Politics and cost-benefit analysis
Brian Rudman in the Herald, discusses the cost-benefit analyses of major infrastructure investment that are required by Treasury guidelines:
I’ve come to the conclusion that the main beneficiaries of the big events politicians subsidise at our expense are the cost-benefit analysts hired to justify the expenditure in the first place.
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The cynical take on the process is that the whole cost-benefit palaver was introduced by politicians to put a veneer of neutrality on the decision-making on pet projects.
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That doesn’t worry me that much [but if] politicians … are going to support certain events and projects, despite the evidence of the cost-benefit analyses, why is so much public money wasted commissioning these expensive reports?
I’m a bit torn on the subject of CBAs of major projects. On the one hand, I think they should be extremely useful for informing political decisions. On the other hand, there’s plenty of evidence that politicians don’t pay any attention to them.
In terms of informing political decisions, I think Rudman’s rather missed the point. The choice is not between treating the CBA as binding gospel or eliminating altogether. The CBA serves as a complete description of the trade-offs that are required and informs the politician’s decision. In that respect, the report is potentially very useful and can significantly improve the quality of the final policy.
CBAs also produce a benefit-cost ratio that purports to give a criterion for the overall worth of the project. While useful, it should be treated as the normative judgement that it is. As Reinhardt reminds us
The problem with welfare analysis is not so much that ethical dimensions typically enter into it, but that economists pretend that is not so. They do so by justifying their normative dicta with appeal to the seemly scientific but actually value-laden concept of efficiency.
The benefit-cost ratio of a CBA is laden with normative judgements and can only be the final arbiter of a project’s value if one agrees with those values. As a test, ask yourself whether you agree with the following statement: “When Jack gains $10 and Jill loses $5 that is unambiguously good”. For most people that is not true. If we were to take $5 from a poor family and give $10 to John Key then that might not be an ethically good thing. Yet a CBA treats that statement as always true. That is why the CBA should only inform the politicians’ decision, rather than make it for them. They should be making their own normative judgements on the basis of the facts presented in the report, rather than letting the CBA do both the science and the moralising.
Of course, in order to make judgements, they need all of the relevant facts in front of them. That is where the reports commissioned for major projects are invaluable: they collate vast quantities of information and condense it into the few facts that politicians need to make an informed decision. Without the reports, politicians would be simply guessing at the effect that their proposed policy might have. You might think of the CBA as analogous to an AA inspection on a car: it can tell you which bits are broken but it can’t tell you whether you should buy it. Much as a car has value to you over and above its mechanical fitness, policies can have social value that isn’t necessarily reflected in a CBA.
Unfortunately, the evidence shows that CBAs are often mere window-dressing for the policy decisions that have already been made. That is where Rudman’s argument has more traction. If politicians are not using the reports to inform their decisions then is it worth commissioning them in the first place? The work done by most scholars in the field points to the remedy being better use of the CBA and greater understanding of its usefulness, rather than its elimination. A starting point is to improve the quality of the analysis. Rudman’s examples show that quite clearly: when the government asks for a CBA to be re-done with vastly different conclusions then it is hard to trust the analysis. If the politicians feel they can’t trust it then they are unlikely to rely on it. In New Zealand the government is pushing hard to improve the quality of policy advice, so perhaps it will one day become more than a handy rock to throw at the opposition!