law. In 2000, however, Congress did
enact and Clinton signed, the Truth in Regulating Act, a three-year
pilot project under which the General Accounting Office will,
if requested by Congress, review and assess regulatory impact
analyses conducted by administrative agencies. As of early October
2001, however, monies had not been appropriated by Congress
to fund the act.
Economists v. the world: an out-of-court settlement?
Economists who signed the amici brief in American Trucking say, in retrospect, that they weren't surprised by the Court's ruling.
Congress had written the act to exclude cost considerations, and it would
have taken a major act of judicial activism to inject cost into it. But
they do hold out hope for the future. "In my untutored view, the
Court was right as the law now stands," said Kenneth Arrow. "I
considered our brief a step toward future legislation. ... Ultimately,
Congress will have to move to improve the decision-making process."
Maureen Cropper agrees, but acknowledges that congressional
representatives won't push for more in the way of cost-benefit
analysis without public support. "I think you really have
to have people have their legislators go on record in saying,
'It's okay to consider costs, and we're not going to spend hundreds
of billions of dollars to reduce ozone by one part per million,'"
said Cropper. "I think that really has to happen."
At this point, however, most observers feel that Congress is
highly unlikely to open up the debate, at least in the context
of the Clean Air Act. "I think it's politically untouchable,"
said Robert Litan, co-director of the AEI-Brookings Center.
"In my ideal world I would love to see an across-the-board
statute that had balancing [of costs and benefits], but I don't
think that's politically realistic now. ... It would be the
regulatory equivalent of the debate over abortion. ... It would
bring out religious apostles from both sides and you would have
a regulatory religious war. I'm not sure there's the stomach
And Congress' ambivalence may well reflect the public's uncertainty
over the wisdom of applying hard economic calculation to health
and environmental legislation, in contrast to pervasive support
for such analysis among economists. "It was a pretty amazing
list," said Litan, noting the wide variety of political
leanings among the amici brief economists. "It just
shows you where the economics profession has a consensus and
how differently we think about things than the Congress does.
And probably how differently we think from a lot of ... the
Indeed, most people would prefer not to face the trade-offs
that economists force us to think about. We want clean air,
but we also demand the goods whose production sullies that air.
Economists tell us, in their dismally scientific fashion, that
we can't have it both ways. And industry and environmentalists
try to persuade us to favor one way or the other. "You
have to decide what your preference function is between income
and what you're willing to pay for the environment, what level
of weight you attach to these two things," observed Bhagwati.
"And that, I think, is what the [nongovernmental organizations]
are working at, if you look at it ideally: They're trying to
change our preference function, in the way advertisers do."
Added Arrow, "Costs are always taken into consideration
in practice, regardless of the law. I think benefit-cost analysis
would permit a finer adjustment, but measures with great private
costs are going to be fought, by political influence if in no
If there is to be eventual reconciliation between critics
and advocates of cost-benefit analysisan outcome that
is far from certainit will come when environmentalists
admit that clean air has a cost and industry concedes that polluters
(and their customers) must pay it. And attempting to reach that
compromise may, in fact, be society's in vivo process
of cost-benefit analysis: seeking the dynamic equilibrium between
those who emphasize the benefits of regulation and those who
protest its costs.
See also: Why Costs Should Count