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Cost v. Benefit: Clearing the Air?

This year's historic Supreme Court case pit industry against environmentalists, but the role of economics in regulatory policy was (and still is) on trial

December 1, 2001


Douglas Clement Senior Writer
Cost v. Benefit: Clearing the Air?

On Election Day, November 2000—shortly before turning attention to chads and dimples—the 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 force "de-industrialization."

In an unprecedented move, a nonpartisan group of 42 of the nation's most prominent economists—including three Nobel laureates and seven former chairs of the president's Council of Economic Advisers—sent 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 court—respectfully—that 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 way.

An equally unpleasant—if less public—fight 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 EPA—required by executive order to perform a cost-benefit analysis for the new standards—had fudged the numbers. EPA cost estimates, said the memo, written by economist Alicia Munnell, "understate the true costs by orders of magnitude."

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 economy."

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 did—at a level greater than zero but less than unmistakably fatal, it had overstepped its authority—it 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 pollutants—certainly ozone and probably particulate matter—were "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 decisions. ..."

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 costs.

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 'public health'?"

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 picked out."

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 policy—and the role of cost-benefit analysis in particular—has 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 programs."

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.

Hazy results

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 time."

It was hardly surprising, then, that the EPA's estimates of net benefits for its 1997 proposed air quality standards—prepared as required by E.O. 12866, though the EPA maintained that the standards were strictly health-based—were subjected to intense dispute by other analysts.

The Council on Economic Advisers, for example, estimated that the new ozone standard—said by the EPA to have annual costs of $9.6 billion and benefits ranging from $1.5 billion to $8.5 billion—actually 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 positive—substantially so, according to the EPA—but 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 analysis—Sen 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 scholarship—the law and economics school associated with the University of Chicago—views 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 decided—and 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 of 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 rejected it."

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 vary 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 industry—faced with regulatory pressures—will 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 years.'"

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 process."


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 utility—or lack thereof—in 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."

Pragmatic advocates

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 criteria—its neglect of distributional equity—should 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 know—thanks to cost-benefit analysis—that 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 down—getting people, pro and con, to say what they think the relative weights ought to be—is a good thing. And once you've done that, cost-benefit analysis just naturally follows."

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 given—as Amartya Sen has observed—the 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 decision-making.

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 for that."

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 public."

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 other way."

If there is to be eventual reconciliation between critics and advocates of cost-benefit analysis—an outcome that is far from certain—it 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


Douglas Clement
Senior Writer

Douglas Clement was a managing editor at the Minneapolis Fed, where he wrote about research conducted by economists and other scholars associated with the Minneapolis Fed and interviewed prominent economists.