The views presented in On Balance are those of the authors and do not represent the views of the Society, its Board, or its members. 

This post is part of a series on President Trump’s deregulatory record and what we might expect in the new administration. 

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 President Donald Trump has repeatedly claimed that his first Administration achieved an unparalleled reduction in federal regulations. He has boasted, for example, that 25,000 pages of “job-destroying regulations” had been removed—more than under any previous President, he has said. Yet an examination of the Code of Federal Regulations, the authoritative repository of binding federal rules, tells a different story. 

This is the last in a series of four blogs featuring key excerpts from the writings of our founder and past president, Richard Zerbe. His insights shaped the foundation of our association and remain relevant to today’s challenges. We hope these selections offer valuable perspectives to all members.

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The Combined Approach

Issues concerning discount rates span the history of Cost Benefit Analysis (CBA) and Benefit-Cost Analysis (BCA) and have long bedeviled the economics profession.  The debate now is primarily between rates consistent with the Social Rate of Time Preference (SRTP) on the one hand (societal, long-term, and often sustainability-focused) and the Opportunity Cost of Capital (OCC) (private market, short-term, and efficiency-focused) on the other hand. Should decisions be guided by private market returns, though allowing for private consumption displacement (OCC) as suggested by Hargerger, or social welfare over time)? I predict that over time a solution will lie in the realization that both play a role. This combined approach, developed by Szekeres 2024, uses the SRTP after accounting for the cost of capital benefits are used to pay costs down if it pays to do so, as long as the OCC > SRTP. This approach recognizes the value of paying down capital costs is of greater value than the current consumption of benefits, and, for the same reason, encourages doing this as quickly as possible.  An example is given in the Table below in which both the OCC and SRTP are each used separately and together in the combined approach. The example assumes the OCC is 7% and the SRTP is 2%.

This is the third in a series of four blogs featuring key excerpts from the writings of our founder and past president, Richard Zerbe. His insights shaped the foundation of our association and remain relevant to today’s challenges. We hope these selections offer valuable perspectives to all members.

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That moral sentiment whose consideration is the most prominent is the Benefit-Cost Analysis (BCA) treatment of distributional matters.

 

This is the second in a series of four blogs featuring key excerpts from the writings of our founder and past president, Richard Zerbe. His insights shaped the foundation of our association and remain relevant to today’s challenges. We hope these selections offer valuable perspectives to all members.

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The treatment of moral sentiments in Cost-Benefit Analysis (CBA) has had an ambiguous role since Kaldor’s assertion that judgements about distributional effects should be left to the politician.  Yet, Benefit-Cost Analysis (BCA) provides a straightforward approach for evaluating moral sentiments:  moral sentiments should be valued as with any other good by determining the Willingness to Pay (WTP) or Willingness to Accept (WTA) for their realization.

An objection to inclusion of moral sentiments is that if we include their values, we will also need to treat immoral sentiments so both should be avoided.  This is perfectly backward.   BCA would recognize both moral and immoral sentiments, for, one man’s morality is another’s immorality. Critics of including moral sentiments raise utility monster cases.[1] These are cases in which utility from bad actions is multiplied until harm exceeds any gains.   For example, say, Donald and his friends like to beat up Joe.  The disutility to Joe will, we presume, be greater than the utility from the beaters.  Now let’s increase the number of beaters until the summed utility of the beaters exceeds that of the loss to Joe. So, it might seem that immoral sentiments should not count.

This is the first in a series of four blogs featuring key excerpts from the writings of our founder and past president, Richard Zerbe. His insights shaped the foundation of our association and remain relevant to today’s challenges. We hope these selections offer valuable perspectives to all members.

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It is useful to date the major changes in Cost-Benefit Analysis (CBA) from the publication of the 1979 work of Kahneman and Tversky (1979) and the subsequent creation of the Society for Benefit-Cost Analysis (SBCA) - which occurred at a 2007 meeting arranged by the Evans School at the University of Washington at which we proposed to form a Society for Benefit Cost Analysis - with a concomitant Journal. In using the Benefit-Cost Analysis (BCA) terminology we thought to distinguish BCA from its CBA roots in engineering. This distinguishment aimed to provide a more economic flavoring to the name and to practice. I suggest BCA can be usefully seen as a further development or evolution of CBA. Table 1 shows the differences.

Table 1: Differences in CBA and BCA

In honor of Dr. Richard O. Zerbe, the Society for Benefit-Cost Analysis is publishing a highlight series celebrating his remarkable contributions to the field. As a founding member and past president of the Society, Dr. Zerbe’s work has shaped benefit-cost analysis (BCA) by advancing its theoretical and ethical frameworks and championing its integration into public policy and decision-making. His efforts have also expanded BCA’s role in addressing today’s complex societal needs. His influence has inspired generations of scholars and practitioners to view BCA not just as a tool for economic outcomes but as a means of promoting equity, social justice, and sustainability.

Dr. Zerbe’s career has redefined BCA by embedding ethical principles into the heart of the analysis. He has emphasized incorporating moral considerations such as fairness and justice alongside efficiency, broadening BCA’s scope beyond traditional economic metrics. His multidisciplinary approach integrates insights from law, economics, and public affairs, promoting BCA’s application in areas such as environmental protection, health care, and social policy. Zerbe’s perspective ensures that BCA remains a relevant and adaptable tool for addressing complex societal challenges.

This tribute series highlights Dr. Zerbe’s transformative impact on BCA, his dedication to fostering a more inclusive and ethically grounded approach, and his lifelong commitment to advancing the public good. Through his pioneering work, he has empowered analysts and policymakers to develop informed, inclusive, and sustainable policies. Join us this November and December as we celebrate Dr. Zerbe’s legacy and the ways his vision continues to inspire benefit-cost analysis today.

The new White House “Frontiers” report, Advancing the Frontiers of Benefit-Cost Analysis: Progress On Federal Priorities, Insights for the Research Community, and Emerging Topics was published October 16th, 2024, by the Subcommittee on Frontiers of Benefit-Cost Analysis (SFBCA), and Committee on the Environment of the National Science and Technology Council. This follows the inaugural December 2023 White House Press Release: Advancing the Frontiers in Benefit-Cost Analysis, and the accompanying report, Advancing the Frontiers of Benefit Cost Analysis: Federal Priorities and Directions for Future Research, January 2023 White House Fact Sheet: National Strategy to Put Nature on the Nation’s Balance Sheet, and Full Report on developing statistics for environmental-economic decisions. These follow a memorandum issued by President Biden to federal agencies, directing them to monetize their analytical approaches (Modernizing Regulatory Review or Executive Order 14094, Jan. 26, 2021). 

High-Level Summary

The 2024 SFBCA “Frontiers" Report summarizes progress on the five focal areas (effects) identified in the 2023 report that are currently difficult to monetize or quantify in analyses of agency regulations, projects, programs, or other actions; highlights ways for the research community to engage with the policy process and provide policy-relevant science and economics for benefit-cost analyses; and identifies additional frontiers topics.

Emphasis on Policy Relevant Research

On page 22, the most recent Frontiers report notes, "Journals such as PLOS One, the Journal of Benefit-Cost Analysis, and the Journal of Policy Analysis and Management are peer reviewed but use different criteria than a typical academic journal... providing a more welcoming venue for policy-related research".  The following JBCA articles are highlighted: 

The 2024 CBA Forum, held by The Economic Society of Australia New South Wales (ESANSW) earlier this year, brought together some of Australia's brightest minds in economic analysis, policy evaluation, and decision-making. The presentations - a mix of keynotes, panel discussions, and case studies - provided updates on state and national guidelines together with sessions on: Health, Justice, Water, Transport, Environment, Energy, First Nations and Carbon values.

The recordings of the forum are now freely available here. Whether you’re looking to deepen your understanding of CBA techniques or catch up on the discussions you missed, these recordings provide valuable access to the forum’s wealth of knowledge.

We’re thrilled to announce the release of the final group of papers from the upcoming Journal of Benefit-Cost Analysis (JBCA) special issue on the revised Circular A-4. With this release, the full collection of comments submitted by former SBCA presidents and JBCA editors is now available as working papers on the SBCA website.

This concludes our series of early releases, though the official JBCA special issue will follow next year. We hope these papers have provided valuable insights, and we look forward to continuing the conversation around the revised Circular A-4.

We are excited to share the third group of papers in our ongoing series related to the JBCA special issue on Circular A-4. These newly released articles provide further insights and analysis on the Biden administration’s revisions to Circular A-4, expanding the dialogue on key policy impacts.

These working papers are available now on the SBCA website here. We encourage our members to review these new additions and engage with the content as part of this critical ongoing discussion. Our final group of papers will be released soon, completing this early preview of the special issue.

We’re pleased to release the second group of papers from the Journal of Benefit-Cost Analysis (JBCA) special issue on Circular A-4. This next set of articles delves even deeper into the implications of the Biden administration’s revisions to the guidelines.

As with the first group, these papers are available as working papers on the SBCA website here. Each piece continues to reflect a combination of peer review and public input, offering unique perspectives from leaders in the benefit-cost analysis community. Be sure to explore this latest set of contributions and check back soon for the next release.

We’re excited to share the first group of papers from the upcoming special issue of the Journal of Benefit-Cost Analysis (JBCA) on the Biden administration’s revised Circular A-4. This first set of papers includes comments from former SBCA presidents, offering a mix of peer-reviewed and public insights on the policy changes.

Each article has been published on the SBCA website as a working paper, giving our members early access to this important research. Access the first group of papers here, and check back periodically for future installments as we continue to release more papers in this series. These papers are part of an ongoing JBCA project, and while they will appear in a future issue, we are thrilled to highlight them now.

As a community of practice, we have the opportunity and even the responsibility to provide input during comment periods for federal and state agencies rule making prior to becoming entrenched in agency policy and application tools. One of these opportunities is currently open in the Federal Register for the US Army Corps of Engineers. The Army has broad responsibility and authority to build, maintain, enhance, and manage flood protection and reservoir projects across the country. The Army has been using a form of benefits exceeding costs test since the introduction of their first projects in the early 1900’s. The 2020 Water Resources Development Act instigated a re-evaluation of what is included in the army’s efficiency analysis and references many of the issues addressed at the last several SBCA conferences. Social and environmental costs are being discussed and how these and other concept can and should be quantified, qualified, and considered in alternatives analysis and final funding processes. This (SBCA) community of practice’s expertise on these topics, as well as the technical mechanics of BCA, valuation methods, and social welfare optimization make each of you a valuable contributor for the army as they collect comments and information to help them formulate practices and rules. Please consider reviewing the current solicitation for comments to ensure, those that know and do, are providing input, and that as a community we are helping guide the framework of the ecosystem within which many, with less experience and training, will be asked to participate on the project level.

Comments must be received on or before April 15, 2024. Learn more>> or contact Duane.

The proposed revisions to Circular A-4 recently put forward by the Office of Information and Regulatory Affairs include guidance on applying what are referred to as "distributional weights." Costs and benefits to households and individuals with lower income are multiplied by a number greater than one, while those to households and individuals with higher income are multiplied by a number less than one. In the public comments on the proposed revisions, a number of criticisms of distributional weighting have been put forth, including:

• Distributional weighting conflates information about welfare with information about equity, undermining transparency.
• Distributional weighting introduces subjective value judgments into BCA;
• Distributional weighting puts a finger on the scale.

In our paper (Acland and Greenberg, 2023), we explicitly recommend that distributional weighting of the sort presented in the proposed revisions be adopted by federal agencies. As such, we feel that some clarification of our position is in order, in the hope that these criticisms may be better understood and laid to rest.

We begin by emphasizing that two justifications for distributional weighting have been historically put forth, only one of which is addressed in the proposed revisions. This justification is that a dollar means more to a poor person than to a wealthy person due to the diminishing marginal utility of income.  Consequently, any given impact on the welfare (or utility, or wellbeing) of the poor is represented by a smaller number of dollars in BCA than the same impact on the welfare of the wealthy: if a poor person and a wealthy person experience the same increase or decrease in their welfare as a result of a policy, the dollar value of that welfare impact that is recorded in BCA will be smaller for the poor person than for the wealthy person, and will thus count for less in the net benefit calculated in the BCA. If this is ignored in BCA, then a bias results, because the welfare or utility of the poor is undercounted in dollar terms and that of the wealthy is overcounted. Applying weights based on the marginal utility of income at different income levels has been proposed as a way to correct this bias, so that a given dollar amount in BCA would represent the same welfare impact on the poor as on the wealthy. We call this "utility weighting."

Regulations to improve air quality, save energy, or reduce climate risks account for the largest share of benefits and costs of the US regulatory program.  We address the economic methods for evaluating this class of regulations in “Benefit-Cost Analysis of Air Pollution, Energy, and Climate Regulations.  This work was recently published as open access in the Cambridge Core Element Series in public economics. The methods considered are relevant for OMB’s ongoing revision of BCA guidance (Circulars A-4 and A-94), and EPA’s proposed changes for measuring the economic benefits of reducing greenhouse gas emissions.  

The work compares and contrasts Regulatory Impact Assessment (RIA) in the U.S. and Europe, and addresses five methodology issues: the estimation of costs, the estimation of benefits, discounting methods, distributional analysis, and the evaluation of less and more fundamental uncertainty. The intended audience is regulators and other constituencies interested in the nexus between scholarship and practice, analysts in government agencies and research organizations, and academic scholars and their graduate students.

The following are some of the key takeaways. 

Economists have for decades recommended that carbon dioxide and other greenhouse gases be taxed to provide incentives for their reduction. The United States does not have a federal carbon tax; however, many state and federal programs to reduce carbon emissions effectively price carbon—for example, through cap-and-trade systems or regulations. There are also programs that subsidize reductions in carbon emissions. At the 2022 meetings of the American Economic Association, the Society for Benefit-Cost Analysis brought together five well-known economists—Joe Aldy, Dallas Burtraw, Carolyn Fischer, Meredith Fowlie, and Rob Williams—to discuss how the United States does, in fact, price carbon already and how it could do so more effectively. Maureen Cropper chaired the panel.

Meredith Fowlie discussed problems that a carbon tax would present if levied on the US energy sector. As Fowlie pointed out, setting a carbon tax equal to the social cost of carbon assumes that the prices of carbon-intensive goods reflect suppliers’ marginal private costs. In many US states, however, regulated retail electricity and natural gas prices exceed marginal supply costs—in the case of electricity, sometimes by a factor of two to three. Electricity prices have risen to cover the costs of upgrading generation, transmission, and distribution systems and making the grid more resilient to extreme weather events. Adding a carbon tax to these prices would slow the pace of electrification for the clean energy transition and would burden low-income households. Fowlie discussed these issues and suggested that retail rate reform is needed.

Joe Aldy presented an overview of clean energy subsidies that the federal government has provided to reduce carbon emissions. These include investment and production tax credits for renewable energy sources, loan guarantees for renewable power, and state block grants to promote energy efficiency. Aldy discussed the limitations of these subsidies relative to a carbon tax. Whereas a carbon tax would provide a price signal throughout the economy that would tend to equalize marginal abatement costs, clean energy subsidies do not. And because of their limited lifetime, clean energy subsidies do not usually provide dynamic incentives for emissions reductions. Aldy discussed how specific clean energy subsidies could be redesigned to better mimic a carbon tax. He also suggested using formal program evaluation to improve the design of subsidies to reduce carbon emissions.
Dallas Burtraw reviewed the barriers to implementing carbon pricing and noted nonetheless that it is important that we price carbon. Pricing carbon encourages cost-effective reductions in greenhouse gases (GHGs), rewards technological innovation to reduce carbon emissions, and helps coordinate activities to decarbonize the economy. To move in the direction of pricing carbon, Burtraw argued for formulating an industrial policy that mimics a carbon tax but is politically acceptable. One way to do this is to couple regulatory standards with sector-specific subsidies. Tradable emissions performance standards, such as California’s Low Carbon Fuel Standard, are an example. Burtraw discussed the extent to which tradable performance standards embody the attributes of a carbon tax.

On June 30, 2022, the Supreme Court of the United States decided West Virginia v. Environmental Protection Agency. The case was about whether EPA in the Clean Power Plan could set the carbon emissions standard for existing power plants at a level that would require the power plants to reduce coal use and shift to or subsidize natural gas or renewable-energy electricity generation (referred to as “generation shifting”). But the focus was not on whether such a level would be benefit-cost justified—but rather on whether the agency was allowed to set a standard requires generation shifting for compliance under this provision of the Clean Air Act. Writing for the majority, Chief Justice Roberts applied the “major questions” doctrine and concluded that EPA could not do this despite reasonable textual support for it; on issues like this one, which have “vast economic and political significance,” Congress must clearly authorize an agency to act in this way.

It is tempting to conclude that this decision about statutory interpretation has no relevance for benefit-cost analysis (BCA). But unfortunately, the decision contains language that suggests the Court misunderstands and disregards the value of using BCA in federal regulatory policy.

The trouble starts when the Court appears to ignore how BCA can help agencies set stringency levels for various standards. The Clean Power Plan, for example, was supported by a BCA that concluded that the rule’s benefits to society would dwarf its costs, with $22.6 billion worth of net health and safety benefits each year in likely scenarios (EPA 2015). But the majority opinion refers to this analysis to highlight only the expected costs of EPA’s approach—without mentioning the expected benefits at all (p. 10). And more concerning, when the EPA argued that its discretion to set an emissions standard is bounded by the fact that it must consider costs, the Court suggested that this admission is itself somehow evidence that EPA’s authority was too vast (p. 25). In fact, the Court seemed to not understand how BCA could reasonably inform and constrain the agency’s choice of the stringency level—or, as the Court called it, the “emissions cap” (p. 29). The Court appeared to think EPA was unconstrained in setting the cap, calling it a cap set to “wherever the Agency sees fit” as opposed to a cap “based on some scientific, objective criterion” (p. 29-30).

The primary way the Society pursues its mission to improve the theory and practice of benefit-cost analysis is by bringing people together, particularly during its annual meetings held each March. It is therefore very rewarding to note the recent increases in conference attendance and the associated increases in Society membership.

The first Society conference took place in 2008 and drew 79 people (Table 1). Attendance has grown steadily since then. In particular, the move to an online format in 2021 and 2022 resulted in very large increases in attendance, with attendance topping 600 people.

Table 1: SBCA Annual Conference Registrations

China is investing trillions of dollars in hundreds of projects, mainly infrastructures under its Belt and Road Initiative. This Initiative termed the BRI seeks to increase trade and contribute to global economic growth through increased connectivity, ports' development, building transport networks, pipelines, and other major infrastructures stretching from the northwestern part of China through Central Asia and Middle East through Africa and onwards to Europe.

We discuss some implications of this BRI in the context of new developments and key challenges it faces, not widely covered in the literature. Specifically, we identified three major areas which require immediate attention if any success of the BRI is to materialize. Such new areas may constitute the new research agenda for Cost-Benefit Analysis. One concern is the issue of NIMBYs (Not In My Backyard) which essentially deals with siting decisions. The second concern has to do with applying Cost-Benefit Analysis to BRI countries and that is whether the framework of conventional Cost-Benefit Analysis remain the same as with applications in developed countries. And, thirdly, the arrival of competing initiatives from the United States and European Union on the BRI. We discuss some conflict resolution instruments to siting issues and the role of auctions. Highlights from the new Health and Digital Silk roads are also presented.

Here are the key takeaways from our presentation at the 2022 Society for Benefit-Cost Analysis Annual Conference:

Hedonic property value regression is a leading technique for estimating how much consumers are willing to pay for nonmarket amenities. The prevailing style of estimation has evolved in recent years to incorporate insights from the “credibility revolution” in applied economics, with high expectations for data quality and econometric transparency. At the same time, recent research has improved our understanding of how parameters identified by quasi-experimental designs relate to welfare measures. This post describes an article summarizing modern best practices for developing credible hedonic research designs and valid welfare interpretations of the estimates. I wrote the article together with Kelly Bishop, Spencer Banzhaf, Kevin Boyle, Kathrine von Gravenitz, Jaren Pope, Kerry Smith, and Christopher Timmins. It was published in the Summer 2020 issue of the Review of Environmental Economics and Policy as part of a symposium on best practices for using revealed preference methods for nonmarket valuation of environmental quality. A 20-minute video summary is posted here.

There have been thousands of hedonic property value studies since the model was formalized in the 1970s and the pace has accelerated due to advances in data, econometrics, and computing power. The model’s enduring popularity is easy to understand. It starts with an intuitive premise that is economically plausible and empirically tractable. The model envisions buyers choosing properties based on housing attributes (e.g., indoor space, bedrooms, bathrooms) and on location-specific amenities (e.g., air quality, park proximity, education, flood risk). In the absence of market frictions, spatial variation in amenities can be expected to be capitalized into housing prices. When buyers face the resulting menu of price-attribute-amenity pairings, their purchase decisions can reveal their marginal willingness to pay (MWTP) for each of the amenities. In principle, estimating MWTP is straightforward. In practice, several key modeling decisions must be made. These include defining the market, choosing appropriate measures of prices and amenities, selecting an econometric specification, and developing a research design that isolates exogenous variation in the amenity of interest.

Defining the Market. Best practices in hedonic estimation start with defining the relevant housing market in a way that satisfies the “law of one price function”. This means that identical houses will sell for the same price throughout that market. The precise spatial and temporal boundaries that satisfy this condition may vary across space and over time as information, institutions, and moving costs change. One common practice is to define the market as a single metro area over a few years. An alternative is to pool data over larger areas and longer periods, and to model the hedonic price function as evolving over space and time.