Tuesday, July 28, 2015

Michigan v EPA: The Court and Cost-Benefit Analysis

Less well known then the gay-marriage decision of the Supreme Court (about which I wrote a few weeks back), was a June 29 decision on the question of the Environmental Protection Agency's regulation of power plants.  Under standard administrative law analysis, rules promulgated by an administrative agency are not to be overturned by a court so long as they are "reasonable." This, of course, is a notoriously tricky word in the law, but the general idea here is that the courts are to give deference to the administrative agency. That is, Congress has empowered administrative agencies to promulgate rules for the purpose of applying specific statutory frameworks. For example, the Securities and Exchange Commission is empowered to create rules applying the provisions of federal securities law. And the Environmental Protection Agency is empowered to create rules applying the provisions of federal environmental law (including, e.g., the Clean Air Act). In other words, many federal statutes leave aside all kinds of details. And it is the explicit intention of Congress that such details be dealt with by the relevant administrative agencies.

Since the Court itself has recognized that the rule-making process of an administrative agency is to be left alone unless it is "arbitrary and capricious" or, in other words "unreasonable," one might expect such rules to be overturned only in extreme cases. One might especially imagine this to be a view held by the purportedly conservative wing of the Court, i.e., those Justices who insist on the importance of not overstepping their bounds, of not overturning the will clearly expressed in a statute, etc.  But, alas, as has been pointed out elsewhere, there is nothing in the least bit consistent about the reasoning of the conservative wing of the court.

In the June 29 decision Michigan v EPA, the Court held that the EPA's rules limiting emissions from coal and oil  plants were "unreasonable." And the reason they were determined to be "unreasonable" is that the EPA had not considered the costs of imposing these regulations, only the benefits.

Now, in fact, as the dissent pointed out, the EPA did consider costs. They just didn't do it at the initial stage -- that is, they did not do so when determining that their regulations were "appropriate and necessary." That is, they determined their regulation of emissions was indeed necessary, but that they would calculate the costs of the regulation when determining the exact extent of the emissions regulations.  As the dissent noted:
Over more than a decade, EPA took costs into account at multiple stages and through multiple means as it set emissions limits for power plants. And when making its initial “appropriate and necessary” finding, EPA knew it would do exactly that—knew it would thoroughly consider the cost-effectiveness of emissions standards later on. That context matters. The Agency acted well within its authority in declining to consider costs at the opening bell of the regulatory process given that it would do so in every round thereafter—and given that the emissions limits finally issued would depend crucially on those accountings. 

So, in fact, the EPA did consider costs, just not in precisely the manner that the majority wanted.

There are two points I want to make here about this decision.  The first is that the right-wing of the Court did not give the "deference" that they otherwise insist they want to give. That is, all the talk about the hubris of the Court, the arrogance, etc., goes right out the window as soon as they see something they do not like.  Their job is to honor the intention of Congress.  As they themselves acknowledge, administrative law jurisprudence says that the Court may only disturb an agency rule only if it clearly violates the intent of Congress.  But that hardly seems the case here.  Although the Court was able to point to statutory language indicating that Congress expected the EPA to consider costs, they were not able to point to any directive that they consider costs at the initial stage, i.e., when determining whether regulation emissions from power plants was "appropriate and necessary." It appears entirely ideologically motivated, i.e., motivated by an economistic reasoning that has infected the Court's jurisprudence.

Which brings me to the second point, i.e., the continued growth the aforementioned malignancy, i.e. the insistence that the way to understand whether a regulation is "reasonable" is to weigh its costs against its benefits. And, of course, what could possibly be the objection to that line of reasoning? How could a regulation be reasonable if its costs far outweigh its benefits? As Scalia declared in the majority opinion: "One would not say that it is even rational, never mind 'appropriate,' to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits."

Except that this kind of thinking is hardly the kind of objective value-free analysis it purports to be.  The continued push for cost-benefit analysis is a boondoggle to industry, simply because the extra expenses they have to bear are typically much easier to quantify than are the benefits from regulation. Exactly how are we to put a dollar figure on improved health, or even lives saved, from emissions reduction?  Or, for that matter, on preservation of species, of ecosystems, or even the future preservation of the planet? It is, of course, possible to create methods for answering these questions, but any such attempt is just an exercise in sophistry. And the reason for this is that we are trying to put a dollar value on things that are not for sale in the market. This will inevitably give rise to exercises in silliness (at best.)   For example, in one study, researchers attempted to place a value and children's lives by looking at the manner in which parents fastened the children's car seats. If they rushed the job, thereby not completing correctly, they were, according to the researchers, saving money. That is, the researchers placed a monetary value on the parents time (based on their wages.) Saving time meant saving money. Hence, it was possible to determine by how much parents valued an increased risk of a fatality. (There are a host of examples of this sort of absurd thinking, some of which, including this one, are documented in an excellent piece by Ackerman and Heinzerling.)

The essential problem with this sort of thinking is that we are imagining that people place dollar values on lives *(or health, or the environment) just as they place dollar values on any commodity on the market.  And all we need do is find the right behavior (or verbal communication) that best captures those valuations.  But, of course, there are no such valuations. It is not a question of accurately measuring them.  They do not exist; therefore they cannot be measured. They are works of fiction, created by the collective imagination of the creators of the project known as "neoclassical economics." And yet, despite their status as pure works of fiction, they are essential for cost-benefit analysis.

It is therefore an absurd exercise to try to find the dollar valuation placed on (certain kinds of) benefits  (i.e., on non-market benefits).  On the other hand, determining the costs imposed on a firm via government regulations is a significantly more straightforward matter, because we are then dealing with market activity.  The costs impose on a firm are, that is, easier to quantify; the market has already translated such costs into monetary values.

In response to Scalia's question above, i.e., whether it could possibly "rational,"  let alone“appropriate,” to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits," one could pose the following hypothetical:  imagine that the pollution prevented will affect only one person. And imagine that that single person is extremely poor. There two ways that economists have typically tried to determine the value of improving a person's health (or saving their life.) One is the lost earnings caused by the health effects of pollution.  The second is the  amount the individual would be willing to pay to avoid the harm done to their health. If we apply the first method, we find that, if a person has very low earnings, then they have almost nothing to lose, and hence the dollar value of the benefit (to their health) is next to nothing. This is precisely the reasoning that Larry Summers infamously used in concluding that it would be most economical to dump the worse pollution in the poorest countries, proclaiming:  "I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that."

If we use the second method, willingness to pay, we again run into the same problem. To the economist, there is no willingness to pay if a person has nothing to offer.  The demand curve typically drawn in standard neoclassical economics depends not just on a person's desires, but upon their income. The lower the income, the lower their willingness to pay.  In such a case, the "benefits" of increased health might amount to very little, economically speaking.  And yet, such a conclusion -- that the costs are justified -- because the victims of pollution would be too poor to buy their way out of it anyway -- is obscene (just as Summers' reasoning above is obscene.)  But it is precisely this sort of conclusion that standard economic reasoning countenances.

If the courts cannot see this, they will continue to insist on this myopic line of thinking where the benefits must outweigh the costs for a regulation to be justified.  There is some deep sort of foolishness going on here, where the commonsense notion that a reasonable decision requires a weighing of the 'upsides' and 'downsides' is magically converted into an economistic formula -- such conversion being  part and parcel of the continued imperialism of economistic thinking.

One job, then, for progressive scholars, lawyers, and economists, is to combat this particular form of imperialism. Some steps in this direction have already been taken.  And more will be.  My hope, ultimately, is that we get to the point where a determination of whether a given government regulation is "worth it" is not a mere technocratic question and product of economistic thinking (which is, in any event, built on pure fictional entities), but, rather, a judgement exercised by our polity. This would be a welcome change.

* To be more accurate, researchers generally are not trying to find the value of a life, but rather on a statistical life.  That is, they are attempting to find the value that people place on increased risk of death.   The problem with this methodology is that one cannot translate so easily between risks of death and death itself. That is, one cannot use any monetary value on increased risk of death supposedly found to justify the loss of any actual lives. And yet this is precisely the move that is implicit in cost-benefit analysis.

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