Even More Ways to Cook The Benefit-Cost Analysis Books

As reported by Bruce Gilley in Law and Liberty, the Biden White House has just finalized a new and dangerous revision to the rules that have been applied to government benefit-cost analyses (BCA) of spending initiatives (which have been required since the Nixon administration). 

The new rules would direct BCA to take into account “the relevant groups of people who gain and lose from policy decisions,” and those groupings could go far beyond income groups, to those of race, ethnicity, gender, sexual orientation, family composition, and “underserved communities” (and it includes the statement that such groupings are not exhaustive). Further, it gives grievance groups (specifically including non-whites, non-Christians, “LGBTQI+ persons,” and “individuals who belong to multiple such communities”) a louder voice. The guidance also announces that the revision “may lead an agency to select a regulatory alternative with lower monetized net benefits over another with higher monetized net benefits.”

As Gilley summarized the revision, it would risk “undermining the integrity of BCA as a tool for rational policy debate,” which would “skew BCA in favor of whatever group the administration is currying favor with at the moment.” Its advocates “assume that the baseline for grievance groups is mass oppression, which will always justify heavier weights for them.”

Such a revision could create a massive new way to “cook the books,” allowing the government to get whatever BCA result it wants, regardless of the financial reality. And given that there is overwhelming evidence that when the government evaluates its own actions, what it always wants is “more” — more money, more power, more freedom from answering to citizens — it is a means to give it and its preferred constituencies more dictatorial control over Americans.

While that would ratchet up our country’s applications of the old adage, “figures don’t lie, but liars figure,” few seem aware of how far down that path we have already moved from the idea of BCA as a technique to organize and clarify our judgments, which even Ben Franklin used, to using it as a systematic way of misrepresenting reality in the desired political direction. 

The problem arises because in disciplining our thinking and identifying the logical principles to be applied to make better decisions, BCA also teaches those determined to mislead others how to do that better, because knowing how to do it “right” also provides a template for how to be wrong in the desired direction. Those trying to “sell” policy proposals will overstate benefits and understate costs.

Consider just a few of the many frequent BCA cheats that Biden’s revisions would build on.

Alleged benefits can be inflated by double-counting. Suppose there was an electrification project that would increase the productivity of land in a certain area. You should count the increased value produced in that area because it will increase those land values. But you should not count that as an extra benefit, because the land prices are simply reflecting the higher productivity. To count it would be mistaken double-counting. But that motivated mistake is common for many investment projects, such as highway improvements and better schools, as well as improved amenities, such as better parks, better flood control, better fire protection, better views, and so forth.

Often BCAs also double-count by treating both income generated and jobs created as if they were different benefits. If you incorporate the cost of raising the funds for a project as well as the spending (too-seldom done), that income and those jobs are really moved rather than created. Further, to workers, the added income is the benefit. Added work (jobs) is rather the cost workers must bear to receive the income. So this represents not just counting benefits twice, it represents counting a cost as a benefit in the process.

These forms of double-counting are further overstated by combining them with perhaps the most common form of BCA cheating — multiplier effects. Since each dollar of government spending becomes someone’s income, that income (and jobs) creates more purchases, which creates more income (and jobs), and so on. Program advocates push to include all those added effects on the benefit side. 

But since government has no resources of its own, every dollar extracted from Americans to finance a program (including the deferred taxes created by deficits) reduces someone’s disposable income, which reduces their purchases, which further reduces incomes (and jobs), and so on. So if you wish to count multiplied effects on the benefit side, you must, to be consistent, also count multiplied effects on the cost side. But BCAs do it inconsistently, usually comparing multiplied benefits to costs that are not similarly multiplied.

As James C. Capretta recently wrote in RealClearPolicy, such double-counting mistakes have not withered away with time, but now seem to involve even more zeros after the dollar sign:

A Medicare maneuver championed by the Biden administration…would double-count trillions of dollars by using the same source of revenue both to pay for the social welfare spending bill now being assembled in Congress and to forestall the coming insolvency of the Medicare Hospital Insurance (HI) trust fund.

The bottom line is that “In total, the administration wants to double-count $3.4 trillion.”

Double-counting is just one class out of many cheats already deeply embedded in BCA analyses.  

There are others, including ignoring relevant costs (by treating resources already owned by government as costless, even though they have valuable alternative uses). Costs and completion dates are massively underestimated, overstating benefits by pushing back when they start, while the magnitude of benefits is frequently overestimated (say, overestimating the speed and forecast ridership of the California High-Speed Rail project). See also: tweaking population and income growth forecasts to raise the value of, say, flood protection in a given area.

BCAs have long used reverse-engineered assumptions to give them the results that governments want. That means that whatever potential benefits the technique has in making government more productive by constraining its errors, missteps, and waste has already been massively compromised. That is where we are now. The new Biden tweaks will add so many more degrees of freedom for government to justify anything it wants to do (at least to its own satisfaction), that it is hard to see how anything of probative value toward the intended purpose of doing BCA would remain. Those who want to keep their government analyst jobs will be able to find even more ways to conclude that every idea cooked up by those who pay their salaries is a good one, however false that conclusion might be. A greater cognitive dissonance from what it would take to actually advance Americans’ General Welfare, as spelled out in the preamble to the Constitution, is hard to imagine.

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