Avoiding the cost of needless fear

Obama’s former regulatory czar explains how to avoid bad rules

By Cass Sunstein

It isn’t easy to love cost-benefit analysis. When the Department of Transportation compares the monetary benefits of a new vehicle safety requirement with the monetary costs, or when the Environmental Protection Agency does the same for air pollution controls, we don’t hear sustained applause.

While presidents from Reagan to Obama have insisted that regulators must use cost-benefit analysis to discipline their policymaking, many people, especially on the left, vigorously object that the approach is a business-friendly obstacle to sensible safeguards designed to protect health and the environment. Last month, President Obama directed the EPA to issue new rules to increase the fuel economy of heavy-duty vehicles. Environmentalists tend to push for strong fuel economy requirements, limited only by what is feasible — and to contend that rules protecting clean air should not be based on an effort to weigh benefits and costs.

Cost-benefit analysis is the practice of scrutinizing regulations to guarantee that the social benefits, understood in monetary terms, justify the social costs. One of the strongest justifications for that approach comes from psychologists and behavioral economists, who have shown that human beings are vulnerable to “misfearing.” Sometimes we fear the wrong things, devoting a lot of money to small problems and little or nothing to big ones. Public officials can also be vulnerable to misfearing. The good news is cost-benefit analysis can help steer all of us straight.