Revesz on Rehabilitating Cost-Benefit Analysis:

NYU Law Dean Richard Revesz has written an interesting essay for Grist arguing that environmentalists should reconsider their opposition to cost-benefit analysis of regulations. It is based upon his new book, Retaking Rationality: How Cost Benefit Analysis Can Better Protect the Environment and Our Health, co-authored with Michael Livermore. While CBA is largely viewed as an "anti-regulatory" tool, Revesz argues cost-benefit analysis, if conducted properly, can support a pro-regulatory environmental agenda. In his view, environmentalists have been wrong to oppose the use of CBA in regulatory review, and should now seek to mend, not end, its use in regulatory policy.

Since Ronald Reagan placed cost-benefit analysis at the center of his deregulatory agenda in 1981, environmentalists have developed a strong allergy to economic analysis. They rarely participate in the debates over how cost-benefit is conducted, and do not place economic analysis at the center of their arguments for new and stronger regulation. On the other hand, antiregulatory groups like trade associations representing industrial polluters and conservative think tanks have embraced cost-benefit analysis. They argue that economic analysis shows deregulation is a good thing.

The asymmetry of participation has had several negative consequences. First, proregulatory interests consistently lose ground before the courts and OBM, which for nearly three decades has reviewed all "significant" regulations. Because OMB and the courts look to cost-benefit analysis, groups that cannot frame their arguments in economic terms are bound to lose.

Second, cost-benefit itself has become biased against regulation. It has been shaped by antiregulatory interests with little input from proregulatory interests, resulting in the adoption of several flawed techniques that tend to underestimate regulatory benefits and overestimate regulatory costs.

Finally, proregulatory interests have lost public approval as they have allowed themselves to be portrayed as extremists in pursuit of "big government." This loss of public support saps political will for new and updated regulatory programs.

Environmentalists made a particularly grave error by failing to advocate for more neutral cost-benefit analysis during the Clinton administration. When Bill Clinton took office, many expected him to drop cost-benefit analysis from the process of regulatory review. Instead, he embraced it, and took some steps to make it more transparent and fair. Environmentalists had eight years to try and remove the antiregulatory biases from cost-benefit analysis, but they let the opportunity pass. I served on an EPA committee charged with making recommendations about cost-benefit analysis to the agency, and during all of our meetings -- which were always well attended by industry groups pushing an antiregulatory agenda -- environmentalist never came. When negotiations are conducted with an empty chair in the room, it is hardly surprising when the results come out skewed.

The environmentalist antipathy to cost-benefit analysis is somewhat ironic because environmentalists once championed the use of CBA for public works projects. Applying cost-benefit principles to dams, reclamation projects, and the like, they argued, would reveal these projects to be as economically wasteful as they were environmentally harmful. This idea worked for a time, until the Bureau of Reclamation, Corps of Engineers, and other agencies hired their own economists and learned to use the process to their advantage.

Revesz is certainly correct that CBA, neutrally applied, is not inherently "anti-regulation." During the Bush Administration, the reliance upon CBA led OMB to issue several "prompt letters" urging agencies to adopt additional regulatory measures that appeared to be cost-justified. True CBA devotees follow the numbers, not their own preference for or against regulatory interventions. While CBA is often used to criticize regulations, in some instances CBA methodology has an inherently pro-interventionist bias, insofar as it elevates collective net welfare maximization over consideration of individuals' subjective value preferences. Just because a given project or regulation is "net-beneficial" does not mean it makes for good policy. We also must be wary of overly precise cost-benefit calculations that understate uncertainties or gloss over the difficulties of quantifying important variables.

There is little doubt that more complete information about the likely consequences of government action should improve government decision-making. Just as the National Environmental Policy Act (NEPA) can foster improved public decision-making by forcing government agencies to consider the environmental consequences of their actions, CBA requirements can foster a more complete consideration, and public accounting, about the pros and cons of regulation. CBA can inform public debate, but it cannot resolve all regulatory policy disputes. Even the best CBA is no substitute for discussion and debate over competing policy agendas and the normative preferences upon which they rest.