ACSBlog: The Blog of the American Constitution Society

As the price of gas continues to rise, politicians keep scrambling to do something – anything. Hopefully someone can stop them from trampling all over the economy, environment, and public health in the process. To successfully do so, public interest advocates will need to pick up a tool they have disregarded: cost/benefit analysis.

Bad Solutions to Tough Problems
Politicians have proposed a laundry list of “fixes” for high gas prices. Suggestions include short-term band-aids like the gas tax “holiday” and fiddling around with the strategic petroleum reserves. Members of both parties also have proposed subsidies in multiple directions — to automakers for hybrid cars, to farmers for ethanol. Recently, a chorus has cheered on offshore drilling.

Many of these proposals will have extremely adverse economic consequences — witness the outpouring of derision from economists on the gas tax “holiday.” Other supply-side strategies, like drilling in the ocean or diverting corn to ethanol, only put off the day of reckoning — if they even do that. Poorly structured subsides will reward bad behavior and bloat bottom lines for the well-connected. Unless demand is reduced, we will continue to spew greenhouse gases and other pollutants at unsustainable levels.

Cost/Benefit Analysis for the Public Good
For public interest groups to successfully block harmful measures and support wise ones, they will need to pick up a tool they have long ignored: cost/benefit analysis. In times of economic trouble, pleading the case of threatened sea life or caribou will not cut it with the American public — they are hurting, and need answers, quick. Cost/benefit analysis, properly used, can show them that quick “fixes” are boondoggles that won’t address their problems, but will pick the pockets of future generations.

Two roadblocks deter the successful use of cost/benefit analysis by public interest groups: a historically-rooted institutional aversion to those practices and improperly weighted analytical tools.

Historic Aversion to Cost/Benefit Analysis
Many groups have developed an institutional aversion to cost/benefit analysis rooted in history, not theory. In 1981, President Ronald Reagan placed cost/benefit analysis at the center of the regulatory apparatus in an attempt to roll back gains by environmental, consumer, and labor groups. With the backing of a cadre of deregulatory ideologues, President Reagan adopted an executive order that essentially gave the Office of Information and Regulatory Affairs (ORIA) veto power over new agency rules.

OIRA, out of public view, used versions of cost/benefit analysis that were deeply biased against regulation to halt progress on many regulations. OIRA review under Reagan and Bush I left a long-lasting distaste for cost/benefits analysis. Even in the Clinton years, groups fought cost/benefit analysis instead of attempting to reform how it is used.

Need For Unbiased Analysis
As currently practiced, cost/benefit analysis is biased against regulation. In researching our book Retaking Rationality: How Cost/benefit Analysis Can Better Protect the Environment and Our Health, we found that many cost/benefit methodologies that assess environmental, health, and safety regulation were shaped by antiregulatory academics and interests groups, and systematically undercount benefits and overestimate costs. As a result, regulations that are economically efficient nevertheless fail the test. These antiregulatory biases must be removed.

A true cost/benefits test would result in most of the measures currently on the table failing —a gas tax “holiday” would only encourage inefficient consumption, bad subsides will be shown to be hopelessly inefficient, etc.

Gas Price Solutions?
There is one obvious solution to the problem of gas price increases: redistribution policies to help the Americans least able to cope with economic shock. Because of large scale wealth inequality, many Americans are very ill-equipped to deal with economic challenges. We can, and should, focus relief directly on the most disadvantaged.

This relief can take many forms, but the most efficient would be increases in the Earned Income Tax Credit that would go to low-income workers, increases in food stamp payments, or other direct payments. Redistribution would alleviate a great deal of the suffering associated with high gas prices, while causing the least amount of economic distortion. From a cost/benefit perspective, it is clearly the way to go.

The interests of the average American are easily lost in the mix. For groups looking out for the public interest, cost/benefit analysis could prove a powerful tool to fight back the bad ideas, and push forward the good ones. We hope they use it.