PRICELESS: On Knowing the Price of Everything and the Value of Nothing, by Frank Ackerman and Lisa Heinzerling,
The New Press, 270 pp., $25.95
reviewed by Osha Gray Davidson in OnEarth from the Natural Resources Defense Council, Spring 2004
A doctor, an architect, and an economist were sitting in a bar arguing over who had the most important profession. "Clearly, it's surgery," claimed the doctor. "After all, God created Eve by removing one of Adam's ribs." The architect disagreed, saying that her job was by far the most important. "Way before Adam and Eve, God built the heavens and the earth out of chaos," she insisted.
The economist leaned back in his chair, smiled, and said quietly, "And who do you think created the chaos?" The joke, of course, is that economists claim to bring order to a chaotic world. But the humor seems more apt than amusing these days, with the Bush administration shredding decades of environmental laws, often justifying its actions with an economic strategy -- cost-benefit analysis -- that seems perfectly reasonable but is in truth fundamentally flawed.
When the Bush administration announced in 2001 that it was appointing economist John Graham to head the little-known Office of Information and Regulatory Affairs, the White House bureaucracy that reviews regulations proposed by the various government agencies, it claimed that Graham would bring order to the way the federal government regulates everything from the amount of mercury a coal-burning power plant can release, to how many trees we should log from our national forests. But instead of order, Graham's obsession with cost-benefit analysis has brought more chaos -- and controversy.
Among the bizarre concepts Graham has championed is the notion that older people are worth less than the young. According to this logic, if Regulation A would save the lives of 50 3-year-olds each year, at a fixed cost, that might be worth doing. But Regulation B, which would save the lives of 50 elderly citizens each year at the same cost, would get scratched. That's because by already having lived many years, the elderly have, in effect, used up much of their value to society.
Graham's championing of this "life expectancy" approach (or "senior death discount," as critics call it) so outraged advocates for the elderly that last May, then-administrator of the Environmental Protection Agency Christie Whitman was forced to assure the public that the agency wasn't basing any of its decisions on Graham's calculation that the lives of people past 70 are worth precisely 37.8 percent less than the lives of everyone else.
That's not to say that there's anything wrong with the underlying principle of cost-benefit. We all use it to make decisions every day. Let's say you want to buy a mountain bike, for example. You find a mid-priced one that you like, with good rear shocks. The salesperson, however, steers you toward a "state-of-the-art" model, with rear and front shocks, a superlight frame, and hydraulic disc brakes. Just one problem: It costs three times as much as the bike you selected. So you think about your dwindling bank balance and that looming mortgage payment. You consider that you're likely to use the bike only a couple of weekends a month. It'd be great to have the primo model, but, all things considered, you decide it makes more sense to go with the less expensive bike.
What you just did in your head was a quick cost-benefit analysis. It's clearly reasonable and helpful when used properly, but problems arise and multiply when policy makers use it as their primary tool to evaluate proposed environmental and health policies, such as whether to put a limit on the pollutants that cause global warming. As Frank Ackerman and Lisa Heinzerling make clear in their important new book, Priceless, when cost-benefit analysis is misused, as it is in the Bush White House, it becomes, literally, a formula for disaster.
"[This economic] theory gives us opaque and technical reasons to do the obviously wrong thing," they conclude. "Cost-benefit analysis promotes a deregulatory agenda under the cover of scientific objectivity."
There are a number of reasons why this is so, and Ackerman (an economist at Tufts University) and Heinzerling (a law professor at Georgetown) do an excellent job of explaining the many deficiencies of cost-benefit, and they do it in clear, jargon-free prose -- no small feat when writing about economics.
They point out that costs of regulations are easy to quantify, while benefits are not. It's one thing to put a price tag on the cost of new "scrubbers" to remove pollutants from smokestacks. But to do a cost-benefit analysis, you have to compare that cost to its purported benefit, and how do you decide how much clean air is worth? Scientists may be able to estimate how many lives will be saved by such a regulation, but economists then have to convert those lives into dollars -- a slippery business. And that's not all they have to do, because air pollution doesn't just kill people outright, it is also responsible for a variety of chronic ailments such as bronchitis and asthma. How will those be "monetized" (the economic term for fixing a dollar value to intangibles -- a necessary bit of jargon in this debate)? And what about something even more abstract, such as the psychological benefit to parents who live downwind from less-polluting smokestacks and who know that their children are not at increased risk for developing respiratory illnesses? What dollar figure do you put on that? In practice, what happens most often, as the authors point out, is that if economists can't monetize it, they ignore it. And many of the benefits of environmental regulations, from the sense of tranquility fostered by an open landscape to the biodiversity of a forest left unlogged, resist monetization. When forced into a narrow economic framework, Ackerman and Heinzerling argue, the benefits of environmental regulations will nearly always be understated.
While costs are easy to translate into dollars, they are also easy to inflate. Consider the case of vinyl chloride, a chemical used in a variety of manufacturing processes and a known carcinogen. In 1974, the government proposed lowering the maximum daily amount that workers could be exposed to vinyl chloride from 200 parts per million (ppm) to one ppm. Industry executives howled that the new regulation would bankrupt them. Compliance, they maintained, could cost upward of $90 billion. The government adopted the rule anyway. A few years later, a study found that compliance had actually cost $278 million. Why? Because when forced to lower worker exposure, business did what it does best: It innovated, designing new technologies to lower costs.
Decades later, regulation-phobic industries are still spending a lot of money trying to hamper the government's ability to effectively regulate them. Before going to work for the White House, John Graham founded and directed the Harvard Center for Risk Analysis, its funding provided by large corporations, many of which have demonstrated a staunch antiregulatory agenda: General Motors, Union Carbide, Exxon, to name a few. It's hardly surprising, then, that a 1995 study coauthored by Graham purports to show how regulations -- when not subject to the scientific rigors of cost-benefit analysis -- can end up being wildly expensive and of meager benefit. Ackerman and Heinzerling take the study apart and instead demonstrate how Graham manipulated data to achieve the results he wanted. Judging by the regulations Graham cites, it's hard to imagine how the country remains solvent.
Take one measure limiting the emissions of chloroform at paper mills. Graham's study showed that, for every year of human life saved, the regulation would cost industry a whopping $99 billion. What he fails to make clear is that the measure was never put into law. No government agency even advocated that it be put into law. Graham's analysis, and more significantly how it has been portrayed by antiregulatory conservatives, muddles the distinction among actual regulations, measures that were considered and rejected (precisely because they weren't cost-effective), and others -- like the $99 billion example above -- that were never seriously considered at all.
On the surface, Graham's list suggests that government regulations are an undue burden on industries. But Ackerman and Heinzerling reveal that of the 10 most expensive regulations listed by Graham, nine were never enacted into law. This academic sleight of hand is troubling coming from a prestigious institution such as Harvard. But when such misrepresentations are the work of an individual who becomes a powerful government official -- one whose decisions affect the fate of Americans' health and the environment for generations to come -- it's downright scary.
The most essential feature of cost-benefit analysis, at least when it's used to decide among public health and safety regulations, is also its most troublesome, and that is the belief that economists can accurately calculate the value of a human life. Proponents like John Graham defend this notion with near religious zeal, but are economists really able to produce such a number? Well, in 2002 the Bush administration said that for the purpose of cost-benefit studies, it would value each human life at $3.7 million. Yet, just two years earlier, the Clinton administration determined that a human life is worth $6.1 million -- a figure that's 65 percent higher. There are scores of economists out there, each pushing his own "life valuation" equation. Some say a human life is worth only $100,000; others say it's worth $12 million. The enormous range shows the absurdity of the exercise itself. But it's especially ironic that the conservative, "pro-life" Bush administration would choose a formula that dramatically devalues human life -- at least when it comes to regulating the polluting industries that have contributed large amounts to the president's campaign coffer.
The holy grail of cost-benefit analysis -- the true monetary value of a human life -- won't be found in even the most complicated equations, assert Ackerman and Heinzerling. Human life, they write, is literally priceless, as are many of the other things economists like Graham rack their brains to put a price tag on. What formula will tell us how much the remaining 90 wild California condors are worth? How much would you take for the Grand Canyon?
Environmentalists who play the dollar game may win those battles where the monetary benefits of what is being saved are easy to calculate, but they will eventually lose the war. By trying to determine the value of nature (in 1997, one group of eco-minded economists and scientists put a price tag of $33 trillion on the entire biosphere), they concede the premise of cost-benefit analysis: that everything has a price, and what doesn't have a price has no value. Ackerman and Heinzerling argue persuasively that values -- the nonmonetary kind -- are really what should be at the heart of crafting policies to protect our health, safety, and the environment. Ardent cost-benefit advocates such as Graham believe that they can reduce the complicated mechanics of democratic decision making to mathematical formulas. But, as the authors write, when it comes to these vital issues "there is no formula... For good decisions, public debate and participation are essential." The authors' alternative to the cost-benefit binge of the current administration is that we stop believing that there is a perfectly objective, scientific method out there that will essentially make our regulatory decisions for us, and instead embrace spirited public debate. Not a bad idea for a democracy.
In their final chapter they offer some basic principles to guide the discussion -- "an attitude rather than an algorithm." If the authors are less successful in articulating these principles than they are in debunking cost-benefit, that's understandable and perhaps inevitable. After all, it is easier to pick apart algorithms than it is to delineate an attitude. The principles they offer are admirable (who could argue with the proposition that policies should "promote fairness"?), but they're a bit fuzzy, and we've heard them all before. That doesn't mean they're wrong -- just that they don't add anything particularly new to the debate.
But this one small fault shouldn't detract from Ackerman and Heinzerling's very real achievement: Priceless exposes a little-known but significant and fatal flaw at the heart of the Bush administration's antiregulatory crusade.