Pricing the Priceless

How much is a human life worth? What is the dollar value of an IQ point or avoided disease? What is the economic benefit of a clear view of the Grand Canyon? Or protecting our national bird, the bald eagle, and other endangered species? Ask these questions of almost anyone, and you’re likely to get a puzzled response. These are not things bought and sold on the open market. They speak to our values as people and a society. Assigning a price tag to a child’s IQ, for example, will strike many as morally repugnant. Yet in the world of devising federal regulation, this is par for the course, as Georgetown Law Professor Lisa Heinzerling and Tufts economist Frank Ackerman document in their excellent new booklet, “Pricing the Priceless”. One IQ point is worth about $9,000, according to government estimates on preventing IQ loss from childhood lead poisoning. The benefit of protecting the bald eagle comes in at $257 a household. And it turns out human life -- valued anywhere from $6.3 million to under $1 million, depending on whether the life is saved today or in the future -- isn’t priceless after all. All federal agencies charged with protecting public health, safety, and the environment must conduct a cost-benefit analysis -- which calls for the monetization of benefits -- before promulgating a major regulation. The resulting numbers frequently dominate debate over whether an agency should proceed with a standard, with scant mention of the analytical methods used to reach those numbers -- which are generally understood only by the practitioner. In the process, transparency is sacrificed as artificial, make-believe dollars mask real-life choices and real-life benefits that should be the focus of public debate. Take EPA’s much-publicized standard to lower the acceptable level of arsenic in drinking water to 10 parts per billion (ppb) (down from the previous standard of 50 ppb -- set back in 1942 -- which the National Academy of Sciences found does not adequately protect public health). EPA’s cost-benefit analysis for the arsenic standard, which was completed toward the end of the Clinton administration, found benefits of $140 million to $200 million and costs of $180 million to $210 million. Opponents seized on these numbers to argue that even EPA’s estimates, which they felt overstated benefits, could not demonstrate “net benefits” for the rule. Lending credibility to these attacks, Robert Hahn and Jason Burnett of the AEI-Brookings Joint Center for Regulatory Studies (a leading proponent of cost-benefit analysis) produced a study that concluded EPA had erred substantially in its calculations -- that really the rule would cost a shocking $65 million for each life saved. In the aftermath of the Bush administration’s move to revoke the Clinton arsenic standard, these numbers were exhibit one for the defense. As Heinzerling and Ackerman point out, the Washington Post ran a series of opinion pieces at the time praising the administration’s decision -- all pointing to the Hahn-Burnett numbers as objective proof that the standard was ill-advised. Even Michael Kinsley, a frequent critic of President Bush, couldn’t help but support the decision to repeal after reviewing the Hahn-Burnett study. “[C]learly this is overregulation,” Kinsley wrote, adding “the cost of meeting the tougher standard exceeds the likely benefit even by the government's own calculations.” But what do these numbers really tell us? What assumptions underlie the monetization of benefits? And what factors were never dollarized? As Heinzerling and Ackerman describe, arsenic “causes cancers of the bladder, lungs, skin, kidneys, nasal passages, liver, and prostate, as well as other cardiovascular, pulmonary, neurological, immunological, and endocrine problems.” However, EPA’s dollar estimates only include the health benefits of reductions in bladder and lung cancer. Quantitative data -- essential for converting benefits into monetized figures -- was not available for other likely benefits of arsenic reductions, which were therefore excluded from EPA’s benefit calculations. In monetizing lives saved from bladder and lung cancer, EPA set the value of human life at $6.1 million (in 1999 dollars) based on studies measuring the extra amount -- or “wage premium” -- required to attract workers to dangerous jobs, according to Heinzerling and Ackerman. For nonfatal cancer, EPA found no existing data on what’s called “willingness to pay” -- a highly questionable tool, used to calculate most nonfatal benefits, that involves surveying a cross-section of people and asking what they might pay for certain benefits. Without such data, EPA amazingly substituted a previously determined willingness-to-pay value for reducing chronic bronchitis instead. In other words, EPA treated nonfatal cases of lung and bladder cancers as equivalent to chronic bronchitis. Despite all of this, Hahn and Burnett argued that EPA had in fact overstated benefits. First, they argued that EPA should have applied a “discount rate” to the benefits of lives saved in the future. Discounting -- an unfortunately common practice in calculating benefits -- rests on the premise that a life saved today is worth more than a life saved tomorrow. This analytical and value-laden choice has significant implications for regulation aimed at preventing cancer, which frequently has a long latency period, or other diseases of old age. OMB’s Office of Information and Regulatory Affairs (OIRA), which broadly oversees cost-benefit analysis across agencies, asks agencies to discount the “value of a statisical life” by 7 percent for each year after a regulation is implemented. However, in the case of the arsenic standard, EPA argued that it did not have enough data on the latency period for cancer caused by arsenic to do so. Hahn and Burnett rejected this argument. Instead, they assumed a latency period of 30 years, providing no scientific citation for this choice. Applying a 7 percent discount rate over this period reduced the present value of a life from $6.1 million (EPA’s estimate) to $1.1 million. Second, Hahn and Burnett argued that EPA had overstated the number of cancer cases caused by arsenic by using a linear “dose-response curve” -- that is assuming, as is common practice, that the number of cancer cases is proportional to total exposure. As Heinzerling and Ackerman explain, “Making up a different dose-response relationship, Hahn and Burnett, neither of whom is a scientist, offered their ‘best estimate’ (again, on an almost evidence-free basis) that there were only one-fifth as many cases of cancer due to arsenic as EPA had projected.” Combined with the discount rate, Hahn and Burnett arrived at their colossal cost figure of $65 million for each life saved, about 10 times the benefits. In fact, Hahn and Burnett even speculated that the old, 1942 standard of 50 ppb might actually be too low. Yet when the National Academy of Sciences examined the arsenic issue yet again in 2001 at the request of the Bush administration, it differed substantially with Hahn and Burnett, finding that a lower limit for arsenic would save more people from cancer than previously thought. EPA had not overstated benefits; it had understated them. This finding, along with substantial political pressure, ultimately forced the Bush administration to retain the Clinton-era arsenic standard despite its original inclinations. However, the administration has not abandoned its belief in monetized cost-benefit analysis to make regulatory decisions. Indeed, the president’s recent budget proposal to Congress advises agencies that it will be providing periodic guidance to standardize methods of monetization. And John Graham -- administrator of OIRA, which must give clearance to major agency regulatory proposals -- stands ready to turn back rules if monetization is not carried out to the administration’s liking. Already, Graham has returned 17 regulations, most for this reason. This heavy emphasis on cost-benefit analysis, and in particular the monetization of benefits, does not bode well for health, safety, and environmental protections. As the arsenic standard illustrates, many benefits are difficult, if not impossible, to monetize. Generally, benefit estimates are derived almost exclusively from avoided fatalities. They exclude or devalue other impacts, such as morbidity, effects on ecosystems, and equity considerations. Moreover, even for measures of avoided fatalities, cost-benefit analysis suffers from severe limitations and a host of questionable analytical assumptions -- again, as the arsenic example shows. Cost considerations, on the other hand, are inherently easier to monetize than benefits. For example, they may involve purchases of new equipment or the hiring of additional personnel. Yet ironically, this does not mean cost estimates are any more accurate. In calculating costs, agencies must rely on data supplied by industry, which has a self-interest to make potential regulation look as expensive as possible. Combine this with well-documented adaptive responses to regulation, such as technological advances or “learning by doing” -- which drive down costs over time, yet are not predicted by cost-benefit analysis -- and agency cost estimates frequently prove overblown in the real world. An article in the American Prospect by Eban Goodstein and Hart Hodges highlights this tendency in dramatic fashion. In examining estimated costs next to actual costs for 13 major rules, Goodstein and Hodges found estimated costs were at least double the actual costs for all but one. For instance, EPA estimated in 1990 that acid rain controls would cost electrical utilities about $750 per ton of sulfur dioxide emissions; yet the actual cost today is less than $100 per ton, billions of dollars less than what was initially anticipated. With costs overstated and benefits understated, cost-benefit analysis is likely to lead us down the path to inaction. It’s no surprise then that industry groups and conservative think tanks have sought to elevate cost-benefit analysis in the decision-making process, or that the Bush administration is obliging -- even at the expense of congressional directives. Congress has long recognized the deficiencies of cost-benefit analysis. Notably, the Safe Drinking Water Act, under which the arsenic standard was promulgated, is the only federal environmental statute to expressly sanction the use of cost-benefit analysis. In fact other health and safety statutes, such as the Clean Air Act and the Occupational Safety and Health Act, expressly prohibit its use to determine a standard. Instead, a host of successful alternatives to cost-benefit analysis -- which has never been central to regulatory decisions -- have emerged over the last 30 years. Most environmental regulation, for instance, is “technology based,” requiring the best available methods for controlling pollution. This approach has allowed environmental protection to move forward, avoiding the trap of paralysis by analysis. Nonetheless, as noted earlier, agencies still must conduct cost-benefit analysis -- a requirement that comes from presidential executive order in effect since the first year of the Reagan administration. This sets up a truly bizarre scenario in which agencies are supposed to conduct a cost-benefit analysis -- which is resource intensive and can take years to develop -- yet completely ignore the resulting work. In practice, however, something different is happening, as the administration, in defiance of Congress, has ominously committed to cost-benefit analysis as the heart of its regulatory decision-making.
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