Freakonomics a Response

Richard L. Revesz is co-author, with Michael A. Livermore, of Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health, which makes clear that by embracing and reforming cost-benefit analysis, and by joining reason and compassion, progressive groups can help enact strong environmental and public health regulation. Revesz is the Dean of New York University School of Law. In the article below Revesz responds to an article in the N.Y. Times Magazine.

In the N.Y. Times Magazine, Steven D. Levitt and Stephen J. Dubner discuss three seemingly unrelated stories about a deaf woman in Los Angeles, a first-century Jewish sandal maker, and the red-cockaded woodpecker. The commonality in these stores, the essay argues, is that they were all the unintended victims of well-meaning regulation – the Americans with Disabilities Act, an ancient Jewish law forgiving debts every seventh year, and the Endangered Species Act, respectively.

Levitt and Dubner are not the first to argue along these lines. The theory of “countervailing risks” was first popularized by President Bush’s former “regulatory czar” John Graham over a decade ago. Under this theory, regulators must be fearful that their actions will create new unintended risks that they did not foresee. The theory of countervailing risks has had widespread popularity and influence for some time; for example in 1992, a federal court used this logic to force a federal agency to consider the effects of stricter automobile fuel efficiency standards on auto safety when setting a new rule. The problem is that the idea of countervailing risks is based on the fallacy that all unintended consequences are bad.

The fact is that in some instances there are “ancillary benefits” that provide additional reason for environmental, health, and safety regulation. These ancillary benefits have occurred in the past, and are just as likely to occur in the future as Levitt and Dubner’s countervailing risks.

The relationship between climate change and respiratory disease is just one example of a positive “unintended consequence” of environmental regulation. Burning dirty coal releases the gases that cause climate change, but coal fired power plants also emit the pollutants that cause smog and acid rain, as well as fine particulate matter. It is well known that these “conventional pollutants,” as they are called, cause serious health problems, and contribute to early death for a substantial number of Americans. Any successful effort to combat climate change by capping (or taxing) greenhouse gas emissions will undoubtedly cause an increase in energy efficiency and a switch from polluting technologies (like coal) to cleaner means of producing electricity (like wind, solar, and perhaps nuclear power). The result will be less greenhouse gases—protecting future generations against the adverse consequences of climate change—but also less conventional pollution, giving us all cleaner, healthier air to breathe. Using common economic tools to measure the monetary value of these health benefits, climate change regulation could potentially deliver billions of dollars worth of cleaner air to the American public, before the benefits of stopping climate change are even counted.

The ancillary benefits of regulation have started to gain recognition now as well. In a recent decision in the Ninth Circuit federal court, the panel struck down the Bush Administration’s fuel economy standards for light trucks on the grounds that the agency failed to consider the positive benefits from reduced greenhouse gas emissions. This was a sensible decision because the agency considered the negative effects of a stronger rule on employment and sales, and the court found that the agency “could not put a thumb on the scale by undervaluing the benefits” of the regulation.

The specter of unintended consequences raised by Levitt and Dubner should not scare politicians from tackling the pressing problems facing our country. Just as regulation can have countervailing risks, it can have ancillary benefits. Focusing on the negative will paralyze regulators, and cause an unnecessary bias against efficient regulation. Now that is a consequence (unintended or not) that we surely want to avoid.