Does Cost-Benefit Analysis Matter?

Other cases show that the cost-benefit equation can result in the right decision being made for the wrong reasons, according to Frank Ackerman, director of the research and policy program at the Global Development and Environment Institute at Tufts University.

Ackerman cites a 1967 Rand Corp. analysis advising that dams not be built on the Colorado River just above and below the Grand Canyon, not because they might ruin its natural beauty but because nuclear power at the time was cheaper. Environmentalists also helped kill the project.

Outcomes like this are used to argue against using such a tool as a deciding factor in rulemakings intended to protect safety, health and the environment.

Critics also point to how economic analysis can be twisted to reach a certain conclusion. In 2001, when the Bush administration eliminated a rule from President Bill Clinton's administration to stem ergonomic injuries in the workplace, the broad reach and costliness of the regulation were cited as the reasons. What was overlooked was that the economic analysis found the $4 billion in cost was outweighed by $9 billion in benefits.

Hahn doesn't get involved in the moral debate over cost-benefit analysis. He cites other reasons why the approach often doesn't have a significant impact on policy -- politics and the quality of the reports themselves.

"There is no reason to think you are getting the straight poop from a government analysis," he said. He cited research that showed 74 rules issued across the Reagan, George H.W. Bush and Clinton administrations "do not provide some very basic economic information," including "net benefits and policy alternatives."

The report may be a cautionary note to policymakers about depending on economic analysis too much.

Charles L. Schultze, who was head of the Council of Economic Advisers in the Carter administration, said that over the past 30 years, economic analysis has made the debate over rulemaking more sophisticated.

"You never hit home runs or good clean singles," said Schultze, now a senior fellow emeritus at Brookings. "But you can narrow the range of what's acceptable and screen out a lot of junk."

Cindy Skrzycki is a regulatory columnist for Bloomberg News. She can be reached atcskrzycki@bloomberg.net.