Supreme Court Remains Skeptical of the 'Cost-Benefit State'

by Amy Sinden

September 26, 2016

Originally published on RegBlog by CPR Member Scholar Amy Sinden.

In the wake of the U.S. Supreme Court's opinion in Michigan v. EPA last term, a number of commentators have revived talk of something called the "Cost Benefit State." It is supposed to be a good thing, although it makes some of us shudder. The phrase was originally coined by Cass Sunstein in a 2002 book by that name. It describes a supposedly utopian government in which agencies and courts apply to all regulatory decision-making a formal cost-benefit analysis (CBA) grounded in welfare economics.

Sunstein and other eager proponents of CBA have seized on language in the Michigan case that, in the course of striking down the U.S. Environmental Protection Agency's (EPA) mercury rule, gestured toward the existence of a presumption favoring the consideration of costs in regulatory decision-making. Sunstein heralded the opinion as a "rifle shot" ringing in the arrival of the Cost-Benefit State. And John Graham and Paul Noe, in a recent RegBlog essay, echoed that sentiment, congratulating the Court on reversing its earlier anti-CBA presumption.

Indeed, in the midst of all of this hoopla, the casual observer might be forgiven for assuming that the Toxic Substances Control Act reform legislation signed into law by President Barack Obama last month is a further instantiation of the same principle. It does, after all, require EPA to consider costs and benefits before setting new rules for toxic substances.

But no matter how much Sunstein, Graham, and Noe might wish it were so, the Cost-Benefit State is—thankfully—not here. The consideration of costs that the Court endorsed in Michigan is not synonymous with formal cost-benefit analysis.

Agencies have many ways of considering costs in regulatory decision-making that are entirely distinct from CBA. Congress has frequently, for example, directed agencies to set environmental standards through the use of feasibility analysis. This kind of analysis considers costs in order to identify the most stringent level of environmental protection that is economically and technologically feasible but does not balance costs against benefits, as CBA does.

Cost-effectiveness analysis—another common tool used by agencies—considers costs but does not involve CBA either. It takes a single regulatory goal (like saving a human life) and compares the costs of reaching that goal under various regulatory alternatives.

Consequently, when the Supreme Court suggests a presumption in favor of considering costs, as it did in Michigan, that is a very different matter from the Court endorsing a presumption in favor of formal cost-benefit analysis, as Sunstein, Graham, and Noe claim.

Even CBA itself comes in many forms—from an informal, intuitive balancing of qualitatively described pros and cons, to a formal, quantified method grounded in welfare economics. Congress and the courts have generally favored the informal kind. But the CBA that Sunstein, Graham, and Noe envision for their Cost-Benefit State is well toward the formal end of the spectrum. At its most formal, CBA requires quantifying and monetizing all of the social costs and benefits of a regulation and a host of incrementally varying alternatives, discounting these costs and benefits to present value, and finding the point where the marginal cost ...

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