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May 31, 2005

Valuing Environmental Services: Explicit, Implicit, Not at All?

People are finally talking more about valuing environmental services (here, here, here, here, here). Some advocate that environmental services be explicitly considered in government cost-benefit calculations (e.g. OMB Circular A-4). Others like me advocate that environmental services be implicitly valued (here).

Explicit Valuation Schemes
The "explicit valuation" argument goes something like this, snipped from OMB’s Circular A-4:

Benefit-cost analysis is a primary tool for regulatory analysis…. Where all benefits and costs can be quantified and expressed in monetary units, benefit-cost analysis provides decision makers with a clear indication of the most efficient alternative, that is, the alternative that generates the largest net benefits to society (ignoring distributional effects). This is useful information for decision makers and the public to receive, even when economic efficiency is not the only or the overriding policy objective.

Many who advocate for explicit valuation schemes are fully aware of the criticisms leveled at it (e.g. here, here) but believe that the advantages of getting into the real games played in the ever-political world outweigh drawbacks. We who are economists ought to love the explicit valuation talk, as it suggest full-employment for us.

Implicit Valuation Schemes
The "implicit valuation" argument goes something like this: Tell the truth, obey the law, and practice adaptive ecosystem management. In a complex systems environment with politically wicked problems lurking all around, the implicit valuation notion is staged from the impossibility of finding closed-form priced solutions to vexing production/consumption possibilities. Economists can conjure up the values, but gaining agreement on the conjuring process will likely prove impossible as J. de V. Graaff pointed out long ago in Theoretical Welfare Economics. The implicit valuation notion is also staged from arguments on the other side, "Do not produce it here, do not produce it from public lands – these lands are sacred and ought not to be subjected to crass consumerism and the production that accompanies it."

If we don’t use explicit pricing in comprehensive cost-benefit analysis, what might we do? W. Edwards Deming’s The New Economics gives us clues, as do the writings or Peter Drucker and many other management writers. In running any organization there are many things that are not priced out. Still, there are ways to focus on improving quality of offerings (and in our public lands case, non-offerings) via simple means for organizing people and information and the relationships that tie one with the other.

Part of the quality improvement process says that we have to pay attention to costs, and that receipts can in some ways be associated with costs (e.g profit, cost reduction, etc.). But we must be vigilant to make sure that whenever we make such comparisons, we haven’t left out important qualitative factors that might tend to overwhelm monetary concerns. It proves too easy to discount the future instead of just looking at discounted cash flows. It proves too easy to project profits or cost reduction by ignoring things that are external to any particular view.

Instead of asking, "How hard can we push systems to enhance revenues?" perhaps we ought to be asking "How gently can we live within systems and still survive?" This is the Buddhist economics E.F. Schumacher talked about in Small is Beautiful. Incidentally, many who advocate for explicit valuation of ecosystem services would agree with the so-called Buddhist economics approach.

Middle Ground Schemes
Some economic practitioners want to defend a middle ground wherein they develop partial monetary efficiency measures. I believe that this middle ground is harder to defend than either the comprehensive full pricing strategy, or the implicit valuation scheme which is simply adaptive management without explicit monetary efficiency metrics. In this case, the problem is trying to gain agreement on why we might consider partial efficiency measures, and how they interrelate with important qualitative considerations in decision-making. A.Allan Schmid summed up the dilemma of middle ground schemes this way in Benefit-Cost Analysis: A Political Economy Approach:

... politicians keep asking technicians to derive some formula to determine the worth of environmental or health products. They ask because of the myth that market prices are somehow natural or right. .... [Politicians] do not need the crutch of an economic or scientific formula derived without political input; these formulas are often a lie or a mask for the personal preferences of the economist who derived them. (p. 293)

... A major theme of this book has been that analysts must be more interactive with politicians and other clientele if analysis is to play its role in demonstrating the systematic effects of implementing more generally stated objectives. The analyst need not be apologetic for asking questions rather than supplying independently determinative project values and rankings. ... To conclude, there is no way politicians can regard BCA as independent information to be weighed, somehow, along with other inputs to make a decision. BCA is either the politician's decision, or it is nothing at all. (p. 306)

The middle ground is excluded in Schmid's conclusions. The comprehensive, explicit valuation ground has to be explicitly identified as "the politician's decision." Neither of these is standard fare in government economic practice. I continue to champion an adaptive management, quality improvement approach, which has stood the test of time in "for profit" and "not for profit" life for eons. I have problem with explicit valuation schemes too, but understand why some economists have gone there – to gain access to what they consider the main political game in play. I leave it to others to make the case for any middle ground schemes.

Proposed Forest Service Economics Directives
Some of us have been working on proposed Forest Service economics directives that simplify analysis requirements. The proposed directives, in essence, only require practitioners to "address social and economic context" and to "address the social and economic consequences of action to the extent practicable and foreseeable."

This loose directive allows economists like me to work on adaptive management, quality improvement via implicit valuation schemes, and to watch closely for people to propose schemes that appear to make money (or to cut costs) while neglecting important constraining safeguards to the environment or to humans (including future generations) who hold a stake in outcomes of government decision making.

Proposed Forest Service economics directives also allow economists to work with decision makers to effect comprehensive, explicit valuation cost-benefit analysis.

Finally, proposed directives also allow economists to defend middle ground, should they be bold enough to try.

Posted by Dave on May 31, 2005 at 10:44 AM Permalink | Comments (0) | TrackBack

May 20, 2005

A Simpler Way (Monitoring and Evaluation Edition)

I am amazed at the Forest Service’s propensity to over-complexify almost everything. I shouldn’t be. I have been watching this phenomenon for more than a quarter of a century. Monitoring and evaluation schemes are no exception to the general rule. Consider a high profile project called LUCID, (Local Unit Criteria and Indicators Development test).

The report that flowed from the LUCID test highlighted 12 pages of criteria and indicators (pp. 29-41) for monitoring and evaluation. When I saw the report I asked myself: Who is going to use such? Who will maintain it? How is it going to be integrated and used in decision making? And so on.

Arguably the task is not impossible, though. It just looks impossible to the casual observer—and to people like me who have seen such wish lists come and go for years with no tangible results.

To make such wish lists into actionable organizational information requires management and decision making systems that provide for various parts to be attended to, upgraded, improved, etc. It requires a management system that empowers people to own things they are supposed to attend to. It requires a system that gives people hope in organization and excites them in working within organization. It requires a management and decision making system that facilitates appropriate contextual framing to ensure that various parts contribute to organizational/societal wholes.

Where are these management and decision making systems? Are they largely lacking?

As I think about my ranting through the years over wish lists, I realize I have witnessed unflagging attention to a proliferation of parts with almost no attention to the organizational and managerial whole.

I guess Forest Service managers believe that these stacks of rules and regulations are their management and decision systems. I look at it and shake my head. All the rules and regulations certainly keep scores of people busy. But is it a useful way to organize, to run an organization? Are we managing the forests or just the rules?

I have spent my career reading about and highlighting managerial and organizational theory and practice that attend to cultural blind spots—management, leadership, organizational culture, etc. I have thought since I walked in the door that there was indeed a better way, and increasingly I believe there is a way that is both much better and much simpler.

For monitoring, as for the other aspects of adaptive management or management writ larger, I highly recommend W. Edwards Deming's The New Economics: For Industry, Government, Education (1994). In The New Economics Deming outlines theory and practice for monitoring and evaluation that is much simpler and much more owned-by-practitioners than what we normally see. How many Forest Service managers are familiar with Deming?

I should also note that when Jack Welch turned around corporate giant GE, he decided that even Deming's rather simple method was too complicated for them. Occam's Razor is in order. How often do we think to apply Occam's Razor?

Here are two article-length classics that help frame monitoring and evaluation, and highlight both the simplicity and excitement practitioners can find by framing things appropriately and finding simple means to deal with complex systems:

Margaret Wheatley and Myron Kellner-Rogers, "What Do We Measure and Why? Questions About the Uses of Measurement."

John J. DiIulio, Jr. "Measuring Performance When There Is No Bottom Line."

Finally, it does little good to attend mainly to evaluation and monitoring without also paying attention to management in general. For those desirous to learn a bit more about this most complex and wicked undertaking, try these:

A Simpler Way, Margaret J. Wheatley and Myron Kellner-Rogers, 1996:

A magical treatment of how to deal simply with the complexity of natural and social systems that enfolds us. Treating information and relationships as co-equals, Wheatley and Kellner-Rogers lead us forward away from rigidity and over-complexification, and toward self-organization, personal identity, and coherence.

Management: Tasks, Responsibilities, Practices. Peter F. Drucker. 1973:

Still viable today, this is Ducker’s magnum opus. This is the book I wish I’d read instead of all the texts I endured in my MBA training. Although a weighty tome, it provides more practical wisdom that you’d find in a library of business books. For those who are tired of internal and external screech-monkey’s advising that we run the government like a business, pay particular attention to Ducker’s sage advice that we not. For those who gravitate to budget-based work planning and performance-based accountability, pay particular attention to Drucker’s advice to steer clear of such quick-fix nonsense. For economists (Personal disclosure: I am one) read his subchapter titled "When efficiency is a sin."

To repeat, Where is our theory? In particular, Where is the Forest Service's theory of the organization as Drucker as calls it? At least we pay some attention to theories of adaptive ecosystem management, ecology, biology, silviculture, and so on. But we seem not to do so for theories and practice of management, leadership, and so on. For those who do – e.g. those selected to sit at the feet of instructors at Harvard and elsewhere – there is almost no sharing of the knowledge. This particular blind spot would not surprise either Drucker or Deming who spent much of his time in Japan, working with managers who would listen, after having been shunned by American CEOs.

Have we learned anything about organizational management in the Forest Service? Can we learn anything? Or are we stuck with a rigid bureaucracy that shuns learning?

Posted by Dave on May 20, 2005 at 03:14 PM Permalink | Comments (0) | TrackBack

May 12, 2005

National Forest Management and the Law

Sometimes we stray too far from founding principles when trying to do our work. Sometimes an outsider’s perspective proves helpful to bring us back to the basics. The following was recently shared with Forest Service managers (Intermountain Region) by one of our USDA Office of General Counsel attorneys:


The prophecies of what the courts will do in fact, and nothing more pretentious, are what I mean by the law.  - Oliver Wendell Holmes Jr.

Nearly every lawsuit is an insult to the intelligence of both plaintiff and defendant.  - Edgar Watson Howe

The Departmental interpreters of the laws in Washington . . . can always be depended upon to take any reasonably good law and interpret the common sense all out of it. - Letter to H.C. Christiancy, Mark Twain, December 18, 1887.

I know no method to secure the repeal of bad or obnoxious laws so effective as their stringent execution. - Ulysses S. Grant.

. . . It is not enough to say that the Forest Service has kept within the law.  Other qualifications go to make efficiency in a Government bureau.  A bureau may keep within the law and yet fail to get results.

When action is needed for the public good, there are two opposite points of view regarding the duty of an administrative officer in enforcing the law.  One point of view asks, “Is there any express and specific law authorizing or directing such action?” and, having thus sought and found none, nothing is done. The other asks, “Is there any justification in law for doing this desirable thing” and, having thus sought and found a legal justification, what the public good demands is done. I hold it to be the first duty of a public officer to obey the law. But I hold it to be his second duty, and a close second, to do everything the law will let him do for the public good, and not merely what the law compels or directs him to do.

. . . To every public officer the law should be not a goad to drive him to his duty, but a tool to help him in his work.  And I maintain that it is likewise his right and duty to seek by every proper means from the legal authorities set over him such interpretations of the law as will best help him to serve his country.  Let the public officer take every lawful chance to use the law for the public good. – “The Fight for Conservation,” Gifford Pinchot.

More often than not, the law does not provide a “cook book” for how things must or ought to be done.  Laws are subject to interpretation by judges, lawyers, bureaucrats, members of Congress, and the public.

There are varying ways that laws can be interpreted and implemented. Responsible public administration means getting the job done, or accomplishing agency objectives, within the legal parameters established by Congress.

Too often, the law is viewed as an obstacle, an impediment to "getting good things done on the ground." Equally often, and just as counterproductive, compliance with the law is deemed to be the ultimate objective, rather than the means to and end. As recognized by Pinchot, public administration requires a careful balance between these extremes. The law must be complied with, but compliance with the law is not the only measure of success. The measure of success is accomplishment of agency program objectives in compliance with the law.

Who manages the National Forests and public lands? The Constitution of the United States says:

"The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States."  Art. IV, Sec. 3, cl. 2. 

The President of the United States “shall take Care that the Laws be faithfully executed”  Art. II, Sec. 3.

all executive and judicial officers, both of the United States and of the several States, shall be bound by Oath or Affirmation, to support this Constitution.” Art. VI, cl. 3; 5 U.S.C. § 3331.

The Oath of Office required of all civil service employees is as follows:

I, _______, do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter.”

The “duties of the office” of civil service employees of the Executive branch is defined earlier in the Constitution as taking “Care that the Laws be faithfully executed.” Notably, the oath of office says nothing about “insuring that good projects get implemented on the ground.”

Congress has chosen to exercise its Constitutional power to manage the National Forests and public lands by creating executive agencies, such as the BLM and Forest Service, to carry on the day to day administration of those lands, and by enacting laws which direct generally how those lands are to be managed, and procedures to be followed in making decisions about the management of the public lands. These laws do leave discretion to land managing agencies to make technical decisions, but many procedural and policy decisions are limited. Under the Constitution and by their oath of office, Federal employees in the Executive branch are obligated to support the power of Congress over the public lands by obeying and implementing the laws that Congress enacts respecting the public lands.    

While it has been argued that this statutory direction is in some cases unclear, or even conflicting, carrying out the direction for public land management set forth by Congress is nonetheless the primary management objective for public land managers. Your success in meeting this objective will often be evaluated by the public through the Court system, which is the ultimate mechanism for holding Executive agencies accountable for carrying out Congressional direction.

How will you carry out this statutory direction? As is often the case, the best advice has already been given:

Any fool can make things bigger, more complex, and more violent.  It takes a touch of genius - -and a lot of courage - - to move in the opposite direction.  Albert Einstein

Ten Standard Orders for Coping with the Legal System

1.)  It is never acceptable to lose litigation, and we can prevent losses. We cannot carry out program objectives if we lose appeals and litigation which prevent or delay implementation of important projects and initiatives. We should do everything we reasonably can to prevent appeal and litigation losses.

2.)  It is not futile to try to win. We should be careful not to do things that convey a message or reinforce an attitude that it is too burdensome or futile to try to build a record and decision that will survive appeals and litigation. Folks will behave like helpless victims if they believe they are helpless victims of the legal system.

3.)  The Forest Service needs a "can do" attitude toward winning appeals and litigation. The Forest Service coined the phrase “can do” to reflect its approach to many challenges like wildland fire, fuels management, and budget limitations. We can control our destiny in the legal system if we work at it the right way.

4.)  The key to winning is not simply more process and analysis, but smarter process and analysis. We need to learn how to be smarter about process and analysis.  There are resources available to help do smarter process and analysis from S.O. staffs, R.O. staffs, Research, OGC, and other sources. Use them, they are there to help. In particular, OGC is there to help you understand the rules of the game that will be played in the legal system.

5.)  Playing the natural resource science game harder will not help to win at the legal game, any more than playing baseball harder would help to win at soccer. The Forest Service is designed to play a different game than the game that is played in the legal system. The rules of the natural resource management game call for the application of scientific principles to specific problems on the ground. The rules of the game in the legal system require that you show compliance with the law and demonstrate rational, objective, reasoned decision making through clear and concise documentation. You will not prevail in the legal system based solely on how good a project is on the ground or how good the science is which supports the project. Part of smarter process is using lawyers to help you better understand the game that is played in the legal system, and getting better at playing that game instead of continuing to just play your own game harder. 

6.)  Do not get bogged down in process and analysis thinking that quantity will solve the problem.  Doing more of the wrong thing will not help, no matter how much more of it you do. It is a mistake to think that simply doing more public involvement and analysis is going to help in the legal game. 

7.)  It is not the courts and lawyers who are imposing unwieldy process and analysis requirements. In addition to process predicament in project decisions, many plans, rules, and directives have been created by the Forest Service which impose unnecessary process and analysis, because they were created under the rules for the natural resources science game to try to win at the legal game. These institutional sources of process requirements can only be improved by the Forest Service.

8.)  Be careful what you read into court decisions. The legal significance of court decisions like Lands Council is not readily apparent to people who are not trained to read and interpret court decisions. In fact, it is difficult even for lawyers to interpret what court decisions really mean without a lot more information than what is often contained in the published decision. Similarly, those involved in the action being reviewed are often too close to objectively evaluate the outcome.

9.)  Natural resource science and management skills are not enough. Be committed to personal and organizational learning. New and diverse skills are needed to make and document resource management decisions that can win the legal game.

10.)  Meeting legal requirements leads to good public process and administrative decision making, and should not be viewed as inconsistent with good public land and natural resources management. The law is designed to encourage public collaboration, rational decision making, and use of objective, scientific information. This is entirely consistent with good public land and natural resource management. Besides, it is every bit as much of your job to comply with the law as it is to make “good” natural resource management decisions “on the ground.”

Posted by Dave on May 12, 2005 at 03:21 PM Permalink | Comments (0) | TrackBack

May 06, 2005

Roadless: A Rule to Sue By
Martin Nie

Last fall I suggested that the proposed roadless rule wouldn't result in less litigation, but it might well let the Bush administration off the hook. Now that the rule is out, perhaps it is time to see how well my forecasts conform to what unfolds. Here are snippets from my earlier essay.

A rule to sue by
By Martin Nie
for Headwaters News

The Bush administration has proposed replacing the original roadless rule with a "petitioning process" that would give governors an opportunity to seek establishment of management requirements for roadless areas within their states.

The proposed change would be available to governors for 18 months following the final rule, a time frame seen as "sufficient for states to collaborate effectively with local governments, stakeholders and other interested parties to develop proposals that consider a full range of public input."

Any petition would then be evaluated, and if accepted by the Secretary of Agriculture, the Forest Service "would initiate subsequent state-specific rulemaking for the management of inventoried roadless areas in cooperation with the state involved in the petitioning process, and in consultation with stakeholders and experts."

It is also at this stage that the agency would comply with the National Environmental Policy Act and consider the environmental effects of these state-based rules.

While the 2001 rule emphasized the need to look at the national-level picture regarding roadless-area management, the proposed change accentuates the importance of the local.

The proposal is also an excellent example of how the executive branch can use rulemaking to its political advantage. If implemented, it provides the executive significant powers to judge the acceptability of state petitions, while also giving it a potential way out of making politically risky decisions.

From a process standpoint, this proposal is fundamentally flawed. First, it is important to remember that Article IV of the U.S. Constitution gives Congress – not state governors – power over public lands management.

Of course, the administration argues that ultimate decision-making authority still will rest with the Secretary of Agriculture, as it must to be legal. Instead of outright delegation to governors, their petitions will be "considered."

For example, will gubernatorial petitions that advocate opening up more roadless areas be "considered" differently than roadless-friendly ones?

Second, what happens when there is a change in gubernatorial administrations? Will the status of a state's roadless lands swing widely on a four-year election cycle? If so, it places those advocating increased roadbuilding at an advantage because they only have to win once.

Also curious is the argument that the proposed rule will take care of the litigation surrounding the 2001 rule. This is poorly reasoned on numerous counts.

First, it is inaccurate to suggest that the courts have forced the administration to rewrite the original roadless rule. That rule is currently in legal limbo, as the 9th Circuit Court of Appeals upheld it on substantive and procedural grounds, while an unfavorable Wyoming District Court decision has been appealed to the 10th Circuit.

It is quite possible, then, that two western Courts of Appeals will uphold the original roadless rule promulgated under Clinton. Or, we may have another circuit split and wait for the Supreme Court to sort things out.

The claim that the new proposed rule will reduce future litigation surrounding roadless areas is also inaccurate. Instead, litigation will certainly proliferate, as some states go forward with crafting detailed petitions – petitions that are then subject to further NEPA analysis and more litigation. Instead of litigation over one national-level rule, it will be over several state-based ones.

And third, it is insincere to lament the amount of litigation surrounding the 2001 rule and use it as a reason to write a new one, when the administration has chosen not to mount a rigorous defense of the rule from the beginning. Instead it plays the role of the helpless federal government that has no choice but to back off from the original rule. And this comes from an administration that has exerted more raw executive power than any other in recent memory.

This is brilliant politics, but it also illustrates the limitations of relying too heavily upon the courts and bureaucracy to resolve conflicts over public lands management.

In the past, the procedural debate over the roadless rule was split between those advocating a national policy and those who favored more traditional forest-planning processes.

Those opposed to the rule often claimed that roadless-area decisions should be made on a forest-by-forest basis, as they have in the past.

So it will be odd if professional foresters and the timber industry now champion the proposed national rule giving governors more power over public lands management. If so, it raises serious questions about the authenticity of their previous arguments.

The proposed rule is particularly egregious from an accountability standpoint. It is an artful dodge of responsibility and may prove to be nothing more than a shrewd way of avoiding responsibility for a risky political decision.

Instead of making the tough choice to either defend or scrap the rule, the Bush administration passes the buck to state governors. If the petitions are made without authentic broad-based public input and participation, they will be a mockery of the original rulemaking process and the unprecedented public comment that went into it.

The proposed rule's promotion to the public has also been disingenuous, for while it is offered as proof of "President Bush's commitment to cooperatively conserving roadless areas on national forests," it does no such thing, as the proposed rule is merely procedural in nature: Maybe it will, maybe it won't.

What is does do, however, is put an enormous responsibility on Western governors and gives the executive branch a sharpened rulemaking tool.

If implemented, the administration will be able to stand for the principle of roadless area conservation in the abstract while laying responsibility at the feet of Western state governors when these lands are proposed for development.

But by retaining final decision-making authority, the administration can also play the rulemaking "consideration" game when it suits itself.

In short, the proposed rule perfectly illustrates the possible dangers of using rulemaking as the primary means to resolve conflicts over public lands.

Posted by Martin Nie on May 6, 2005 at 03:39 PM Permalink | Comments (6) | TrackBack

May 05, 2005

Cost-Benefit Analysis: Wonder Tool or Mirage?

Cost-Benefit Analysis: Wonder Tool or Mirage [i]? Which is it? At the highest levels, the US government maintains that cost-benefit analysis is indeed helpful to sort out potential good v. bad of "significant regulatory action." [ii]  September 17, 2003 OMB Circular A-4 "guidance to heads of executive agencies" says,
A good regulatory analysis is designed to inform the public and other parts of the Government (as well as the agency conducting the analysis) of the effects of alternative actions. Regulatory analysis sometimes will show that a proposed action is misguided, but it can also demonstrate that well-conceived actions are reasonable and justified.

Benefit-cost analysis is a primary tool for regulatory analysis[2]. Where all benefits and costs can be quantified and expressed in monetary units, benefit-cost analysis provides decision makers with a clear indication of the most efficient alternative, that is, the alternative that generates the largest net benefits to society (ignoring distributional effects). This is useful information for decision makers and the public to receive, even when economic efficiency is not the only or the overriding policy objective.

It is not always possible to express in monetary units all of the important benefits and costs. When it is not, the most efficient alternative will not necessarily be the one with the largest quantified and monetized net-benefit estimate. In such cases, you should exercise professional judgment in determining how important the non-quantified benefits or costs may be in the context of the overall analysis. If the non-quantified benefits and costs are likely to be important, you should carry out a "threshold" analysis to evaluate their significance. Threshold or "break-even" analysis answers the question, “How small could the value of the non-quantified benefits be (or how large would the value of the non-quantified benefits need to be) before the rule would yield zero net benefits." In addition to threshold analysis you should indicate, where possible, which non-quantified effects are most important and why. (p. 2, [2]: references E.J. Mishan’s book, Cost-Benefit Analysis, 1994)

There are many economists who believe cost-benefit analysis to be very helpful in government rulemaking and other regulatory efforts. But many others are not so sure that detailed cost-benefit analysis is either warranted or even helpful. Some argue that far from being helpful, such analysis is in fact often harmful to disadvantaged individuals and groups, and to the environment.

The latest manifestation of long-standing criticism of cost-benefit analysis, comes in the form a book by Frank Ackerman and Lisa Heinzerling titled Pricing the Priceless: Knowing the Price of Everything and the Value of Nothing, 2004. In the fall of 2004, Carrie McLaren of Stay Free! Magazine interviewed Frank Ackerman and Lisa Heinzerling about Priceless: http://www.stayfreemagazine.org/archives/23/priceless.html


… Throughout Priceless, Ackerman and Heinzerling show how regulators have determined costs for anything from a case of chronic bronchitis ($260,000; EPA, 1997), to the preservation of national forests ($219,000; OMB, 2002), to IQ points ($8,346 each; EPA, 2000).

The authors oppose cost-benefit analysis and consider it too inherently biased to base decisions on. Yet in their critique they remain level-headed and clear, pointing out blatant errors in logic and calculations--criticisms that should be of value even to cost-benefit's advocates. …

Frank Ackerman is an economist at the Global Development and Environment Institute at Tufts University. Lisa Heinzerling is a professor at the Georgetown University Law Center and has clerked for Judge Richard Posner and Justice William Brennan. We talked by phone in July 2004, and I was immediately taken with both of them.--Carrie McLaren ….

STAY FREE!: Are there any critics of cost-benefit analysis who don't share your politics? Any conservatives oppose it?

ACKERMAN: Conservative policy wonks generally love this stuff.

STAY FREE!: How do mainstream environmental groups respond to cost-benefit analysis? Are they responding with their own numbers: "if you can't beat 'em, join 'em"?

HEINZERLING: Good question. Certainly when Newt Gingrich's Contract with America came to Washington, environmental groups united against a so-called "super mandate" that would have required cost-benefit analysis for health and environmental rules. And so you have that fairly recent experience when the environmental community was united against cost-benefit analysis. Today I hear among environmental groups some sense that, "well, this is inevitable, so let's try to make it as good as we can."

STAY FREE!: What about "bioeconomics"? I've read that some environmentalists have been arguing for putting a price on natural resources in order to deter corporations from plundering the environment without paying. What has become of this idea?

ACKERMAN: There have been little successes here and there, but the problem is that the market values of sustainable uses of natural resources are often much less than the values of damaging uses. What happens in, say, the Amazon, where it turns out that the value of preserving the trees for tourism and sustainable industries is nowhere near the short-term value of clear-cutting, selling the timber, and farming the land? To take another example, if you wanted to put a price on whales, you could add up the money people pay for whale-watching trips, but it turns out that's fairly small. It's easy to believe that commercial exploitation of whales could produce a lot more money than the revenues of whale-watching trips.

My reaction to those who want to save nature by adding up its market value is, more power to them, but they're not going to get us nearly as far as we need to go.

STAY FREE!: You would prefer to get rid of cost-benefit analysis entirely, wouldn't you?

HEINZERLING: We think it's fundamentally flawed and that refinements aren't going to help in a meaningful way.

ACKERMAN: The people who are pushing it are not just relying on its intrinsic flaws; they're often cheating in their calculations. Environmental groups fighting a rear-guard action against cost-benefit analysis can always find ways in which the benefits numbers are too small, but that never wins the war.

STAY FREE!: It reminds me of the divide between police estimates of the crowd size at a protest verses the organizers' estimates. The two sides are never going to agree on the numbers, so it boils down to politics. To play devil's advocate, proponents of cost-benefit analysis argue that obviously some ways of preserving our environment or our health are cheaper and better than others, so can't cost-benefit analysis help with that?

HEINZERLING: It doesn't necessarily help with that. What might help is setting a goal and then thinking about creative ways to get to that goal most cheaply. In some contexts, that might mean labeling a product rather than banning or restricting it. In other cases, when you're talking about pollution, it might mean allowing emissions trading in that pollutant rather than requiring a particular control technology.

ACKERMAN: From the beginning of modern environmental regulation in the early 1970s right to the present, there has been continuous discussion about the best, most innovative ways to regulate--a search for cheaper control technologies, simpler forms of record keeping and so on. I'm not convinced that cost-benefit analysis does anything to accelerate that process. The case for cost-benefit calculations so often depends on a strange rewriting of the past, as if the EPA was once run by Stalinist bureaucrats who delighted in capriciously spending money, and so now we have to bring in economic analysis to undo the damage. If you were alive then, or if you've read about the period, you know that this legendary era of extravagance never happened. So cost-benefit analysis is presented as solving a desperate problem that never actually occurred.

STAY FREE!: How do you respond to economists who argue that cost-benefit analysis helps in making difficult decisions? If closing off a particular waterway is going to harm a couple of types of fish but will protect a couple of other species, or it will devastate the livelihood of one community but not another, can't cost-benefit analysis help with making the best choice?

ACKERMAN: Making difficult decisions is what government and the courts have always done, and there's no evidence that they have failed for lack of a magical mathematical formula.

HEINZERLING: One of the subtle things that's also lost when you decide things according to this formula is any sense of loss or tragedy. Martha Nussbaum, a philosopher at the University of Chicago, has pointed out that if you reduce everything to numbers you can easily think nobody was hurt by a regulation. It may be, in some cases, that you can't please everybody and at the end of the day somebody is hurt, but cost-benefit analysis completely papers over that fact. Sometimes in human situations when you realize that people are being hurt you can actually come up with a solution that you wouldn't have thought of if you were pretending that you were just trading money around.

STAY FREE!: So do you think cost-benefit analysis is going to be around for a while?

HEINZERLING: Yes, unfortunately. There are too many people who make their living off of it [laughs]. There are too many think tanks. It's a huge industry.

If you enjoyed these remarks, you might also like this from OMB Watch, 3/21/2005, titled "Is Cost Benefit Analysis Needed?" The article concludes,

[C]ost-benefit analysis is not only a weak tool for determining public protections, but its "impartial" calculations can have severe and damaging impacts. In no way is it a blind arbitrator, equally weighing both sides of an issue. Rather it is a political tool, weighted to favor the regulated community that does not adequately address our regulatory priorities.
Finally, I have carried similar criticisms forward in social science circles and broader circles in the Forest Service for many years. My latest criticism is packaged as "Top Ten Reasons why Cost Benefit Analysis Fails in Public Choice Settings."

[i] "Cost-Benefit Analysis: Wonder Tool or Mirage?" titled borrowed from Dec. 1980 Congressional Report, cited in my late-1980s "Economic Advice for Forest Managers."
[ii] OMB A-4 Note: Significant regulatory action is defined by Executive Order 12866.   OMB Circular A-4 pertains in particular to two sections of EO 12866: Section 6(a)(3)(c) and Section 3(f)(1), but also references other authorities.

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