# Utilitarianism comes to benefit-cost analysis

Kevin Drum points to an obscure, but radical proposal to change the way the US government does benefit cost analysis. The Office of Management and Budget has released draft guidance saying

One practical approach to implementing weights that account for diminishing marginal utility uses a constant-elasticity specification to determine the weights for subgroups defined by annual income. To compute an estimate of the net benefits of a regulation using this approach, you first compute the traditional net benefits for each subgroup. You can then compute a weighted sum of the subgroup-specific net benefits: the weight for each subgroup is the median income for that subgroup divided by the U.S. median income, raised to the power of the elasticity of marginal utility times negative one. OMB has determined that 1.4 is a reasonable estimate of the income elasticity of marginal utility for use in regulatory analyses.

This is pretty obscure, but what it means is that, a project that delivers a dollar of benefits to each of a group of poor people is worth more than a project that delivers a dollar of benefits to each of a group of poor rich people.

A lot more !

Kevin uses a graph to illustrate, showing that an extra dollar for the median household is worth 50 times as much as an extra dollar for a household with an income of \$1 million a year. Conversely, an extra dollar for households at the bottom of the income distribution is worth 12 times as much as an extra dollar at the median.

It’s actually simpler to get the intuition of you use an elasticity of 1, which corresponds to logarithmic utility. Then you can sum up the implications by saying that a given percentage increase (or reduction) in income yields the same additional (or reduced) utility no matter who gets it. So, for example, if a policy halved Elon Musk’s income, while doubling the income of a single randomly chosen US household, it would be evaluated as neutral. If the policy doubled the income of two households, it would be beneficial. More generally, you can just add up all the percentage changes in income from the project (included the taxes needed to finance* it). If that sum is positive, the project should be approved.

This proposal would imply such radical changes that it is almost certain to be killed off. But it’s a straightforward implication of mainstream neoclassical welfare economics, based on utilitarianism. And the estimated elasticity is very close to that we usually get when we look at individual choices under risk (you can translate to social welfare using a device like Rawls veil of ignorance).

Even if the proposal is never implemented, it has some striking implications for the way we think about utilitarianism. For instance, it means that the limitarian position for which Ingrid Robeyns has argued follows from utilitarianism, if we accept the additional claim that the existence of very rich people has a net negative impact (not necessarily large) for society as a whole.

More generally, this kind of calculation ought to give some pause to critics of utilitarianism who worry about trolley problems, forced organ donation, and the like. Unless they go with a similarly sharp case for radical income distribution, arguments like this are, in practice, politically aligned with the kind of logic-chopping practised by US-style libertarianism/propertarianism.

(H/T James Wimberley)

• Please no MMT quibbles. Substitute “release resources for” if you must.

## 9 thoughts on “Utilitarianism comes to benefit-cost analysis”

1. Ian Williams says:

“This is pretty obscure, but what it means is that, a project that delivers a dollar of benefits to each of a group of poor people is worth more than a project that delivers a dollar of benefits to each of a group of poor people.”

Should the underlined “poor” be “rich”?

Regards

Ian Williams

3A Tilba Street

ABERFELDIE VIC 3040

0419 941 349

2. James Wimberley says:

JQ: “This proposal would imply such radical changes that it is almost certain to be killed off.”

Pigeonholed, yes. But the OMB’s proposal is not a paragraph in a philosophy article but a 91-page technical methodology, now in the public domain. Suppose some government somewhere puts forward a controversial scheme or policy justified by distribution-blind cost-benefit analysis. Nothing stops objectors from running their own counter-analysis using the better OMB method. Independent experts like John Quiggin would stand ready to testify in court challenges and talk shows that the OMB was right. We have not seen the last of this.

3. Ikonoclast says:

The proposal will gather dust. The oligarchs and corporations will never allow it to happen. Neoliberalism is intensifying, not waning. The oligarchs, corporate leaders and government leaders want us dead or destitute. All of us. By “us” I mean of course the 99%. They have never had any use for us except as cannon fodder, factory fodder, office fodder and service fodder. They won’t need much, if any, of this fodder in the future. Robots, drones and AI will do all that stuff. There are billions of humans right now who are surplus to requirements. The best course, as determined by the oligarchs, is to kill us off by disease and to profit by the process. Diseased and dying people are very easy to asset strip.

They want us infected. They want us dead. It’s as plain as day. Handsome is as handsome does? Sure. And vicious is as vicious does.

https://sciencebasedmedicine.org/we-want-them-infected/

4. Ikonoclast says:

I am fully aware my above comment will seem completely negative and snarky. However, it is the plain truth as I see it. Further, I refuse to self-censor on these matters. If this is too annoying or just generally unhelpful then I can be banned. It will probably be a mercy for everyone anyway.

Otherwise, I will break out from time to time and just say what I think. That is inevitable given my “on the spectrum” nature. I am totally sick of the BS and callousness of virtually the entire human race. I have zero hope that anything will change for the good, ever.

I am okay personally. I have enough familial ties, interactions, hobbies, interests, pursuits duties and responsibilities to go with. I even have enough property since this is all we measure and care about these days. All of these are enough to keep me tinkering on my own riverboat following some less frequented stream (It’s a metaphor. I don’t own a river boat) as the entire human race steams itself inevitably into the heart of darkness, collapse and extinction.

5. Moz in Oz says:

Isn’t this the basis for progressive taxation, among other things? If so, in many ways it’s widely accepted and acted on already. And if not, I’m confused about the above point.

(viz, taking half Elon Musk’s income and giving \$1 each to the X million poorest people is a huge win for total economic satisfaction, which is … oh, wait, we tax Elon at a much lower percentage than even the median taxpayer. Sorry, bad example. Well, we tax me at a much higher rate than the median taxpayer, let alone the bottom 20% of taxpayers. And that makes everyone happy – and I still have my head!)

6. KT2 says:

JW said: “Nothing stops objectors from running their own counter-analysis using the better OMB method.”

Well said. We just have to get it into to public domain and repeat repeat repeat. Which may be difficult with our current media set up.

A method to overcome “This proposal would imply such radical changes that it is almost certain to be killed off.”

It would only be killed off if the public at large were unable to see benefits. And so a public process to educate for this change is necessary.

Here is one such process for elicidation, which, when combined with sortition plus public policy development, using egregious examples of “an extra dollar for a household with an income of \$1 million a year.”, may allow pilot projects (ala a 4 day week) to tease out acceptable policy in the long run.

Eventually this paragraph will sink in:
“… an extra dollar for the median household is worth 50 times as much as an extra dollar for a household with an income of \$1 million a year. Conversely, an extra dollar for households at the bottom of the income distribution is worth 12 times as much as an extra dollar at the median.”
*

A suggested process – one of many. Any better suggestions to overcome such negativity as “This proposal would imply such radical changes that it is almost certain to be killed off.” … and “The proposal will gather dust.”?

“Disappointing Outcomes: Can Implementation Modeling Help?
July 2018
DOI:10.1007/978-3-319-57018-1_10

In book: Outcome-Based Performance Management in the Public Sector (pp.179-200)

Authors:
David Wheat
University of Bergen
Eugene Bardach

Abstract
“This paper addresses questions about modeling the implementation requirements of a public policy proposal. Can modeling provide advance warning of problematic implementation requirements inherent in the design of a policy idea? Going further, can it suggest feasible redesign options to improve the chances for desired outcomes?

“Our methodology, system dynamics, is more than just a simulation tool; it also a method of scientific inquiry that fosters operational thinking about how to improve the functioning of complex social systems. Our model is motivated by a case often cited as the seminal work in the implementation literature: Pressman and Wildavsky’s narrative of problems that undercut a US policy to combat persistent unemployment among minorities in Oakland, California in the late 1960s.

https://www.researchgate.net/publication/318606012_Disappointing_Outcomes_Can_Implementation_Modeling_Help

“The Pressman-Wildavsky paradox: Four addenda or why models based on probability theory can predict implementation success and suggest useful tactical advice for implementers

Elinor R Bowen
“Pressman and Wildavsky’s Implementation occupies center stage in the developing literature about policy implementation, in part because of the analogy they drew between implementation processes and the multiplicative model from probability theory.

This paper takes the relevance of probability theory further and considers the additive model from probability theory and conditional probabilities as well as the multiplicative model. This expanded coverage of probability theorems
(1) leads to markedly increased optimism about the likelihood of successful implementation,
(2) encompasses empirically reasonable tactics such as persistence, packaging of clearances, engineering bandwagons and policy reduction, and
(3) generates advice to hopeful implementers – some of it non-obvious.”
Journal of Public Policy , Volume 2 , Issue 1 , February 1982 , pp. 1 – 21 DOI: https://doi.org/10.1017/S0143814X00001768

7. KT2 says:

Know a US citizen?
Comment… “The revisions span some 90 pages and make for some tough, but essential, reading. As noted, comments are due by June 6, 2023.”
*

“Regulatory Developments: OMB Requests Comments on Proposed Circular A-4, “Regulatory Analysis”

Bergeson & Campbell PC
USA May 17 2023

“On April 7, 2023, the Office of Management and Budget (OMB) requested comments on proposed Circular A-4, “Regulatory Analysis.” 88 Fed. Reg. 20915.

“OMB states that it proposes revisions to the Circular, as well as a preamble that offers further context for prospective public commenters and peer reviewers. In addition to the request for public comments, OMB will conduct a peer review of these materials in accordance with its Final Information Quality Bulletin for Peer Reviewand the Regulatory Right-to-Know Act. Comments are due June 6, 2023.

“The Preamble states that a peer review of OMB’s 2013 Report to Congress on the Benefits and Costs of Federal Regulations notes that Circular A-4 “provides very little guidance on estimating costs.” OMB welcomes feedback related to this observation — and the related need to provide additional guidance on estimating benefits — including, but not limited to, potential revisions of the Circular to include or address any of the following:

– The use of wage data to estimate cost of time spent responding to a regulation is addressed in a section of 2011’s Circular A-4 Frequently Asked Questions titled “How do I value time?” Should this content, or a revised version of it, be incorporated into the Circular itself? Are there other metrics for estimating the cost of time that can be used where wage data are not readily available, such as for volunteers, retirees, or the self-employed? How should fringe benefits and overhead also be accounted for in estimating the cost of time?

– Is there general guidance that can be provided regarding how regulatory benefits or costs differ depending on the length of time allowed for compliance (that is, the length of time between issuance of a regulation and the date(s) when regulated entities must comply with its provisions)? For example, are there rules of thumb related to “rush” charges that would be broadly applicable?

– For many regulations, the most direct costs are associated with activity that does not itself yield benefits, but instead may prompt intermediate actions that connect the direct effects with ultimate beneficial outcomes. Is there guidance that can be provided toward the goal of avoiding the inappropriate omission of costs of activities that accrual of benefits is contingent upon?

– In some cases, empirical evidence, including cost-related data, will be available only from entities or individuals who have voluntarily performed (or refrained from) some activity. All else equal, a regulatory requirement will impose higher costs than what is observed from voluntary actions or inaction — if not in terms of direct spending, then in some other aspect of the broader phenomenon of opportunity cost. Are there potential revisions to the Circular that would inform extrapolation from empirical evidence in such cases?

Commentary
“Given the significance of this proposed rewrite of Circular A-4, it is surprising more has not been written about it and disappointing more time is not being provided to comment. The proposed changes could, if implemented as proposed, profoundly change benefit-cost analysis in federal rulemaking and greatly expand opportunities for public participation in the regulatory review process. Significant issues relating to how to quantify the impacts of federal action differently for different groups is consistent with the Biden Administration’s commitment to environmental equity, and it offers much on which to think about and comment. No attempt is made here to outline these issues in detail. The revisions span some 90 pages and make for some tough, but essential, reading. As noted, comments are due by June 6, 2023.”
https://www.lexology.com/library/detail.aspx?g=c1ef092c-b9da-41e4-ac5e-d94f762b7146

8. gregvp says:

I’ve been waiting for this correction to policy evaluation for a long time, since 1981 probably. I had been working with a simple logarithmic model but the elassticity 1.4 on top of that probably matches reality better.

However the most likely results are that red states in the US, and billionaire-captured governments in Europe, will ban 1) the OMB and its counterparts, and/or 2) the publication of statistics relating to individual or household income or wealth (and perhaps their collection and aggregation also), and maybe 3) the teaching of mathematics or economics or philosophy.

9. Harry Clarke says:

There has been a substantial debate on whether distributional weights should be used in cost benefit analysis. I thought the consensus was that, as CB is an efficiency-based tool, that “a dollar is a dollar” and that weights should be uniform. Inequality issues are then handled separately.