Why Government Fails So Often: And How It Can Do Better (9 page)

BOOK: Why Government Fails So Often: And How It Can Do Better
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No informed, sophisticated analyst could deny that some CBAs are conducted more rigorously and convincingly than others, depending on whether the analyst’s assumptions, data, and techniques
were the best available. My point is that
this
—the competence, transparency, moral scrupulosity, and persuasiveness of a given CBA—is what the argument
should
be about. The argument
should
not
be about whether CBA is a legitimate, desirable, and arguably indispensable technique for policy assessment. When well-conducted, CBA is each of those things. A CBA should not necessarily be deemed dispositive of a program’s effectiveness, but if it meets the objections reasonably well, it should at the very least shift the burden of proof to those who would challenge its conclusions.

GUIDELINES FOR INTEGRATING CBA INTO POLICY DECISIONS

Cost-benefit analysis is the central tool of policy evaluation, but policy makers need some additional normative principles in order to guide its effective use. Here are fourteen such principles.

1. Policy makers should intervene only when it will correct a significant market failure
. For reasons deeply rooted in the American political culture (see
chapter 4
) and economic system (
chapter 7
), market competition and provision are public policy’s strong default conditions. Like any default conditions, these may be—and often are—overridden by some government intervention that is usually rationalized as one that will cure the kinds of standard market failures discussed in
chapter 1
. In order to overcome the default and justify the intervention, policy makers should have to answer four relevant questions in the affirmative: (1) Does an actual market failure exist?

(2) Is that market failure large enough to justify an intervention, given the costs that it will impose on actual or potential market actors and on taxpayers? (3) Are substantial public values at stake that the market default cannot adequately advance? (4) Is the intervention likely to succeed, given the possibility that the intervention may itself constitute a government or “nonmarket” failure (discussed in
chapter 5
) that could not readily be corrected or dislodged?

Many public policies, especially those designed to correct market failures, do not satisfy these tests. According to Brookings Institution
economist Clifford Winston, assessments relying on detailed empirical analysis are a relatively recent development in policy studies, and they have led to a damning verdict: “Thirty years of empirical evidence on the efficacy of market failure policies initiated primarily by the federal government but also by the states, suggests that the welfare cost of government failure may be considerably greater than that of market failure.” On a brighter note, Winston finds that some of the more egregious
government
failures have been rectified and that such failures may therefore be more avoidable in the future.
24
(Many of the policy assessments to which he refers are detailed in
chapter 8
.)

2. A program should maximize net benefits and also be cost-effective
. To be considered successful, a program must at a minimum pass a cost-benefit test—it must yield more benefits than the costs it entails—and if it is one of two policies that pass this test, the policy maker should choose the one that
maximizes
net benefits, all other things being equal. This principle is straightforward and incontrovertible. As discussed above, however, some of its normative assumptions and especially its application to particular programs can be matters of intense debate. A somewhat less demanding and less controversial criterion of effectiveness demands that a program that produces net benefits also be cost-effective. This simply means that
whatever a program’s purposes
are and
whatever level of benefits it actually produces
, these purposes and this level should be attained at the lowest possible cost—and, correlatively, that at any given level of cost it should produce as many benefits as possible. In other words, whether one holds constant the actual cost or the actual benefits of a program, it should maximize the benefits or minimize the costs, as the case may be.

Because this criterion accepts whichever benchmark (its existing costs or existing benefits) the program chooses to hold constant, I can think of only one plausible objection to it in principle: that cost-effectiveness analysis compares the actual performance of an existing program to the imagined performance of a hypothetical alternative, ignoring the implementation difficulties that could well afflict that
alternative if it were instituted in the real world—difficulties that are analyzed in
chapter 8
. This, however, is less a principled objection to cost-effectiveness analysis than an important reminder that the analyst must strive to anticipate those difficulties.

3. CBAs should be conducted for different levels of benefit
. Although Mae West opined that “too much of a good thing is
wonderful
,” the same is not true in the policy world. For any given policy under assessment, diminishing returns are likely to set in at some point of benefit generation. That is, the cost-benefit ratio almost certainly will vary across different levels of benefit, with the ratio increasing as the policy approaches 100 percent achievement. Because reaching the highest levels of benefits tends to be much more costly per unit of benefit than at lower levels of benefit, the CBA will generate different outcomes at different levels of benefit achievement: gaining 90 percent of the benefits may be cost-effective, while getting to 95 percent—much less 100 percent—may not, as the last increment may be far costlier.
25
Before joining the Supreme Court, Stephen Breyer, then a regulatory reformer, argued that policy makers’ “tunnel vision” often blinds them to this essential and far-reaching constraint of diminishing returns in regulation and indeed in all policy efforts.
26

4. A program should be target-efficient
. Target efficiency—the notion that resources should be allocated to where they can do the most good, given the program’s purpose—also logically follows.
27
But knowing where they can do the most good can be difficult because the policy maker lacks information about key facts, such as the extent to which program resources will produce desired policy outcomes. Certain normative judgments may also be disputed. For example, we usually want a program to target its resources on individuals who are disadvantaged relative to others who might claim the resources. But not always. The public, for example, may think that the neediest people the program could target will not use its resources wisely or effectively, or are capable of being independent without the government’s resources, or are needy only because of some sort of misconduct or other personal failings. In this spirit, the public often
distinguishes between the “worthy” and “unworthy” poor in considering which programs to support and how they should be designed and funded.
28
In practice, moreover, the target efficiency criterion is applied only in discrete policy domains.
*

Despite these complications, resource scarcity makes target efficiency a compelling policy criterion with considerable bite—and a sound default rule, at a minimum. Indeed, it indicts many programs that will be discussed in
part 2
—most farm subsidies, for example—and universal entitlements even more so. Because initial enactment necessitates adding enough beneficiaries to assemble a winning political coalition, policy makers tend to sacrifice target efficiency—until perhaps decades later, when cost control needs become compelling and, as in today’s debates over Social Security, Medicare, and food stamp reform, they are faced with the much harder challenge of denying benefits to some in the previously successful coalition.

5. A policy may be cost-ineffective because it uses the wrong tool
.
Chapter 3
will discuss many different policy instruments—subsidies, taxation, regulation, tort law, market incentives, competition, and many others—that might be deployed individually or in combination to reach the policy makers’ goals. Each, of course, entails characteristic features, advantages, and disadvantages, so the choice among them is seldom straightforward—and, despite political rhetoric to the contrary, is never as simple as a choice between “government” and “the market.” Nevertheless, this choice will significantly affect the relative success or failure of a program. Which tool is “best” for a given
purpose will usually depend on a number of factors, and analyzing this question can be difficult.

For example, much of the criticism of federal environmental policy during the past four decades has readily conceded the need for regulation but maintained that the precise regulatory
form
that the Environmental Protection Agency has often used—command and control rather than market incentives–based—is misguided and far more costly than alternative forms would be. As explained in
chapter 8
, this economic critique is largely accepted today among regulators, theorists, and environmentalists, as is the fact that the two approaches often appear in hybrid forms. Nevertheless, the use of command-and-control forms of regulation still dominates in many regulatory systems, including some environmental programs; indeed, some environmental statutes also reject the use of CBA. As a result, much environmental regulation, while producing public health and other benefits, fails a cost-effectiveness test.

6. Special efforts must be made to identify “invisible victims” and consider their interests in the analysis
. Many people whom a policy will make worse off are not aware of this fact until the policy is operative—and often not even then. Policy makers will not attend to the interests of these cost bearers unless they make a special effort to identify, analyze, and weigh them. Such cost-bearers, which I call invisible or silent victims, are systematically neglected by policy makers whose programs adversely affect their interests. These costs ordinarily gain little recognition because they are small at the individual level and because the causal link between the policy and these costs is difficult to trace, even or especially by its victims. Thus, they will not organize politically to protest those interests even though the costs may be quite large when aggregated across all of the invisible victims. Invisible victims include, for example, those who will not get a job opportunity because a new regulation, higher minimum wage, or litigation-averse employer chills job creation. Other examples include those whose food prices rise somewhat because biofuel requirements increase the demand for corn (
chapter 8
), and low-income people
who do not receive the medical care to which they are entitled under Medicaid because of the program’s rigid, inadequate reimbursement rates (
chapter 6
). Policies will systematically ignore or undervalue these interests unless analysts make special efforts to take them into account and urge policy makers to do so.

7. CBA should be used to retrospectively analyze the effectiveness of existing policies, not just proposed ones.
Such systematic retrospective reviews are indispensable. The predictions of programs’ sponsors are singularly unreliable guides to policy assessment. Because public funds are always scarce (even in a federal budget approaching $4 trillion in 2013), a program that is perfectly defensible and successful at one level of cost may be undesirable and thus unsuccessful at a higher cost. Politicians, interest groups, and bureaucrats often have a powerful incentive to predict costs and benefits by minimizing the former and maximizing the latter. (This bias is explored in
chapter 5
, and helps explain why government cost overruns are endemic.
*
) The only constraint on this incentive is politicians’ need to devise a way to pay for it—in this sense, they are buyers of their own legislative product—but the complexity and obscurity of the legislative process (to outsiders) and their ability to hide costs weaken this constraint. Later chapters discuss this problem, emphasizing the need for greater accountability both before and after the fact. Thus, minimizing policy makers’ incentives to underestimate costs and exaggerate benefits is one of the most challenging and urgent tasks of a democratic polity. (If voters and other participants fully and accurately discounted these distorted estimates of costs and benefits, then perhaps no harm would occur; but this is implausible, especially among voters.) Unfortunately, holding them accountable when later assessments show their estimates to have been wrong is an insufficient constraint on such chronic underestimates.

Research by psychologist Philip Tetlock finds systematic failures both in experts’ predictions and in their “postdictions” (explanations of the past). He explains why we cannot rely on the “marketplace of ideas” to flush out bad policy ideas quickly enough to avoid serious damage in the meanwhile, and why “lots of nonsense [can] persist for long stretches of time.” Competition among information providers will not suffice if consumers are unmotivated to discriminate among competing claims, are themselves biased as to the information, or are unable to determine the truth of the matter.
29
These conditions, unfortunately, are commonly met in policy debates.
30
Government effectiveness, then, depends not only on ex ante predictions of these complex interactions, but also on ex post assessments of—and hence learning from—predictive and programmatic failures in programs already on the books. The value of this may be obvious, but OIRA is only now beginning to conduct the kind of retrospective reviews presented in this book (especially in
chapter 8
), and even then is doing so only on a limited basis.
31

BOOK: Why Government Fails So Often: And How It Can Do Better
13.4Mb size Format: txt, pdf, ePub
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