The Return of Benefit-Cost Analysis

The U.S. Supreme Court recently signaled that cost-benefit analysis might become more widely used in government regulatory decisions. Deciding on May 30 to expand its continuing review of the Clean Air Act, the Court said it will decide whether the statute requires the government to look beyond the public health benefits of reducing air pollution and to consider the economic costs as well.

Originally, the Supreme Court agreed to hear the Clinton administration's appeal of a federal appeals court finding that the Clean Air Act, as interpreted by the Environmental Protection Agency, gave the agency excessively broad authority of a legislative nature. The lower court held the broad authority assumed by EPA amounted to an unconstitutional delegation by Congress of its lawmaking power.

In the May action, the Supreme Court granted a separate appeal, filed by the American Trucking Association, that asked the justices to look at the Clean Air Act in a different way. This alternative approach--interpreting EPA's rulemaking authority to include a requirement to do benefit-cost analysis--could avoid the entire question of excessive delegation of congressional power.

Requiring EPA to analyze the benefits and cost of regulation, it can be argued, preserves the constitutionality of the Clean Air Act by limiting the agency's discretion in issuing regulations under the Act. As would be expected, the Clinton administration opposed the trucking association's appeal, but unsuccessfully.

The substantive issue involved in the Supreme Court review of the Clean Air Act is the highly controversial standards EPA issued in 1997 for ozone and small airborne particles. At the time, the scientific basis for issuing the newer and tougher standards was criticized as very weak. The old standards were working and the air was getting cleaner. In comparison to the substantial costs that would be imposed by the new standards, many analysts concluded the additional benefits in terms of improving human health would be very modest.

The courts have not ruled directly on the scientific basis for the standards. Nevertheless, if the agency is required to analyze the benefits and the costs of the standards while they are being written, there is some likelihood that less-onerous standards would be promulgated. In any event, EPA's efforts at pollution control would have to address the fundamental question the agency has ignored in administering the Clean Air Act:

Is the government doing more good than harm?

Viewed in this broader light, we can see that the debate over benefit-cost analysis is not a narrow matter of statistics or accounting. Rather, should the trucking association's appeal prevail, more basic questions could be raised in the regulatory process: Is there a better way of achieving Congress's goals? What are the side effects of the proposed regulation? How will the new (or expanded) regulation relate to the existing and very substantial body of regulation? On balance, will the government be doing more good than harm?

Cost-Benefit Analysis Prohibited

The key reason these issues are going to the Supreme Court is that, in 1980, the Court of Appeals for the District of Columbia ruled--in the precedent-setting Lead Industries case--that the law prohibited EPA from considering any factor other than public health. Only the Supreme Court can overrule that earlier decision. If the Lead decision is reversed, the outlook for more sensible regulation will brighten substantially.

Nevertheless, a benefit-cost test is no panacea for overregulation. The onus will still be on Congress to enact more realistic regulatory legislation in the first place. In many cases, the regulatory agency has too little, rather than too much, discretion and thus cannot select the most cost-effective way of achieving the objective.

It is important for the courts--and other decisionmakers­-to understand the limits of benefit-cost analysis. For example, it is not a cost-minimization strategy. Frequently, a larger investment will show a higher benefits-to-cost ratio because it can generate more net benefits than a smaller outlay.

Perhaps the overriding value of benefit-cost analysis is to demonstrate the importance of making objective evaluations of essentially subjective actions and narrowing the area in which subjective forces dominate. Thus, if economically inefficient programs are adopted, government decisionmakers at least know the price being paid for those actions.

Murray Weidenbaum is chairman of the Center for the Study of American Business.

For more information ...

The ABC's of Regulatory Reform. It's easy to complain about regulatory bureaucrats­-but Congress should lead the way to reform. (Competitive Enterprise Institute, March 1999, 2pp.)

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