*This is the second post in a series on Michael Livermore and Richard Revesz’s new book, Reviving Rationality: Saving Cost-Benefit Analysis for the Sake of the Environment and Our Health. For other posts in the series, click here.

“We must not be deluded into thinking that the characteristic work of Adam Smith is over because the laws of which he disapproved are repealed.” — Walter Bagehot (1876)[1]

Reviving Rationality[2] went to press just before the results of the 2020 presidential election were known. If Donald Trump had been re-elected president in 2020, it would have been an important book for obvious reasons. Livermore and Revesz meticulously criticize the benefit-cost analyses conducted by the Trump Administration for inconsistencies and manipulation of assumptions to achieve pre-ordained results, or as the authors put it, “the Trump Administration has treated cost benefit analysis as a charade . . . .”[3] Their critique is generally consistent with the conclusions of other experts in the field.[4]

The important question now, however, is not so much whether the Trump Administration – and in particular Scott Pruitt’s EPA – manipulated benefit-cost analysis. Many, if not most, of the Trump era rules that Livermore and Revesz criticize have either already been revoked by the Biden Administration, set aside in court or soon will be. The more important question now is “What is the broader, enduring significance of their critique of practices under the now departed Trump Administration?” As Walter Bagehot notes in the epigram quoted above, the deeper import of a work may outlive the repeal of the laws that it criticized.

Opponents of benefit-cost analysis, most prominently Lisa Heinzerling and Frank Ackerman in their classic jeremiad against benefit-cost analysis,[5] argue that the technique’s claim to objectivity is bogus because it can be manipulated via assumptions that are not apparent to most observers. Doesn’t Livermore and Revesz’s critique confirm the claims of the opponents about the possibilities for manipulation and thereby undermine the legitimacy of using benefit-cost analysis? On the contrary, I think that the deeper lesson from the book is that the transparency and discipline that benefit-cost analysis provides is invaluable for exposing perfidy, as I explain in more detail below. 

The Standardization Debate

Is there a right way and a wrong way to do benefit cost-analysis? For example, risk analysis is an important component of benefit-cost analysis because it is typically used to calculate the “benefit” side of benefit-cost balance in the environmental area. I have long been an proponent of standardizing techniques for risk analysis,[6] but I have come to see that it is not necessary to straitjacket benefit-cost analysis with standardized rules as long as deviations from the standard approach must be explained and justified.

The debate about standardizing risk assessment goes back to the John Graham-Paul Noe OIRA in the early days of the George W. Bush Administration when OIRA attempted to promulgate standardized techniques for computing benefits via risk assessment. Then-OIRA Administrator Graham made the mistake of asking the Board of Environmental Studies and Toxicology (BEST) of the National Academy of Sciences to review OIRA’s proposed risk bulletin. Much to his surprise (and consternation), BEST criticized the very idea of standardizing techniques for risk analysis.[7] I was serving on the board of BEST at the time, and I argued long and hard that standardization of risk analysis across the government was a good thing as it would facilitate comparisons of benefits among various government initiatives. For example, if the National Highway Transportation Safety Administration computes the benefits of its rules one way, and EPA computes the benefits of its rules another way, it is difficult, if not impossible, to conclude that we as a society should invest in more of one and less of the other. In a sense, a consistent method for making comparisons between investments in various agencies may be more important that exactly how the computations are made. At a minimum, I argued, OIRA should define standardized practices for risk assessment as default rules from which individual agencies may deviate but must explain and justify if they do. My view did not prevail, as John Graham’s successor as OIRA Administrator, Susan Dudley, abandoned the effort.

In retrospect, however, I think that the benefits of standardization may not always be worth the costs. Some variations in benefit-cost analysis do go to the core of the technique’s legitimacy. I might put in this category whether to consider the co-benefits of a rule. I, like Livermore and Revesz, think that if a proposed government action produces benefits in addition to limiting the target pollutant or other risk that provides the legal justification, those benefits should at least be identified for decision-makers to consider. The classic (perhaps extreme) example is EPA’s 2011 proposed mercury and air toxics rule (MATS) for coal-fired power plants.[8] According to Dudley and other critics, 99.996% of the benefits of that rule came not from controlling mercury and other toxics that provided the legal justification for the rule but from reducing particulate matter by forcing coal-fired power plants to close because they could not meet the stringent limits on mercury.[9] But of course, the “elephant in the room” was the putative climate change benefits from forcing coal-fired power plants to close, which many thought was the “real reason” for the rule.

My view is that that all co-benefits that are significant should be identified for the decision-maker, who may rationally decide either to take them into account or decide not to weigh them in the balance. There are two caveats to this principle: specific provisions of a particular statutory scheme may dictate one approach or the other (although in practice few actually do) and the decision-maker must articulate a rational basis for its approach to co-benefits in a particular rule. Similarly, if a proposed rule has positive net benefits under some discounting assumptions but not others, that too should be disclosed for decision-makers and reviewers to consider but it my view, it does not follow that only one discounting regime should be allowed.

Unlike many of my fellow academics, I do not regard benefit-cost analysis as an automated substitute for human decision-making, but rather as only a tool for informing human decision-makers about the conditions under which a proposed action would have social benefits in excess of its costs.[10] Thus, I believe that disclosure of assumptions underlying a benefit-cost analysis is essential, but unlike Livermore and Revesz, I also believe that absent statutory restrictions, policy-makers may decide – as the Trump Administration often did – to make non-standard assumptions and use non-standard approaches – as long as they are transparent and their methods can be subject to criticism and review by the courts, Congress and the public. Few if any statutes require regulators to adopt the “aggregate net social benefit” (i.e. Kaldor-Hicks economic efficiency) approach that was embodied in the original 1981 Executive Order mandating OIRA review and that Livermore and Revesz appear to endorse.[11]

In short, many of the so-called “abuses” of benefit-cost analysis by the Trump Administration criticized by Livermore and Revesz strike me as actually vindicating using quantitative benefit-cost techniques precisely because they expose the conditions and assumptions underlying policy-choices and thereby facilitate criticisms like those made by Livermore and Revesz.

In my view, there is no one “right way” to conduct benefit-cost analysis but the assumptions that drive the analysis must be disclosed and are fair game for criticism. Livermore and Revesz show us that a kind of “common law” of consensus assumptions and procedures has develop for doing benefit-cost analysis. I do not believe that these approaches should become mandatory straitjackets for benefit-cost analysis, but I do believe that they are default rules, and that deviations from them must be explained and justified.

E. Donald Elliott is a Distinguished Adjunct Professor at Antonin Scalia Law School, George Mason University.

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[1] 3 The Economist 119 (1876), quoted in The Best of Bagehot 42 (ed. Ruth Dudley Edwards, 1993).

[2] Michael A. Livermore and Richard L. Revesz, Reviving Rationality: Saving Cost-Benefit Analysis for the Sake of the Environment and Our Health (Oxford University Press, 2021), DOI:10.1093/oso/9780197539446.001.0001 (hereafter “Livermore and Revesz”).

[3] Livermore and Revesz at p.7.

[4] For example, in the definitive history of EPA’s first fifty years, Resources for the Future senior fellow Richard Morgenstern concludes that in the main, a bipartisan consensus existed through multiple administrations about how benefit-cost analysis should be done – until the Trump Administration deviated through unprincipled, result-oriented approaches. Richard D. Morgenstern, How Economics Has Contributed to EPA in Fifty Years at the US Environmental Protection Agency: Progress, Retrenchment, and Opportunities 393-441 (Lanham, MD: A. James Barnes, John D. Graham, David M. Konisky, 2021). Earlier work by Morgenstern and Art Fraas also identified a core consensus of how to do benefit-cost analysis across Republican and Democratic administrations prior to Trump. Art Fraas & Richard Morgenstern, Identifying the Analytical Implications of Alternative Regulatory Philosophies, 5 J. Benefit Cost Analysis 137 (2014). Livermore and Revesz accurately describe Frass and Morgenstern’s conclusions as “there were important differences in emphasis even if the underlying methods were similar … with Republican and Democratic agreeing on a foundational approach of counting costs and benefits and using regulation to improve the aggregate well-being of the American public, but with different emphasis and some disagreement on specific methodological issues.” Livermore & Revesz at 25

[5] Frank Ackerman and Lisa Heinzerling, Priceless: On Knowing the Price of Everything and the Value of Nothing (New Press, 2004).

[6] See generally E. Donald Elliott and Daniel C. Esty, Advanced Introduction to U.S. Environmental Law 13 (Elgar, 2021)(“Benefit-cost analysis and risk assessment are linked, as the risk reductions quantified through risk assessment are monetized and counted as benefits and compared to the costs in benefit-cost analyses.”)

[7] National Research Council. 2007. Scientific Review of the Proposed Risk Assessment Bulletin from the Office of Management and Budget. Washington, DC: The National Academies Press. https://doi.org/10.17226/11811.

[8] 76 Fed.Reg. 24976 (May 3, 2011)(proposed rule), https://www.govinfo.gov/content/pkg/FR-2011-05-03/pdf/2011-7237.pdf

[9] See Susan Dudley, EPA’s risks outweigh rewards for new mercury rule, The Hill (Dec. 20, 2011), https://thehill.com/blogs/congress-blog/energy-a-environment/200539-epas-risks-outweigh-rewards-for-new-mercury-rule; Prepared Statement of Susan E. Dudley, Hearing on Review of Mercury Pollution’s Impacts to Public Health and the Environment Before the Committee on Environment and Public Works Subcommittee on Clean Air and Nuclear Safety United States Senate April 17, 2012, https://www.epw.senate.gov/public/_cache/files/b/2/b269df79-8ef3-4897-8483-c5f33fb3ec62/01AFD79733D77F24A71FEF9DAFCCB056.41712hearingwitnesstestimonydudley.pdf

[10] See generally E. Donald Elliott, Only a Poor Workman Blames His Tools: On Uses and Abuses of Benefit-Cost Analysis in Regulatory Decision Making About the Environment, 157 U. Pa. L. Rev. PENNumbra 178 (2009) http://www.pennumbra.com/responses/response.php?rid=62 http://ssrn.com/abstract=1712326

[11] For an alternative foundation for environmental regulation based on the right to be free from harm caused by others, rather than net social benefit or economic efficiency, see E. Donald Elliott and Daniel C. Esty, The End Environmental Externalities Manifesto: A Rights-Based Foundation for Environmental Law (January 7, 2021). NYU Environmental Law Journal, Volume 29.3, Forthcoming 2021. Available at SSRN: https://ssrn.com/abstract=3762022