Why we should discount the views of those who discount discounting.

• Author: Donohue, John J., III
• Position: Response to article by Lisa Heinzerling, Yale Law Journal, vol. 107, p. 1981, 1999

Lisa Heinzerling, Regulatory Costs of Mythic Proportions, 107 YALE L.J. 1981 (1998).

Deciding how to allocate the resources to be spent on promoting health and safety through governmental regulation is a challenging task of immense significance. The Environmental Protection Agency estimates that roughly $250 billion (2.6% of Gross National Product) will be spent on pollution abatement alone in the year 2000.(1) Billions more are spent on a wide array of other health and safety measures. Tens of thousands of lives will be lost or saved depending on whether these allocations are made foolishly or wisely.(2)

In 1986, Office of Management and Budget (OMB) economist John Morrall devised a now-famous table designed to assess the desirability of an array of federal health and safety regulations.(3) Morrall concluded that roughly half of the forty-four regulations he reviewed were unsound because the cost per life saved exceeded $26.8 million in 1998 dollars(4)--a figure substantially higher than the amount of money that workers would demand in exchange for a comparable increased risk of death on the job.(5)

In her provocative article, Regulatory Costs of Mythic Proportions,(6) Lisa Heinzerling illustrates how "the table" has taken on a life of its own as it has become "Exhibit A"(7) in the case against the soundness of current regulatory decisionmaking. She documents how the table has been widely cited for the propositions that "the costs of regulation often exceed its benefits, that many more cost-effective strategies exist for reducing risk, that regulation sometimes increases overall risk, and that regulatory priorities are not set in a rational manner."(8)

Heinzerling has selected a marvelous topic and has exhaustively probed beneath the surface of a widely accepted study to see if its conclusions can withstand close scrutiny. She has taken Morrall's very lean report and admirably fleshed out the details behind many of the forty-four regulations that each appear as just one line in Morrall's table. Heinzerling legitimately questions whether Morrall's selection of regulations is representative or overweighted toward less cost-effective rules.(9) She demonstrates that Morrall's cost and benefit estimates are not always well-documented and are consistently less optimistic than the estimates of the agencies issuing the rules,(10) and she observes that a number of the worst-performing regulations on Morrall's list were withdrawn or never adopted because their costs far exceeded their benefits.(11) By accounting for these factors, Heinzerling suggests that only eleven of the forty-four regulations reviewed by Morrall are cost-ineffective, rather than twenty-two, as Morrall claimed.(12)

Ascertaining that only 25% of federal regulations were defective would be an interesting conclusion--although perhaps not the ringing endorsement of regulatory policy that Heinzerling seeks. Heinzerling attempts, however, to further whittle the number of cost-ineffective regulations from eleven to two. She argues that Morrall improperly uses a 10% discount rate to determine the cost per life saved of government regulation, and she instead proposes a discount rate of zero. She even suggests that cost-benefit analysis should be jettisoned altogether. These arguments go too far. Had Heinzerling been content to make the case that 10% is too high a discount rate and that some lower but still positive discount rate should be used, her work would have made a major contribution to the literature. But by arguing that the quantification involved in cost-benefit analysis is harmful and that discounting future benefits is wrong, Heinzerling has impaired the value of her paper.

This Correspondence makes the following points: (1) cost-benefit analysis is a useful tool for improving the quality of regulatory decisionmaking; (2) whether one evaluates regulations using either the cost per life saved approach--so-called cost-effectiveness analysis--or instead uses standard cost-benefit analysis, one should discount future benefits using a reasonable discount rate or a range of rates; and (3) if Morrall is guilty of exaggerating the unattractiveness of many regulations, then Heinzerling is equally guilty of exaggerating their desirability by failing to discount future benefits. Following Heinzerling's advice to avoid discounting and cost-benefit analysis generally would likely undermine rational decisionmaking, thereby increasing the number of misguided regulations and increasing overall risk.

1. THE VALUE OF COST-BENEFIT ANALYSIS

   Heinzerling suggests that numbers will be too persuasive and that we should therefore jettison the whole enterprise of cost-benefit analysis.(13) This seems a hasty judgment of a tool designed to promote wise decisionmaking. Requiting agencies to set forth the relevant costs and benefits carefully helps them to rationalize their regulatory agenda and enables independent analysts to evaluate the soundness of particular regulations. Just as the practice of requiting judges to explain their decisions improves the quality of judicial decisionmaking, the requirement that agencies systematically consider and document the effects of their decisions will improve the quality of agency decisionmaking. Light is the best germicide--and all that. This is why a distinguished panel of economists has set forth guidelines calling on agencies to "spell out all key assumptions clearly and highlight uncertainties" in conducting cost-benefit analyses of major regulations.(14) This should be the message that academics convey to our regulators, politicians, judges, and citizens.

   While cost-benefit analysis can aid the regulatory process, however, its limitations must be acknowledged. Judgment must still be exercised across a vast array of issues, such as distributional concerns, possible irreversible consequences, and the treatment of considerations not easily susceptible to quantification. Moreover, the process is impaired when advocates for or against regulation present biased estimates, as they typically do.(15) Two steps that should improve the quality of federal regulations are the 1997 congressional directive that the OMB begin reviewing all new federal regulations, and the creation of the new Joint Center for Regulatory Studies. The Center, jointly sponsored by the conservative American Enterprise Institute...