Dimensions: 5.5'' x 8.5'' 128 pages AEI Press: AEI-Brookings Joint Center for Regulatory Studies  (Washington) Publication Date: February 2005 Paperback ISBN: 0844771864 Price: $ 20.00 Add to Cart   Examination Copies

 This summary is also available here as an Adobe Acrobat PDF.

The application of economic analysis to regulatory decision making has become more controversial in recent years, particularly with regard to environmental, health, and safety regulations. In his new book In Defense of the Economic Analysis of Regulation (AEI-Brookings Joint Center for Regulatory Studies, February 2005), Robert W. Hahn defends quantitative economic analysis of regulation and argues that the solution to the problems cited by critics is to gain a deeper understanding of the strengths and weaknesses of economic analysis, rather than to eliminate its application altogether.

Robert W. Hahn is a resident scholar at AEI and cofounder and executive director of the AEI-Brookings Joint Center for Regulatory Studies.
 
Several scholars are highly skeptical of the use of cost-benefit analysis and other economic tools in regulatory decision making. Recently, these critics have focused on debunking economic summaries of regulatory activity, which are sometimes referred to as regulatory scorecards. The critics generally support less quantitative economic analysis of regulations.

This monograph addresses the analytical concerns raised by the critics. It makes the following four points: first, summary measures of the impact of regulations have made important contributions to our understanding of the regulatory process, a point often overlooked by the critics; second, many of the critics’ concerns could be addressed by making refinements to scorecards rather than wholly rejecting them as an analytical tool; third, some of the suggestions made by the critics are legitimate, but many are not; and finally, the solution to legitimate concerns raised by the critics is not to eliminate quantitative economic analysis but to gain a deeper understanding of its strengths and weaknesses and to use it wisely.

Critiques of Economic Approaches

Over the past several decades, there have been numerous critiques of the application of economic approaches to problems in public policy. Indeed, several books and articles criticize various aspects of cost-benefit analysis and economic policy analysis more generally. There have also been a number of defenses of quantitative approaches to analyzing important public policy issues. For example, Cass R. Sunstein, in Risk and Reason, argues for an approach that would weigh the costs and benefits of different policies but also consider a number of other factors. And Supreme Court Justice Stephen G. Breyer argues that the government needs to set regulatory priorities differently so that more lives can be saved for a given amount of money.

The debate over the use of economic analysis as a tool in regulatory decision making has been more than academic. Countries and states throughout the world require extensive use of cost-benefit analysis and related tools as a way of informing key regulatory decisions and reforming the regulatory process. In the United States, for example, the regulatory oversight agency uses cost-benefit analysis to both improve regulatory proposals and stimulate new regulatory measures where the benefits exceed the costs.

Scholars generally agree that economic analysis is becoming a more important part of regulatory decision making. Sunstein argues that we are witnessing the emergence of a “cost-benefit state” in the United States. Other scholars have argued that the trend extends around the world. The issue is not simply which analysts are right in analyzing a particular regulation, but how should responsible governments make multimillion- and billion-dollar decisions that affect their citizens.

Recently, the application of economic approaches to problems in regulation has created a veritable firestorm in some parts of the legal community. The debate has been particularly strident in the area of environmental, health, and safety regulation. According to government estimates, the costs associated with this regulation are substantial—on the order of $200 billion annually. The benefits, which are harder to pin down, may be even larger. Thus, changes in the regulatory apparatus can significantly affect the public’s health and welfare.

Supporters of the use of economic analysis in measuring regulatory impacts agree that placing monetary values on the costs and benefits of regulation is difficult. The critics, however, argue that the techniques of economic analysis and their applications are fundamentally flawed.

One particularly controversial approach that scholars have used to gain insight into the general impact of regulation is the use of scorecards. Scorecards typically attempt to summarize the impact of different regulations based on a number of indicators. Examples of these indicators include costs, benefits, cost savings, lives or life-years saved, cost-effectiveness, and net benefits.

For example, in an important early paper, John Morrall developed an analysis that suggested that the cost-effectiveness of regulation (measured by the cost-per-life saved) varied over several orders of magnitude. More recent work by Tammy Tengs and others amplifies on that theme, arguing that there are often important differences in the cost-effectiveness of life-saving interventions.

Why Economic Analysis Matters

Differences in the cost-effectiveness of different investments in life-saving activities could have important implications for public policy. It matters, in terms of the number of lives likely to be saved, whether the government mandates reductions in radiation exposure on X-ray equipment ($23,000 per life saved) or radiation emission controls at uranium fuel cycle facilities ($34 billion per life-year saved) or when the government institutes a mandatory seat belt use law ($69 per life-year saved) versus requiring airbag installation in cars ($120,000 per life-year saved). In some cases, the government can and does advocate several different life-saving investments. But, because such investments are frequently expensive and resources are limited, there is a need to prioritize. Tammy Tengs and John Graham illustrate the possible gains from prioritizing expenditures. They show that changing the mix of life-saving investments has the potential to save thousands of additional lives at no additional cost.

In related work, I assembled and analyzed the most comprehensive set of federal regulations to date. Using the government’s numbers contained in regulatory analyses, I found results similar to those of Tengs, Graham, and Morrall. Cost-effectiveness varied over several orders of magnitude. In a calculation similar to that of Tengs and Graham, I argued that reallocating funding to life-saving alternatives in developing countries could save substantially more lives at the same or lower cost. In addition, I found that the total benefits associated with the regulations examined exceeded the total costs. Perhaps my most controversial finding, at least the one hardest for the critics to accept, was that a substantial number of regulations would not pass an economist’s strict benefit-cost test based on the government’s numbers.

In a recent paper, Richard Parker of the University of Connecticut Law School argues that the regulatory scorecards used by me and others are deeply flawed and should be abandoned. In this monograph, I respond to those criticisms. My objectives in the monograph are more ambitious than that, however; in it, I also examine some general critiques of the economic analysis of social regulation. While the arguments advanced by certain of the critics have some validity, by and large, the analysis they find so offensive has yielded important research and policy insights and has also led to more efficient regulation. The solution to legitimate concerns raised by the critics is not to eliminate the quantitative analysis but to gain a deeper understanding of its strengths and weaknesses and to use it wisely.

At the end of the day, the critics have spent a great deal of effort trying to discredit certain academics and their work. That they have made a valiant effort cannot be denied. They have shown that scholars should be careful in interpreting the findings from particular studies and that there are likely to be some mistakes in all studies with many numbers. But they have failed to show why scorecards or economic analysis of regulation should be abandoned. And they have failed to see how scorecards, in particular, have provided scholars and practitioners with useful insights into the policy process. Maybe they should consider abandoning the quest to banish scorecards that do not suit their needs and accept that economic analysis should be an important part of the regulatory policymaking process.

 This summary is also available here as an Adobe Acrobat PDF.