How to Cheat with Cost-Benefit Analysis: Double Count the Benefits
Because my economics courses focus on public policy, I often deal with benefit-cost analyses (BCA) in them. While little discussed, the central idea is simply to identify and include all the relevant benefits and costs of a decision, do our best to estimate their values, then choose the option that provides the greatest net benefits. Hardly a radical idea. It can be useful in disciplining our thinking to be more consistent. Benjamin Franklin employed a version of it.
The problem is that in disciplining our thinking and identifying the logical principles to be applied to make better decisions, BCA also teaches those determined to mislead others about public policies how to do that better, because knowing how to do it “right” also provides a template for how to be wrong in someone’s desired direction.
In fact, BCA today may be more helpful to such motivated mistakes than to appropriate application. The term itself suggests that it is difficult, technically complicated, and uninteresting, so the prospect of work and boredom deters careful thinking by those not specialists in the field. And that is reinforced by the imagery that those doing such analyses are doing so as dispassionate scientists, so that their conclusions can be trusted. Very few people, as a result, pay enough attention to act as an effective constraint on abuses of the technique.
That is why I have extended my classroom BCA discussions to include various ways to cheat on the correct principles. Not so that they can cheat better (in fact, I threaten them with signing a “superhero oath” on their final exams, where they promise they will only use what they know for good), but so they can better detect others’ cheats.
Our discussion starts with the correct principles on what should and should not be included (and why) and how magnitudes might be estimated in various cases. But then we detour to the incentives of those doing analyses for public consumption. Those who are trying to “sell” a policy proposal will be tempted to overstate benefits and understate costs. Those they employ who fear that they “won’t work in this town again” if they don’t get the answers politicians want to justify their proposals face the same incentives. On the other hand, opponents will be tempted to overstate costs and understate benefits.
Knowing which direction someone has an incentive to cheat, then, informs us of which red flags to look for in evaluating their claims. It tells us which mistakes we need to be most alert to. Those warnings are particularly useful because those misusing BCA
Article from Mises Wire