July 23, 2015

'Health-Health' Analysis in Policy Decisions

Patrick McLaughlin

Director of Policy Analytics
Summary

Some recent regulatory milestones have been crossed. First, we've reached the five-year anniversary of Dodd-Frank. I recently published some charts showing that Dodd-Frank may be the biggest law ever, if the size is measured by how much new regulatory text it spawns. No one disputes this fact: Dodd-Frank created a massive surge in regulations, and it did so in a relatively short time span.

Some recent regulatory milestones have been crossed. First, we've reached the five-year anniversary of Dodd-Frank. I recently published some charts showing that Dodd-Frank may be the biggest law ever, if the size is measured by how much new regulatory text it spawns. No one disputes this fact: Dodd-Frank created a massive surge in regulations, and it did so in a relatively short time span.

Second, less than a month ago, the Supreme Court ruled in Michigan v. EPA that the Environmental Protection Agency (EPA) — and perhaps implicitly, all regulatory agencies — must consider economic costs prior to deciding whether to promulgate a regulation. Some regulatory economists marked this moment as the triumph of cost-benefit analysis as a method to inform and improve regulation.

It will be interesting to see which independent agencies, like the Securities and Exchange Commission (SEC), Futures Trading Commission and the Consumer Financial Protection Bureau will begin performing some degree of analysis prior to making a rule. Currently, the independent agencies are not — and cannot be — obligated by the president to perform such a cost-benefit analysis. Statutory language, created by Congress, does require that the SEC perform some degree of analysis, but that is of a different variety from the type that every president since Reagan has required of regulatory agencies.

Cost-benefit analyses of regulations implicitly recognize that regulations can create both winners and losers. In fact, sometimes they're the same person: An individual may be both positively and negatively affected by the same rule. If a regulation will, for example, deliver some sort of health benefit — say, reduction of asthma rates induced by ambient pollutants — while simultaneously increasing the prices of energy, those higher energy prices might negatively affect the same people who are receiving the benefits. And if you take this analysis to its logical conclusion, those higher energy prices will offset, at least to some degree, the positive health benefits created by the regulation.

To be clear: I don't mean that the higher energy prices will make consumers worse off in some abstract way. I mean, very specifically, that the higher energy prices could have a negative effect on health, and that that at least could partially offset the positive health benefits. After all, if some essential goods and services cost more, budget-constrained consumers will necessarily have less to spend on all other goods — some of which are goods that improve health, such as gym memberships (when they're used) and new automobile tires when old treads are worn thin.

These are examples of risk tradeoffs. Risk tradeoffs occur when policy interventions — in particular, health, environmental, safety and security regulations — which are intended to address risk in one area increase a risk elsewhere. One important form of risk tradeoff is the health-health tradeoff, which derives from the health-wealth relationship. A former Office of Information and Regulatory Affairs administrator aptly defined this tradeoff nearly two decades ago, writing that health-health tradeoffs occur when "the diminution of one health risk simultaneously increases another health risk."

Life expectancy and wealth are positively correlated. Several studies have demonstrated that the correlation is not mere happenstance; wealth is a causal determinant of health (although it is probably also true that health is a determinant of wealth — the causality goes in both directions). A relevant corollary to the "wealthier is healthier" paradigm is the "richer is safer" paradigm. Wealthier societies can invest in more medical research, systems designed to improve societal resilience to health-threatening emergencies such as natural disasters, and develop an infrastructure that permits individuals to choose to use their disposable income on health-improving or risk-reducing goods. The flip side of that coin is that reductions in disposable income induced by government interventions can lead to reductions in expenditures that reduce health and safety risks.

This is a potentially useful insight that can inform policy decisions of all stripes, but especially those designed to address issues such as health, safety, and the environment. In fact, there is already a name and precedent for this type of analysis: health-health analysis. In the early 1990s, the Office of Management and Budget considered the application of health-health analysis in estimating the effects of some proposed environmental and safety regulations. Around the time, scholars pointed out that, although these regulations are intended to improve health or reduce risk, the resulting costs to employers from complying may be passed on to workers in the form of layoffs, reduced working hours or lower wages. If low income is detrimental to one's health, then the beneficial health effects of environmental regulation may be offset.

To what degree are they offset? That is a question that could be answered with analysis — specifically, with health-health analysis. A health-health analysis would ask the question: What sort of health benefits are created by this regulation, and to what degree are they offset by the reductions in health-related expenditures that lower incomes imply?

Regardless of specific numbers, the consideration of this sort of tradeoff — the tradeoff between regulatory costs and individuals' health — makes clear that some regulations (and the acts of Congress that induce their creation) may induce more health loss than health gains. They may not be common, but we won't really know until we start methodically considering how losses in income caused by regulatory compliance can affect the health of individuals.

Perhaps this sort of analysis could be considered as part of the cost-benefit analyses that agencies should engage in prior to regulating. Or, even better, perhaps this tradeoff could be considered in Congress, before the creation of massive laws such as Dodd-Frank. All of those Dodd-Frank-induced regulations created costs, and the "richer is safer" paradigm indicates that those costs can have real, negative effects on health. Are they at least outweighed by the regulations' benefits?