What Can Economics Really Have to Say About COVID-19 Policies?

Recently, economists and other policy analysts have called for the use of benefit-cost analysis to assess existing and proposed public policies to address the novel coronavirus pandemic, the incidence of COVID-19, and the deaths that may follow.  These calls for a benefit-cost perspective have unfortunately generated both confusion and controversy; and – most important – are unlikely to be persuasive to key decision makers.  But ignoring economics when considering alternative policy responses to the pandemic would be a mistake.

Fortunately, a different type of economic analysis is available, which is much more likely to be acceptable to policy makers, and would enable government authorities to identify policy instruments that minimize costs to achieve given objectives.  I’m referring to cost-effectiveness analysis, which differs in important ways from the benefit-cost analysis now being recommended by my fellow economists, as well as others.

First, I should note that in principle, sensible arguments can and have been made in favor of the use of benefit-cost analysis.  I endorse the use of such analysis to assess the wisdom (efficiency) of a wide range of government policies (through what is known as Regulatory Impact Analysis in the U.S. government), and I have been teaching these methods, under the rubric of “net present value analysis,” in my environmental economics course at Harvard for some 30 years.  This type of analysis facilitates the identification of efficient policies that generate the greatest net benefits, that is, benefits minus costs.

So, to be perfectly clear, I enthusiastically endorse the work being carried out by economists and others to execute such benefit-cost analyses of COVID-19 policies.  My concern, however, is that in the current context, policy makers are likely to be highly resistant to embracing this type of analysis for assessing existing and potential pandemic responses.  Rather than throwing out the (economic analysis) baby with the (benefit-cost) bath water, I am suggesting that other forms of economic analysis — namely cost-effectiveness analysis — can be useful, and the results of such analysis should be seriously considered by policy makers.

The problem is that executing benefit-cost analysis requires evaluating not only the costs, but also the benefits of policies in economic terms.  In the COVID-19 context, that is difficult enough on the cost side because of the great uncertainties involved, but at least those costs – largely the loss of GDP due to slowdown in economic activity – are fundamentally financial.

The benefit side – primarily the reduced risk of mortality – requires estimates of the value of a statistical life (VSL), which typically draw upon empirical evidence from markets in which people receive higher wages for taking on more risky jobs (in sectors such as mining, forestry, and commercial fishing).  The concept and use of VSL – estimated by the U.S. Environmental Protection Agency to be about $10 million per life saved – is well accepted by economists, but is highly controversial among nearly everyone else.

For these reasons, politicians are reluctant, to say the least, to adopt the benefit-cost paradigm to help them formulate better policies to address the current pandemic.  But much of the confusion and nearly all of the controversy could be avoided by employing cost-effectiveness analysis, in which economics is brought to bear only on the cost-side of an issue.

I need not tell readers of this blog that this is an approach that is frequently employed in the environmental realm to examine alternative policies that would bring about a given degree of environmental benefits, that is, a given reduction in environmental damages.  For example, in the case of carbon dioxide (CO2) emissions, a variety of analyses have found that cost-effective approaches would cost just 25% of what the costs would be with some other approaches.

In the current, COVID-19 context, take some policy objective as given (presumably not a reckless one such as reopening “large sections of the country” by Easter Sunday with “packed churches,” as President Trump had recently promised).  Rather, a policy objective to be used in such analysis might be a specified maximum mortality number, a specified mortality risk reduction, or – more simply – a specified case transmission rate.  Then, the economic costs of achieving that objective by using various alternative policy instruments can be estimated and compared.  At a minimum, these policy instruments would include – among others – the current approach of social distancing of nearly the entire population to suppress the curve of new incidence; and a targeted approach to reduce transmission – more testing, more contact tracing, and more and better facilities for those who need to be separated from others or treated.

For example, one recent study estimated that the current practice of widespread social distancing may be expected to save some 1.2 million lives at an economic cost of $6.8 trillion.  Without resorting to trying to value human lives, the question is “simply” how much would it cost with an alternative, more targeted policy to save a similar number of lives?

By the way, the uncertainty that plagues various aspects of these and other policy approaches can be taken into account in the cost-effectiveness calculations.  Likewise, constraints – whether physical (such as limited availability of ventilators or cotton swabs), economic, institutional, or political – can all be included in the analysis.  In my work as an environmental economist (focused on climate change policies), we do this regularly.  My professional cousins – health economists, principally in schools of public health – are equally or more familiar with these approaches, and are well equipped to make the cost comparisons.

In this way, without the confusion and controversy that arises with trying to quantify the economic benefits of mortality risk reduction, economic analysis can still play an exceptionally important role by identifying policies through cost-effectiveness analysis that can help achieve sensible objectives with as little sacrifice as possible of the many other things we value.

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Will the COVID-19 Pandemic Bring About Long-Term Societal Changes?

We have just released the newest episode of our podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.”  In this latest episode, I engage in a conversation with Scott Barrett, who – more than any other environmental economist I can name – is exceptionally well equipped, based on his research and experience, to reflect intelligently on the coronavirus pandemic, and public policies to address it.

Scott is the Lenfest-Earth Institute Professor of Natural Resource Economics at Columbia University, where he also serves as Vice Dean of the School of International and Public Affairs.  Readers of this blog will recognize Scott as one of the world’s leading authorities analyzing alternative approaches to addressing the threat of climate change through international treaties, but he has also written for more than a decade on an economic perspective on global infectious disease policy.

In addition to his scholarly work, Scott has served as an advisor to many international organizations, including the European Commission, the OECD, the World Bank, and the United Nations, and he and I worked together when we were Lead Authors of the Second Assessment Report of the Intergovernmental Panel on Climate Change.  Also, I’m very pleased to say that Scott has been a frequent participant in our programs and projects at Harvard, and has been my co-author on a number of occasions.

Scott Barrett, Ph.D. Lenfest-Earth Institute Professor of Natural Resource Economics Columbia University, New York

In this podcast episode, Professor Barrett assesses the massive global efforts underway to address COVID-19 and the potential impacts of the pandemic on our lives in the future.  He describes how COVID-19 will be a “persistent challenge” and will result in “fundamental changes in society.”   Turning to domestic U.S. policy, he comments that “what really stands out is the failure of the United States to be prepared.  It’s clear that our inability to do testing has really compromised the health and well-being of Americans.”  Calling it “an equitable scourge,” Scott notes that the pandemic is affecting people from all levels of income and wealth, and that “it’s in everyone’s best interest that we control it.”

Comparing the COVID-19 outbreak to the Plague in the 14th century and the Spanish Flu of 1918-19, Scott remarks, “I think this is going to have profound changes that will last at least a generation.  It’s hard to know exactly what those changes will be, but there will be changes in terms of how we understand our relationship with each other, to technology, to science, to government, to international institutions.  I think all of this is in play right now.”

All of this and much more is found in the newest episode of “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” Listen to this latest discussion here, where, by the way, you can also find a complete transcript of our conversation.

My conversation with Scott Barrett is the eighth episode in the Environmental Insights series.  Previous episodes have featured conversations with:

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.

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Fifty Years of Policy Evolution under the Clean Air Act

Fifty years ago, in 1970, the first Earth Day was celebrated, the U.S. Environmental Protection Agency (EPA) was established, and the U.S. Clean Air Act was passed.  Much has transpired with air pollution policy in the United States since that time.  Given the current state of Federal clean air policy in this country, it may be helpful to reflect on these fifty years of policy evolution, which is what Richard Schmalensee (of the MIT Sloan School of Management) and I do in a new article that appears in the Journal of Economic Perspectives (Volume 33, Issue 4, Fall 2019), “Policy Evolution under the Clean Air Act.”  I hope this brief essay will stimulate you to download and read the full article.

Setting the Stage

In the article, Professor Schmalensee and I review and assess the evolution of air pollution control policy under the Clean Air Act with particular attention to the types of policy instruments used.  After outlining key provisions of the 1970 act and its main changes over time, we trace and assess the historical evolution of the policy instruments used by EPA in its clean air regulations.  This evolution was sometimes driven by the emergence of new air quality problems, sometimes by innovation and experimentation within EPA, and sometimes by changes in the Clean Air Act itself.

It is striking that until about 2000, EPA made increasing use of market-based instruments, enabled by major amendments to the Act in 1977 and 1990, which passed with overwhelming bipartisan support. In recent years, however, environmental policy has become a partisan battleground in the United States, and until now, it has not been possible to provide an effective response to climate change or to address other new and evolving air quality problems.

Policy Instruments Used under the Clean Air Act

Three major types of policy instruments have been employed under the authority of the Clean Air Act:  technology standards, which specify the equipment or process to be used for compliance; performance standards, which specify the maximum quantity of emissions or maximum atmospheric concentrations that are allowed; and emissions trading systems, either in the form of emissions-reduction credit (offset) systems or cap-and-trade. In addition, taxes have sometimes been employed, although their use under the Clean Air Act has been peripheral.

The Evolution of Air Quality Policy Instruments

Under the 1970 Clean Air Act, all federal air pollution regulation involved either technology standards or performance standards.  At that time, some environmental advocates argued that facilitating greater flexibility through tradable emission rights would inappropriately legitimize environmental degradation, while others questioned the very feasibility of such an approach.  But over time, as the Clean Air Act was amended and as its interpretation by EPA evolved, air pollution regulation evolved from sole reliance on conventional, command-and-control regulations to greater use of emissions trading.

In the article, we examine EPA’s early experiments with emissions trading in the 1970s, and then turn to the leaded gasoline phasedown in the 1980s, implemented via a tradable performance standard by the Reagan administration.  We also take a look at the U.S. approach to complying with the Montreal Protocol for stratospheric ozone protection, which involved both an excise tax and a trading system.

Next up in our review and assessment is the path-breaking sulfur dioxide allowance trading program, under the Clean Air Act amendments of 1990.  We also examine several regional programs that were executed under the authority of the Clean Air Act, including the Regional Clean Air Incentives Market (RECLAIM) in southern California, NOx trading in the eastern United States, and the NOx budget trading program.

To bring this up to date, Dick Schmalensee and I also examine climate change policies, including those of the Obama administration, as well as those of the current, Trump administration.

Conclusions

We conclude that the supporters of the 1970 Clean Air Act, who no doubt hoped that it would produce major environmental benefits, would be pleased that despite the fact that real U.S. GDP more than tripled between 1970 and 2017, aggregate emissions of the six criteria pollutants declined by 73 percent.

On the other hand, the original supporters of the 1970 Clean Air Act might be quite surprised by some aspects of the evolution of clean air regulation under the Act.  For example, it is difficult to imagine that any of the supporters of the 24-page 1970 Act would have predicted how complex air pollution regulation would become over the subsequent half century. And we suspect that the evolution toward more intensive use of market-based environmental policy would also have been a surprise to those involved in passage of the 1970 Clean Air Act.

However, those involved in the bipartisan passage of the 1970 Clean Air Act would likely be disappointed that environmental policy has become a partisan battleground. It has become impossible to amend the Clean Air Act or to pass other legislation to address climate change in a serious and economically sensible manner.

The Path Ahead

In the final part of the article, we note that an implication of these five decades of experience may be that policies to address climate change and other new environmental problems should be designed in ways that make them more acceptable in the real world of politics. This could mean, for example, giving greater attention to suboptimal, second-best designs of carbon-pricing regimes, such as by earmarking revenues from taxes or allowance auctions to finance additional climate mitigation, rather than optimizing the system via cuts in distortionary taxes, or using such revenues for fairness purposes, such as with lump-sum rebates or rebates targeted to low income and other particularly burdened constituencies.

Economists might also be more effective by sometimes working to catch up with the political world by examining better design of second-best non-pricing climate policy instruments, such as clean energy standards, subsidies for green technologies, and other approaches. At some point the politics may change, of course, which is why ongoing economic research on climate policy instruments of all kinds is important.

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