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Then in clear, understandable language, he describes an alternative, precautionary approach to making decisions under uncertainty. Once a mere theory, the precautionary principle has now been applied in practice through the European Union’s REACH protocol. Citing major studies, many of which he has directed, he shows that the precautionary approach has not only worked, but has been relatively cheap.
Poisoned for Pennies shows how the misuse of cost-benefit analysis is impeding efforts to clean up and protect our environment, especially in the case of toxic chemicals. According to Ackerman, conservatives—in elected office, in state and federal regulatory agencies, and in businesses of every size—have been able to successfully argue that environmental clean-up and protection are simply too expensive. But he proves, that is untrue in case after case.
Ackerman is already well known for his carefully reasoned attacks on the conventional wisdom about the costs of environmental regulation. This new book, which finds Ackerman ranging from psychological research to risk analysis to the benefits of aggressive pesticide regulation, and from mad cow disease to lead paint, will further his reputation as a thought leader in environmental protection. We can’t afford not to listen to him.
Product Details
| ISBN-13: | 9781610911016 |
|---|---|
| Publisher: | Island Press |
| Publication date: | 06/22/2012 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 352 |
| File size: | 2 MB |
About the Author
Read an Excerpt
Poisoned for Pennies
The Economics of Toxics and Precaution
By Frank Ackerman
ISLAND PRESS
Copyright © 2008 Frank AckermanAll rights reserved.
ISBN: 978-1-61091-101-6
CHAPTER 1
Pricing the Priceless
How strictly should we regulate arsenic in drinking water? Or carbon dioxide in the atmosphere? Or pesticides in our food? Or oil drilling in scenic places? The list of environmental harms and potential regulatory remedies often appears to be endless. Is there an objective way to decide how to proceed? Cost-benefit analysis promises to provide the solution. The sad fact is that cost-benefit analysis is fundamentally unable to fulfill this promise.
Many approaches to setting environmental standards require some consideration of costs and benefits. Even technology-based regulation, maligned by cost-benefit enthusiasts as the worst form of regulatory excess, typically entails consideration of economic costs. Cost-benefit analysis differs, however, from other analytical approaches by demanding that the advantages and disadvantages of a regulatory policy be reduced, as far as possible, to numbers, and then further reduced to dollars and cents. In this feature of cost-benefit analysis lies its doom. Indeed, looking closely at the products of this pricing scheme makes it seem not only a little cold, but a little crazy as well.
Consider the following examples, which we are not making up. They are not the work of a lunatic fringe; on the contrary, they reflect the work products of some of the most influential and reputable of today's costbenefit practitioners. We are not sure whether to laugh or cry, but we find it impossible to treat these studies as serious contributions to a rational discussion.
Chapter 1 by Frank Ackerman and Lisa Heinzerling.
Several years ago, states were in the middle of their litigation against tobacco companies, seeking to recoup the medical expenditures they had incurred as a result of smoking. At that time, W. Kip Viscusi—for many years a professor of law and economics at Harvard—undertook research concluding that states, in fact, saved money as the result of smoking by their citizens. Why? Because they died early! They thus saved their states the trouble and expense of providing nursing home care and other services associated with an aging population.
Viscusi didn't stop there. So great, under Viscusi's assumptions, were the financial benefits to the states of their citizens' premature deaths that, he suggested, "cigarette smoking should be subsidized rather than taxed."
Amazingly, this cynical conclusion has not been swept into the dustbin where it belongs, but instead has been revived: the tobacco company Philip Morris commissioned the well-known consulting group Arthur D. Little to examine the financial benefits to the Czech Republic of smoking among Czech citizens. Arthur D. Little found that smoking was a financial boon for the government—partly because, again, it caused citizens to die earlier and thus reduced government expenditure on pensions, housing, and health care. This conclusion relies, so far as we can determine, on perfectly conventional cost-benefit analysis.
There is more. In recent years, much has been learned about the special risks children face from pesticides in their food, contaminants in their drinking water, ozone in the air, and so on. Because cost-benefit analysis has become much more prominent at the same time, there is now a budding industry in valuing children's health. Its products are often bizarre.
Take the problem of lead poisoning in children. One of the most serious and disturbing effects of lead is the neurological damage it can cause in young children, including permanently lowered mental ability. Putting a dollar value on the (avoidable, environmentally caused) intellectual impairment of children is a daunting task, but economic analysts have not been daunted.
Randall Lutter, who became a top official at the U.S. Food and Drug Administration in 2003, has been a long-time regulatory critic. In an earlier position at the AEI-Brookings Joint Center for Regulatory Studies, he argued that the way to value the damage lead causes in children is to look at how much parents of affected children spend on chelation therapy, a chemical treatment that is supposed to cause excretion of lead from the body. Parental spending on chelation supports an estimated valuation of only about $1,500 per IQ point lost due to lead poisoning. Previous economic analyses by the U.S. Environmental Protection Agency (EPA), based on the children's loss of expected future earnings, have estimated the value to be much higher—up to $9,000 per IQ point. Based on his lower figure, Lutter claimed to have discovered that too much effort is going into controlling lead: "Hazard standards that protect children far more than their parents think is appropriate may make little sense. The agencies should consider relaxing their lead standards."
In fact, Lutter presented no evidence about what parents think, only about what they spend on one rare variety of private medical treatments (which, as it turns out, has not been proven medically effective for chronic, low-level lead poisoning). Why should environmental standards be based on what individuals are now spending on desperate personal efforts to overcome social problems?
For sheer analytical audacity, Lutter's study faces some stiff competition from another study concerning kids—this one concerning the value, not of children's health, but of their lives (more precisely, the researchers talk about the value of "statistical lives," a concept addressed later in this chapter). In this second study, researchers examined mothers' carseat fastening practices. They calculated the difference between the time required to fasten the seats correctly and the time mothers actually spent fastening their children into their seats. Then they assigned a monetary value to this interval of time based on the mothers' hourly wage rate (or, in the case of nonworking moms, based on a guess at the wages they might have earned). When mothers saved time—and, by hypothesis, money—by fastening their children's car seats incorrectly, they were, according to the researchers, implicitly placing a finite monetary value on the life-threatening risks to their children posed by car accidents.
Building on this calculation, the researchers were able to answer the vexing question of how much a statistical child's life is worth to its mother. (As the mother of a statistical child, she is naturally adept at complex calculations comparing the value of saving a few seconds versus the slightly increased risk to her child.) The answer parallels Lutter's finding that we are valuing our children too highly: in car-seat-land, a child's life is worth only $500,000.
The absurdity of these particular analyses, though striking, is not unique to them. Indeed, we will argue, cost-benefit analysis is so inherently flawed that if one scratches the apparently benign surface of any of its products, one finds the same kind of absurdity. But before launching into this critique, it will be useful first to establish exactly what cost-benefit analysis is, and why one might think it is a good idea.
Dollars and Discounting
Cost-benefit analysis tries to mimic a basic function of markets by setting an economic standard for measuring the success of the government's projects and programs. That is, cost-benefit analysis seeks to perform, for public policy, a calculation that happens routinely in the private sector. In evaluating a proposed new initiative, how do we know if it is worth doing or not? The answer is much simpler in business than in government.
Private businesses, striving to make money, only produce things that they believe someone is willing to pay for. That is, firms only produce things for which the benefits to consumers, measured by consumers' willingness to pay for them, are expected to be greater than the costs of production. It is technologically possible to produce men's business suits in brightly colored polka dots. Successful producers suspect that few people are willing to pay for such products, and usually stick to at most minor variations on suits in somber, traditional hues. If some firm did happen to produce a polka-dot business suit, no one would be forced to buy it; the producer would bear the entire loss resulting from the mistaken decision.
Government, in the view of many critics, is in constant danger of drifting toward producing polka-dot suits—and making people pay for them. Policies, regulations, and public spending do not face the test of the marketplace; there are no consumers who can withhold their dollars from the government until it produces the regulatory equivalent of navy blue and charcoal gray suits. There is no single quantitative objective for the public sector comparable to profit maximization for businesses. Even with the best of intentions, critics suggest, government programs can easily go astray for lack of an objective standard by which to judge whether or not they are meeting citizens' needs.
Cost-benefit analysis sets out to do for government what the market does for business: add up the benefits of a public policy and compare them to the costs. The two sides of the ledger raise very different issues.
Estimating Costs
The first step in a cost-benefit analysis is to calculate the costs of a public policy. For example, the government may require a certain kind of pollution control equipment, which businesses must pay for. Even if a regulation only sets a ceiling on emissions, it results in costs that can be at least roughly estimated through research into available technologies and business strategies for compliance.
The costs of protecting human health and the environment through the use of pollution control devices and other approaches are, by their very nature, measured in dollars. Thus, at least in theory, the cost side of cost-benefit analysis is relatively straightforward. (In practice, as we shall see, it is not quite that simple.)
The consideration of the costs of environmental protection is not unique to cost-benefit analysis. Development of environmental regulations has almost always involved consideration of economic costs, with or without formal cost-benefit techniques. What is unique to costbenefit analysis, and far more problematic, is the other side of the balance, the monetary valuation of the benefits of life, health, and nature itself.
Monetizing Benefits
Since there are no natural prices for a healthy environment, cost-benefit analysis requires the creation of artificial ones. This is the hardest part of the process. Economists create artificial prices for health and environmental benefits by studying what people would be willing to pay for them. One popular method, called "contingent valuation," is essentially a form of opinion poll. Researchers ask a cross-section of the affected population how much they would be willing to pay to preserve or protect something that can't be bought in a store.
Many surveys of this sort have been done, producing prices for things that appear to be priceless. For example, the average American household is supposedly willing to pay $257 to prevent the extinction of bald eagles, $208 to protect humpback whales, and $80 to protect gray wolves. These numbers are quite large: since there are more than 100 million households in the country, the nation's total willingness to pay for the preservation of bald eagles alone is ostensibly more than $25 billion.
An alternative method of attaching prices to unpriced things infers what people are willing to pay from observation of their behavior in other markets. To assign a dollar value to risks to human life, for example, economists usually calculate the extra wage—or "wage premium"—that is paid to workers who accept more risky jobs. Suppose that two jobs are comparable, except that one is more dangerous and better paid. If workers understand the risk and voluntarily accept the more dangerous job, then they are implicitly setting a price on risk by accepting the increased risk of death in exchange for increased wages.
What does this indirect inference about wages say about the value of a life? A common estimate in cost-benefit analyses of the late 1990s was that avoiding a risk that would lead, on average, to one death is worth roughly $6.3 million. This number is of great importance in costbenefit analyses because avoided deaths are the most thoroughly studied benefits of environmental regulations.
Discounting the Future
One more step requires explanation to complete this quick sketch of costbenefit analysis. Costs and benefits of a policy frequently occur at different times. Often, costs are incurred today, or in the near future, to prevent harm in the more remote future. When the analysis spans a number of years, future costs and benefits are discounted, or treated as equivalent to smaller amounts of money in today's dollars.
Discounting is a procedure developed by economists to evaluate investments that produce future income. The case for discounting begins with the observation that $100, say, received today is worth more than $100 received next year, even in the absence of inflation. For one thing, you could put your money in the bank today and earn a little interest by next year. Suppose that your bank account earns 3 percent interest. In that case, if you received the $100 today rather than next year, and immediately deposited it in the bank, you would earn $3 in interest, giving you a total of $103 next year. Likewise, to get $100 next year you need to deposit only $97 today. So, at a 3 percent discount rate, economists would say that $100 next year has a present value of $97 in today's dollars.
For longer periods of time, the effect is magnified: at a 3 percent discount rate, $100 twenty years from now has a present value of only $55. The larger the discount rate, the smaller the present value: at a 5 percent discount rate, for example, $100 twenty years from now has a present value of only $38.
Cost-benefit analysis routinely uses the present value of future benefits. That is, it compares current costs, not to the actual dollar value of future benefits, but to the smaller amount you would have to put into a hypothetical savings account today to obtain those benefits in the future. This application of discounting is essential, and indeed commonplace, for many practical financial decisions. If offered a choice of investment opportunities with payoffs at different times in the future, you can (and should) discount the future payoffs to the present to compare them to each other. The important issue for environmental policy, as we shall see, is whether this logic also applies to outcomes far in the future, and to opportunities, such as long life and good health, that are not naturally stated in dollar terms.
The Case for Cost-Benefit
Before describing the problems with cost-benefit analysis, it will be useful to set forth the arguments in favor of this type of analysis. Many different arguments for cost-benefit analysis have been offered over the years. Most of the arguments fall into one of two broad categories. First, there are economic assertions that better results can be achieved with costbenefit analysis. Second, there are legal and political claims that a more objective and more open government process can emerge through this kind of analysis.
Better Results
Economics frequently focuses on increasing efficiency—on getting the most desirable results from the least resources. How do we know that greater regulatory efficiency is needed? For many economists, this is an article of faith: greater efficiency is always a top priority, in regulation or elsewhere. Cost-benefit analysis is thought by its supporters to further efficiency by ensuring that regulations are adopted only when benefits exceed costs, and by helping direct regulators' attention to those problems for which regulatory intervention will yield the greatest net benefits.
But many advocates also raise a more specific argument, imbued with a greater sense of urgency. The government, it is said, often issues rules that are insanely expensive, out of all proportion to their benefits—a problem that could be solved by the use of cost-benefit analysis to screen proposed regulations. Thus, much of the case for cost-benefit analysis depends on the case against current regulation.
(Continues...)
Excerpted from Poisoned for Pennies by Frank Ackerman. Copyright © 2008 Frank Ackerman. Excerpted by permission of ISLAND PRESS.
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Table of Contents
AcknowledgmentsIntroduction
Chapter 1. Pricing the Priceless
Chapter 2. Was Environmental Protection Ever a Good Idea?
Chapter 3. The Unbearable Lightness of Regulatory Costs
Chapter 4. Precaution, Uncertainty, and Dioxin
Chapter 5. The Economics of Atrazine
Chapter 6. Ignoring the Benefits of Pesticides Regulation
Chapter 7. Mad Cows and Computer Models
Chapter 8. Costs of Preventable Childhood Illness
Chapter 9. Phasing Out a Problem Plastic
Chapter 10. The Costs of REACH
Chapter 11. Impacts of REACH on Developing Countries
Chapter 12. How Should the United States Respond to REACH?
Conclusion: Economics and Precautionary Policies
Appendix A: Outline of the Arrow-Hurwicz Analysis
Appendix B: The Fawcett Report on Atrazine Research
Appendix C: How Not to Analyze REACH: The Arthur D. Little Model
Appendix D: U.S. Impacts of REACH: Methodology and Data
Notes
Bibliography
Index