Tuesday, July 19, 2005

More BCA Debate

E.J. Mishan in Introduction to Normative Economics explains what I always took to be the position of economists with respect to policy analysis. That is, economists, as economists, do not argue for or against specific value judgments that define the appropriate role or purpose of government. Rather, the role of the economist is to study the economic implications of alternative value judgments. While I don't think I hear economists speaking in such terms very often any more, I still think this is the best conceptual view of the role of economists in public policy discussion. I would add that I think it is the best conceptual view of the role of any social scientist in terms of public policy discussions.

For this perspective to work and make sense, I think it is important for the economist (or other social scientist) to be very explicit about the value judgments being studied. In my view, economists are pretty good at doing this in general. After all, nearly every undergraduate textbook on a microeconomic policy topic discusses efficiency and market failure. Economists precisely define efficiency as pareto optimality, and they are very up-front about the fact that their study of efficiency and public policy does not question individual preferences. The benefit-cost analysis that is developed by most economists is an effort to provide empirical information about which public policies are likely to be efficient and which are likely to be inefficient. If those in government want to choose efficient policies, if they like to define the role of government as efficiency and correcting market failure, then they should be very interested in the information provided by BCA.

On the other hand, if our policy makers think another normative framework is important to defining the appropriate role of government and in defining the appropriate use of government's coercive power, then the information provided by BCA should be of little interest.

I mention this because I think the discussion of BCA over at Environmental Economics Blog seems to be missing this. Specifically, my guess is that those who have written critically about BCA in that discussion simply do not think government's role should be to correct market failure or to pursue an economically efficient allocation of resources. Unfortunately, it seems the best I can do is guess because the critics have not made their value judgments clear, and certainly they have not made their value judgments as clear and explicit as economists do.

Consequently, I suggest the discussion has made little progress, and I'm not sure there is much common ground. For one thing, I hear in the critics an unwillingness to accept the preferences of individuals, and instead I hear a willingness to judge some preferences as better than others. But, again, I'm not quite sure because the discussion seems to me to stay well away from the real issue and fundamental difference between those who find BCA useful and those who do not.

Those who find BCA useful are exploring the implications of government policy alternatives under the normative assumption that the role of government is to correct market failure. Those who are critical of BCA do not want the economic efficiency normative framework to define the appropriate role and purpose of government. I suggest that when we discuss policy alternatives and the tools to evaluate policy alternatives, it is of utmost importance that we be explicit about our normative framework for defining the appropriate role/purpose of government. When we don't, I think we talk with each other in very unproductive ways.

I will offer what I think is one illustration of unproductive discussion. Ackerman & Heinzerling have an article titled "Pricing the Priceless: Cost Benefit Analysis of Environmental Protection" (150 U. Pa. L. Rev. 1553, 2001-2002) in which they write:
". . . Cost-benefit analysis differs, however, from other analytical approaches in the following respect: it demands that the advantages and disadvantages of a regulatory policy be reduced, as far as possible, to numbers, and then further reduced to dollars and cents. In this feature of cost-benefit analysis lies its doom. Indeed, looking closely at the products of this pricing scheme makes it seem not only a little cold, but a little crazy as well.

Consider the following examples, which we are not making up. They are not the work of a lunatic fringe, but, on the contrary, they reflect the work products of some of the most influential and reputable of today's cost-benefit practitioners. We are not sure whether to laugh or cry; we find it impossible to treat these studies as serious contributions to a rational discussion."

The paper begins this way. This beginning makes it clear, unfortunately, that the critique to follow has little relevance to the work of economists in developing BCA. The reason it has little relevance is that the discussion does not understand the normative framework upon which BCA is built. Economists are NOT estimating prices when they develop a BCA. What economists are doing is attempting to estimate changes in individual well-being that will result from the allocative changes in the economy due to government choosing the action or policy that is being studied. We want to estimate changes in the well-being of all the individuals who will be affected by the allocative changes in the economy because this is fundamental to the normative framework we generally use to evaluate public policy. We need estimates of changes in individual well-being to be able to identify which government actions we expect to be consistent with economic efficiency and which we expect will not be. Prices DO NOT tell us such information. We are not estimating prices, we are estimating a term we call "compensating variation." It seems to me of little value to offer a critique of BCA if the critique is not founded upon the very normative framework upon which BCA relies. It is difficult to treat the BCA critiques "as serious contributions to a rational discussion" if they do not accurately describe what economists are up to with their BCA.

The discussion over at Environmental Economics Blog about BCA seems to me to talk right past the fundamental differences. Economists are comfortable with the normative idea that government should correct market failure. I'm pretty sure those who are critical of BCA are not comfortable with that normative foundation for the purpose of government. I think a better and more useful conversation would take place if both sides of the debate made their value judgments regarding the role of government very explicit. Then the debate about evaluating alternative environmental public policies could, perhaps, be over the bottom line issues, i.e., what is the appropriate role of government and its coercive force in our lives?

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