The Devil, The Detail and Cost Benefit Analysis

On January 18, 2011, President Obama signed an Executive Order that addresses regulatory reform. Among other things, all federal rules affecting business will be reviewed to see if they are “outmoded, ineffective, insufficient or excessively burdensome.” Prominent in the Order is a directive that:

Each agency must, among other things: (1) propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits and costs are difficult to quantify); (2) tailor its regulations to impose the least burden on society, consistent with obtaining regulatory objectives, taking into account, among other things, and to the extent practicable, the cost of cumulative regulation; (3) select, in choosing among alternative regulatory approaches, those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity); (4) to the extent feasible, specify performance objectives, rather than specifying the behavior of manner of compliance that regulated entities must adopt; and (5) identify and assess available alternatives to direct regulation, including providing economic incentives to encourage the desired behavior, such as user fees or marketable permits, or providing information upon which choices can be made by the public.

In other words, the agencies are to do a cost/benefit analysis of their regulations. This is not a new requirement, but it is interesting that the President would choose this time (just before the State of the Union Address) to reiterate the principle.

Perhaps not surprisingly, the EPA has decided to modify its method of determining the value of a human life when it comes to regulatory analysis. In a draft White Paper issued on December 10, 2010, EPA sets out its new formula. I’ll leave it to you to decipher the sixty-two page tome, but you should be happy to know that you are worth more today than you were last year. (While perhaps a consoling thought, one should consider the source). 

One notable aspect of the Paper is that EPA proposes to add a 50% “cancer differential” to arrive at the appropriate life valuation. In effect, this says that dying is costly but dying of cancer is 50% costlier than the risk of dying in other ways. That increased risk, then, must be calculated into the cost/benefit analysis.

There is no question that applying cost/benefit analysis to regulatory reform is necessary and appropriate. Like so many economic tools, however, the devil is in the detail; that is, what you count (and don’t count) becomes the real fighting issue. As a general rule, one side tends to emphasize the hard costs of environmental regulation while the other attempts to put a dollar value on the benefits of the regulation.  Benefits tend to be the harder side of the equation because many are intangible or unquantifiable (like "human dignity" and "fairness" - newly added by the President), with the "value of life" being high on the list.  For the fourteen economists who can decipher it, the White Paper changes the way that value is computed.   And don't forget that the U.S. Supreme Court has recently said that it is up to the agency to determine what to include in a cost/benefit analysis for regulatory purposes.  

My only comment about the change is that we shouldn't get too exited (or buy more life insurance) just yet -- we likely will be considered for "re-valuation" in two or six years.


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