Scott Farrow at The Economists' Voice:
Benefit-cost analysis is the applied side of welfare economics. Its broad use in support of public decisions draws both detractors and defenders. This tongue-in-cheek piece demonstrates that knowing how to lie provides insights into how not to lie; we assume the former is always accidental among economists and we hope it is so for others. ...
Analyzing public decisions using benefit-cost analysis is poison for some, a truth serum for others and a targeted diagnostic for a few (heavily concentrated among economists). Its surface simplicity and its subtle complexities make it easy to lie, accidentally or not.
Benefit-cost analysis in a simple form was described by Benjamin Franklin, implemented for water resource investments since the late 1930s and has been required by Presidents of both parties from the 1980s through the present day for major government regulations and for some other Federal decisions. It is used to a more limited extent in states, charities, other countries and international lending institutions. Textbooks and government guidance struggle to explain how to do it right but do not provide clear examples of doing it wrong. What is benefit-cost analysis doing and why is it so hard to avoid lying?
Benefit-cost analysis tries to answer whether a society is better off from an action when impacts of all kinds are put into monetary terms, including those generally outside the marketplace such as avoided fatalities. The bottom line measure, the eponymous benefits less the costs (net benefit) is defined as a measure of the change in economic efficiency (and who can be against efficiency?). A positive value, using equal monetary weighting for all concerned, is standardly interpreted to mean that society will be better off by taking the action and the converse for a negative result. This apparent simplicity obscures numerous challenges in practice and interpretation and so I offer the following lies and how to avoid them as aids to distinguish among good, bad and ugly analyses. Some “lies” may just reduce credibility and yet not change the sign; the devil is in the details.
Here are the four lies:
Lie #1: Be selective in your impacts and values
Lie #2: Confuse the baseline
Lie #3: Count jobs entirely as a benefit
Lie #4: Act as if a number is certain
Read more here.
