Underestimating the Benefits of Public Protections

10/10/2012

In a September article, OMB Watch highlighted how difficult it is for everyday Americans to find information on the benefits of the standards and safeguards that protect and improve our quality of life. In this piece, we describe how agencies identify benefits and assign a monetary value to them. If agencies either underestimate or undervalue the benefits of a proposed safeguard, it could be rejected by the Office of Information and Regulatory Affairs (OIRA), and important protections could be delayed for years, leaving the health and safety of American workers and families at risk.

Background

Federal agencies are required to complete cost-benefit analyses of rules expected to cost more than $100 million. This requirement has been imposed by each president since Gerald Ford. Currently, Executive Order 12866 requires federal agencies to determine the costs and benefits of a proposed standard and to ensure it maximizes "net benefits." The Office of Information and Regulatory Affairs (OIRA) reviews an agency's assessment of costs and benefits to determine whether its analysis passes muster. Unless the estimated benefits of a public protection exceed the estimated aggregate costs (to industry and consumers) of complying with the rule, E.O. 12866 directs agencies not to adopt the rule.

The National Highway Traffic Safety Administration and the Backup Camera Rule

In 2007, Congress required the National Highway Traffic Safety Administration (NHTSA) to reduce backup accidents after a father backed up his vehicle and killed his toddler. The most effective way to reduce such accidents is to require automakers to install backup cameras in all new cars, but this is also the most expensive way to address the issue. Costs for backup cameras range from $159 to $203 per new car, a total of $1.9-2.7 billion annually. Based on these costs, NHTSA's proposed rule is among the most expensive rules under consideration.

NHTSA estimates that requiring backup cameras will prevent between 95-112 deaths and 7,072-8,374 injuries every year. More than 44 percent of those injured or killed in backup accidents are under age 5. Too often, when these accidents occur, parents have killed or injured their own children. In addition to saving the lives of children and preventing thousands of injuries, NHTSA has also identified a number of other benefits of the proposed regulation to put backup cameras on new cars. NHTSA believes that avoiding the emotional distress from backup accidents, particularly by parents who have accidentally killed or injured their own children, and the convenience of being able to see behind a car while backing up are benefits of the proposed regulation that cannot be quantified.

The question for our country is: Is the backup camera rule worthwhile? Congress said yes when it passed the law requiring NHTSA to issue this regulation. We believe most parents would agree that spending $200 more for a new car is a modest price for ensuring they don't harm their own or a neighbor's child. It is extremely unlikely to affect demand for new cars (or by extension, reduce jobs in the auto industry).

However, if strict cost-benefit analysis is used as the basis for deciding whether to move forward, NHSTA's backup camera rule will never be put in place because OIRA emphasizes monetary costs of avoiding death in benefits calculations but ignores other difficult-to-quantify benefits, such as non-fatal injuries and emotional distress.

In the case of the backup camera rule, NHTSA assumed the value of each life saved was $6.1 million. This is not an expression of what NHTSA thinks a life is worth, but an estimate of what economists think people would pay to avoid a small risk of death. "If people are willing to pay $6.10 to avoid a one in a million increase in the risk of death, then the value of a 'statistical life' is $6.1 million," according to the agency. Economists base the value of a statistical life on surveys and other data, but since there is no market to trade the risk of dying, we do not know whether these guesstimates are realistic.

This method of valuing the benefits of public protections is called "willingness to pay." When NHTSA calculated the benefits of its rule using this method, the value of deaths to be avoided by backup cameras was less than the expense of installing them. However, NHTSA concluded that even though the monetized benefits of the rule are less than the costs, the qualitative, non-monetized benefits make the rule worthwhile. And Executive Order 12866 specifically says that agencies should consider quantified benefits, as well as benefits that cannot be quantified, when deciding whether to regulate. NHTSA forwarded a final rule to OMB for review on Nov. 16, 2011. It is still pending.

Valuing Some Benefits and Ignoring Others

In addition to the moral and ethical questions raised by pricing a human life, relying on these quantitative estimates of the value of a life to determine whether to adopt any given standard has other basic problems. There is no market to buy and sell the risk of dying, so how do we know what people would pay to avoid a one-in-a-million risk? And those with limited incomes cannot willingly pay as much as those with high incomes, so does that mean we should provide less protection to middle-class workers than to wealthy individuals?

Second, the backup camera rule and many other health and safety protections reduce both death and serious injury. Reliance on the value of a statistical life to monetize the benefits of public protections means we count only the benefit of avoiding death and not the benefits of avoiding injury, such as less absenteeism from work, lower medical bills, and less pain and suffering. These benefits could be quantified in theory, but they are not quantified in practice.

Finally, cost-benefit analysis ignores all values that we cannot price. In the case of the backup camera rule, the qualitative benefits that NHTSA could not monetize include the benefit of preserving the lives of children, avoiding the mental anguish of harming your own child, and the convenience of a larger field of vision when driving in reverse. Most Americans would place a high value on such benefits, but they would be hard-pressed to express that value in dollars and cents. The cost-benefit analysis associated with the proposed rule values these benefits at zero.

Conclusion

Congress directed NHTSA to take action to prevent backup accidents. NHTSA believes the best way to do so is to require all new vehicles to be equipped with backup cameras. The costs of these cameras – about $200 per new vehicle – exceed the estimated quantified benefits of the rule. But the rule also has many other benefits that NHTSA could not quantify. Looking at all the benefits of the backup camera rule – those it quantified and those that it could not – NHTSA concluded the backup camera rule was justified. OIRA has been reviewing the rule for almost one year. Let's see whether it agrees with NHTSA that the value of the rule's benefits make it worth finalizing.

Image in teaser by flickr user Inhabitat, used under a Creative Commons license.