Tag Archives: cost benefit analysis

Cost Benefit Analysis Scramble

Cost Benefit Analysis

One of the dark clouds on the week that was in the U.S. Supreme Court was the decision in Michigan v. the Environmental Protection Agency, one portion of which reads:

“Our reasoning so far establishes that it was unreasonable for EPA to read §7412(n)(1)(A) to mean that cost is irrelevant to the initial decision to regulate power plants. The Agency must consider cost—including, most importantly, cost of compliance—before deciding whether regulation is appropriate and necessary,…”

Important Distinctions

First, let’s differentiate between a CBA (a cost benefit analysis) and a Cost Effectiveness Analysis (CEA).   There are two important functions of a CBA: (1) To determine if an investment or a decision is justifiable or feasible. (2) To provide a way to compare and contrast alternative projects or proposals. Additionally, “In CBA, benefits and costs are expressed in monetary terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their “net present value.”

The most common use of the CEA is found in the health sector.  In a CEA  the outcome is expressed as a ratio.  The denominator is the quantified gain, while the numerator is the cost associated with the gains.  For example, we know that sterilized surgical theaters yield quantifiable positive results for patients, therefore the costs associated with sterilization far outweigh the costs of sanitizing the facilities.

Another analysis which gets folded into the mixture is the analysis of the Social Return on Investment, or abbreviated SROI.  There are four elements considered: Inputs (investments), Outputs (products), Outcomes (benefits), and Impact (difference between the policy or practice change and what would have happened if nothing had been done.) [Investopedia]

There are other formats for analysis:  Cost/utility analysis; Risk/benefit analysis; and the Economic impact/analysis.  The definitions and descriptions of these forms are readily available from online sources.

The problem is that the CBA isn’t a static form of analysis.  Just as each problem in both the public and private sector has unique factors, the CBA may take on some elements from other formats – the CEA, the SROI, and the others.  Often the term “CBA” is used with great precision, i.e. it returns a study yielding a net present value.  There are other examples illustrating how the term CBA in common parlance and news reporting is an admixture of individual studies speaking to the CEA ratios, or the SROI elements.

As in so many other unfortunate instances, the cost/benefit analysis has come to mean what the partisan advocates want it to mean. One of the pitfalls involved in being a good consumer of news and political rhetoric is that the listener is required to sort out precisely what analysis is being described or advocated. The most common source of confusion comes when a CBA is conflated with an Economic Impact Study:

“One industry’s outputs are inputs to other industries, and vice versa. Input-output analysis measures all of the linkages and flows within the matrix (the economy). Based on these linkages and flows, the cumulative effect of any given stimulus (or change) can be derived. This is how multipliers are calculated.” [Decision Analyst Ser]

A public sector example might be that of a decision to build a public broadband access system.  This would trigger spending for infrastructure necessities for the system, which in turn increases employee and contractor income, causing (in sequence) more disposable spending for the local (or national) economy.  If we study the “linkages and flows” as the the project impacts the community we can calculate the cumulative “economic impact.”

So, when politicians speak to the necessity of doing cost/benefit analyses on government regulation it’s important to pin them down on precisely what form of analysis they are advocating, and how the form of the analysis can influence the reported results.

Good news Bad news

The bad news from the Michigan v. EPA  decision is that the EPA is required to perform a cost benefit analysis on emission regulations promoted by the EPA.  The slightly better news is that the decision doesn’t do what corporate radicals want – dismantle the EPA. Nor does the decision declare that the EPA may not issue rules on carbon or other pollutant emissions, granted that it does constitute another shackle on the Agency’s attempt to clear the air.

One way to support the efforts of the EPA to enforce the provisions of the Clean Air and Clean Water Acts might be be advocate for more, not less, study – studies which incorporate the CEA elements (health benefits included) and SROI quadrants which incorporate social benefits.

The argument that government regulations should hinge upon the notion that private sector operations should agree that the regulations are “not too expensive,” is a narrow, corporatist, perspective, and one which would all but insure no regulation of exploiters and polluters.  A better approach is to take into consideration the cumulative economic impact of regulations and the social returns we can make on our national investments.

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Yes, West Virginia, there is a Grinch

Freedom IndustriesAs thousands of West Virginia residents get first hand experience in what it’s like to live in a region without potable water, House Speaker John Boehner’s knee jerk reaction is, “We have enough regulations.” [HuffPo]

The extension of his remarks is instructive:

“The issue is this: We have enough regulations on the books. And what the administration ought to be doing is actually doing their jobs,” Boehner said at a press conference. “Why wasn’t this plant inspected since 1991?”

“I am entirely confident that there are ample regulations already on the books to protect the health and safety of the American people,” he added. “Somebody ought to be held accountable here. What we try to do is look at those regulations that we think are cumbersome, are over the top, and that are costing the economy jobs. That’s where our focus continues to be.”  [HuffPo]

There are three questionable assertions included in the Speaker’s remarks.  First, do we have a sufficiently robust regulatory regime in place to help prevent future chemical spills of the type created by Freedom Industries?  Secondly, if the Freedom Industries facility was not inspected was this a function of (a) inadequate implementation of existing regulations; or, (b) because the plant was not deemed to be included in those facilities which should be inspected?  Third, by what standards are regulations considered to be “cumbersome, over the top, job killers?”

Question One

First, do we have a sufficiently robust regulatory regime in place to help prevent future chemical spills of the type created by Freedom Industries?

The Environmental Protection Agency, often a target for conservatives some of whom have advocated for its abolition, publishes a brochure outlining its inspection authority (pdf).  Under the terms of the TSCA (Toxic Substance Control Act) the EPA  may “Enter and inspect any premises at which chemicals are manufactured, processed, stored or held, and enter and inspect any means used to transport chemicals, to inspect records, files, processes or controls to determine compliance with TSCA. 15 U.S.C.A.§2610(a)–(b)

The phrase “manufactured, processed, stored, or held” appears to indicate that the facility in West Virginia operated by Freedom Industries would fall in the category of those which should be regularly inspected by the EPA for compliance.   However, where there are laws there are often loopholes and the West Virginia incident appears to have been such a case:

“I think the loophole, if you will, that this facility fell into is because it was not a hazardous material, it flew under the radar,” said Secretary Randy Huffman, head of the state Department of Environmental Protection. This isn’t the only potential loophole.  The DEP never inspected the facility because the company didn’t produce any chemicals or have any legal emissions.”  [PPG]

What we may have in this instance is a chemical which was perfectly capable of contaminating drinking water, and of creating health and safety hazards, but which did not fall under the provisions of the TSCA?  And, further if we require inspections only if there is manufacturing going on, or if there are emissions which pose an issue of air or water quality standards, then the regulations didn’t extend far enough to require the inspection of a ‘storage’ facility such as the one run by Freedom Industries.  Senator Joe Manchin (D-WVA) offers his proposal:

“… West Virginia Sen. Joe Manchin (D) said he has a plan to make his colleagues pay attention: a renewed push for legislation that would require more disclosure and testing for chemicals. The current federal law, known as the Toxic Substances Control Act, or TSCA, has been in place since 1976 and requires very little public disclosure about the safety of chemicals. As a result, there are tens of thousands of chemicals like the one at the heart of the West Virginia disaster that are in use, even though there is scant data available about their hazards.”  [HuffPo]

The West Virginia Senator’s proposal encompasses two questions.  Are the provisions of the TSCA sufficiently broad to embrace the control of chemicals which while not lethally toxic are known to be hazardous?  And secondly, should more facilities (manufacturing, storage, and transport) be subject to inspection?

If Senator Manchin is referring to S. 1009, then his support could give new impetus to the efforts toward improving public information about, and regulatory inspection of, those plants which handle hazardous chemicals.

Question Two

Secondly, if the Freedom Industries facility was not inspected was this a function of (a) inadequate implementation of existing regulations; or, (b) because the plant was not deemed to be included in those facilities which should be inspected?

If the chemical involved in the West Virginia drinking water contamination did not appear on the current list of toxic substances, then regulation and enforcement would be a haphazard thing.   The plant may not have been inspected since 1991 because existing regulations permitted it to slip into a loophole in which while the chemical was hazardous it was not necessarily lethal or was not included in a listing of dangerous substances.   In short, the “existing regulations” were inadequate.

Question Three

Third, by what standards are regulations considered to be “cumbersome, over the top, job killers?”

The phrasing isn’t a specific objection to S. 1009, but a shorthand expression for Republican opposition to any restrictions of corporate operations.  The phrase has been applied to statutes requiring compliance with corporate accounting standards, compelling inspections of food manufacturing and processing, and laws demanding that banks treat their customers fairly and honestly.   In short, Republicans have been advocates of de-regulation across the board.

Thus, any proposal from any quarter which might impinge — even ever so slightly — on corporate management is declared “cumbersome,” or “burdensome,” or a “job killer.”  No particular form or quantity of substantiation is required to support the assertion.

A Fourth Question

Is the enactment of S. 1009 an improvement on the situation?  Ironically, one of the panelists called to testify before the Senate Committee on the Environment and Public Works concerning this bill last July 31, 2013* was the chief of the West Virginia emergency response division of their Department of Environmental Protections.

H. Michael Dorsey’s testimony (pdf) made two major points which deserve more consideration.  His first comments highlighted the fact that the TSCA was outdated and in great need of upgrading and updating.  He also commented that there were states which had inserted language into their environmental protection laws directing that the state law may be no more stringent than the federal statutes.  However,  Mr. Dorsey’s testimony also caught the other side of this issue, as noted by Daniel Rosenberg’s testimony on behalf of the NDRC. (pdf)

Rosenberg put a spotlight on one of the crucial weaknesses of S. 1009, the usurpation of state efforts to protect citizens from toxic and hazardous chemicals, the usurpation of the capacity of the states to control environmental hazards:

“The CSIA imposes limits on the ability of States to protect their citizens limits that are in critical ways worse than current law. S. 1009 blocks states from taking new action on a chemical as soon as the Environmental Protection Agency (EPA) has listed the substance as a “high priority” and scheduled an assessment. This is especially damaging because years could elapse between the time EPA schedules an assessment and the time it conducts the assessment and decides whether to regulate.”

“Numerous chemicals deemed “high priority” by EPA could be languishing on the schedule, which as noted above, would be unenforceable. The waiver provision of the bill is too narrow and onerous to mitigate the fundamental flaws in the preemption section of the bill. The bill also would preempt existing state laws on high priority chemicals, once EPA has adopted a
restriction on the substance, even if the State provision may be broader in scope and more protective of the public but not directly in conflict with the federal provision.”

Dorsey’s testimony referred to states which lack laboratory, staff and other necessities required to property test, analyze, and evaluate potentially hazardous chemicals, indicating that it would be preferable to have the Feds do it.   Rosenberg’s testimony highlights what happens when the task is transferred to the federal level leaving states in limbo as the tests and reports are completed, and contends that the result may very well be that the federal activities could result in standards less stringent than those of the states.  In other words, the bill might propel environment standards in reverse.

What Do We Want?

The obvious answer is that we want safe drinking water, and breathable air.  We’d prefer not to have contaminants in our coffee cups, washing machines, dish washers, and sinks.   This requires some differentiation, and we enter into the sticky realm of cost-benefit analysis: Are we getting the results we desire in one category at a price we are willing to pay in another?

Even within this framework there are further differentiations to make.  For example, we know that lead and mercury are toxic substances, potentially lethal, always harmful.  Are we willing to absorb the production costs of paint which does not contain lead? And, who’s “we?”  Should the manufacturers of a product absorb the costs of keeping their merchandise free of contaminants in order to keep their prices “competitive?” Or, should the consumers be required to select products free of contaminants in which the costs are passed along to them?

The essential problem with the cost-benefit format is that no matter how artfully presented in mathematical terms, both “cost” and “benefit” are subjective words.   “Cost” is informed by marketplace selections, projected revenues, and estimated expenses.  What is, or is not, acceptable is related to corporate policies which may have little to do with environmental benefits — stock prices, bond yields, compensation for management and workers.  We can objectively identify if a corporation is profitable; we cannot unilaterally announce that a corporation is profitable enough; that’s a subjective judgment.

“Benefits” may be informed by such concepts as standards for emissions or contaminants,  measurements along a scale from dangerous to safe.  Do we accrue benefits when the emissions are reduced to zero?  Or, is 50 ppb sufficient to insure safety?  How do we measure those benefits?  Do we measure only the emission or contaminants and evaluate them based on scientific  standards?  Or, do we create measurements predicated on human health reports? Fewer reports of asthma? Lead poisoning?  We are willing to put up with 10 ppb of arsenic in our water supplies, assuming some occurs naturally, but are we ready to agree to having any dangerous forms of mercury in our food sources?  Again, the benefit side of the equation is fraught with differentiations requiring human judgment.

There is a Grinch

In view of the problems associated with the manufacturing, storage, transport, and use of chemicals in our economy, and in light of the insistence of the cost-benefit format for evaluating our efforts to mitigate contamination,  we’ve created our own Grinch.  He’s not out to hold Whoville hostage, he is Whoville — he wants the cheapest price, the lowest cost, and the most competitive products, but he also wants to be as safe as possible.   He wants local control, but national standards; national standards but not ones which reduce local control.   S. 1009 is therefore not the answer.  What’s probably necessary is a better informed, less contentious, national conversation about what we want to experience in our physical and economic environments and how we should go about getting it.

{*More testimony can be located here, in PDF form}

Additional References and Resources: CRS Summary S. 1009, Congressional Research Service;  Hart Hodges, “Falling Prices: Cost of Compliance,” EPI (pdf); Brookings Institution, “Are Pollution Controls Worth Their Cost?” July 19, 2013.  EPA, Chemical Data Reporting; US Senate, Committee on Environment and Public Works, hearing on addressing toxic chemical risks, July 31, 2013.  EWG, Opposition to Senate Chemicals Bill, July 12, 2013.  Andrew Cochran, “A Chemical Bill Everyone Should Oppose,” Legal Examiner, June 6, 2013.

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Filed under ecology, Economy, EPA, Politics, pollution

Rinky Dinky Rankity: Chamber of Commerce Flunks Nevada

The U.S. Chamber of Commerce (ICW) doesn’t think much of the higher educational systems of Nevada, Louisiana, and Idaho — these states received “F’s” in its report card.  [NNB]   It’s not that these three states don’t have some work to do to improve their public institutions of higher education, they do.  However, even a cursory glance at the technical appendix demonstrates the problem with research for which the desired outcome is determined before the data arrives.

One quick example:  Nevada receives low scores for “student access and success,” a portion of which is based on the percentage of Pell Grant recipients — the technical notes don’t explain whether this is a positive or negative factor.  In terms of 4 yr. institutions, the state is then “rated” on completion rates, retention rates, and credentials produced.   The “credentials produced” is problematic:

“We developed a simple weighting scheme that reflected information about the cost of graduate instruction and typical program lengths. For simplicity, we assumed that graduate instruction is, on average, about twice as expensive to deliver as undergraduate, upper-division courses. The weights are therefore equivalent to two times the ratio of the coursework required for graduate degree to the program length of a BA. While we acknowledge that different disciplines are more expensive, we did not distinguish between program types.”  [ICW]

That last sentence should be a reminder about why assumptions should be carefully considered before statistics are swallowed without chewing.  The assumptions also color how different “credentials” are weighted.   “Research” PhD’s (not defined) are weighted at 1.5 times a B.A, while “professional “PhD’s or “first professional degrees” are weighted at 2.0 times the B.A.  The assumptions are clearly skewed towards the land of Cost Benefit Analysis.

At least they were honest about it:

“We readily acknowledge that this weighting technique is not perfect. In the absence of more granular cost data or a consensual method for weighting degrees, however, we believe this approach is reasonable and simple to understand. Other researchers should experiment with alternative weighting schemes.”  [ICW]

It’s  simple, whether or not it’s reasonable is debatable.  The first obvious question should be:  Why are the degrees weighted in the first place?  Why is a Master’s degree weighted at 3/4ths of a BA?  (Because it’s twice as expensive to provide, but takes 1/4 to 1/2 as long to complete?) Thus, an institution with a good reputation for teacher training, which graduates a significant portion of its enrollees with Master’s degrees in specialized fields such as speech therapy, educational psychology, special education, and/or requires a subject matter BA/BS before attaining a teaching credential in a Master’s program, would be weighted below an institution which emphasizes BA/BS and PhD programs?

Granular cost data really isn’t going to be all that helpful, especially not if  the point is to put subject specialists in secondary school classrooms.   Or, if the point is to produce individuals with Master’s level education in bio-medical technology fields.

There are criteria by which “failing” institutions may be rated, but ratings based on variations on cost benefit analyses are particularly troublesome:

“Even when conducted with the best of intentions, the method is still problematic, because it substitutes calculation for informed and considered judgment. Although we need not abandon such analysis altogether, we must recognize how and why it is subject to misuse and abuse.” [Strategy+Business]

The problem with applying any form of cost benefit analysis is that it reduces the value of any given proposal or variable into economic terms, as if we could rationally monetize benefits and risks in a mathematically neutral way.  We can’t.

Here’s why:

(1)But quantitative analyses are never neutral. To be useful, any data, including economic data, must be considered in the context of the decision that is being made. Also, no matter how clever the mathematics, certain key inputs in a cost-benefit analysis cannot be translated into economic value. ”

(2)…analysis is an act performed by human beings. Complex systems and modeling experts have long asserted that human beings operating in isolation or within the mental models of their professional training simply aren’t able to be objective enough to come up with the right answers to the kinds of problems that cost-benefit analysis addresses. Certainly, within tightly defined boundaries — when they practice the scientific method, for instance — people can approximate objectivity. Yet even then, they cannot help making value judgments at every step. ”  Translation: People make the models and then people make judgments predicated upon the models they’ve created.

(3) The data is almost never complete.  In the Chamber of Commerce “study” for example, they “regret” the absence of granular data, but then proceed to draw conclusions as if the data were available.

Some important questions are left unanswered by the USCOC’s attempts at a rating system.  For example, might tuition rates be reduced if more state funding were available?  Is it the function of institutions of higher education to focus on providing the private sector with a ready-made work force?  Or, is the function of a university to conduct independent research toward improving the knowledge base and informational environment for the general use of the private sector businesses which may avail themselves of the research products?

One other problem illustrated by this generalizes rating system is the lack of emphasis on the economic impact of the education received on the individual.   The Technical Appendix tells us that 2 year institutions had their certification programs weighted to 3/4th or 1/4th of an Associates degree.   However, if one’s prospective employer wants a person with a 48 week training program in Diesel Technology — then the value of that certificate is of greater value to the individual seeking the job than an AA degree which may or may not increase the pay level than the certificate.

There is some good news in the offing.  The upcoming budget from the Sandoval Administration will contain “flat budgets,” i.e. no more cuts to education.  [KTVN] The bad news is that a flat budget does nothing toward back-filling previous cuts.

One might hope that the Chamber wants to spur Nevadans toward more funding support for the University of Nevada System, however a person could probably bet that the failing grade will be further “proof” that public sector education is “failing” and therefore the institutions should be “punished” by seeing further reductions in public support.

Perhaps one of these days the notion will catch on that education has VALUE, the price of which we will never be able to capture statistically.   And, all the bi-variate regressions in the world will never go much further in the direction of objective results than asking alumni if they were pleased with their educational opportunities.

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