Mark Kleiman on Regulatory Reform and Benefit-Cost Analysis
He has an open letter to Henry Waxman and Peter Orszag:
Reforming regulatory benefit-cost analysis: At one level, all policy analysis starts with benefit-cost analysis: on what basis could one choose among option except their advantages (benefits) and their disadvantages (costs)?... [But] benefit-cost analysis should be controversial... [in] environmental and safety... beloved of industry lobbyists and loathed by activists.... [T]he benefit-cost analysis practiced in the regulatory process... differs in three ways from ideal, or armchair, benefit-cost, as practiced by someone trying to figure out what course of action will best serve the public interest.... Each of those differences constitutes a frank error, and all are enforced by the courts and by the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget.
Formal benefit cost analysis counts everyone’s gains and losses equally. But common sense and the principle of diminishing marginal utility agree that a dollar’s worth of gain is more valuable to someone with few dollars than it is with someone with many....
Formal benefit cost analysis draws artificial lines around the impacts of a program: impacts that are very indirect, or very distant in time, or highly uncertain, which ought of course to be adjusted to reflect those facts, are instead usually excluded from the analysis as “speculative,” which amounts to treating them as being certain not to take effect....
The same is true of gains and losses with no obvious market valuation. After great struggle, the value of preventing an early death has been set at several million dollars. But any health damage short of death, or health gain other than reduced mortality, is usually valued only in terms of lost income and medical expense, rather than at its full “willingness-to-pay” value....
[T]he Congress should order the administration to commission a study by the National Research Council to establish a set of standards... written into the statutes that require such analysis... adopted by OMB for benefit-cost analysis done in other administrative contexts... rules that embody distributional adjustments, Bayesian weighting of uncertain gains and losses, and willingness-to-pay evaluation of gains and losses that do not come with market prices attached.
Mr. Waxman?
