The War against Benefit-Cost Analysis
By BENJAMIN ZYCHER September 15, 2023
The War against Benefit-Cost Analysis
September 15, 2023 6:30 AM
8 Comments Listen
Such are the fruits of an abandonment of analytic rigor in favor of a pursuit of ideological outcomes. The ends really do justify the means.
In the Environmental Protection Agency’s recently proposed rule on “multi-pollutant” emissions standards for light- and medium-duty vehicles — the EPA’s contribution to the regulatory onslaught designed to force Americans into electric and plug-in-hybrid vehicles — the agency claims (Table 6) that the present value of fuel savings would be $380 billion to $770 billion, depending on the choice of discount rate. (The lower the discount rate, the greater the weight given to savings further into the future.)
TOP FINANCIAL STORIES
Gone with the Wind: Romanticizing East Germany
The Middle Class Is Prospering
Celebrating Adam Smith at 300
In the EPA analysis of the proposed rule, fuel savings are a major component of overall benefits, which include alleged climate benefits. Nowhere in the proposed rule itself or in the EPA analysis of the rule does the agency ask why individuals continue to spend scarce resources on fuel when they could enjoy these savings. Why do they not adopt the vehicle choices preferred by the EPA without regulatory coercion?
The obvious answer is that conventional vehicles must offer benefits in terms of the quality of transportation services greater in value than the cost of the fuels they consume. Nowhere does the EPA address that obvious dimension of the benefit-cost question. So far as the EPA analytic methodology is concerned, the quality of transportation services — reliability, resilience in the face of temperature and weather fluctuations, refueling ease, ad infinitum — is irrelevant. Suppose that conventional vehicles powered with fossil fuels and vehicles powered with electricity were simply outlawed, forcing all ground-transportation services back to horse-drawn stagecoaches and carts. Under the EPA benefit-cost analysis, net benefits would be enormous in that there would be large fuel savings, achieved without any reduction in the quality of transportation services.
More onEPA
China Abandons Paris Agreement, Making U.S. Efforts Painful and Pointless
Biden’s Draconian Electric-Car Mandate
Biden Says ‘In Practice’ He’s Declared a National Climate Emergency
However preposterous, this problem with the EPA analysis is only a tiny tip of the benefit-cost iceberg under the new benefit-cost methodology mandated in a recent revision of analytic guidelines by the Office of Management and Budget. Consider the choice among discount rates: In order for a government regulation to make sense, it should yield a stream of benefits at least equal to the ones that those resources would yield if directed by market forces. Accordingly, it is the before-tax rate of return to investment in the private sector that is the appropriate discount rate for regulatory resource allocation by government.
That discount rate is currently roughly 7 percent, the rate specified by OMB under the old guidelines. Under the new guidelines, the discount rate to be applied is 1.7 percent, justified on the grounds that the lower figure is the interest rate on government bonds. That rationale is utterly confused, ignoring the crucial difference between (1) the risk that a government regulation will fail to yield benefits justifying the costs and (2) the risk to those holding government bonds that the government will renege on its debts, particularly with an unanticipated inflation.
PhotosDETROIT AUTO SHOW
The use of an artificially low discount rate will introduce a huge bias in favor of government regulation, and a huge bias in favor of climate regulations in particular, because the asserted benefits are far in the future. Moreover, the common argument that a low discount rate is needed to incorporate the interests of future generations is not correct. Future generations are interested in a bequest of an aggregate capital stock — both natural and man-made, and the higher the value the better. That objective requires efficient resource allocation by the current generation and therefore the application of the correct discount rate to regulatory policy.
The Biden “whole of government” climate-regulatory agenda cannot be justified on the grounds that it actually would yield material climate effects. Using the EPA climate model, the entire net-zero policy would reduce global temperatures in 2100 by 0.137 degrees Celsius. And so the Biden regulatory agencies claim instead that the “benefit” of their various greenhouse-gas regulations is the purported reduction in GHG emissions multiplied by the “social cost of carbon” (SCC).
The SCC is a number almost wholly fictitious. It is the purported future decline in global GDP caused by one metric ton of emissions, based on future climate catastrophes predicted by models that cannot predict the historical record on temperatures and other climate parameters. (Example: The satellite temperature record for the lower atmosphere began in the late 1970s, and for the entire period since then the climate models used by the Intergovernmental Panel on Climate Change on average have overpredicted that actual record by a factor of about 2.5.) Moreover, the models incorporate assumptions that are almost impossible about the magnitude of future emissions and about the effects of future emissions that are not consistent with the evidence reported in the peer-reviewed literature. Because the SCC framework exaggerates the economic costs of greenhouse-gas emissions, it exaggerates also the benefits of reductions in those emissions. A regulation causing a purported given reduction in GHG emissions can be asserted to yield large net economic benefits even if it results in changes in future climate phenomena effectively equal to zero.
There is much more. There is a heavy emphasis on the purported inefficiencies inherent in market behavior, while the problems inherent in government policy-making are ignored. The draft guidelines assert that imperfect information is a “market failure,” a preposterous stance in that the acquisition of information is never free. And it is very far from obvious that government has better information than do markets or that government would use such information to pursue efficient ends.
The draft guidelines assert that “market power” is a source of market inefficiency, but they fail to tell us how to measure it, what degree of market power is too much, or how to evaluate the trade-off between market power and the achievement of scale economies. The “control of inherently scarce resources” as a source of “market power” is a tautology: Monopolization of an input yields monopoly power. Moreover, all resources with market values greater than zero are “scarce”; how “scarce” does a resource have to be in order to create “market power” sufficiently important to justify regulatory intervention? OMB fails to tell us.
It goes on and on. OMB claims that “privileged access to infrastructure” is a source of market inefficiency; precisely who is offering such privilege? There is the assertion that “behavioral biases” are a problem for government to rectify, as if bureaucrats and politicians are immune to such habits. The comedy highlight of the OMB proposal is the classification of “imperfect self-control” as a behavioral bias that “increases short-term well-being by less than it decreases future well-being.” Is it the position of OMB that regulatory outcomes will not be driven by the political dynamics of the next election?
“Distributional fairness” and “equity” now are to be important components of regulatory decision-making. Unsurprisingly, OMB leaves the definitions to the imaginations of the regulatory agencies, allowing them to “justify” almost anything. Such are the fruits of an abandonment of analytic rigor in favor of a pursuit of ideological outcomes. The ends really do justify the means.
NEXT ARTICLEGeorge Washington’s Economy
Share8 Comments