The cost-benefit of budget cutting

UNDER INTENSE pressure from its political base, the Bush administration is at last taking budget cutting seriously. But to make the most effective use of its knife, it should apply the same tool to controlling spending growth that it has used with skill in controlling the growth of regulation: cost-benefit analysis.

This administration has understood better than any predecessor the trade-offs involved in government regulation. By carefully weighing the costs and benefits of regulatory actions, it has dramatically increased their effectiveness. According to the Office of Management and Budget, the average annual net dollar value of benefits from federal regulation for 2001 to 2004 was double the average during the previous eight years. The growth in the cost of federal regulation has slowed by 68% when compared to the average annual growth rate during the previous three administrations.

This same level of economic scrutiny would go a long way toward focusing budget control and making it more effective. The administration has made a first effort by calling for zeroing-out 91 programs that were not achieving their objectives or that were no longer needed. But that’s different from cutting programs that may be working, though not enough to justify their costs.

Here’s an example from the regulatory world of what cost-benefit analysis can yield. When the government imposes a health or safety regulation, it in effect mandates that society (meaning consumers, private business, nonprofit organizations, government) spend money on something that it would not spend on otherwise. The justification is that lives will be saved.

Economists have measured the cumulative annual cost of individual regulations as well as the number of lives that particular regulations save annually. By dividing costs by lives saved, they have come up with the price of saving a “statistical� life. In the 1990s, they found that regulations covering asbestos, arsenic, radioactive substances, formaldehyde and more were costing society hundreds of millions of dollars -- and in some cases, billions -- per “statistical� life saved.

All well and good, except that, during those same years, Harvard economist Kip Viscusi noticed a statistical link between direct and mandated government spending and mortality. His studies found that for each increase of $15 million in the government’s cost to society, about one “statistical� life was lost. Another way of putting this is that the world is full of trade-offs.

So when trade-offs are taken into account, it looks as though some regulations may well have been costing more lives than they were saving.

Critics on the left will object to employing cost-benefit analysis in the budget process for the same reason they object to using it in evaluating environmental, health and safety rules. They see it as a sophisticated vehicle to say “no,� a device for business-oriented economists to justify cuts in social spending. But the fact is that there are areas in which cost-benefit analysis may well say to spend more, rather than less.

For example, the benefits of medical research -- whether funded by government or industry -- have been long established. The famous Framingham study followed a group of more than 5,000 people for nearly six decades. It was instrumental in identifying the risk factors for heart disease -- high blood cholesterol, smoking, hypertension, lack of exercise. Its direct benefits -- such as lower medical costs and fewer lost work hours -- between 1970 and 1990 have been estimated at more than $400 billion annually.

Its indirect benefits may be greater. University of Chicago economists Kevin Murphy and Robert Topel have found that progress against heart disease, through increasing life spans, is worth about $1.1 trillion per year to the nation. Much of that progress has almost certainly come as a result of findings and clues that emerged from Framingham.

The current federal budget proposes to zero-out a study modeled on Framingham that focuses on children. Called the National Children’s Study, it is designed to follow 100,000 children in 105 communities from each mother’s early pregnancy to the child’s 21st birthday. The intent is to develop data for pinpointing causes of autism, asthma, obesity, heart disease, schizophrenia and other childhood health and safety hazards. If the study proves fruitful, its findings could lead not just to development of better medicines but better health practices, a major source of Framingham’s benefits.

The potential payoff suggests that the administration should take a second look at the program. Employing conservative estimates of the effects of the National Children’s Study on 10 adverse health outcomes, an independent, government-funded analysis found that the return for each dollar invested could be as much as $30 by 2030.

The point here is not to favor a particular program but to point out that cost-benefit analysis is a tool that can help decision-makers. Many federal programs should be cut -- on their merits. But others make us a stronger, healthier, freer nation and return more to society than they cost. The rule for budget cutters is simple: Our government should not only live within its means but give us true value for our money.