Monetization: An Impediment to Clear Thinking About the Merits of FDA Regulations?

August 7, 2013

By James R. Phelps

The Federal Register on July 10th published certain recommendations of the Administrative Conference of the United States, including one that independent regulatory agencies should prepare cost-benefit analyses for proposed and final regulations.  This was very timely, coming just as I was slogging my way through the Office of Management and Budget’s (“OMB’s”) 2013 draft report to Congress relating to the cost-benefits of government regulations.  (The authors of the OMB report seemed to extend an effort to make their document comprehensible to a layman.  The academic literature on the subject of cost-benefits is not an easy read; it justifies the description of economics as “The Dismal Science.”)

I was drawn to the adventure of cost-benefit analysis by a report from RAPS, introduced under the headline “Federal Agency Says FDA's Benefits Far Outweigh its Costs.”  RAPS Regulatory Focus said this about the OMB draft report:

The draft report was published in response to the Regulatory Right-to-Know Act of 2001, which requires OMB to prepare a cost-benefit report on the costs of federal regulations for the Congress. The influential report can be a strong case for agency officials to argue for additional funding, but can also provide a harsh spotlight on agencies that fail to promulgate well-tailored regulations. 

OMB’s draft report noted that in 2012, FDA released a total of eight regulations which cost an estimated $800 million to $1.2 billion. While that may seem high given the cumulative nature of many regulations, OMB said the benefits afforded by those eight regulations exceeded the costs dramatically, with low-range estimates of $2.1 billion in societal benefits and a high range estimate of $21.9 billion—more than 2600% more than the lowest estimate, and 75% more than the most conservative estimate.

Learning that FDA hit the societal benefit jackpot was very exciting, and raised questions.  From where did these numbers come?  What are “societal benefits” and how do they get measured?  Reading the OMB report seemed the best way to get answers to these questions and so I entered the world of government economists.

The report is required by the Regulatory Right-to-Know Act of 2001, Pub. L. No. 106-554, and by several Executive Orders.  To develop the report, which is the sixteenth of its kind, OMB used information provided by other agencies, such as FDA, that analyzed costs and benefits of major regulations that they issued.

So the legislative and executive branches of government have tasked the agencies to justify the cost-effectiveness of their own regulations.  The bureaucracies have responded, “monetizing” information to show that their regulations are, for the most part, a terrific investment, showering billions upon billions of dollars of “societal benefits” upon the public.

“Monetization,” in the context that it is used by OMB and the agencies contributing to the report, means giving monetary valuation to things such as life and health, in the context of the benefits that regulations purport to protect or create.   

The OMB report has this to say about monetizing health-related regulations (page 16):

Agencies often design health and safety regulation to reduce risks to life, and valuation of the resulting benefits can be an important part of the analysis.  What is sometimes called the ‘value of a statistical life’ (VSL) is best understood not as the ‘valuation of life’ but as a valuation of statistical mortality risks.  For example, the average person in a population of 50,000 may value a reduction in mortality risk of 1/50,000 at $150.  The value of reducing the risk of 1 statistical (as opposed to known or identified) fatality in this population would be $7.5 million, representing the aggregation of the willingness to pay values held by everyone in the population. 

The final number achieved by use of the VSL is the “dollar” amount of what the economists have called the “benefit.” In the RAPS report and elsewhere, the “benefit” is called the “societal benefit.”
Economists have generated a large body of literature about the use of VSL in cost-benefit analyses. VSL calculations are expressed with the powerful authority of numbers, though the methods of arriving at VSLs use assumptions and judgments that do not guarantee precision.  The OMB report (page 16) recognizes the unsettled character of VSL calculations stressing that “the technical literature has not converged on uniform figures (for VSL). . . .”

Building on an extensive and growing literature, OMB Circular A-4 provides background and discussion of the theory and practice of calculating VSL.  It concludes that a substantial majority of the studies of VSL indicate a value (in 2001 dollars) that varies ‘from roughly $1 million to $10 million per statistical life.’ 

(OMB says the literature on VSL valuation now puts it, in 2010 dollars, in the range of $1.2 million to $12.2 million.)  Government agencies do their own VSL calculations, and the numbers used by the many agencies vary.  According to OMB, FDA consistently used VSL values of $5.0 and $6.5 million in several of its rulemakings.  Other agencies use different numbers; for example, according to the OMB, the DOT uses $9.1 million in 2012 dollars; OSHA has used a VSL of $8.7 million, and EPA has used a calculation that arrives at a VSL of $8.9 million. 

Much to their credit the OMB authors highlight the limitations of the information used in their report (page 8), saying: [w]hile the estimates in this draft Report provide valuable information about the effects of regulations, they should not be taken to be either precise or complete.”  (Emphasis added)

In addition to the VSL calculations, the authors provide other significant details to justify their cautionary statement.  For example: They are aggregating analytic results that are not comparable.  Quantification of costs and benefits is not always possible.  The distributional effects of regulations are not well analyzed. 

Further, the report notes that the benefits analyzed by the agencies are prospective.  An assumption built into this quantification process is that a given regulation will achieve those things for which it has been put in place; these are the “societal benefits” referred to in the RAPS piece. 

The OMB recognizes that costs and benefits of regulations cannot be truly known until the regulation has been implemented and tested by time.  A regulation might not achieve the result desired by the government agency, and there can be unexpected and negative effects that occur when a regulation is implemented.  The information derived from actual experience is of course not in the calculation of benefits provided by the agencies.  (On page 9 of the report, OMB strongly recommends that retrospective analyses of effects of regulations should be done.)

Further, the VSL used to compute the “benefit” is said to be based on the average amount of money that people have said they would spend to have a certain effect.  But those people did not write the regulations and most probably never saw them, so we cannot know if they would spend the money to take the specific actions required by the regulations.  They might oppose the methods prescribed in a regulation. 

Notwithstanding all the foregoing, the OMB soldiers on, reporting page after page of billions and billions of dollars of “benefits.”  On page 63, the report offers a summary of “total net benefits” of major rules through the 4th fiscal year of the administrations of Presidents Clinton, Bush, and Obama.  Clinton eked out $30 billion and Bush $60 billion; Obama eclipsed them, providing $159.2 billion “benefits.” 

The RAPS report understandably reads the OMB document like a financial report, because that’s the way it looks, presenting “benefits” as a dollar return on a dollar investment.  FDA’s eight regulations are seen as a bargain because of the magnificent return of “benefit” money.  Never mind that the regulations incur real money expenses, and in these reports reap the harvest of a currency that couldn’t be used to play Monopoly.     

Looking at the OMB “total net benefits” comparison cited above, or the RAPS report, one might conclude that we need more and more regulations, because they will increase our “benefits.”  Can the successor to Mr. Obama provide more than his $159.2 billion in “societal benefits?”  To accomplish that, more regulations will need to be devised and promulgated.

The estimates presented in the OMB document, though not “precise or complete,” convey that nearly every agency’s regulations provide a huge return in “societal benefits” (page 13 of the report).  And in only a few relatively minor instances is the cost of a regulation possibly more that the minimal calculated benefit.  In every instance the span between the low “benefit” estimate and the high is quite large; for FDA, the low figure — $2.1 million – is .098 of the high figure — $21.9 million. 

The huge numbers, the “dollars” generated in monetization calculations are of course very impressive.  The RAPS report notes that they are used to secure appropriations from Congress, and readers of that report might admire the “dollars” accrued by FDA.  The Congress and the American people like to see the agencies operating in the black; seeing a huge profit, even if it’s dollars of “societal benefits,” will be considered very good news.

The Administrative Conference wants the independent agencies to join the other government agencies to produce the cost-benefit information.  It says, at 78 Fed. Reg. 41,355, that these cost-benefit analyses can “. . . help ensure that decisionmakers fully contemplate the risks and rewards of any proposed regulatory strategy.”  Further, they will help to “. . . ensure that the public and Congress understand why regulatory decisions are made.”  One wonders if this is so.

What do those “dollar” numbers mean?  They are carefully presented as only estimates, and even so with extensive qualifications affecting their reliability.  The enormous range of variances between the low and high estimates of “benefit dollars” as presented by virtually all the agencies makes the numbers more like guesses than estimates.  What useful insight about why regulatory decisions are made do these inconclusive numbers provide?

Not only are the “dollars” questionable.  Describing the effects of regulations, any government regulations, as “benefits,” is grounded in the dubious assumption that all government rules have benign effects. Rules issued by the government prescribe and proscribe conduct, and what is a benefit for one may be very hurtful to the interests of others.  For example, regulations that shut down businesses might not be universally considered to be a benefit.  Some regulations have been shown to be wrong-headed, certainly not benefits.   

One prominent critic, cited in both the OMB report and the announcement of the Administrative Conference, challenges the validity of monetizing in cost-benefit analyses.  See Heinzerling & Ackerman, Pricing the Priceless, Cost-Benefit Analysis of Environmental Protection, 150 U. Pa. L. Rev. 1553 (2001). The process, however, is embedded in the federal government’s agencies and likely to be a continuing feature in government policy planning.

Considering and judging the relative merits of regulations is a needed but complicated process, deserving of attention from as many disciplines that can be employed to make it work properly.  How does monetization, with its authoritative reports of “benefit” dollars that cannot be spent or saved, and its benefits that may not be so beneficial, fit into this process?  I submit that monetization is an impediment to clear thinking about the merits of regulations. 

Categories: Miscellaneous