When is quantifying benefits a bad thing….

A recent article in the New York Times, In New Calculus on Smoking, It’s Health Gained vs. Pleasure Lost, describes the economic analysis being done by the US Food and Drug Administration to support tobacco regulations.  According to the Times, the economic analysis includes a “happiness measure”— the lost pleasure of smoking.  In the analysis, the value of lost happiness offsets much of the costs of smoking (cost of illness, for example), with the implication that tobacco regulation looks much less attractive.

Those critical of Benefit-Cost Analysis (BCA) can point to this as yet another example of economic analysis coming up with the “wrong” result, and the evils of using BCA. But the problem is not that economic analysis of regulations  is inherently bad, but rather that economics-poorly-done does not support good decision making.

In the case of the tobacco regulations, the loss of the “intangible” happiness is a disbenefit—a cost—of regulation.  For climate change, the opposite is true;  the things that are hardest to measure are benefits of action, rather than inaction.

Many of the benefits of doing something about climate change—reducing emissions and slowing the rate of change or taking measures to adapt and so reduce the impacts—are very tangible. Climate change is expect to result in the US in damage to transportation infrastructure, lost productivity in some sectors, and increasing demands on our energy production, distribution, and transmission systems, to name a few tangible effects. These effects can be measured using asset values, engineering costs, sector and market models, and other well-established methods.  Globally, effects on already stressed agricultural production, water supplies, public health systems, and a host of other impacts can also be measured using familiar economic techniques.

But even where climate impacts have been quantified and valued, differences in income complicate the process of valuing equitably.  And some effects are intangible and hard to value.  Climate change is expected to have increasingly negative  impacts on tribal cultures, on mental health, on political systems, and on safety. Equally intangible from a valuation perspective are the implications of relocating  coastal villages or coping with the loss of ecosystems and species.  All are difficult to quantify and value in dollar terms. Yet such impacts—linked as they are to the near-term health of our communities and ecosystems, and to the long-term sustainability of human and natural systems—may, in aggregate, be potent drivers in our political will to take on the challenge of climate change more vigorously.

According to the NYT, economists have pointed out  numerous problems with the FDA analysis.  Apparently, some potentially high-magnitude benefits of regulation (such as reduced health effects associated with second-hand smoke) were not counted, and the “happiness value” was larger than justified by the literature cited.  Moreover, it long has been recognized  (by the public, economists, and policy-makers) that substances causing addiction and affecting the behavior of minors are subject to regulation for a variety of moral reasons that go beyond the “economics” of the situation.

Should we work to put values on difficult intangibles in thinking about climate change or in developing regulations?  If we don’t attempt it, we run the risk that things without a value will effectively be of zero value in economic analyses.  Whether or not we decide to put a value on the intangible effects of government action (including regulations) should not be based on whether we like the outcome.  Rather it should be based on whether estimates can be done that are believable, credible, and robust, and that can stand up to analytical scrutiny.  It will be worth the resources expended to do the analyses if it produces information that can improve the decisions we make.

The fault is not with economists trying to value “happiness.” Rather, it’s a case of good economic analysis gone bad.

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