Sunday, November 9, 2014

"There is no such thing as a secondary benefit"

Arthur Maass, "Benefit-Cost Analysis: Its Relevance to Public Investment Decisions" (1966):
There is no such thing as a secondary benefit. A secondary benefit, as the phrase has been used in the benefit-cost literature, is in fact a benefit in support of an objective other than efficiency. The word benefit (and the word cost, too) has no meaning by itself, but only in association with an objective; there are efficiency benefits, income redistribution benefits, and others. Thus, if the objective function for a public program involves more than economic efficiency — and it will in most cases — there is no legitimate reason for holding that the efficiency benefits are primary and should be included in the benefit-cost analysis whereas benefits in support of other objectives are secondary and should be mentioned, if at all, in separate subsidiary paragraphs of the survey report.
The executive agencies have painted themselves into the efficiency box. In 1950 the Subcommittee on Benefits and Costs of the Federal Inter-Agency River Basin Committee gave overwhelming emphasis to the efficiency ranking function in its now well-known “Green Book” report. In 1952 the Bureau of the Budget, in a Budget Circular that neither required nor invited formal review and approval by the Congress, nailed this emphasis into national policy, adopting it as the standard by which the Bureau would review agency projects to determine their standing in the President’s program. And soon thereafter agency planning manuals were revised, where necessary, to reflect this Budget Circular. In this way benefits to all became virtually restricted to benefits that increase national product. 
The federal bureaucrats, it should be noted, were not acting in a vacuum; they were reflecting the doctrines of the new welfare economics which has focused entirely on economic efficiency.


Peter Dorman said...

For more background on this, see -- a most interesting discussion.

Sandwichman said...

Yes, that's a very informative article.

Also of interest is this classic by Gilbert White: "The Limit of Economic Justification for Flood Protection,"
The Journal of Land & Public Utility Economics, Vol. 12, No. 2 (May, 1936), pp. 133-148.


"Some Aspects of the Evaluation of Watershed Flood Control Projects." Bernard Frank, The Journal of Land & Public Utility Economics, Vol. 18, No. 4 (Nov., 1942), pp. 391-411.

Sandwichman said...

From the Banzhaf paper, for all you cynics out there:

"On the other side [from pro-development interests] were anti-tax or pro-consumer advocates, including Ralph Nader, as well as environmental groups like environmental groups like the Sierra Club (who particularly agitated for high discount rates to block more development)."

footnote: "Those who follow these debates today will be struck by the irony. Now, benefit-cost analysis is typically a hurdle for environmental rules, weighing the costs of the upfront investments (such as a cleaner power plant) against the future environmental gains. In this setting, environmentalists have advocated lower discount rates. But in the 1960s and early 1970s, environmentalists viewed benefit-cost analysis as a potential hurdle for environmentally destructive investments likes dams and dredging."