Scenario 9: Cost-Benefit Analysis - Class Discussion

[00:00:00] Speaker 1: first about the issues of cost-benefit analysis if we're doing it and then come back to the issues that Lee outlined about what's wrong with cost-benefit analysis because whether or not you believe something that's wrong with it many decisions are made with it so but first of all I'm impressed at what everyone has done here and particularly people doing this level of presentation cold and its level of impersonation of participants in the faith very impressive that you seem to have grasped most of the things that I would end up talking about in cost-benefit analysis in an initial discussion so let me try to move on to some of the more difficult or advanced issues that I think are touched on indirectly the first speaker mentioned the willingness to pay or willingness to accept this is a distinction that sounds almost the same they turn out to be extremely different in practice and economists who have written about methods have pretty much come to a consensus on willingness to pay I'm not sure that it's necessarily for that great reasons I mean one of the things I've said is that people feel strongly about the environment they might have ridiculously high willingness to accept values that they wouldn't accept damage unless you offered them an absurdly large amount of money but I mean that that might be data a problem in analysis nonetheless the practice has settled on willingness to pay I think there's a question about what do the numbers mean if the costs and benefits are not comparably monetized I think lurking behind the whole discussion is the assumption that the cost benefit results are meaningful because they are comparably complete and that if they are not comparably complete if for instance the accounting of costs is much more complete than the accounting of benefits then you have at best a lower bound rather than a point estimate of the exact right estimate so you know that's also essentially never recognized sometimes there's a throwaway qualification about what the unquantified benefits might mean but the question about how economic benefits of job creation are handled is a separate puzzle and this depends on the macroeconomic theories that one subscribes to cost benefit analysis is sometimes but not necessarily embedded in a theory that assumes free markets reach a state of full employment more or less all the time computable general equilibrium models which essentially concealed this assumption behind waves of mathematics but assume that labor markets clear well guess what it looks like it will be good for the the labor markets clear you don't create net jobs by putting people to work there are essentially no policy makers in the country who actually act as if they believe this right I mean are we creating local jobs is a central question for for every policy maker so that in that sense the calculation is correct relative to what people assume but not necessarily to correct relative to the theories um um the who should uh the question of is it worth doing this you know does cost benefit analysis on its own terms show that it's worth remediating um the who should uh the question of is it worth doing this you know does cost benefit analysis on its own terms show that it's worth remediating versus what does it show about development uh you know uh you know are as i think people noted two separate questions and what it showed what you know is it worth remediating is a question that takes cost benefit analysis what should be developed there strikes me as probably a more straightforward financial calculation about development uh unless it has environmental impacts we haven't talked about also the question of who should uh who should uh who should pay versus who benefits are again separate questions cost benefit analysis identifies again in its own terms is it worth it for society to do it not who should pay should the people who benefit the most from development pay for it is a policy question about distribution of benefits if you were building low-income housing you would never suggest that the people who benefited most from low-income housing should pay the cost that's not the point of low-income housing um the discounting question i think uh applies in particular to health costs one of the other debates that's which my co-author lisa heinzerling particularly has highlighted is that if you have diseases that have a long latency period as you might well in superfund pollution things that will show up 20 30 40 years after exposure do you discount them from the time when the disease appears or from the time when the risk the exposure occurs at a high discount rate this can make a very large difference the uh government practice has drifted toward the more conservative approach of discounting from when the disease appears but the the discourse of risk which is involved seems to point to discounting from the time when the exposure happened which makes them [00:05:33] Speaker 2: look much larger and just expand on that because people were i think a little fuzzy about discounting in the first place [00:05:40] Speaker 1: if you want one of those particular slides brought up your discounting size um well let me try just saying it once so uh discounting applies to cases where you know costs and benefits happen at different years no one is indifferent between whether costs or benefits happen now or ten years from now uh and so trying to express everything as an equivalent president um the farther in the future it is generally the less it seems like it's worth today um so if costs and benefits happen at very different times as they do in many environmental problems the rate at which we discount the future right we can all agree that getting paid far in the future is worth less than getting paid the same amount today but how much less is it worth what's the discount rate um brings up that that will affect essentially the trade off between the price ratio between the future and present and so the more the higher the discount rate the more unfavorable that is so one of the issues with the kind of toxic health hazards that arise in this scenario in particular is that you can be exposed to them today and you know cancer is famous for many cancers have very long latency period before there's any detectable disease but they come from from exposures childhood exposures exposures exposures exposures decades earlier uh people have the people who immigrate internationally have the cancer patterns of the country they lived in before they were twenty generally um so even cancers occur late in life so in that case if you're discounting the future at a big value you're exposed today you show signs of cancer thirty years from now should we treat that as a harm that was done to you today when you were exposed or a harm that was done to you thirty years from now when you had cancer uh at a high enough discount rate those will be very different [00:07:47] Speaker 3: for discounting does that only happen when you when the costs and benefits are only looked at for present day people like if you include future people in your accounting you no longer have discounting? [00:07:58] Speaker 1: no then you really have discounting because there's no way for future people to be at the table and make decisions so I mean the decisions are being made by today's people on you know you don't know what the future wants you don't know what the futures will be um so we're making decisions about what we think those things are worth and the farther in the future they are uh the more uh the more we discount them at a positive rate uh [00:08:28] Speaker 3: um I don't know if we have time to clarify this I'm just wondering like I I think we can make a reasonable assumption that like for air pollution how much it matters to us like the people in the future also don't want air pollution like they relate to air pollution at least similarly to us right there wouldn't be [00:08:46] Speaker 1: discounting that to you um well I mean people who have thought a lot about this and again Mark Sagoff who we mentioned as a philosopher who's looked at some of this could essentially conclude that we're going to create the future you know if we preserve wild nature and act like we value it we'll probably have descendants who value that if we create a world that's all paved and has script malls and excellent video games we'll probably create uh descendants who value that so it's like if there's a circularity in that that what we do today will actually create the future's preferences uh so there's no way actually to do something from a hypothesis about what the future prefers because not only do they not exist yet but we will create them uh uh oh my god okay so um so um so what do you do with this refusal of uh cost-benefit analysis for such excellent reasons as uh Lee outlined um you know I think again separating in this story separating the cleanup from the development there might be a stronger case for uh the future prefers because not only do they not exist yet but we will create them uh we will create them uh we have two minutes to go to their autonomous class uh so um so um so um so what do you do with this refusal of uh cost-benefit analysis for such excellent reasons as uh Lee outlined um you know I think again separating in this story separating the cleanup from the development there might be a stronger case for uh for the cleanup and a weaker one for development uh the more you're thinking about these non monetized values the more you're thinking about these non-monetized values the more you're thinking about these non-s monetized values I think that I've come to the conclusion that despite the validity of all those critiques and the importance of uh saying them every time you get a chance that you know if you have more than six minutes to uh talk about one of these things that you you have to then go on and say using the prevailing values what would you get uh try to avoid endorsing them as a sign of you know yes we think this is the greatest idea ever but saying you you I've ended up saying using values that have become conventional here's what you would conclude and so in this case you know 35 million dollars damage is not very large if you think it's going to kill a few people because values of life in the six to eight million dollar range have become conventional if we had more time I could tell you how absurd the basis for the six to eight million dollars per life is and the paradoxes and the paradoxes that come from that but given that that has become semi-standard in the policy discourse uh a policy that saves a few lives predictably uh is clearly worth 35 million dollars to society in conventional cost benefit terms so that uh there's a kind of uh you know hold your nose and go with the lesser evil which uh American politics is so full of uh occurs here too [00:11:21] Speaker 2: would that last sentence in a sense be adequate to just say to the governor I think you don't need to spend money on an elaborate analysis even using the prevailing values of six to seven million dollars per person we undoubtedly would save six or seven lives maybe 60 or 70 maybe six or 700 in the course of this so we don't even need to do any further analysis [00:11:45] Speaker 1: I think that's right if it's clear that it saves a lot of lives uh and air pollution often kills people so that things that reduce air pollution are particularly successful in this uh there are a handful of these values that have become standard there's been an argument that uh you shouldn't allow uh other values there's been a very partisan discourse about which values are allowed but the handful of values which have been allowed create uh strong uh strong arguments for some policies super fund ones actually are trickier to demonstrate the number of deaths than air pollution air pollution so clearly kills people that it just doesn't have a chance that these of us don't have to [00:12:26] Speaker 2: uh we will stop that in respect to the fact that you have to go study more in our first friend thank you so much thank you so much [00:12:40] Speaker ?: thank you so much thank you so much