Supreme Court's Mercury Decision Did Not Usher in Sunstein's 'Cost-Benefit State'

In Michigan v. EPA, handed down two weeks ago, the Supreme Court waded into the decades-long debate over the use of cost-benefit analysis (CBA) in agency rulemaking.   The decision struck down EPA’s limits on mercury emissions from power plants for the agency’s failure to consider costs, and so appears, superficially at least, like a win for the pro-CBA camp.  Indeed, Professor Cass Sunstein of Harvard—President Obama’s former “regulatory czar” and one of CBA’s most prominent cheerleaders—has been crowing about the opinion, hailing it as “a rifle shot,” ringing in the arrival of “the Cost-Benefit State.” 

But Sunstein’s celebration is a bit premature; his so-called “cost-benefit state” remains mostly in his imagination.  In fact, there is good reason to believe that the Court remains quite skeptical of the particular brand of CBA that Professor Sunstein advocates.  And that’s very good news for the rest of us.

The push to incorporate CBA in agency rulemaking was led by industries in the 1980s that were looking for ways to weaken and delay the wave of environmental regulation that had swept the country in the 1970s.  More recently, some prominent academics—most notably Professor Sunstein—have taken up the banner, claiming that CBA will rationalize agency decision making, counteract the influence of special interests, and increase transparency.  Industry and their academic allies like to point to Ben Franklin (who once famously said that he liked to make a list of pros and cons when making tough decisions) and present CBA as a matter of simple, home-spun common sense.  But opponents, including most environmental groups, charge that it obfuscates and obscures rather than promoting transparency and that it systematically undercounts regulatory benefits (which tend to be things like preventing deaths or preserving ecosystems that are hard to measure in dollar terms).

When Congress and the Supreme Court have weighed in on this debate before, they’ve expressed considerable skepticism about CBA, particularly in the environmental realm.  Indeed, most of the environmental statutes passed by Congress in the 1970s (and still in effect today) eschew CBA in favor of other standard setting methods that don’t draw agencies into the messy and controversial business of trying to assign dollar values to environmental and public health benefits.  And the Supreme Court has on several previous occasions applied a kind of anti-CBA presumption to reject arguments by industry that agencies should have used it—saying that unless a statute is clear, it should be presumed to preclude CBA.  More recently, in 2009, the Court read ambiguous statutory language to allow EPA to use CBA if they choose to, but Michigan marks the first time the Supreme Court has actually read ambiguous statutory language as requiring the agency to use CBA when it didn’t want to.  

That certainly looks at first blush like a big win for Sunstein and the others who promote CBA.  And that’s exactly how Sunstein is reading it.  But that’s a superficial reading that really only tells part of the story.

The problem is that no one in this debate has been particularly careful about defining what they’re talking about.  The term “cost-benefit analysis” can actually refer to a broad range of different decision-making techniques, ranging from the kind of informal weighing of qualitatively described pros and cons that Ben Franklin described to a highly technical and formal analytic method grounded in economic theory that attempts to fully quantify and monetize all of the social costs and benefits of a whole range of regulatory options, discount to present net value, and then calculate the point at which the marginal benefits curve intersects the marginal costs curve.  (If you want to know more about CBA’s formality-informality spectrum, see my two recent articles, here and here.)

The two ends of this spectrum actually have very little in common, other than the general approach of juxtaposing positive and negative impacts.  Indeed, most of those who oppose formal CBA have no objection to informal CBA of the Ben Franklin variety.  The controversy arises largely from formal CBA’s insistence that everything—including intangibles like life and death or an endangered species or clean air over the Grand Canyon—has to be shoehorned into a monetary metric. 

But the kind of CBA that agencies increasingly do (or at least strive to do) and that people like Professor Sunstein advocate for is quite formal—and, ironically, about as far as you can imagine from the rationality and common sense of Ben Franklin.  It insists on monetization of things like preventing people from dying from exposure to pollutants and preserving species and ecosystems.  And it requires discount rates like you would apply to a financial transaction to be applied to the value of saving lives in future generations, with the result that the lives of our great-grandchildren shrink to a mere pittance.

And it gets even worse.  In a book published just last year, Professor Sunstein suggests that the “next generation” of CBA should adopt even higher levels of sophistication by “disaggregating” along race, gender and class lines what’s called the “Value of a Statistical Life” (VSL).  This is the dollar figure that formal CBA assigns to the value of saving a life (by, for example, reducing the amount of pollution power plants are allowed to discharge into the air we breath).  Economists arrive at this number by asking people how much they’d be willing to pay to avoid small risks (on the order of 1 in 10,000 or a million) and then multiplying by the denominator of the risk fraction.  Alternatively, they analyze data about how much more people earn in high risk jobs as compared with otherwise comparable but safer jobs. 

As of now, the common practice is for agencies to use a single number for the whole population.  The going rate is $9 million per “statistical life.”  But when Professor Sunstein suggests that we should “disaggregate” or “individuate” that number, he means that we should use a different value for rich and poor, male or female, White or African-American.  And indeed, researchers have been busily conducting studies asking how people’s willingness to pay to avoid risk varies across various demographic characteristics.   Guess what?  Poor people consistently end up with a lower VSL—often by several magnitudes—than rich people.  (No surprise there, since “willingness to pay” is obviously constrained by ability to pay.)  And you can only imagine what happens when researchers start asking how much more women or people of color get paid to take on high risk jobs.  One study Sunstein cites in his book (Valuing Life, page 105) found that African American men get no additional compensation at all for taking riskier jobs.  If we used that to calculate the statistical value of an African American male life, we would get exactly zero.

Sunstein recognizes that what he’s saying is “controversial.” And he waffles a bit in the face of that controversy and (thankfully) attaches a number of qualifications and caveats. But ultimately, he continues to insist that “a higher degree of individuation would be desirable.”

This is scary stuff.  And so it was with considerable relief that I read the Justices’ assurance in the Michigan decision that when they say EPA has to use CBA, they’re not talking about the formal (scary) kind.  Justice Scalia, writing for the majority, was careful to say that EPA need not “conduct a formal cost-benefit analysis in which each advantage and disadvantage is assigned a monetary value”—a statement that the four dissenting justices explicitly signed on to as well. 

This language is both reassuring and not terribly surprising.  Justice Scalia has actually been on record for decades (even before he joined the Supreme Court) expressing skepticism of formal, monetized CBA.  Indeed, the last time he wrote an opinion addressing the use of CBA by the EPA, he included a similar disclaimer against formality. Justice Breyer did too, in a concurrence urging EPA to “avoid lengthy formal cost-benefit proceedings and futile attempts at comprehensive monetization.”

The fact the Supreme Court endorses the kind of common sense weighing of pros and cons that Ben Franklin talked about is not particularly surprising or noteworthy—hardly a “rifle shot.”  After all, who doesn’t think weighing pros and cons is a good idea?   If someday the Justices start calling for the kind of formal quantified and monetized CBA that Professor Sunstein is pushing, that will be cause for worry.  Fortunately, that day has not arrived.