Cost-Benefit Analysis

TAP has an interesting debate between Kerry Smith, a proponent of using cost-benefit analysis in making environmental decisions, and Frank Ackerman and Lisa Heinzerling, who oppose it. Though I'll doubtless be kicked out of the environmental movement for saying such a think, I think Smith has the stronger position:

Why then is there so much controversy about cost-benefit analysis? In my view, the reason is simple: It forces those with alternative agendas to place their cards on the table. The rationale for each proposed decision must be made explicit. Holistic, moral, safe, and fair criteria must be translated into specifics. Once this is done, the tradeoffs among alternative outcomes implied by these decisions can be compared with the wishes of the affected people and any deviation from those wishes must be explained.

The general principle of cost-benefit analysis (CBA) correct. It recognizes the necessity and inevitability of tradeoffs between different values, and forces us to be explicit about what those tradeoffs are. CBA is a tool for helping us structure our thought processes, not a black box that will spit out The Correct Answer. A CBA is an argument, a proposal for how to weigh the various considerations, not an incontrovertible decision or revelation of an objective fact. It's open to tinkering with the inputs and structures, while making such tinkering, and the assumptions behind it, transparent.

The one major revision I would make to CBA is to incorporate more of the techniques of handling uncertainty and utility scales that have been developed within the Decision Analysis framework. Monetary costs can be misleading because the amount of benefit associated with a dollar differs depending on how many dollars someone has. In any case, the criticisms made by Ackerman and Heinzerling aren't specific enough to differentiate between the various mathematically explicit decision procedures (such as classical CBA, Decision Analysis, Analytical Hierarchy Process, and Linear Programming). They argue:

The administration of George W. Bush is the most hostile to environmental protection of any in recent memory. It is also the most enthusiastic about the use of cost-benefit analysis to screen proposed regulations. Perhaps this is only a coincidence. Perhaps a process of carefully summarizing people’s preferences has found that the American public wants to weaken the Clean Air Act, drill for oil in the Arctic National Wildlife Refuge, ignore the dangers of global warming, allow more polluting snowmobiles into national parks, use cheaper and less effective safeguards against SUV tire blowouts, accept high levels of mercury in our food and water, and so forth. But we don't believe it. Gamblers know that dice that always roll snake-eyes are loaded. The same holds true for a decision-making method that repeatedly tells us to do less about environmental protection, even when public opinion polls tell us that the American people want to do more. ... It is a political tool used to undermine regulation, hardly ever to strengthen it. As Smith notes, cost-benefit analyses have occasionally supported environmental protection, as in EPA’s retrospective analysis of the Clean Air Act. In such cases the Bush administration -- populated by the most ardent defenders of cost-benefit analysis in executive branch history -- has pressed ahead in exactly the opposite direction, attacking rather than defending key provisions of the Clean Air Act, without mentioning the cost-benefit results.

In what way does "the Bush administration doesn't do CBA properly" imply "CBA itself is no good"? If the administration's CBAs are "loaded," then the problem is the loading. And the explicitness of analysis that CBA requires would seem to make it easier to identify the whether, how, and why of the administration's disregard for public preferences.

Almost no one attaches a price to the things they care most about. How much is your family worth to you? Or your religion? Or your health? By arguing that good decision-making requires monetary equivalents for environmental goals, the advocates of cost-benefit analysis degrade priceless values to the level of cheeseburgers and fries ... Without cost-benefit calculations, we are not helpless or indecisive; without help from economists, ordinary people think profoundly and come to reasoned judgments about threats to life, health, and nature, and about our obligations to future generations.

I doubt that, for all the pieties about the sacredness and infinite value of human life, anyone seriously feels that way. We make tradeoffs in our lives all the time. If our health was really priceless, we would never eat so much as a single Dorito, or get within a hundred feet of a car. The fact that we drive around and eat junk food (among other activities with some level of risk) shows that -- as the authors go on to admit -- we're capable of making tradeoffs. What CBA does is ask us to try to be explicit and systematic about those tradeoffs.

When it disagrees with actual public opinion -- as it does so often on environmental issues -- we’d rather let the people decide.

Public opinion does not exist prior to and independently of the policymaking process. CBA incorporates public opinion into its analysis, and has the possibility of in turn shaping public opinion.

The numerous deaths avoided by reducing air pollution were given a monetary value, around $6 million apiece in today’s dollars. This was based on an average of the small wage increases that blue-collar workers in the 1970s and early 1980s supposedly received for accepting small risks of dying on the job. What do the wages of blue-collar workers decades ago, many of whom went to work out of economic necessity and without an explicit understanding of the risks they faced, have to do with our preferences, today, for cleaner air? Some economists try to avoid this problem by asking people, in “contingent valuation” surveys, how much they would be willing to pay to avoid a hypothetical risk. But survey participants’ answers are heavily censored by the surveyors, who discard some answers for internal inconsistency and others for asserting too high a value for protecting health and the environment.

That CBA has been done poorly or ineptly should be no surprise. But it's only the explicitness of CBA that makes such specific criticisms possible. People's intuitions about what course of action is better incorporate these very kind of tradeoffs, in inchoate -- and thus dificlt to criticize -- form. Such intuitionism may be fine for private decisions. But major governmental policy changes should be obligated to make their reasoning clear, through a technique like CBA.

Smith says that we have limited resources and that we may have to trade one environmental or educational program against another. But why is it only good things that have to be traded against each other? What if we want both education and environmental protection, what if we want both protection of coastal wetlands and spending on climate change mitigation? Personally, we’d like to have it all, and finance it by giving up some useless missiles or tax cuts for millionaires.

Education versus environment is a tradeoff that CBA helps us analyze. So is education and environment versus missiles and tax cuts. I entirely fail to see how CBA requires us to make the former decision but prevents us from making the latter. Indeed, it would be helpful if Congress could use some form of CBA to decide whether money spent on missiles and tax cuts wouldn't be better put into education and environmental protection. Then we'd have a clearer basis for decision than Ackerman and Heinzerling's intuition (which I share) that the tradeoff would be beneficial.

Ultimately, it seems that most of Ackerman and Heinzerling's arguments point to the benefits of CBA, rather than detracting from it.