Treating the unserious seriously.

Brannon, Ike

IN THE DEFENSE OF THE ECONOMIC ANALYSIS OF REGULATION By Robert Hahn 128 pages; Washington, D.C.: AEI Press, 2005

ESTIMATING THE VALUE OF a statistical life (VSL) has become an industry unto itself. Hundreds of studies have been done using different techniques, countries, sampling methods, and methodologies. There have also been a number of meta-analyses attempting to make some sense of the morass.

The impetus for this research is policymakers' desire to have a value that they can assign to life-saving regulatory changes based on some aspect of reality so that their regulations can survive the rigors of cost-benefit analysis. There is a real demand from government agencies for some numbers that they can defend, and the Environmental Protection Agency, alone, has spent millions of dollars on grants to help researchers tackle the problem.

The debate over the issue of the appropriate VSL has been contentious. Some people (myself included) feel that the EIA has, at times, attempted to tilt the results of their research in favor of a high VSL by de-emphasizing some studies and commissioning new ones when previous ones have not given them the desired (i.e., appropriately high) number.

Their motivation for wanting to do so is straightforward: The higher the VSL, the easier it is for regulations to pass muster and survive the judgment of the Office of Information and Regulatory Affairs (OIRA). The people who work for agencies such as the EPA generally argue that government ought to err on the side of too much safety even when the required regulations may cost society greatly. They also suggest that companies are generally quite adept at adjusting to the myriad regulations and minimizing the costs of meeting them, and that the estimated costs of new regulations are often overstated.

Each side in this debate (and the people somewhere along the middle of the spectrum) offers studies to support its position, and in this cacophony a consensus is slowly starting to emerge. Robert Hahn has played an important role in this debate with his cogent and voluminous writings on regulatory economics and the merits of quantifying the results of regulation with cost-benefit analysis. The various tables published by the Office of Management and Budget that do this have improved tremendously since the practice began, and it has shed light on the effectiveness of our regulatory state. The results have not always been pretty, but they represent a solid first step toward improving the situation.

However, a small contingent of regulators, professors, and gadflies rejects this debate entirely, arguing against the very premise of cost-benefit analysis. (See "The New Challenge to Cost-Benefit Analysis," Fall 2005.) They believe that the costs and benefits of a regulation are often difficult or impossible to quantify, that there are vested interests trying to impede regulations (and apparently none advocating regulations), and that the distribution of the benefits and costs are such that it is the poor and oppressed who benefit the most from the regulations deemed ineffective by the regulators. Given those myriad flaws, they argue, society should allow the regulators of the various government agencies, who are usually intimately familiar with the industry they are regulating, to use their own best judgment to issue the necessary regulations that would ensure the optimal amount of environmental and physical safety.

This group coalesces around an entity called the Center for Progressive Reform, and they have put Robert Hahn in their crosshairs, with good reason: If anyone represents the antithesis of what the opponents of cost-benefit analysis believe, it is he.

REGULATORY BIAS? In the Defense of the Economic Analysis of Regulation is Hahn's rebuttal to their attacks and charges against him. By using an entire monograph to rebut their critiques, he perhaps gives them too much credit by addressing their work directly. There is little doubt to the objective reader that he has landed a telling blow with his tome.

People who have worked in the regulatory arena simply put no credence in claims of anti-regulatory bias. In reality, stopping the path of a regulation often takes Herculean political strength that simply cannot be mustered for something as arcane as the design of tire pressure monitors. The firestorm that even a slight delay in issuing a regulation can bring can be so intense as to deter the most dogged bureaucrat.

A coworker of mine at OIRA who opposed a mandate that all children flying be put in safety seats was told by an FAA official the day after a plane crash killed an infant that the child's blood was on his hands. When told that such a mandate would result in more children traveling long distances in less-safe automobiles, the regulator simply replied that the first "a" in FAA stands for "aviation" and that what happens on highways is not that agency's responsibility.

As anyone who has worked on regulatory issues knows, government agencies are not staffed with objective bureaucrats. The sympathies and paths to career advancement and outside pressures tend to go in one direction, toward more regulation. What is more, scarcely anyone arrives at the EPA without a sense of mission that he is going to fix things. One of my coworkers explained to me on my first day working at OIRA that working at the EPA--the prime generator of regulations that go through OIRA--is more like a religion than a job for many. My acquaintances at the EPA do not disagree with that sentiment.

Most people at the EPA consider environmental groups such as the Natural Resources Defense Council to be their stakeholders. In my experience, they make no bones about it. They are as much beholden to those entities as the typical Hill staffer is to any other lobby--they are sympathetic to many of the things the environmental groups are trying to do, they form social relationships with each other, and hope to some day get a job with the groups when they leave the government.

On my first day at OIRA, I visited EPA headquarters to attend a meeting with a coworker just to see how things worked. The meeting was with a contingent of EPA staffers and began with the ranking EPA worker issuing a rather loud warning and glaring in our direction that the meeting was strictly off-the-record and that everyone had better keep quiet about the proceedings. By the time my coworker and I had returned to our offices 45 minutes after the meeting had ended, the minutes of the meeting had been posted on the Web page of one of the environmental groups.

NECESSARY WORK Hahn's monograph is a careful defense of the utterly defensible. Having to spend pages to support the idea of discounting benefits that accrue in the future will seem to most readers of Regulation to be utterly superfluous, much like defending the standardization of time zones. Economists who are unfamiliar with the literature may be dumbfounded that people actually believe that discounting applies to some investments but not investments in health or safety.

Another criticism of regulatory analysis that the people with the Center for Progressive Reform level at Hahn regards the range of values for VSL that he uses in his analyses. On this matter, Hahn uses a range between $3 million and $7 million. That actually covers the range of the mainstream on this issue--the EPA prefers the latter number and cites a meta-analysis by Kip Viscusi and Joe Aldy as support, while other agencies use a number closer to $3 million, citing another meta-analysis done by Janusz Mrozek and Laura Taylor. In reality, the actual number used by the agencies is closer to the upper end of Hahn's range; when the cost-benefit analysis looks close, the tie always goes to the regulation. Indeed, Hahn shows the robustness of the cost-benefit analysis tables by calculating the costs and benefits with different discount rates and VSL estimates, and showing that the proportion of regulations passing muster does not vary more than five percentage points.

Other complaints of Hahn's work are even more egregious. Hahn finds it necessary to rebut complaints that he ignores the effects of inflation by carefully pointing out that the choice of a base year is irrelevant when making comparisons of real values.

Hahn is at his best in defending how economists quantify qualitative benefits as well as explaining in general how regulatory scorecards work. In this area, the complaints of the Progressive Reform contingent have some merit and need to be carefully addressed, and Hahn does just that. Many of the benefits of regulation do not come with a price tag on them; to tease out the true worth to society of various improvements can be difficult or close to impossible to do in a way that satisfies everyone. When a proposed rule has considerable non-monetary benefits, regulators generally acknowledge this and take it into consideration, even if the benefits do not appear in the cost-benefit league tables published by the OMB.

Economists, at their best, quantify the previously unquantifiable. What made John Morrall's Regulation article ("A Review of the Record," November/ December 1986) so important was that he informed so many of us for the first time of the enormous opportunity costs that regulations imposed on the economy. Most of what has been done in this area since then has been, in essence, an elaboration of Morrall's early work, with a good deal of it being done by Morrall himself.

IMPROVING THE DATA Regulation in the United States often devolves into a contest between the regulators at the various agencies and OIRA, which theoretically has the final say over whether a regulation gets issued. The analysts at OIRA evaluate regulations to see whether they make sense from a cost-benefit perspective. It is an intensely political game, needless to say. During the last years of the Clinton administration, virtually no regulations proposed by federal agencies were ever returned by OIRA, an abrogation of duties that the administration defended by saying that they let the agencies know early on what would be acceptable to them. Frustrated OIRA analysts referred to this as "preemptive caving." Even during the best of times, the political will needed to combat a well-meaning but cost-ineffective rule is simply not there.

Even during the Bush administration, returning a rule is not easy. In 2002, an attempt to void a ridiculous Department of Agriculture rule designed to increase the prices of some obscure fruit grown in California in order to increase farmer income by $20 million generated so much heat that it eventually resulted in a meeting between the head of the OMB and the head of the USDA on the issue, with the USDA getting its way.

There is a lot of research pertinent to cost-benefit analysis, and agencies are finally starting to take serious the need to apply some rigor to the calculations of benefits and costs of regulatory actions. Thanks to the work of economists like Robert Hahn, the field is improving its ability to quantify vague but very real costs and benefits produced from regulations. The idea that we should not bother with any evaluation of our regulatory endeavors is a disturbingly luddite idea that does not deserve to be seriously considered. But Hahn, ever the scholar, gives it serious attention and dismembers it fully.

Ike Brannon is an economist for the Joint Economic Committee of the U.S. Congress.

The views expressed in this article do not necessarily reflect the views of the JEC or the U.S. Congress.