Poisoned for Pennies – The economics of toxics and precaution: principal author Frank Ackerman with Lisa Heinzerling, Rachel Massey, Wendy Johnecheck, and Elizabeth Stanton (2008)
The purpose of Ackerman’s book is to expose the weaknesses of the “cost-benefit method” of economic analysis, which has been promoted heavily since the Reagan administration, and increasingly used in this capacity since then, as the best way of determining whether a particular attempt at instituting public health safety or environment regulation of society, business, and industry should be allowed to proceed. Ackerman, who has spent the 21st century devoting his writing and speaking efforts to exposing the potential harm and overall inadequacy of using this method as the sole or main test for public policy in this arena. He, writing this book in conjunction with several others and using already published work, summarizes the process of cost benefit analysis as simply
- Calculating monetary value of costs
- Calculating monetary value of benefits
- Only recommend adopting policies where costs are less than benefits
The book would not be of as much value to the average reader and in particular to socialists unless it offers some other way to determine the advisability of enacting health and environmental protection policies. As it turns out, what he does suggest can prove very useful in socialism, which will no doubt place a high “value” on the protection of people and planet, and hopefully incorporate these “costs” inextricably into the administration of all production. In a previous article of mine, which concerned working towards a Socialist Economic Model by attempting to create a formula for determining the total labor costs of production and how they are interdependent and iterative, I proposed that all negative consequences of production, including waste, should be calculated according to how much labor it would cost to ameliorate them. Since this aspect of calculating the costs of production was not very well developed in that article, this book will doubtless serve useful in future work on the model.
So what do Ackerman, et al. propose be used in place of cost benefit analysis (in a context of capitalism of course)? A methodology suggested by Nobel-laureates Kenneth Arrow and Leonid Hurwicz suggests using conditions of extreme uncertainty when approaching precautionary policies such as those that attempt to deal with an existing or potential health risk or environmental protection policy. This type of evaluation was shown to depend only on the worst-case scenario when applied in to a general population that is risk averse. Extension of this way of thinking to health or environmental risks could be interpreted as collective insurance. These terms, and the method in general, will be examined later.
***
In Chapter 1 Ackerman and Heinzerling explain in detail what goes into the cost-benefit analysis (CBA) process, its fatal flaws, and setup following chapters where the analysis was actually used in previous public policy initiatives. They show that CBA differs from other analytical approaches by demanding that the advantages and disadvantages of a regulation be reduced as far as possible to numbers and then further to dollars and cents.
This was applied, and promptly led to absurd methods of benefits calculations, in the cases of attempts to hold tobacco companies responsible for the effects of smoking, eliminating lead poisoning in children, and a study concerning child seat belt safety. Since there is no accurate way to calculate the value of a saved human life, referred to as a “statistical life” (by far the most widely, and sometimes the only method used to determine the benefits of a health or environmental policy), some rather creative and shocking comparisons were employed in order to arrive at a dollar value. In the case of smoking, tobacco lawyers pointed to the health care costs saved the state and society by the early death of smokers, going so far as to suggest smoking should be subsidized instead of taxed (actually the tobacco is subsidized whereas the smokers are taxed). Analysts in the lead abatement example used the costs families were willing to spend on lead therapy for their children ($1500 per IQ point saved), and those involved in the child safety policies calculated the difference in time spent by mothers to correctly fasten their child vs. incorrectly, and then multiplied that by the parents’ hourly wage to arrive at a dollar amount signifying the value of the child’s life ($500,000). The absurdity of the calculation of the benefits of health and environmental policy, in addition to the commonplace attempts to minimize them, through selectivity and discounting, constitute the bulk of the case against cost-benefit analysis put forth in the book.
Since the application of monetary values of human production and activity are usually given monetary value when bought and sold in the marketplace, CBA (commonly used in the private sector) must use other methods to apply a price to things that are not – policies, regulations and public spending are the prerogative of the government and are not subject to market conditions – and thus cannot be readily assigned an exchange value. Unfortunately, the outcomes of these types of things usually show up on the benefits side of the calculation, whereas the monetary values of policy costs, such as lost sales or the price of equipment and technology used to reduce a health risk or pollutant are easily identified and calculated. This disparity allows analysts wide latitude on the methods used to determine, and in most cases minimize or inaccurately represent, benefits. In addition, the main aim of business and industry, most often the parties responsible for causing the problems needing addressed, is the maximization of profit, which is by definition expressed in monetary values. Conversely, there is no single straightforward way to express the value (other than monetarily) of the maintenance of public health and protection of the environment, especially when different interested parties place different values on these societal premiums.
One tactic that CBA practitioners use to estimate the monetary value of public policy benefits is to ask how much people would pay for them, thus artificially attempting to create a calculable exchange value. This is done in methods called “contingent valuation” and in the authors’ eyes are not much different from opinion polls. Similarly, in attempting to commoditize a human life, analysts compare the pay rates of similar jobs in deadly vs. relatively safe conditions, thus using the “wage premium”, extended over the life of the worker, to arrive at a dollar value. A commonly used value from a 1999 EPA study on the benefits of 20 years of arsenic reduction as a result of the Clean Water Act of 1970, arrived at $6.1 million. Observe that such a highly touted analytical method, operating in the context of infallible capitalist economics, has determined that the life of an adult worker is 12-42 times more valuable than a child’s!
As if the practice of turning social and personal benefits of health and environment wasn’t logically invalid and even downright twisted, the value of said benefits are also reckoned to decrease over time. Since, for example, $100 invested today at 3% interest becomes $103 next year, the value of $100 is necessarily worth less in the future (only $55 in 20 years). Working backwards in time, in order to get $100 next year, you would have to invest only $97. This reasoning serves to delay spending on the costs of regulation as far into the future, when they will be “cheaper”, as possible! Since the logic of capitalism requires all current expenditures that have deferred outcomes or compensation to be evaluated in terms of investment, this process of discounting is regularly applied in CBA. The perversity reaches a pinnacle when this discounting is then applied, directly or indirectly, by CBA to human lives!
Why then use CBA as a method for determining the worthiness of policy initiatives in the first place? Reasons are offered by the authors to attempt to show why CBA has proven to be so attractive. While they do not go so far as to recognize that CBA’s very nature enables easy manipulation of the analysis to favor the costs side (and thus business and industry), as a socialist I will! However, they do entertain two other broad reasons: CBA is supposedly able to give superior (more efficient) results than other methods, and the whole process is supposed to be more objective and transparent, an image that government has, up until the G.W. Bush administration, been more or less eager to project. That greater efficiency is a holy grail of economists and government regulators cannot be disputed. Therefore CBA excels at weeding out initiatives where high costs or insignificant benefits would normally waste time of regulatory agencies and impair the ability of business and industry to maximize profits and pass the costs of health and environmental degradation on to society at large. Since any regulation is already assumed to be disproportionately expensive, the need for CBA is often subtly advanced as a defense against regulation in general. This assumption in turn gives birth to another absurd homunculus – the “statistical life”. CBA proponents propose that shifting regulatory action and spending from a few very expensive policies to many less expensive ones, more lives are actually saved and, get this, the failure to shift amounts to statistical murder. Another holy grail (there are many, you see) of both economists and government regulators has, at least in theory, been that of transparent objectivity, particularly in so-called free market democracies. CBA is offered as both a restraint to enacting regulation that is either clandestinely favorable or unfavorable to a particular political group and as a beacon through the often impenetrable fog of scientific data, statistics, and expert opinion that often accompanies the decision making process.
The authors convincingly expose the failures of CBA to even approach these lofty ideals, much like the Union of Soviet Socialist Republics was socialist in name only. I will sum up what is probably the most incisive part of the book with what Ackerman gives as CBA’s four main fundamental flaws (once again, from a capitalist perspective).
1. The standard economic approaches to monetary valuation are inaccurate and implausible
2. The use of discounting improperly trivializes future harms and the irreversibility of some environmental problems
3. The reliance on aggregate, monetized benefits excludes questions of morality and social equality
4. The values-laden and complex cost benefit process is neither objective or transparent
He concludes with stating that economic analysis has done much to determine which goals can be achieved cheaply and efficiently but relatively little about what those goals should be.
In a later chapter, Ackerman points to the continuing problems with the chemical dioxin. While a majority of the scientific community is convinced of its danger to human health, an overall shortage of direct evidence and significant amount of debate still exists, especially concerning its link to cancer. Using this example, he proposes a precautionary approach to begin acting where suspected problems or risks exist to both minimize the expenses accumulated in studying the problem until consensus is reached and avoid waiting until it is too late and some preventable environmental catastrophe or public heath threat occurs. Critics of this approach, not surprisingly comprised of conservatives and business interests, protests at the potential for wasting money on false positives, or potential risks that turn out to be less severe than anticipated. Historically, these types of cases are few and far between. Ackerman accuses these opponents demanding proof that something that works in practice can work in theory. He then goes on to attempt to provide the theory backing up the use of precautionary principles by citing the Arrow and Hurwicz paper which showed using mathematical logic that the most efficient approach to determining public policy is under conditions of extreme uncertainty (“ignorance” in their words), where only the best and worse case scenarios need be considered. The condition of extreme uncertainty can be characterized as one where the probability of any particular possible outcome of an environmental or health problem is completely unknown. Dioxin proves a useful example where this can and should be applied. Since there is unequal agreement concerning the potential harm of dioxin’s effects, extreme uncertainty strips away the weight assigned to any particular outcome granted by the number of adherents to that outcome’s possibility. More plainly: even if 4 out of 5 dentists recommend fluoride toothpaste, extreme uncertainty conditions place no assumption of correctness on any one dentist’s opinion. Based on this data, one would normally assume that fluoride toothpaste has an 80% probability of being effective against tooth decay. However, in this example, or a more complex debate with a wider range of opinions like dioxin, using an average of opinions assumes that all individual opinions have an equal chance of being correct. Extreme uncertainty avoids this and in doing so excludes all of the standard models of risk assessment and economic analysis, including CBA, from validity. Instead, by nullifying the repetition (and thus the weight) of a certain outcome of problem or regulation, it only needs to consider the best and worse possible results.
Further work by other analysts have taken Arrow and Hurwicz one step further: in the case of a society that is keen on reducing possible risks, where death is permanent and so therefore human life and health are priceless, and which is vulnerable to irreversible environmental catastrophe, only the worst case scenario need be considered. This in effect endorses public health and environmental decision making be done on precautionary principles.
Before going on to examine how precautionary principles under conditions of extreme uncertainty can be applied to socialist economic administration, the last part of the book we’ll look at here deals with the 2007 enactment of Registration, Evaluation, and Authorization of CHemicals (REACH) in the European Union. The main feature of the legislation is that it reversed the former burden on the government to prove the harm of a chemical to the manufacturers who must now prove it is safe (for chemicals introduced after 1981 and accounting for more than one hundred tons annual sales, with less stringent regulation on chemicals in the 1-100 ton range). The direct costs to industry are small, amounting to around €300 million annually – several times smaller than the costs incurred for the cleanup of PCBs underway and a tiny percentage of the industry’s €556 billion in annual sales (2003). Thus, if REACH prevents a future hazard such as PCBs, then it pays for itself. The indirect costs, such as increased prices and lower sales, were under much more debate. However, two studies based on simplified models of the industry determined the indirect costs to be around double the direct ones. Other costs were considered, such as those to “downstream” users of chemicals that may be taken off the market due to reduced profitability or hazardous effects, the costs of protecting confidential business information, and those associated with increased delays in bringing new products to market. At the end of the day, even numerous CBAs of varying accuracy and sensibility showed a much larger value of benefits provided by REACH legislation than either the aggregate costs of implementing it or expected damage control costs resulting from not implementing it.
On the whole, applying a precautionary principle looked like a wise move in the case of REACH, from both an environmental and economic standpoint. The chapter that followed examined the potential impact of REACH on developing countries, and while of some interest, is the point at which our discussion of the book jumps forward to its conclusion. Ackerman posits that an examination of the costs of environmental regulation since the 70’s when most of the furthest reaching initiatives began, have been small. Owing to the failures of CBA as currently practiced, they advocate using a “holistic” approach to economic analysis where such analysis is absolutely necessary and where uncertainty in costs, benefits, and possible outcomes does not exist. However, in those cases where it is not, and of much more interests to socialists, the precautionary principle of decision-making under conditions of extreme uncertainty provides a much more objective, efficient and transparent option. Of minor note is his mention of the possibility of continued reliance on economic analysis like CBA in the US will increasingly prevent American exports from being competitive (due to lax regulation and lower standards) and add to the current economic woes they are experiencing in the global marketplace. So of what value is this work to socialists? That will be the topic of a future post.
Related posts:
