On Balance: Interview With Richard Zeckhauser

In the following interview I asked Richard Zeckhauser to recount what it was like to be part of the “Whiz Kids,” the name given to a group of experts with which Robert McNamara (then Secretary of Defense and later President of the World Bank) surrounded himself in order to turn around the management of the United States Department of Defense in the 1960s. The group sought to shape government decision making by bringing in economic analysis, operations research, game theory, and computing, as well as by implementing new methods, such as Planning Programming Budgeting System (PPBS). Their efforts did a lot to extend and solidify the influence of the principles of benefit cost analysis in U.S. Federal government decisions.

 

The interview with Richard is a complement to Alain Enthoven’s new article, “How Systems Analysis, Cost-Effectiveness Analysis or Benefit-Cost Analysis First Became Influential in Federal Government Program Decision-Making," appearing in the upcoming Summer 2019 Journal of Benefit Cost Analysis (Volume 10, No. 2)There Alain recounts in detail his experience as a Whiz Kid and the origins of the cost-benefit analysis movement in government as a tool for planning and budgeting.

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On Balance: Using Congressional Hearings to Identify Policy Impacts

The field of benefit-cost analysis is replete with guidance on theoretical and empirical valuation of impacts. Many fewer resources, however, are available for analysts to consult when determining the set of policy impacts to value in the first place. This post describes a new article published with co-authors Joseph Ripberger, Wesley Wehde, Hank Jenkins-Smith, Carol Silva, Kuhika Gupta, Benjamin Jones, and Robert Berrens, in the Spring 2019 Issue of the Journal of Benefit-Cost Analysis. The article, entitled, ‘Benefit-Cost Analysis, Policy Impacts, and Congressional Hearings,’ proposes a method for identifying policy impacts that contributes a degree of systematism, transparency, and replicability to the process.

 

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On Balance: Looking Below the Surface at Regulatory Compliance Costs

Academic researchers and government institutions have both encouraged retrospective analysis of the costs and benefits of regulation to facilitate evidence-based review and possibly revision of the design and stringency of existing regulations (White House 2012; Morgenstern 2015). However, rigorous examples of these types of ex post analyses are relatively rare. This post describes a study comparing the retrospective costs (evaluated ex post) of a U.S. Environmental Protection Agency (EPA) regulation to the cost estimates reported during the regulatory process (calculated ex ante). These findings are reported in more detail in a recent article, “Retrospective Evaluation of the Costs of Complying with Light-Duty Vehicle Surface Coating Requirements,” published in the Spring Issue of the Journal of Benefit Cost Analysis, with co-authors Nathalie Simon and Ann E. Ferris.

 

In recent years, the EPA has attempted to conduct retrospective cost analysis systematically by developing a framework that identifies the main cost components and key questions analysts should ask when evaluating them ex post.  (The framework is described in detail in an article from a 2014 Special Issue of the Journal of Benefit Cost Analysis, Retrospective Cost Analyses of EPA Regulations: A Case Study Approach.)

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On Balance: Assessing Ohio’s Use of Benefit-Cost Analysis

Since Ronald Reagan’s 1981 Executive Order 12291 established benefit-cost analysis as standard practice for major rule changes, benefit-cost analysis has been commonly used to assess the efficiency of proposed federal regulations. Because of this and subsequent executive orders, all federal regulations that are projected to have a total economic impact of over $100 million are subject to a full benefit-cost analysis. Despite this prevalence at the federal level, benefit-cost analysis is much less common at the state level. In 2013, the Pew-MacArthur Results First Initiative released a study of the use of benefit-cost analysis in the states (study results were subsequently reported in the Journal of Benefit Cost Analysis in 2015). The study found that, over the four years from 2008 to 2011 states conducted only 36 full cost benefit analyses and 312 partial cost-benefit analyses. This averaged out to 9 full analyses and 78 partial analyses per year across all 50 states.

 

Since that study, the Results First Initiative has worked to outfit states with the capacity to conduct benefit-cost analyses, replicating cutting-edge work done by the Washington State Institute for Public Policy, the leading state producer of benefit-cost analyses. Despite these and similar efforts, benefit-cost analysis is still relatively rare at the state level.

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On Balance: The Costs and Benefits of Deregulation

Administrative agencies, courts, and litigants are just coming off two years of intense debates over the legality of agency deregulation through delay. One fascinating development has been how significant cost-benefit analysis has been in these debates. Cost-benefit analysis has formed the basis for several important court losses suffered by the administration. (See Air Alliance 2018; California 2017.) Now agencies have proposed to repeal many big-ticket rules, including the Clean Power Plan, the Clean Water Rule, and vehicle emissions standards. A key question is what role cost-benefit analysis will play in the upcoming legal battles over repeals.

 

The Administrative Procedure Act of 1946 governs regulation and deregulation. In passing the statute, Congress wanted to make sure agencies were accountable to the public and to Congress. The statute mandates notice-and-comment procedures so that the public is informed about agency actions and has an opportunity to participate in the process. The statute also requires agencies to provide an explanation for their actions. This helps facilitate judicial review. When an individual or entity has standing to sue—such as a state suffering a concrete injury traceable to the agency’s conduct—and brings a lawsuit (usually at the federal district court level), courts can look at the agency’s explanations and check for arbitrary and capricious decisions.

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On Balance: From the SBCA President: Impressions of the 11th Annual Conference

The 2019 Annual Conference and Meeting of the Society for Benefit-Cost Analysis took place March 13-15 at George Washington University’s Marvin Center. The conference was attended by 329 friends of benefit-cost analysis, the largest number of attendees since the first conference in 2008. The attendees were treated to a cornucopia of benefits and costs, eminent speakers, and good conversation.

Forty-three conference sessions covered topics presented by researchers and practitioners from around the world, reflecting the global applications of benefit-cost analysis and the reach of the Society. Presentations tackled subjects as diverse as the Olympics, taxes, crime prevention, international environmental agreements, sanitation, prohibition, deregulation, drawbridges, nudges, and the statistical value of a dog life. Discussants’ perspectives, questions and comments from audiences, and spirited talk during breaks and evening receptions were often as enlightening as the presentations themselves. It all came together to create an ideal event for those who care about benefit-cost analysis.

This year’s conference showcased the benefit-cost analysis of health and development policies in low- and middle-income countries. The sessions on “Benefit-Cost Analysis in Global Health and Development” and the plenary session wonderfully illustrated the value of benefit-cost analysis in evidence-based policy-making in resource-limited settings.

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On Balance: Trump’s Deregulatory Record

In his campaign for the US presidency, candidate Donald Trump advocated widespread deregulation of the US economy. Upon taking office, President Trump quickly issued policies to fulfill his campaign promises. Midway through his term, it is fair to ask: Is deregulation being accomplished?

To answer this question, we recently completed a study of the Trump deregulatory record at the two-year mark (Belton and Graham 2019). We interviewed dozens of regulatory experts, reviewed the literature, searched regulatory databases, and conducted original analysis. We deliberately chose not to take a position on whether deregulation is in itself good or bad, but rather to focus on whether the Trump Administration has been effective in deregulation.

Our final report, “Trump’s Deregulatory Record,” which was sponsored by the American Council for Capital Formation, includes several findings, including the following:

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On Balance: Books of Interest

The editorial staff have identified these books that are a bit off the beaten track of Benefit-Cost Analysis, but yet might have some interesting lessons.

 


Confronting Inequality:  How Societies Can Choose Inclusive Growth

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On Balance: How Expanding Health Insurance Coverage Reduces Financial Risks

When researchers and policy analysts consider the benefits of expanding health insurance coverage, they understandably focus first on the health benefits, such as reduced infant mortality, increased longevity, lower rates of illness, and improved quality of life. However, access to insurance also lowers financial risk exposure—i.e., it protects the household against major shocks to its financial well-being—by mitigating lost earning capacity and helping to cover out-of-pocket health care expenditures. This post describes a new article published in the JBCA, Valuing Protection against Health-Related Financial Risks  with co-authors Kalipso Chalkidou and Dean Jamison, which is part of an open access Special Issue, Conducting Benefit-Cost Analysis in Low- and Middle-Income Countries, edited by Lisa Robinson (Harvard T.H. Chan School of Public Health).

 

We suggest that any assessment of expansions or reforms in health insurance programs should account for these financial effects; indeed, they could even have a larger impact on the overall welfare of lower-income households than the health effects alone. In our study, we provide several practical approaches to measuring these effects to assess both financial benefits, as well as distributional changes in income inequality arising from the health insurance expansion. We follow earlier literature in using a simple two-period model of the household, where welfare is calculated based on a conventional expected utility framework.

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On Balance: Social Welfare Effects of Smoking Bans in Bars and Restaurants

Since the 1964 Surgeon General’s report linking smoking cigarettes to adverse health outcomes, numerous federal, state, and local governments have passed regulations designed to reduce the prevalence of smoking and related externalities. Examples of such regulations include cigarette taxes, public health campaigns, minimum purchasing ages for tobacco, and – the focus of this post – smoking bans in bars and restaurants. While the links between smoking and health are clear, the effects of these bans on social welfare, which includes other types of risky behavior as well as smoking, are less well understood. This post describes work-in-progress to address some of the gaps. Preliminary results will be presented at the Annual Conference and Meeting of the Society for Benefit-Cost Analysis in March 2019.

 

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On Balance: Using Retrospective Analysis to Increase Policy Learning in Europe

A retrospective exercise is an opportunity to learn and improve. With this in mind, an international consortium led by CSIL (Centre for Industrial Studies) recently developed an evaluation framework to carry out a retrospective assessment of infrastructure projects in several environmental sectors. The framework was developed as part of a study being carried out on behalf of the European Commission (Directorate-General for Regional and Urban Policy) to look retrospectively at 10 of the major infrastructural projects co-financed by the Commission over the period 2000 to 2013. While it will come as no surprise that, in retrospect, forecasts are imperfect, learning from mistakes or unexpected outcomes may improve the quality of forecasts. In turn, better forecasts may lead to better policy-making. This post reports some preliminary results from the study; more complete results will be presented at the Society for Benefit-Cost Analysis Conference in March 2019.

 

Just to give you a flavor of the study, the 10 projects are briefly presented in the table below. All the projects have been in operation for at least 5 years, placing—de facto–the assessment in an intermediate viewpoint when compared to the projected lifetime of the infrastructure (typically 20 to 30 years).

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On Balance: Can Cost Benefit Analysis Tell Us If Our City Should Host the Olympics? It Does. But Could Do It Better.

There is growing skepticism among both academics and government officials about the benefits of large-scale sport and cultural events. Although Input-Output (IO) has long been the dominant approach to estimating the impacts of these events, the method faces criticism for both its lack of realism and the incompleteness of its results. Consequently, economists have begun to turn to two alternative approaches: computable general equilibrium (CGE) and cost-benefit analysis. These approaches can take into account effects not captured within an IO framework. They also often produce strikingly different results than those obtained using an IO model. This post reports some preliminary results from ongoing research evaluating nearly 60 studies that use cost-benefit methods to evaluate events. More complete results will be presented at the Society for Benefit-Cost Analysis Conference in March 2019.


An IO approach is fundamentally a multiplier approach, converting expenditures (on infrastructure, for example) into gross production in the host city. One limitation is that IO treats expenditures, such as those for infrastructure or by the local population, as fully additional; since this approach does not take account of substitution (i.e., that these resources have been diverted from other uses), it may overstate the favorable economic impact of an event. Another concern is IO’s focus only on gross domestic product and other related impacts, rather than on welfare, which also recognizes externalities and opportunity costs (Massiani 2018).

The earliest examples of the use of cost-benefit analysis and CGE to evaluate mega-events appeared in the 1980s and 1990s, respectively. Since then, almost 60 cost-benefit analyses of mega events of different sizes have been conducted. (For an examination of the use of CGE in evaluating mega-events, see Massiani (2018a).)

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On Balance: Review of The Cost-Benefit Revolution by Cass R. Sunstein

Fomenting revolution brings to mind crowds storming the barricades, not analysts struggling to debug a spreadsheet or craft a clear sentence. Yet in his book, The Cost-Benefit Revolution, Cass Sunstein (Robert Walmsley University Professor, Harvard Law School) argues that benefit-cost analysts are doing exactly that. The barricades we surmount are decision-making errors resulting from overreliance on intuition and emotion, our weapons are science and economics, and our achievements are better policies.

As a previous Administrator of the Office of Information and Regulatory Affairs in the U.S. Office of Management and Budget, which oversees the U.S. regulatory program, it is not surprising that Sunstein focuses on the use of benefit-cost analysis in the regulatory realm. However, his insights and conclusions are broadly applicable to wherever benefit-cost analysis is practiced.

Those of you who are familiar with Sunstein’s scholarship will recognize familiar themes. He integrates and builds on previous work, including articles initially published in the Journal of Benefit Cost Analysis: “The Value of a Statistical Life: Some Clarifications and Puzzles” and “Cost-Benefit Analysis, Who’s Your Daddy?.” Among these themes, the most central are the findings from behavioral science which indicate that our intuition often leads us astray. Sunstein argues that benefit-cost analysis is an important corrective, promoting more rational decisions. He reminds us that we can agree or disagree on the underlying theory while still agreeing that the results provide useful and important information about the consequences of alternative policy choices.

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On Balance: Two quick fix solutions to baseline estimation challenges: good enough for practical analysis?

Since 2010, I have been a practitioner of practical benefit-cost analysis at Environment and Climate Change Canada (ECCC), working with colleagues to inform policymakers and stakeholders about the likely impacts of proposed federal environmental regulations. I would like to examine a key issue in developing estimates of the benefits and costs of these regulations: the development of the baseline in a benefit-cost analysis.

In recent years, a number of articles in the Journal of Benefit Cost Analysis have addressed the question of how best to conduct—and evaluate—a regulatory benefit-cost analysis. Two of these subsequently resulted in posts to On BalanceConsumers Guide to Regulatory Impact Analysis, by Susan Dudley, and Two Decades of Benefits and Costs: Promise and Pitfalls, by Clark Nardinelli. Another article by Richard Morganstern, Retrospective Analysis of U.S. Federal Environmental Regulation, examines various estimates for environmental rules and analyzes issues relevant to developing credible baselines.

These articles remind us that baselines in a regulatory impact analysis can be slippery: in estimating benefits and costs the comparison is not between before-and-after regulation but between a counterfactual with-and-without regulation. In turn, the “counterfactual” should take into account the effect of other regulations, the evolution of the market in the absence of regulation, and other external factors. In short: developing this counterfactual requires understanding how the baseline has been changing and how it is likely to change.

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On Balance: What’s the Score? The Congressional Budget Office and its Role in the Policy Process

The Congressional Budget Office (CBO) plays an important role in the federal legislative process. CBO’s score on a given bill—that is, its estimate of how it would affect the federal budget deficit—can determine whether Congress decides to go forward with the bill, modify it to get a more favorable estimate, or simply drop it. Given their importance, debates over CBO’s scores and the methods they use to produce them can be as controversial as the bills that are being considered. While this controversy can be politically motivated (with advocates on either side of an issue arguing for a score that is more favorable to their position), it also stems from limited understanding of CBO’s intended role in the process—and reflects the difficulty of conducting analyses of benefits and costs in the context of policy decisions.

 

Because Congress wanted an objective scorekeeper to develop accurate budget estimates, it created CBO in the Congressional Budget and Impoundment Control Act of 1974. Among other functions, CBO is required by law to produce a formal cost estimate for nearly every bill that is approved by a full committee of either the House or the Senate. It also produces informal cost estimates for a much larger number of legislative proposals. This scorekeeping function has become more important over time. CBO’s Update to the Budget and Economic Outlook estimates the current federal budget deficit at almost $700 billion and projects it will more than double over the next decade, and Congress is acutely conscious of the budgetary implications of potential legislation.

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On Balance: Using Cost-Benefit Analysis to Make the World a Better Place

If you had billions of dollars to make the world a better place, and could spend it however you wanted, how would you maximize your impact? This is not just a thought experiment, but a daily concern for the world’s governments, philanthropists, and multilateral institutions. Since 2004, Copenhagen Consensus has been using cost-benefit analysis to help decision makers identify highly effective interventions. While most cost-benefit analysis seeks the best solution for a single problem, Copenhagen Consensus takes a wider view, looking across all major domains for policies that improve social welfare.

 

Our approach is, first, to identify smart ideas across 15 to 20 relevant policy domains by consulting widely in the region or country in which we’re working. This process typically generates more than a thousand ideas. An advisory council then whittles this list down to around 100—with preference given to ideas that are likely to be highly cost-effective or those backed with significant funding and political will. We then work with some of the world’s top economists to analyze the costs and benefits of these 100, insofar as data and other constraints permit.

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On Balance: Nudging Electricity Consumption

Nudges are all the rage in behavioral economics and public policy applications around the world because of their potential for doing good at little or no cost. Economists, including Kip Viscusi (2018), have begun examining previously unexplored sides of nudges including some involving energy consumption. An often employed nudge in the area of conserving energy and reducing pollution is the home energy report, where after a home energy survey a household receives a message, usually monthly, that compares its energy use to that of neighbors and suggests ways to reduce electric or gas use and, in turn, its carbon footprint. Each month the consuming unit can also see how its energy use compares to its own past usage too. The subtleties of the benefits of home energy surveys and home energy reports is the subject of a recent article, "Differential and Distributional Effects of Energy Efficiency Surveys: Evidence from Electricity Consumption," available open access at the Journal of Benefit-Cost Analysis.

 

Nobel Laureate in Economic Sciences, Sir Angus Deaton (2018), has emphasized the importance of moving beyond only the mean differences revealed in the “gold standard” random controlled trials and recommended other statistical setups to consider effect heterogeneity including intervention distribution effects, such as how the treatment effect differs by predicted outcome quantile. The particular intervention my co-author, Dr. Galib Rustamov, and I investigated involves about 4200 customers of an Investor Owned Utility in California who voluntarily participated in a Home Energy Effectiveness Survey in January 2009 and January 2010. In addition to energy use the survey contained more than 130 questions, including household size, income, house size, and energy using/saving behavior and appliances. The comparison group contained customers who did not participate in the surveys then but would voluntarily participate in subsequent years. Our estimation procedures included quantile difference-in-differences propensity score matching regressions of two years of monthly energy consumption.

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On Balance: Review of "Cost Benefit Analysis" by Per Olov Johansson and Bengt Kristrom

Cambridge Elements has created a series on Public Economics, edited by Robin Boadway, Frank Cowell and Massimo Florio. This is part of a major project by Cambridge University Press, which is intended to provide peer-reviewed analytical surveys and frontier topics in all the disciplines. We happily note that the first published “Element” in this series is Cost Benefit Analysis, by Per-Olov Johansson and Bengt Kriström (2018). Cost-Benefit Analysis is available as a free download for a limited time, and is for sale (relatively inexpensively) in print at Cambridge and at online booksellers, such as Barnes and Noble. The Element is just above eighty pages (plus a short technical annex and a long list of references).

Encompassing the whole of Cost-Benefit Analysis in such a reduced volume is a tour de force, as acknowledged by the authors in the prologue. The aim is to provide a comprehensive and non-technical state of the art overview of Cost-Benefit Analysis, including both basic classical results and some new frontiers. It has been successfully reached.

The authors’ task is made easier by a book they co-authored in 2015, Cost Benefit Analysis for Project Appraisal, which was about three times as long as the Element. While of course the authors build on this source, the Element has several differentiating features.

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On Balance: Executive Order 12866 and the Durability of Core Regulatory Principles

On September 24, 2018, experts gathered at the George Washington University (GW) to commemorate the 25th anniversary of Executive Order (E.O.) 12866Regulatory Planning and Review—and discuss the implications of its provisions and future prospects. The Society for Benefit-Cost Analysis (SBCA) cosponsored the event with the GW Regulatory Studies CenterABA Section of Administrative Law and Regulatory Practice, and the Trachtenberg School of Public Policy and Public Administration. (Additional information on the event, including commentaries by the speakers, and videos when they become available, are posted on the GW website.)

 

The E.O., which President Clinton signed in 1993, expanded on previous executive orders requiring benefit-cost analysis and formalized the principles of regulation and centralized review procedures that still guide the rulemaking process (see also an earlier “On Balance” post, written by Susan Dudley and Clark Nardinelli, which preceded the event). The three panels highlighted insights from government experts, scholars, and past and present administrators of the Office of Information and Regulatory Affairs (OIRA) responsible for applying the order’s principles under presidents Clinton, Bush, Obama, and Trump. The most significant theme that emerged from each panel was the durability of E.O. 12866’s principles and process—both across administrations and over time.

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On Balance: Two Decades of Benefits and Costs: Promise and Pitfalls

A new article in the Fall Issue of the Journal of Benefit-Cost Analysis (JBCA),  “Some Pitfalls of Practical Benefit-Cost Analysis,”  describes common pitfalls that well-meaning analysts fall into. Over the past 23 years I have worked on and supervised hundreds of benefit-cost analyses. Most of these analyses have dealt with public health regulations proposed by the Food and Drug Administration, although on occasion I have reviewed analyses from other government agencies and academia. I’ve seen these pitfalls occur many times and at one time or another I’ve been guilty of most of them.

 

Benefit-cost analysis can have great value in creating efficient regulations and in making the effects of regulations and policies accessible to policy makers and the public. From public investments to traffic control to educational choice, benefit-cost analysis has shown its value. Several articles in the JBCA over the years have highlighted “good practices” in specific areas where benefit-cost analysis is done, notably papers by Susan Dudley (with others), and by Scott Farrow and Kip Viscusi.

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