Costs, Benefits, and Distribiution
Whenever people say they’re “against” cost-benefit analysis as a method for evaluating policy initiatives or regulatory schemes, they appear to be talking in paradox. To say that you think something is a good idea more or less just means that you think the benefits of doing it would outweigh the costs of doing it. So pretty much any proposal for changing the way these things are evaluated amounts to a proposal to “mend but don’t end” the practice of cost-benefit analysis. That said, the current way of doing things has a number of very serious flaws. Mark Kleiman offers up three here but let me just site the most egregious one:
Formal benefit cost analysis counts everyone’s gains and losses equally. But common sense and the principle of diminishing marginal utility agree that a dollar’s worth of gain is more valuable to someone with few dollars than it is with someone with many. Obviously, taking $1 each from 900,000 poor people to give $1 million to a hedge-fund billionaire doesn’t reflect a social gain, but a formal benefit-cost analysis will show that it does: after all, the net benefit is $100,000. Thus gains and losses should be adjusted by (at least) dividing each gain or loss by the income or wealth of the person bearing it, so that a $20 gain to a family with an income of $20,000 weighs as a heavily as a $10,000 gain to a family with an income of $1 million.
This is a very common pathology of economic analysis. As Brad DeLong points out in this Socratic dialogue what passes for “value-neutral” positive economics in fact embeds some very strong and perverse ideas about value:
Agathon: “That means that the market system, in weighting utilities and adding them up, gives you a much lower utility than it gives Richard Cheney. In fact, if marginal utility of wealth is inversely proportional to the square of lifetime wealth, the market system gives Richard Cheney about 400 times as big a weight as it gives you.”
Glaukon: “That’s sick.”
Agathon: “And it gives Bill Gates a weight about 400,000,000 times as big a weight as it gives you.”
Glaukon: “That’s sicker.”
Agathon: “But it gives you about 40,000 times the weight it gives your average Bengali peasant, who thus has about 1/16,000,000,000,000 the amount of the market system’s concern as Bill Gates has. Will you teach that?”
And:
Glaukon: “We are value neutral economists! We don’t care about distribution! We care about efficiency!”
Agathon: “But claiming that you don’t care about distribution is implicitly saying that shifts in distribution are of no account–which can be true only if the social welfare function gives everybody a weight inversely proportional to their marginal utility of wealth.”
Glaukon: “You’re introducing politics into a value-neutral technocratic social science.”
Now as it happens it’s not 100 percent clear what alternative rule you should use. Which I think is one reason economists remain attracted to the “distribution doesn’t matter” point of view. It’s false to say that distribution doesn’t matter. But if you choose to believe that distribution doesn’t matter, that provides an unequivocal answer to how you ought to build distribution into your analysis. If you decide, accurately, that distribution does matter you’re left with the tough problem of specifying exactly how it matters. Much easier to just pretend it doesn’t matter, and then pretending that the fact that you’re pretending it doesn’t matter doesn’t matter either because it’s a “value-neutral” point-of-view. But it just isn’t/
57 Responses to “Costs, Benefits, and Distribiution”
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August 30th, 2009 at 11:43 am
Oddly enough, people with lots of money don’t generally support economists who argue against people having lots of money.
So economists who covet those endowed chairs act rationally and avoid the subject of maldistribution of wealth like the plague.
August 30th, 2009 at 11:43 am
Most Federal rulemakings by rulemaking agencies (NHTSA, FAA, EPA, TSA, Treasury, FRA, and many others) must be accompanied by a Regulatory Impact Analysis (RIA) that is basically a very detailed cost benefit analysis of the rule’s effects on regulated parties and the public. Criteria for this are laid out in Presidential Executive Order 12866 and OMB Circulars A-94 and A-4. For economically significant rules (annual impact greater than $100 M) the RIA must include a “regulatory flexibility analysis” that looks at impacts on small businesses and organizations in greater detail, with “small” defined using Small Business Administration standards by industry. RIAs also often include discussions of the distribution of impacts on specific population cohorts.
So distributional consequences are among the things considered in federal cost benefit work, although sometimes it’s a bit cookie cutter and pro forma.
August 30th, 2009 at 11:44 am
Another way of expressing decreasing marginal utility might help to convince the “value-neutral economist” who is only interested in aggregate social gains and losses. If you have $10 to give to someone, which would you choose? A millionaire or someone on food stamps? Which of them would be more likely to spend the whole $10 on a gallon of milk? If you say the millionaire (which I believe is the only sensible answer) then you have to recognize that the social value of that $10 is less in his hands than in the hands of the other. Accumulate enough of these transactions, and the price of milk goes up to $10, and we have inflation, or a diminished social utility of the dollar.
That is to say, the distinction between distributional concerns and value-neutral social utility is, in this case, false; the social utility properly speaking is an aggregation of the values as perceived by the subjects (which guides their behavior, which is what we really care about), not an aggregation of the face value of currency (which is arbitrary in meaningless absent its value in an exchange – a form of behavior).
August 30th, 2009 at 11:46 am
We have value-neutral economics for the same reason we have the hypothesis of perfect competition, which also rarely exists; as very much useful, and illustrative, abstractions that help us navigate beyond the incoherence of the details of daily life ad look at the fundamental nature of things.
August 30th, 2009 at 11:48 am
This is a nice follow-up to the discussion with Tyler Cowen about cost-benefit analysis of high-speed rail.
The relatively weak cost-benefit case for HSR did get me thinking about things not factored in — like distributional effects.
August 30th, 2009 at 11:52 am
I think the claim that “Whenever people say they’re “against” cost-benefit analysis as a method for evaluating policy initiatives or regulatory schemes, they appear to be talking in paradox” doesn’t stack up with the deconstruction of CBA.
I can think of several reasons why one could say that they are against CBA influencing particular decisions:
1. You might hold certain values that you hold higher than economic value. The abolition of slavery, for example, would have scored really badly on a standard CBA – it destroyed the largest source of capital in America in return for a benefit that largely depends on your belief in the equality of man. To the abolitionist, the equality of man is essentially infinite in value, hence “until every drop of blood drawn with the lash shall be paid by another drawn with the sword.” From this position, you might say that CBA is appropriate for say, railroad subsidies or the tariff, but not for abolition.
2. Given the nature of the ideological assumptions in economics as shown above, you might argue that CBA is not value-neutral science but a hidden exercise in ideology that you disagree with, hence not worth using as it exists, but to “reform” it for use would require the essential re-writing of economics to the extent that you’re really talking about using an entirely different system of analysis that shares nothing more than a name. Note that this still assumes some form of CBA is possible.
3. Certain policy ends might not be quantifiable. CBA is notoriously bad at estimating costs that involve human life because our beliefs about the value of human life start with it being beyond price, ditto sometimes with the environment or the arts, etc. Thus, one might conclude that there is no way to reform CBA to achieve its ends, namely a scientific method of balancing costs and benefits, and that you should revert to philosophy.
This is why, when we think about economics, it doesn’t really help to say “mend, not end,” because there are certain ideological questions that might not be mendable.
August 30th, 2009 at 11:57 am
We have value-neutral economics for the same reason we have the hypothesis of perfect competition
Because without fairy tales we’d go starkers and start killing things.
August 30th, 2009 at 11:58 am
“Now as it happens it’s not 100 percent clear what alternative rule you should use. ”
Yglesias asks what is the relationship between wealth distribution and yield curve.
They are related, a dip in the wealth curve shows up as an inversion in the yield curve. So if some essential consumer good is in short supply, then some rich person will lose a bunch of wealth and the consumer has a less elastic supply of that essential good.
August 30th, 2009 at 12:17 pm
If economics were a value-neutral social science, it wouldn’t evaluate outcomes at all: neither as better or worse, more rational or less, or in any other way. Economics is ideology through and through.
August 30th, 2009 at 12:21 pm
When people say they are “against cost benefits analysis”, they are usually against whatever kind of “cost/benefit” analysis is being done. It’s no great secret that “Costs” and “benefits” don’t really have set definitions. Any attempt to “set” a definition.
Slavery was still wrong before the Cotton Gin. Any chances Matt wound consider it as such, given the obvious results of any cost-benefit analsysis? How about committing Genocide against this continent’s native population?
You see Matt, there are these things called “Morals” and “Convictions”. I know folks in the upper-class think these ideas are quaint, but most people have them. Obviously, very few people HERE have them, but that’s because most of you are upper-class twits, and half of an Ivy league education means learning why morals are unscientific (If you want to pretend economics is a science) and should be discarded for the greater good!
At some point, it really should be pointed out that treating governance like it’s a subset of economics is to govern in a fully Amoral and often outright Immoral ways.
August 30th, 2009 at 12:32 pm
Plus, lets be honest, most of the “costs” associated with these analysis are purely, and often extremely, hypothetical. Every time we raise the minimum wage, these folks scream that unemployment will skyrocket too. When has that ever actually happened? How do we know all of their so-called “costs” don’t end up turning out like that? Bullshit they say to tip the scales in favor of conservatives. How often do they add up each additional opportunity cost, instead of just using the most profitable alternate use of resources? That’s always an easy trick to rick a “cost/benefits” analysis against a social program.
The reason we don’t trust them is that they are purely statistical. Anyone who has spent 5 minutes studying statistics knows full well how easy it is to lie with them. Economists are best known for their faulty predictions, usually on the negative impact of ANYTHING that might help the working or middle classes. It’s hard not to see Economicists as inherently dishonest people who exist solely to serve wealthy interests. Why on earth would we trust them or anything that came from them? They aren’t real scientists, and their work hasn’t exactly made life better for most of us.
August 30th, 2009 at 12:52 pm
Matt the philosophy major demonstrates (again) that all he knows about finance & economics could be written on the head of a pin with a dull crayon.
August 30th, 2009 at 12:57 pm
Any posting of Delong’s “non-socratic dialogue” must include the followup by Caplan.
http://econlog.econlib.org/archives/2009/06/how_markets_val.html
August 30th, 2009 at 12:59 pm
If economics were a value-neutral social science, it wouldn’t evaluate outcomes at all: neither as better or worse, more rational or less, or in any other way. Economics is ideology through and through.
Fascinating analysis.
August 30th, 2009 at 1:02 pm
Matt doesn’t know anything about academic Economics. That’s fine, but why does he keep writing posts about it?
August 30th, 2009 at 1:05 pm
Nobody seems to have mentioned what I think is the biggest problem with mathematical cost-benefit analysis, which is that it doesn’t actually give answers. To do such an analysis, you have to make numerous judgment calls: experts disagree about effect sizes, there’s not much data available on most relevant questions, etc. And the calls are so big that by making them differently you can get just about any result you want.
The implicit notion behind the kind of analysis is that we can take these policy questions out of the realm of politics and let professional experts tell us whether they’re a good idea or not using science. But the science just isn’t there, you’re just letting one group of people make judgment calls instead of another. And, on the whole, these economists tend to be a pretty conservative group. So giving them a veto on regulations seems like a bad idea.
August 30th, 2009 at 1:33 pm
The relatively weak cost-benefit case for HSR did get me thinking about things not factored in — like distributional effects.
It would be strongly regressive. Matt doesn’t care about that because his enthusiasm for HSR is that of a naive fanboy.
August 30th, 2009 at 1:44 pm
Slavery was still wrong before the Cotton Gin.
Err…slavery was more profitable after the cotton gin.
August 30th, 2009 at 1:58 pm
@17: why do you think HSR would have regressive distributional effects? I’m not saying you’re wrong, just saying that I’d be more persuaded if you offered a reason.
To me, this doesn’t seem like a question that is easily answered by intuition. I can think of a number of different classes of people likely to take HSR. The old (relatively wealthy), the young (less so), the carless (even less so), the urban (probably relatively wealthy on average). On the face of it, I don’t know where the center of gravity would fall; this seems to me like a question one needs actual quantitative evidence to answer.
August 30th, 2009 at 2:12 pm
Obviously the decisions reached on the basis of numerical economic models will ultimately depend on values assigned, but there is no reason these values have to be hard-wired in. That is, such values should be discretionary input so it can be seen how different values may lead to different results. Economists do not have to make decisions beforehand about these values, but actually most of them are so strongly motivated by ideology or group- or self-interest that they may not even recognize that they are variable.
August 30th, 2009 at 2:20 pm
@17, 19: Also, it matters a lot whether you think HSR will be competing with cars, or with short airplane trips. My money would be on the latter.
August 30th, 2009 at 2:22 pm
this seems to me like a question one needs actual quantitative evidence to answer
Quantitative evidence? You upper class, Ivy League twit. Have you no convictions?
August 30th, 2009 at 2:36 pm
If HSR is competing with short haul air trips, it will be regressive at least in so far as it will be most attractive to those already taking air trips in the dense markets where HSR makes sense, and these are high fare markets. That may be OK to the extent that it reduces the load on the aviation system which is overburdened in some places.
re: the stuff about assumptions of perfectly competitive markets, etc that economists make. I’m an economist and I’ve always viewed those restrictive assumptions, such as those that lie behind the first and second welfare theorems, as an indication of how unlikely such happy outcomes really are. Except at some of the freshwater universities, I think that’s how these relationships get taught, in graduate school anyway. But these full complexities are not taught in Econ 101 or “business education ” type courses so people come away with a very simplistic short hand version of how economists think. The assumptions do make it possible to do clean comparative statics analyses — the sorts of things that Krugman does in his blog pages all the time, for micro or macro purposes — that clarify the major forces driving an economic issue. But the devil is always in the details.
August 30th, 2009 at 2:48 pm
If I were to decide to abandon CBA because of potential skewing of results due to distributional effects operating on uneven marginal utility, I would lose the chance for the following win-win. Let us start with Matt’s hypothetical example: take $900K from the poor in order to give $1m to the rich. If I couple that with a distributional tax/payment that say takes $950K from those very same rich, and gives it to those very same poor, I can create a situation where both groups benefit, i.e. the policy combination is win-win. As long as we are politically capable of altering the distribution, we can choose to offset any negative distributional effects of any policy. Of course people of the “government is the problem -not the solution” persuasion, would be horrified at the ideological consequences of that. But, at least in theory, if we had a rational political policy making apparatus we could do so.
August 30th, 2009 at 2:49 pm
@17: why do you think HSR would have regressive distributional effects?
Because it would require huge public subsidies. Most of the costs would be paid by the general population, and most of the benefits would go to the small number of people who actually ride it. It would be even more regressive than regular Amtrak.
August 30th, 2009 at 2:52 pm
I second bdbd’s comments about Econ 101 versus what actual academic economics looks like (at the graduate level for example). I present the formal conditions of the First Fundamental theorem in my grad level classes (basically Adam Smith’s invisible hand) and the first question is always “Are there any markets where this actually holds?” One of the problems with economic discouse in this country is that we have a bunch of people who’ve learned the equivalent of Newton’s Laws trying to explain why Scanning tunneling microscopes couldn’t possibly exist.
As far as CBA goes, I don’t believe there is any agency that uses CBA as the only decision rule. It’s typically just one input into the policy-making process (and in general, people who support CBA argue that it should only be one input into the process and not the determining factor). For example, if the EPA is evaulating 10 different policies for reducing local air pollution, they don’t simply choose the one with the best CBA outcome. My beef with CBA as an environmental economist is that it tends to favor including easily measured market values (typically the costs or profits to industry) while excluding harder to measure non-market values (environmental benefits and costs and such). This tends to bias the outcomes of CBA towards development and laxer environmental regulation than might be warranted.
August 30th, 2009 at 3:09 pm
Why does the fact, if it is a fact, that it’s hard to measure environmental costs and benefits imply a bias towards regulation that is too lax? Environmental benefits might just as easily be overestimated as underestimated.
August 30th, 2009 at 3:14 pm
“Environmental benefits might just as easily be overestimated as underestimated.”
Because in too many cases they aren’t being included, period. It’s not that they’re being assigned some value X with some plus/minus uncertainty, they are being assigned a value of zero, zip, nada with certainty. At the same time, easier to measure market outcomes are included in the analysis and assigned a value of something greater than zero, hence the bias.
August 30th, 2009 at 3:17 pm
Good points. And also this:
By being couched in economic terms, cost-benefit analysis makes it very hard to take account of non-fungible values, e.g., human relationships, communities, natural beauty, spiritual values (if you’re into that sort of thing), etc. I think this is why a lot of people say they’re “against” cost-benefit analysis: they’re really against the creeping monetarization of all values, and they see the language of cost/benefits as instantiating that process.
August 30th, 2009 at 3:21 pm
If the benefits of environmental regulation “aren’t being included, period,” what’s the justification for the regulation?
August 30th, 2009 at 3:26 pm
I think this is why a lot of people say they’re “against” cost-benefit analysis: they’re really against the creeping monetarization of all values, and they see the language of cost/benefits as instantiating that process.
Then what alternative method do they (and you, if you’re one of them) propose for deciding whether a project is worth doing?
August 30th, 2009 at 3:30 pm
@25: You’re using “regressive” in a very unusual way. By your logic, any program with a small target audience is regressive. I.e., if I say, “I’m going to tax everyone 1 percent of income and give that money to the poorest 1 percent of the population” — well, that’s a regressive program inasmuch as a small population benefits at the expense of many others.
But that’s not at all how the word is normally used. It’s used to describe programs that cost the poor a greater share of their income than the rich. If HSR is funded by a progressive income tax, there’s no prima facie reason to assume that the funding mechanism *itself* will be regressive. To overcome the inherently progressive funding mechanism, you would have to show that the benefits of HSR would flow predominantly to the wealthy.
August 30th, 2009 at 3:30 pm
It’s not like the smart supporters of cost-benefit analysis for regulation haven’t thought about this question. The standard answer is that using the tax system for redistribution dominates using the regulatory or legal system for redistribution. So, if it is wealth maximizing, you raise overall surplus by giving Bill Gates surplus at the expense of poorer people, then you tax him to pay for stuff the poorer people value. As a result, everybody is better off. This claim does rely on some assumptions about what is observable and targetable by the tax system compared to the regulatory system. Basically, the tax system can see ability to pay or wealth more precisely than the regulatory system and is better at targeting redistribution.
See for instance Kaplow and Shavell, Why the legal system is less efficient than the income tax in redistributing income (1994).
August 30th, 2009 at 3:31 pm
One of the problems with economic discouse in this country is that we have a bunch of people who’ve learned the equivalent of Newton’s Laws trying to explain why Scanning tunneling microscopes couldn’t possibly exist.
And then came along quantum mechanics, and in fact there is simply stuff that’s impossible to measure with any accuracy unless you lump a who shit ton of it, and get a basically useless value. Aggregate supply being a classic example.
August 30th, 2009 at 3:42 pm
@25: You’re using “regressive” in a very unusual way.
No, I’m using it in the standard way, to mean an increase in economic inequality. The riders would not only be a small fraction of the general population, but they would be wealthier on average than the general population.
August 30th, 2009 at 3:48 pm
cbt – I think part of Matt’s point is that there is no easy way to answer that question. That’s why we tend to fall back on the abstract model: it gives us guidance and a way to determine if a given course of action is “worth it,” even though it relies on a myopic conception of worth. So, in short, I would just say (admittedly unsatsfyingly) that it’s just not a perfect science.
But I would err on the side of giving priority to those values which aren’t monetary, simply for the reason that they’re more primary. (We pursue money, in theory, so that we can achieve happiness, health, fulfillment, etc.; not vice versa). Of course then you have the very tricky problem of determining which values you want to prioritize: do we consider an unspoiled environment a paramount concern? Or the social cohesiveness of communities, or what? The questions involved are every bit as messy as politics itself, but we at least ought to free ourselves of the false comfort (and, in fact, the destructiveness) of cost-benefit analyses that ignore our most fundamental values.
August 30th, 2009 at 4:06 pm
Chachy,
Yes, CBA is an imperfect way of deciding what to do. And democracy is the worst form of government except for all the others. If you think there’s a better way than CBA of deciding what to do, then describe it.
And appealing to “values which aren’t monetary” doesn’t help. You still have to decide how to balance those values against monetary values, and against one another.
August 30th, 2009 at 4:55 pm
Err…slavery was more profitable after the cotton gin.
Err, was slavery ever really more profitable than the cost of just offering a wage and a place to stay? I know speaking to your modern African-American historian the US was built on the backs of slaves, never mind the fact that the most productive part of America had no slaves. I think the idea of the hyper productive slave was probably a fiction of slave traders, turned into religion by those who liked the pseudo-king status (also see: Egypt).
August 30th, 2009 at 5:02 pm
Wow, just wow… I mean the vitriol toward economists I’m reading here is amazing. Not to sound condescending, but do any of you who are being so harsh (which is not everyone, but I’m not naming names) know what you’re talking about? I am an economist, and Matt’s got it mostly right… there was one minor point I was prepared to comment on before I read these other posts. I’m floored. In the past, I’ve generally found Matt’s commentors cogent and well informed.
To those of you who think that economists don’t consider moral issues, I suggest you read Adam Smith’s Theory of Moral Sentiments. You would be hard pressed to find an economist who doesn’t think, all else being equal, that equity is a laudable goal. To those who think that economists never predict anything, I suggest you read the last decade’s worth of writing from Krugman or Roubini. Granted there were far too many economists 2 or 3 years ago cheerleading the run-up to the current problems, but unless you were doing any better 2 or 3 years ago, then I suggest you stfu (please excuse my abv’d language).
Now I’ve got that off my chest, let me just say what I came here to say. I mostly agree with Matt. When we economists call ourselves value-neutral, we generally mean that we do not one group over another. Let me give an example… there is a policy that takes $1 away from, let’s say Bill Gates, and gives with that $1, the government can spread around, say $.01 to every other consumer. If there are, say, a million beneficiaries most people would say this is worth it… right? Well, there’s a problem, this redistribution is NOT what’s called a “pareto-improvement” which means that no one in society is made worse off, but some is better off because of the policy change. This is the problem that Matt and DeLong are pointing to. To see why this is a problem, imagine that $1 is taken away from a homeless man, so that $.10 can be distributed to every taxpayer in the country.
The first case is obviously a good policy, but how many of you haters really think the second case is good policy? Strictly speaking, though, the second case is the better deal! As Matt suggests, the problem boils down to what weights you put on everyone… how much does each individual matter. In the first case, we make the moral decision that Bill Gates can afford $1… i.e. that he should not be given too much weight. In the second case, we make the moral decision that the homeless person cannot afford $1, so we put more weight on him.
The one thing I would add to Matt’s post, is that it is possible for policies to be pareto-improving (no one made worse off). Forcing the better outcome of a prisoner’s dilemma, for example, is pareto-improving. Trade is pareto-improving if the losers are compensated. In those cases, it doesn’t matter what weight you put on anyone.
August 30th, 2009 at 5:10 pm
Whatever else he might be, I think it’s pretty clear that bse is not an economist. But he does know what pareto efficiency means. Google is a wonderful tool.
August 30th, 2009 at 5:19 pm
Agreed. It’s not possible for the government to provide pareto-improving outcomes. By definition is must harm one to help another.
And no discussion of transaction cost problem in public policy?
August 30th, 2009 at 5:40 pm
Here’s what EPA says about how it does economic analyses of environmental regulations. It’s not a short document; a lot goes into these things.
someone said something about cotton gins making slavery more profitable. This is an excellent example of the jumbled way people with a smattering of economic jargon in their pockets opine about economic matters. A better approach, and one that an economist takes, can be found in Brad Delong’s little paper on who benefited from North American slavery.
August 30th, 2009 at 6:51 pm
I want to see the CBO for our wars in Afghanistan and Iraq.
August 30th, 2009 at 9:55 pm
http://www.cbo.gov/ftpdocs/86xx/doc8690/10-24-CostOfWar_Testimony.pdf
It’s been around for a while. About a trillion. At one time I would have called it the best waste of money by the United States government ever. Fortunately Obama has made it a game of who can most rapidly bankrupt the Federal Government.
August 30th, 2009 at 9:56 pm
best = biggest
August 30th, 2009 at 10:19 pm
I disagree with the earlier post on what is required by OMB and OIRA (which was a big part of the initial gripe from Kleiman).
Some RIAs may be detailed, but they are not thorough. It is heavily biased towards what can be quantified and usually turns into some kind of tedious counting exercise and away from sound economic analysis. EO 12866 and A-4 DO request distributional and equity impacts (contrary to what is suggested in the blog post) but this type of analysis is usually not performed and would would not be performed well if it were.
FWIW, there is no economic significance threshold on the regulatory flexibility analysis.
August 30th, 2009 at 11:42 pm
Vince raises some useful points (and he’s right that there is not economic significance threshold for a reg flex, although as a practical matter, the more detailed analysis, and the significant impacts on small entities — which tend to be based on estimates of effects on revenues, costs, and or profits — comes with the economically significant rules).
Part of the problem here is of the ” in an ideal world” nature (I think Kleiman said “armchair”) — in many cases, rules (and the timetables governing their issuance) are created long before the economic analysts begin doing their part. Completing the regulatory impact analysis is often the last step needed (and the last step started) for completing a notice of proposed rulemaking or a final rule, which means the economic analysis faces a very tight schedule and can be viewed as a bottleneck by the program offices that often develop rules. (Program offices can be very creative in devising “qualitative” benefits for their rules, and they can be very eager to share these with the regulatory analysts.) There have been efforts in some agencies to integrate the economic analysis earlier in the rule making process, a change that at the very least would make the development of rule alternatives for analysis and comparison to the chosen rule more rigorous.
August 31st, 2009 at 3:18 am
Thanks Matt, this was a really good post.
August 31st, 2009 at 10:00 am
[...] Matt Yglesias also comments. [...]
August 31st, 2009 at 10:49 am
We have value-neutral economics for the same reason we have the hypothesis of perfect competition, which also rarely exists; as very much useful, and illustrative, abstractions that help us navigate beyond the incoherence of the details of daily life ad look at the fundamental nature of things.
But they don’t. They help us look at the fundamental nature of simplified abstractions. Simplified abstractions turn out to be quite different from things, and if you’re only looking at the simplified abstractions, you’ll probably miss this crucial point.
Those maps are very much not the territory and in many important respects they don’t even *resemble* the territory. Following them with your eyes closed to the real world is an excellent way to get lost.
August 31st, 2009 at 11:08 am
Chris — you’re hiding the new assumption you added — if you’re only looking at the simplified abstractions that was necessary for getting the result you wanted. You’d make a good economist, maybe.
August 31st, 2009 at 11:09 am
Chris — you’re hiding the new assumption you added — “if you’re only looking at the simplified abstractions” — that was necessary for getting the result you wanted. You’d make a good economist, maybe.
That’s clearer, I think.
August 31st, 2009 at 11:22 am
Isn’t Brad’s definition of the marginal utility of wealth essentially assuming the consequent? If you start out by saying money is less useful to rich people than to poor people, of course you are going to have a beef with a system that doesn’t say that.
August 31st, 2009 at 11:38 am
Drew Miller — the marginal claim would be that an additional unit of money is less useful (produces less utility) for richer people than an additional unit of money for poorer people. And what Delong does is point out the weighting consequence in social utility of assuming constant marginal utility of the additional unit across wealth classes, and then ask “could that be for real?”
August 31st, 2009 at 12:02 pm
bdbd – I understand the marginal claim. Brad’s dialog only holds up if you assume it to be true, and his numbers only hold up if you assume it to be exactly how he defines it. And I don’t see a source or a reason for defining it as he did.
August 31st, 2009 at 3:22 pm
Drew Miller — I don’t think things need to be “exactly” as Delong describes. Here’s something like a reason for defining it as he did.
August 31st, 2009 at 11:01 pm
for Sycophant of the Bourgeois:
http://delong.typepad.com/sdj/2009/08/we-told-them-so.html#comments
“Yet more evidence that the first generation of macroeconomists after Keynes really did have some idea of what they were talking about…”
Republicans burnt money to play war games with real people and real deaths; Democrats spent money to save the USA from the Republican disasters.