Does Cost-Benefit Analysis Matter?

By Cindy Skrzycki
Tuesday, June 12, 2007

The practice of estimating the costs and benefits of U.S. government regulations is "frequently done poorly," with scant evidence that it makes a difference on policymaking.

That's the dismal finding of a recent report concluding that economic analysis had little substantial impact on decisions made by regulators. The assessment is important because the White House budget office estimates that major rules can cost industry $40 billion annually, while benefits to society from regulation can range from $94 billion to $449 billion a year.

The conclusion by the AEI-Brookings Joint Center for Regulatory Studies underscores the continued disagreement over the relative value of regulation and the role that cost-benefit analysis should play in making politically sensitive decisions, such as writing clean-air rules.

"Given the forces of law and politics, one should not expect the role of economic analysis to be any more than modest," said John D. Graham, a proponent of cost-benefit analysis who headed the Bush administration's regulatory review office until last year.

Economic analysis has been a key tool in making regulatory policy since 1981, when Ronald Reagan became president, with cost-benefit reviews increasingly being applied to initiatives.

The idea is to assign monetary values to regulation, such as installing pollution-control technology or overhauling assembly lines to avoid repetitive-motion injuries to workers. That number is then weighed against benefits, such as how many illnesses could be avoided or lives saved.

Although the report's general assessment is gloomy, it suggests that putting rules under an economic microscope is worthwhile since analysis can save billions of dollars at the margins.

"It certainly does matter in selected instances,'' said Robert W. Hahn, a scholar at the American Enterprise Institute and co-author of the report with Paul C. Tetlock, an assistant professor at the University of Texas at Austin. "Our findings suggest that government regulatory analyses are a lot like chicken soup: They typically do no harm, and in some instances, they help a lot."

Hahn is executive director of the Joint Center, which published their study. The center is a collaborative effort between the American Enterprise Institute and the Brookings Institution, two District-based research groups.

The report cited the lead-in-gasoline rule as an effective use of cost-benefit analysis. The calculations forced the Reagan administration to adopt a stringent rule that ordered about 90 percent of the lead still in gas to be removed by 1988.

In that case, cost-benefit analysis showed potential improvements in health, including lowering blood pressure, to be 10 times the cost to refiners from 1985 to 1988. The numbers -- $20 billion in benefits and $2 billion in costs -- were too lopsided to argue with.

The recent report has special relevance for the Bush administration, which has been an enthusiastic practitioner of cost-benefit analysis. President Bush's budget office has instructed federal agencies in the finer points of the methodology and appointed to the regulatory-review office two ardent believers in economic and scientific assessment of rules -- Graham and Susan E. Dudley, who is from a research group at George Mason University in Arlington.

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