Pricing the Priceless
How much would you pay for a case of chronic bronchitis? How many dollars are hunchback whales worth? Frank Ackerman and Lisa Heinzerling discuss the sordid world of cost-benefit analysis.
[ Interview by Carrie McLaren ]
For years, the cell phone industry has harbored a dirty little secret: talking on a cell phone while driving is about as dangerous as driving drunk. Even the pro-business Harvard Center for Risk Analysis recently estimated that the use of cell phones by drivers may result in approximately 2,600 deaths and 330,000 injuries each year. Yet attempts to ban cell phone use in cars in the U.S. have as of yet proved feckless. New York and several other municipalities forbid drivers to use handheld phones but allow "hands-free" versions, which, research shows, aren't any less dangerous.
In their excellent new book Priceless: On Knowing the Price of Everything and the Value of Nothing (New Press, 2004), Frank Ackerman and Lisa Heinzerling show how the cell phone industry has managed to escape regulation for so long: by enlisting some of the country's most influential economists to perform cost-benefit analyses.
In the case of cell phones, cost-benefit analysis works like this: economists assign dollar amounts to the lives of people killed annually in cell-phone--related car crashes, then compare that number to the amount of money that people behind the wheel spend on cell phones. Since, by the economists' calculations, the money spent on cell phones is greater than the "value" of those human lives, they've concluded that cell phone use in cars shouldn't be regulated.
How do you put a price tag on a human life, you ask? Number-crunchers at think tanks such as the Harvard Center for Risk Analysis, the AEI-Brookings Joint Center for Regulatory Studies, and the Cato Institute have for the most part focused on workplace data. Dangerous jobs at construction sites, nuclear plants, and coal mines tend to pay more than low-risk ones; economists maintain that this wage difference indicates the price people are willing to pay to avoid death. Through some fancy math involving comparing risks to wages, that works out to be about $5 to $6 million.
The lives of cell phone victims are by no means the only nontangibles with price tags. Throughout Priceless, Ackerman and Heinzerling show how regulators have determined costs for anything from a case of chronic bronchitis ($260,000; EPA, 1997), to the preservation of national forests ($219,000; OMB, 2002), to IQ points ($8,346 each; EPA, 2000).
The authors oppose cost-benefit analysis and consider it too inherently biased to base decisions on. Yet in their critique they remain level-headed and clear, pointing out blatant errors in logic and calculations--criticisms that should be of value even to cost-benefit's advocates.
For example, calculating risk on the basis of wages assumes that workers can freely choose among several job options; and it assumes that those workers are perfectly informed of any risks involved. But when unemployment rates are high, workers end up taking whatever jobs they can. The cost of risk, then, says less about how much someone values his life than about the current state of the job market. And poor, uneducated people--in any job market--simply don't have the access to low-risk jobs that wealthier people do. Ackerman and Heinzerling argue that, to correct for this problem, analysts should figure in the amount of money a rich person would have to be paid to take a risky job.
Cost-benefit analysis invariably places different values on different lives. Rich people and young people are worth more than the poor and the elderly. And if you're poor and elderly, you may as well give up: according to cost-benefit economics, it's better to let old people die than to require pollution controls.
At times, Ackerman and Heinzerling's measured, point-by-point refutation of cost-benefit logic makes you want to continually poke yourself to remember that all this is insane. Deconstructing cost-benefit analysis feels like getting into a serious debate over whether it's better to kill your mother or your father. But Ackerman and Heinzerling's book is crucial if for no other reason than the fact that so many people in power take such stuff very, very seriously.
Frank Ackerman is an economist at the Global Development and Environment Institute at Tufts University. Lisa Heinzerling is a professor at the Georgetown University Law Center and has clerked for Judge Richard Posner and Justice William Brennan. We talked by phone in July 2004, and I was immediately taken with both of them.--Carrie McLaren
STAY FREE!: Why do Bush and other opponents of environmental regulation like cost-benefit analysis so much?
LISA HEINZERLING: Well, there are a bunch of reasons. One, it requires getting numbers for both costs and benefits. On the cost side, this is relatively easy; you can try to figure out the price of the equipment required for pollution control, for example. On the benefit side, however, there are a whole lot of important benefits that we can't attach numbers to in the first place. For example, we can quantify the number of certain kinds of cancers that will be avoided, but there are other illnesses that can't be quantified, and so they're just left out of the analysis.
STAY FREE!: They can quantify the cancer because...?
HEINZERLING: Well, one reason is that there is a very clear end point--you get a tumor or you don't get a tumor.
FRANK ACKERMAN: Also, it's the most thoroughly studied of the diseases.
STAY FREE!: I guess pain would be something that you can't really quantify because it's so subjective.
HEINZERLING: Pain or dermatitis, neurological effects, endocrine disruption--a slew of serious impairments can't be quantified.
ACKERMAN: But even for cancer cases, the medical data is only part of what cost-benefit analysts need. The benefits of pollution control--lives saved, cancer cases avoided, damage to ecosystems prevented--don't have prices naturally attached to them in the market. That's why we called the book Priceless.
When the EPA did a cost-benefit analysis of arsenic regulation, it found that removing arsenic from drinking water leads to fewer cases of cancer. So what's it worth to not die of cancer? What's it worth to avoid a nonfatal case of cancer that leaves you in chemotherapy for years? To do the cost-benefit analysis, you've got to put numbers on both of those things. The EPA rose to this challenge and made up numbers. Apparently, it's worth $6.1 million to not die of cancer. The value of avoiding a nonfatal cancer was estimated by saying, "We really don't have a clue what it's worth, so we'll use the value of avoiding a case of chronic bronchitis," which they made up by interviewing shoppers in a North Carolina mall in 1987. Those numbers were treated as hard science and have been carefully adjusted for inflation since 1987; unfortunately, they were never adjusted for common sense.
STAY FREE!: Are those the only effects of arsenic in drinking water?
ACKERMAN: No, those are just the only ones the EPA tried to put prices on. All the other diseases associated with arsenic were mentioned in passing, and then ignored. If you can't come up with a number, it's treated as zero; that's where the great crunch comes in. Many things that people care about have no price attached to them. They don't appear in the analysis.
STAY FREE!: You've argued that putting prices on things that have no market value decreases rather than increases the information available to decision makers.
ACKERMAN: If you have a long list of the health effects of arsenic in drinking water, that's much more informative than reducing everything to a made-up dollar amount.
STAY FREE!: You mentioned arsenic--wasn't that the first time the U.S used formal cost-benefit analysis to write a major regulation?
HEINZERLING: Yes. But the White House has for many years said that they're going to require agencies to do cost-benefit analysis for very important rules. In recent years, that dynamic has really accelerated.
STAY FREE!: What are some of the other regulations cost-benefit analy-sis has shaped?
HEINZERLING: Every major rule now coming through the agencies is evaluated according to cost-benefit analysis. Let me offer one qualification, though: the Bush administration has in some cases avoided cost-benefit analysis, and troublingly, those are cases in which I think the cost-benefit analysis would have shown that regulation was a good thing. For example, air pollution kills so many people and the effects are so well-documented that virtually any regulation that reduces common air pollutants is going to turn out to be good in cost-benefit terms. Yet the Bush administration weakened the rules for power plants and factories without doing a cost-benefit analysis.
ACKERMAN: I'm involved in a case now where the United Farm Workers are suing the EPA over its decision to allow very toxic pesticides to be used on crops. In effect, the EPA just said, "It's so beneficial to the growers to use these pesticides that we don't have to worry about evaluating the damage it does to farm workers."
STAY FREE!: After the Ford Pinto disaster and, more recently, Philip Morris's analy-sis of smoking in the Czech Republic [which showed that smoking saved the government health care system money because smokers die earlier], are corporations any less likely to produce cost-benefit analyses on health and safety issues?
HEINZERLING: Yes, I think corporations are leery of doing this kind of analysis internally, for their own decisions, because, if the public finds out, they get punished for it.
ACKERMAN: But they'll definitely lobby to modify the government's calculations and offer competing analyses. When the government considered requiring power plants to install cooling towers in order to prevent the killing of fish, the power companies' experts claimed that power plants don't really hurt fish, because there are virtually an infinite number in the water, so if you kill some, more will grow.
STAY FREE!: With new rules on "takings," governments have to pay companies for passing laws that cost them money. So if I'm a real estate owner and the state passes an environmental protection law that devalues my property, I could sue the state. What effect has this had on the environment?
HEINZERLING: Actually, they haven't had a lot of success in requiring compensation for conventional pollution regulation. They've had some success with land use, saying "no, you can't put something in this wetland," or "you can't put something in this coastal zone" without paying compensation, because conservative academics and think tanks have been pushing this in the courts for years. Still, it's hard to win a takings claim. It's really more that they've had a chilling effect. I think a lot of local and state governments worry that, "if we lose, we're in real trouble."
STAY FREE!: Could you give me an example of an acceptable takings claim and an unacceptable one?
HEINZERLING: The state can't tell somebody, "you may not use your land" without paying them for their property. On the other extreme, telling a company that it can't discharge cyanide into a river has not been considered a taking.
ACKERMAN: The real sleeper in this area, though, is that language similar to takings is sneaking into international trade agreements. Buried deep in the seemingly boring language of NAFTA is a statement that companies can sue other governments directly, making a takings-like claim against the other country's regulations. So U.S. companies can sue the Mexican and Canadian governments, for example. That has yet to shake out, but it has some frightening possibilities.
STAY FREE!: Does cost-benefit ever include in its accounting who is paying the cost? Using the cooling towers example, say killing fish will cost $10 million in direct costs to the public, whereas cooling towers will cost zero in direct costs because the company has to pay for them. Why doesn't the government conclude that the cooling towers are cheaper?
ACKERMAN: Because cost-benefit analysis explicitly does not consider who's paying. The theory holds that if there are net benefits for society as a whole, then the winners could compensate the losers. Distribution is considered a separate issue. All too often, the winners chose to keep the winnings and not share them with the losers, so the compensation remains purely hypothetical.
STAY FREE!: Are the values of human lives based on how many friends or loved ones they have?
STAY FREE!: What about insurance or wrongful death suits? If you have dependents, doesn't that affect the value of your life?
HEINZERLING: In the wrongful death context, the courts really only have money to give, so what they've developed are a series of ways of trying to figure out what survivors lost as a result of the death of a loved one. There, what they've come to say is that you've lost mostly income, maybe some medical expenses; they look at the true economic losses, and give the victims that amount. That's why, in the context of the September 11th victims fund, for example, you see different amounts given to victims based on their income, because that's the traditional way of doing it in the tort system.
What we're looking at is the prospective context--not looking backward, and trying to figure out how much to compensate someone who has been wronged, but how to figure out who you're going to save in the future, or whether to save anyone.
ACKERMAN: With cost-benefit analysis, you'd have tremendous political problems if you started differentiating by incomes. It's the "old black woman" problem: if income was all that mattered, would pollution that just killed old black women be okay?
HEINZERLING: That's actually the reason why regulators turned away from income calculations--what's called the "human capital" method--and toward "willingness to pay." They said, "we're going to try to value people the way they value themselves."
STAY FREE!: Are there any critics of cost-benefit analysis who don't share your politics? Any conservatives oppose it?
ACKERMAN: Conservative policy wonks generally love this stuff.
STAY FREE!: How do mainstream environmental groups respond to cost-benefit analysis? Are they responding with their own numbers: "if you can't beat 'em, join 'em"?
HEINZERLING: Good question. Certainly when Newt Gingrich's Contract with America came to Washington, environmental groups united against a so-called "super mandate" that would have required cost-benefit analysis for health and environmental rules. And so you have that fairly recent experience when the environmental community was united against cost-benefit analysis. Today I hear among environmental groups some sense that, "well, this is inevitable, so let's try to make it as good as we can."
STAY FREE!: What about "bioeconomics"? I've read that some environmentalists have been arguing for putting a price on natural resources in order to deter corporations from plundering the environment without paying. What has become of this idea?
ACKERMAN: There have been little successes here and there, but the problem is that the market values of sustainable uses of natural resources are often much less than the values of damaging uses. What happens in, say, the Amazon, where it turns out that the value of preserving the trees for tourism and sustainable industries is nowhere near the short-term value of clear-cutting, selling the timber, and farming the land? To take another example, if you wanted to put a price on whales, you could add up the money people pay for whale-watching trips, but it turns out that's fairly small. It's easy to believe that commercial exploitation of whales could produce a lot more money than the revenues of whale-watching trips.
My reaction to those who want to save nature by adding up its market value is, more power to them, but they're not going to get us nearly as far as we need to go.
STAY FREE!: You would prefer to get rid of cost-benefit analysis entirely, wouldn't you?
HEINZERLING: We think it's fundamentally flawed and that refinements aren't going to help in a meaningful way.
ACKERMAN: The people who are pushing it are not just relying on its intrinsic flaws; they're often cheating in their calculations. Environmental groups fighting a rear-guard action against cost-benefit analysis can always find ways in which the benefits numbers are too small, but that never wins the war.
STAY FREE!: It reminds me of the divide between police estimates of the crowd size at a protest verses the organizers' estimates. The two sides are never going to agree on the numbers, so it boils down to politics. To play devil's advocate, proponents of cost-benefit analysis argue that obviously some ways of preserving our environment or our health are cheaper and better than others, so can't cost-benefit analysis help with that?
HEINZERLING: It doesn't necessarily help with that. What might help is setting a goal and then thinking about creative ways to get to that goal most cheaply. In some contexts, that might mean labeling a product rather than banning or restricting it. In other cases, when you're talking about pollution, it might mean allowing emissions trading in that pollutant rather than requiring a particular control technology.
ACKERMAN: From the beginning of modern environmental regulation in the early 1970s right to the present, there has been continuous discussion about the best, most innovative ways to regulate--a search for cheaper control technologies, simpler forms of record keeping and so on. I'm not convinced that cost-benefit analysis does anything to accelerate that process. The case for cost-benefit calculations so often depends on a strange rewriting of the past, as if the EPA was once run by Stalinist bureaucrats who delighted in capriciously spending money, and so now we have to bring in economic analysis to undo the damage. If you were alive then, or if you've read about the period, you know that this legendary era of extravagance never happened. So cost-benefit analysis is presented as solving a desperate problem that never actually occurred.
HEINZERLING: The EPA in particular has accomplished a lot over the years. But it has gotten even smarter and more flexible--
STAY FREE!: Huh? You think the EPA has gotten smarter under the Bush administration?!
HEINZERLING: Oh, no, they haven't done much of anything under Bush. But if you go through the Clinton years, there are a lot of ways in which they've gotten more flexible and have been very attentive to critiques; so I just find it ironic that they're one of the most vilified agencies.
STAY FREE!: How do you respond to economists who argue that cost-benefit analysis helps in making difficult decisions? If closing off a particular waterway is going to harm a couple of types of fish but will protect a couple of other species, or it will devastate the livelihood of one community but not another, can't cost-benefit analysis help with making the best choice?
ACKERMAN: Making difficult decisions is what government and the courts have always done, and there's no evidence that they have failed for lack of a magical mathematical formula.
HEINZERLING: One of the subtle things that's also lost when you decide things according to this formula is any sense of loss or tragedy. Martha Nussbaum, a philosopher at the University of Chicago, has pointed out that if you reduce everything to numbers you can easily think nobody was hurt by a regulation. It may be, in some cases, that you can't please everybody and at the end of the day somebody is hurt, but cost-benefit analysis completely papers over that fact. Sometimes in human situations when you realize that people are being hurt you can actually come up with a solution that you wouldn't have thought of if you were pretending that you were just trading money around.
STAY FREE!: So do you think cost-benefit analysis is going to be around for a while?
HEINZERLING: Yes, unfortunately. There are too many people who make their living off of it [laughs]. There are too many think tanks. It's a huge industry.