The Folly of Cost-Benefit Analysis

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It’s the return of cost-benefit analysis. George W. Bush has recently appointed a “regulations czar” who will be overseeing the regulations drawn up by fifty or so government organizations. Bush’s choice for the position is Harvard professor John D. Graham. The business community is pleased with the choice of Graham. Graham is a big believer in cost-benefit analysis and a proponent of calculating the costs to businesses whenever new government regulations are created. Businesses have reason to be pleased. With Graham as regulations czar, it is likely that businesses will enjoy at least a slight reprieve form the crushing regulations of the Clinton era.

Graham’s faith in cost-benefit analysis, however, is somewhat troubling. Cost-benefit analysis is a system of measuring the desirability of government programs by weighing both the long and short-term benefits of a program against the long and short-term costs of a program. An artificial discount rate is used to calculate what the costs and benefits may be in the long run. John Graham puts a lot of faith in this method. He believes that cost-benefit analysis clearly justifies mandatory seat-belt laws, for example, and that cost-benefit analysis can help indicate in which programs government money can be most efficiently spent. .

While cost-benefit analysis can, if in the right hands, help to slow the progress of the modern nanny state, its inherently utilitarian foundations can act as a great justifier for government intervention. As with anything that justifies government action on utilitarian grounds, there is nothing to stand in the way of increased government power as long as societal “benefits” can be found to put in the “plus” column of an analysis. For example, if enough benefits can be found that support a national “minimum income” in the style of the negative income tax, how can we argue that there is anything wrong with it? A cost-benefit analysis could easily be constructed that shows that a national income floor could save the nation all kinds of costs in health care, crime prevention, and remedial education. The math may be bad, and the core assumptions even worse, but if people are trained to view cost-benefit analyses as authoritative calculations of government efficiency, little can be said in defense of economic liberty. The debate can center on little more than whose numbers are better.

The cost-benefit mentality has been important to apologists of socialism for decades. They speak in favor public schooling because they claim that not only does it keep potential criminals in class instead of on the streets, but it causes everyone to think alike, thus minimizing anti-social behavior. The minimization-of-anti-social-behavior-in-public-schools theory is certainly debatable, but the arguments can be extended to virtually any area in which government claims it should have regulatory authority. All that is necessary to justify any program is to come up with enough real or imagined benefits to plug into the analyst’s calculations.

As regulations czar, John Graham will likely stand in the way of some of the more egregious violations of property rights that are being turned out by organizations like OSHA and the EPA, but by defending the merits of cost-benefit analysis as an authoritative measure of government efficiency, he is paving the way for tacit justification of countless government programs in the near and distant future. Founded on the modern assumption of public administration that some ideal level of government involvement can be used to maximize social benefit, cost-benefit analysis can only serve to betray its Conservative supporters. Once the terrain of Reagan-style conservatives, the pro-government folks have now discovered that enough junk science or enough “psychic benefit” can always be conjured up to justify any new project.

Insofar as cost-benefit analysis serves to obstruct government through “paralysis-with-analysis”, it may serve a useful purpose. But, by putting great faith in the abilities of government analysts to properly calculate the social benefits of property-violating government programs, cost-benefit analysis will, in the end, prove to be quite dangerous.

March 29, 2001

Ryan McMaken lives in Denver, Colorado. He edits the Western Mercury.

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