February 27, 1994

February 27, 1994 | FYI on

Can We Save Even More Lives? Understanding the 'Opportunity Costs' of Regulation

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February 28, 1994 CAN WE SAVE EVEN MORE LIVES? UNDERSTANDINGTHE "OPPORTUNITY COSTS95 OF REGULATION

John C Shanahan Adam D. Thierer Policy Analyst Policy Analyst Ask the average American how much it is worth spending to save a life and you will be told a huge number-perhaps even that -no amount is too much." It is this answer that leads Congress and fedual agencies to impose huge costs on businesses and families to reduce the risk of injury or death by often an infinitesimal degree. But there is another way of looking at the same question: If public or private resources are to be spent proiecting lives, is it best to spend these resources saving just a few lives - perhaps even none-or many lives? Presented with that question, which is al- most never askeA Americans would give an answer that would lead to a very different level and type of regulation than that which burdens America today. In fact, it Um out that in many cases, if the private resources used up in complying with federal mandates were to be left in the industries concerned, or used in other ways in the local economy, Americans would benefit more. For in- stance, far more lives could be saved. Policy makers generally fad to recognize the simple truth that using resources one way means not using them in other ways that could yield better results. Too often, therefore, and with little public debate, they cream conmramd-and-control type regulations that impose enormous costs on the econ- omy to eradicate even the smallest risL Yet they ignore the benefits, including much greater possi- ble reductions in risks to individuals, that could be achieved by using these resources for some other purpose. The foregone benefits that could have been obtained by using funds in an alternative way am what economists call the "opportunity cost" of a regulation. As a result, in part of ignoring opportimity costs, the aggregate costs of federal regulation now are estimated somewhere between $881 billion and $1.656 trillion annually. I This burden, which now rivals the tax burden, imposes costs of between $9,388 and $17,134 per household. But these huge figures mask the more important costs of federal regulation-more benefits, including far greater possible reductions in risk, that could be achieved through other uses of that money. FYI #1 IM

To understand the practical meaning of opportunity cost, consider the federal standards that re- quire automobile manufacturers to make their cars more fuel-efficient. Proponents of these Corpo- rate Average Fuel Efficiency, or "CAFE," standards say that greater fuel efficiency reduces health risks for Americans by cutting auto pollution. But the mandate to raise fuel efficiency standards en- courages automakers to produce lighter cars. Unfortunately for drivers and passengers, lighter cars are also less able to withstand crashes, leading to an increase in the number of highway deaths. 2 Hence the opportunity cost of saving some lives through this form of pollution reduction is the- much larger-number of lives lost in additional crash fatalities. Taking opportunity costs into account reveals that many regulations have large unintended conse- quences. Some are far less obvious than fuel efficiency standards, but just as real to those affected. For example, in 1992 the Occupational Safety and Health Administration (OSHA) proposed safety standards to protect workers from hazardous substances, a seemingly laudable action. But, after re- view, the Office of Management and Budget's Office of Information and Regulatory Affairs (OIRA) concluded that the proposed standards actually would cost more lives than they would save. The reason? OIRA noted that a recent D.C. Circuit Court of Appeals opinion cited statistical analy- sis that found one premature death was caused by each $7.5 million of imposed costs. This is due to the lowering of overall worker living standards through pay and job losses, which is known to in- crease mortality rates. Thus, the OSHA regulation in reality would result in an estimated eight to fourteen more deaths per year than the rules would save. 3 Relying on statistics developed by OIRA staff, 4 the opportunity cost of other regulations can be quantified. 5 For instance, in an effort to avert possible premature deaths due to active uranium mill tailings, which are toxic wastes left over from mining operations, the federal government mandated that mill tailings be covered or removed. 6 That action imposed an estimated $35 million annual cost on the nation and yet results in reduced risk of death b@ less than one person. In fact, there is only a 49 percent chance that even one death will be averted. Thus, the total economic cost of preventing one premature death would be $71.6 million. Although advocates of the uranium mill tailings man- dates would argue human life is worth any price, even $71.6 million, they miss a crucial point. The point is that using the same funds in alternative ways could save many more lives, such as, to take a simple example, constructing more prison space to incarcerate repeat violent criminals. According to OIRA, as noted earlier, the reduction ineconomic activity due to the burden of regu- lation itself actually increases risk because living standards are reduced and thus mortality rates are raised. This increased mortality, however, reflects only the heightened risk caused by the economic effects of the regulations, and is separate from reduced risks that could be achieved by devoting expenditures to other uses. OIRA estimates that each $7.5 million increase in the regulatory burden to regulate uranium mill tailings, for instance, leads on average to one death from these economic causes. Thus, incurring $7 i.6 million in costs over several years might save one life due to the regu- lation, but an estimated 10 other Americans will die becauge'of the depressing effect on living stand- ards. Thus, in reality, there will be a net loss of nine lives. Even without taking into account the lives lost because of economic impacts, the more direct op- portunity costs of a regulation such as the uranium mill tailings mandate can be enormous. If, for in- stance, $71.6 million was devoted to additional colo-rectal cancer blood tests, which saves an estimated one life for every $24,964 spent, approximately 2,858 lives could be saved overall. Likewise, under the Environmental Protection Agency's hazardous waste disposal ban, only one premature death would be averted for each $4.2 billion of costs incurred. Alternatively these same resources could be used to keep 47,890 dangerous criminals in prison for an additional three and one-half years.8 Since criminals kept in jail are not able to commit crimes, the number of charges that would otherwise be brought against these criminals would be reduced by: 22,680 for violent crimes; 1,035 for homicides; 586 for rapes; 1,191 for other sexual assaults; 658 for kidnappings; and 7,711 for robberies. 9 Taking opportunity costs into account should be the first step in reforming the regulatory process. Policy makers must understand that federal risk regulation involves important trade-offs, or opportu- nity costs, that should not be ignored. Regulatory policy in the United States has been distorted be- cause lawmakers typically have looked at only half of the equation. To look at the other half they must ask: Would the regulation actually endanger more lives? Would the same spending save more lives if used in other ways? Is the regulation a wise use of economic resources? Since even well-crafted regulations can preclude using another mechanism that will save more lives, a missed opportunity can mean unnecessary deaths. Moreover, regulations frequently not only fail to save lives, but actually increase the death toll. Unfortunately, too many lawmakers ignore the fact that several alternatives usually exist to achieve a political objective. Crude command-and-con- trol regulations rarely are the best way to accomplish such goals. They are difficult to enforce, costly to administer, and often fail to do the job, thus inviting further regulation. A clean environ- ment, safe workplaces, and healthier populace are all admirable goals for public policy. Yet no soci- ety has unlimited resources to fund every available methods of reducing risks. Thus, the trade-offs must be understood and made.

INSTEAD OF SPENDING $491901,400,,000 TO AVERT ONE DEATH

UNDER THE HAZARDOUS WASTE DISPOSAL BAN...

47,890 criminals could be kept in jail for 3 112 years.

This would reduce arrest charges over that period by:

22,680 violent crimes 7,711 robberies

1,035 homicides 586 rapes

11 191 other 658 kidnappings sexual assaults

INSTEAD OF SPENDING $11990001,0009000* TO AVERT ONE DEATH UNDER THE FORMALDEHYDE OCCUPATIONAL EXPOSURE LIMIT...

331 new drugs could be

X.X4 developed and brought to market.

Note. Cost figures are based on amount necessary to avert one death, not actual program costs. * 1992 dollars; all other figures in 1990 dollars. I Figures shown are based on the number of arrest charges brought against released prisoners who were re-arrested within 3-4 years, in a Department of justice study. The number of convictions stemming from these charges is not available. See: Bureau of justice Statistics, U.S. Department of justice, Recidivism of Prisoners Released in 1983, April, 1989, p. 1 2 Based upon a drug development cost of $359 million per drug in 1990. Source: Pharmaceutical Manufacturers Association.

INSTEAD OF SPENDING $1689200,000 TO AVERT ONE DEATH UNDER THE BENZENE NESHAP STANDARD...

3,064 police officers could be placed on the street.

INSTEAD OF SPENDING $929069t7OO9OOO TO AVERT ONE DEATH UNDER THE ATRAZINE/ALACHLOR DRINKING WATER STANDARD...

Cancer research funding at the National Cancer Institute could be quadrupled for the next 12 years.4

INSTEAD OF SPENDING $653,000,000 TO AVERT ONE DEATH UNDER THE 1,2-DICHLOROPROPANE WATER STANDARD...

4,353 new firetrucks could be purchased: 10 per congressional 5 district.

About the Author

Show references in this report

1 Willimn G. Laffer M and Nancy A. Bard, -George Bush's Hidden Tax: The Explosion in Regulation:'Heritage Foundation Backgrounder No. 905, July 10, 1992.

2 Robert W. Crandall and John D. Graham, "New Fuel-Economy Standards: The Politics of Energy," The American Enterprise, March/April 199 1, p. 68; William G. Laffer 111, "Auto CAFE Standards: Unsafe and Unwise at Any Level," Heritage Foundation Backgrounder No. 825, April 19, 199 1; John Shanahan, "How to Help the Environment without Destroying Jobs," Heritage Foundation Memo to President-Elect Clinton No. 14, January 19, 1993.

3 See Frank Swoboda, "OMB's Logic: Less Protection Saves Lives," The Washington Post, March 17, 1992, p. A 15; Daniel J. Mitchell, "Me Deadly Impact of Federal Regulations," Journal of Regulation and Social Costs, Vol. 2, No. 2, June 1992, p. 45-56.

4 See Regulatory Program of the United States Government, April 1, 1991 - March 31, 1992, Office of Management and Budget, p. 12; Randall Lutter and John F. Morrall III, "Health-Health Analysis: A New Way to Evaluate Health and Safety Regulation," Journal of Risk and Uncertainty, Vol. 7 (1993), p. 295-318.

5 See the accompanying charts based on calculations by the authors.

6 Note that the government's methodology to determine the risk of is purposely overstated to ensure absolutely that the estimate is not too low. Tlus the actual probable risk is typically only a fraction of official government projections.

7 To be more precise, 0.49 premature deaths will be averted.

8 Based upon $25,000/year cost to incarcerate one prisoner. Note that this figure represents the cost to incarcerate a federal prisoner; the cost to incarcerate state prisoners will vary by state. Figures from Morgan 0. Reynolds, "Crime Pays, But So Does Imprisonment," NCPA Policy Report No. 149, National Center for Policy Analysis, March 1990, p. 20; also see: William P. Barr,"Crime, Poverty, and the Family," Heritage Lecture No. 401, July 29,1992,p.4.

9 See: Bureau of Justice Statistics, U.S. Department of Justice, Recidivism of Prisoners Released in 1983, April, 1989, p. 1.

Figures are based on the number of arrest charges brought against released prisoners who were re-arrested within three to four years, according to the study. 71be number of convictions stemming from these changes is not available.

3 Based upon a per officer swom operating expenditure of $54,900 for fiscal year 1990. Source: Bureau of justice Statistics, Law Enforcement and Pretrial Statistics Unit.

4 Based upon 1993 funding level of $1,978,420,000.

Source: Budget of the United States Govemment, Fiscal Year 1994. 4401@5 Based upon an average cost per new firetruck of $ 150,000.

Source: Fire Apparatus Manufacturers Association.

6 This figure represents the amount of societal resources that would have to be dedicated for the purposes outlined in the tables.

7 For cost per life saved estimates for cancer screening and medical care programs. See: Bernard L Cohen, "Reducing the Hazards of Nuclear Power Insanity in Action," Physics and Society; Vol. 16, No. 3, Guly 1987), p. 2