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When President Obama nominated a liberal Harvard law professor named Cass R. Sunstein to head a little-known department called the Office of Information and Regulatory Affairs, it hardly seemed like a risky choice. But in the weeks since, the decision has unleashed a torrent of discussion about the arcane concept of "cost-benefit analysis," a subject not often mentioned outside the province of economists and government regulators.

What is cost-benefit analysis and why do we care?

Let's start with the Office of Information and Regulatory Affairs. Since the Reagan administration, this little agency has been entrusted with a big mission: reviewing all proposed government regulations before they go into effect. Those regulations (and there are thousands to be considered every year) involve everything from airline safety to public health to environmental protection to workplace rules, plus any of a million other subjects.

Each new administration must decide how it will go about judging such regulations. What's the best way to separate the good ones from the bad ones, the effective ones from the ineffective ones?

Sunstein is a well-respected public intellectual and an unabashed liberal. But it turns out that he has one little problem on his liberal resume: He's a proponent of judging new and proposed regulations by weighing what they will cost to impose against the benefits they will reap. And that, in a nutshell, is cost-benefit analysis.

Well, that doesn't sound so unreasonable. Isn't it just common sense?

Its supporters say it's just common sense. But critics say cost-benefit analysis is a sham -- a rigged, pseudoscientific process (created by Republicans and their allies in the business world) that almost always seems to favor doing less rather than more. They say that in the hands of people such as John Graham, the first OIRA chief of the George W. Bush administration, cost-benefit analysis has been used to ensure that needed health and safety regulations are rejected as too costly.

What's an example of cost-benefit analysis at work?

Consider the Environmental Protection Agency's regulation of arsenic in the drinking water, which is an example Sunstein used in an article several years ago. Should the allowable level be set at 20 parts per billion, at 10 ppb or at 3 ppb? Keep in mind that, as the regulation becomes more stringent, it becomes more effective in protecting people -- but it also becomes increasingly expensive, dramatically driving up consumers' annual water bills.

In the example posed by Sunstein, reducing the allowable level of arsenic by that final margin -- from 10 ppb to 3 ppb -- saves only five more lives. Is that worth it? If it costs $1 million to do so, you might decide it is. But, on the other hand, if it costs $1 billion or $10 billion, you might decide that it's not. That's the calculation that has to be made: How much are we willing to spend to save those five lives?

How can you calculate such a thing? Isn't the value of human life incalculable?

That's one of the chief complaints of liberal critics about cost-benefit analysis: that it requires setting dollar values on things that are simply not measurable -- such as human life or, say, pristine wilderness. According to Frank Ackerman and Lisa Heinzerling, authors of a book on the subject called "Priceless," the Environmental Protection Agency in 2000 valued a life at $6.1 million as part of its analysis of arsenic in the drinking water. The agency settled on that seemingly arbitrary number after a study of how much American workers demanded in wage increases to face annual accident risks. Ackerman and Heinzerling ridiculed this approach, arguing that the value of life is immeasurable and that deaths are not mere "costs" that can be coldly calculated by statisticians.

That does sound kind of creepy. How does Sunstein defend it?

"Of course it is difficult and uncomfortable to assign monetary values to human lives or to risks of death," Sunstein has acknowledged. "Many people find the very idea preposterous. But whenever government decides how much to reduce risks, it is implicitly assigning such values. ... Any regulator will acknowledge that at some point, the cost of additional risk reduction is just too high. Why not be honest about that?"

That's hard to argue with. Anytime a politician chooses to pay for, say, homeland security instead of healthcare, or decides to allocate $1 million rather than $10 million for traffic safety, he or she is making a similar decision. Cost-benefit analysis merely tries to make that process logical and coherent rather than instinctual and emotional -- to give policymakers a tool to make the most effective choices about how to allocate scarce resources. Sunstein argues that our current regulation structure is irrational; we often pay large sums to fight small risks while simultaneously paying small sums to fight large risks.

Sunstein also argues that cost-benefit analysis isn't inherently anti-regulation; in fact, he notes that OIRA has sometimes pressed agencies to issue regulations that hadn't even been proposed when it has felt the benefits justify the costs.

What's the "senior death discount" that has gotten Sunstein in trouble?

Sunstein has argued that in judging the benefits of a regulation, it is important to figure out not just how many lives it saves but how many "life years" it saves. "Other things being equal," Sunstein says, "a program that protects young people seems far better than one that protects old people, because it delivers far greater benefits."

This line of thinking drives many people crazy. They find it inequitable, inherently unjust to seniors, heartless and cold. But many economists and actuaries think this way. And perhaps we all do to some degree. If you could save either a 3-year-old child or a 95-year-old man from a burning building, are you sure you wouldn't make a similar calculation?

Is there an alternative way to assess regulations rather than cost-benefit analysis?

Some liberals prefer an approach popular in Europe known as the "precautionary principle." This theory allows for aggressive regulation even in the face of scientific uncertainty if something is thought to pose a potential harm; it shifts the burden of proof to those who would stand in the way of regulatory protections and takes the focus off dollars and cents. Sunstein is not a proponent.

So is Sunstein totally in line with the Reagan-era bureaucrats who first lent credence to cost-benefit analysis?

Not at all. Sunstein acknowledges many of the liberal critiques of cost-benefit analysis. For instance, he believes that regulators should take account of all potential benefits, such as protection of ecosystems and animals. He agrees that it is "crude" to say that a life is worth $6.1 million, and that the calculation of such numbers has been simplistic. Most significantly, he is a supporter of a strong regulatory state.

"We cannot rely entirely on cost-benefit analysis," he concludes, "but we will do a lot better, morally as well as practically, with it than without it."

Could the controversy scuttle Sunstein's appointment?

That's highly unlikely.

Nicholas Goldberg is the deputy editor of The Times' editorial pages.

Copyright © 2014, Los Angeles Times
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