My comrade the Sandwichman traces the sad devolution of thinking about public investment in the U.S. Check out the signatories to the letter at the top: Henry Wallace, Frances Perkins, Harry Hopkins, Harold Ickes, Wesley Mitchell. Giants! How did we get stuck with Gene Sperling and Rahm Emanuel? Jack Lew?? Oh please.
One thing that got lost was the idea of taking advantage of economic downturns to launch new public works projects. I think this is still a good idea, and I’m not the only one.
Contrary to one argument in the post, however, I would not include the stimulus resulting from a project in a benefit-cost calculation. The reason is that it is useful to know benefits and costs abstracting from where we are in the business cycle. That should be the principal criterion, in principle. The stimulus piece is worth knowing as an inducement to accelerating investment during downturns, like the one we are still in, so it should figure in the decision, but it’s a categorically different number.
Alas, it is hard to know benefits and costs. There is a sophisticated, finely-wrought methodology for conducting such analyses. Typically the data required is not available. Moreover, the analysis is flawed by virtue of the fact that it is performed by humans who always operate in a political setting. The customer for a study may have a benign view of a project, or a jaundiced one. He will get what he wants, either way. In a political environment that is adverse to new initiatives — projects, regulations — benefit-cost analysis is routinely deployed as a bludgeon to kill innovation. Nobody did a cost-benefit analysis of welfare reform in 1996, nor have they since. The politicians wanted it and they got it. What they don’t want, they first say should be the subject of cost-benefit analysis. I would not say the practice evolved to preclude new investment; rather, the politics evolved to create a professional environment adverse to progress. I think the Sandwichman is saying that too.
Big projects are risky, but there is a remedy: do lots of big projects. Some will work out well, others will be white elephants, and on average we will be all right. The wisest principle can be found in Tom Cruise’s big debut film, Risky Business.
I was talking about this with the avowed libertarian economist Bill Niskanen before he passed away, and he actually agreed with me. Suppose it was 1870. Should we build a bridge connecting Brooklyn to Manhattan? Would it have been possible to compute a favorable benefit/cost ratio for this project? Quite possibly not. How about the Panama Canal? People died building both of these things. Very great costs.
It’s not so far-fetched in the current context. We think we have a better methodology, but do we have the data and foresight to gauge benefits and costs of new, innovative projects? What’s the benefit of a modern electric grid? I doubt anybody knows, but I still think it’s worth building.
Perhaps the greatest weakness of the methodology lies in the task of measuring costs and benefits occurring over some extended period of time. To this end future flows are discounted by some rate that purports to equate values in different time periods. If the interest rate is ten percent, $1.10 a year from now is worth a dollar today. Put aside that we’re prognosticating future events like crazy people. There is a more interesting thing going on.
Climate change is going to seriously fuck with the human race. You know that, right? So imagine a blow to those living 200 years from now in the amount of $100 trillion. (Assume no inflation.) A discount rate of 3% is pretty modest, as these things go. How much is that $100T worth to us in present value? The answer is less than $271 billion. The implication is that we should be willing to pay no more to eliminate that risk, today, than $271 billion, even though the hit to those living in 2214 would be more than 369 times higher. We are applying a far lesser weight to their well-being than to our own. They might not forgive us, but we’ll be long dead, so what the fuck.
You might be willing to put a price on carbon calculated to bend the curve on emissions, but I hope you won’t be deluded enough to think you can, or should, calculate a price based on the present value of future harm to humanity. The vanity of economists today knows few bounds. But in 1928 one of the greatest economists, by the name of Frank Ramsey, referred to the conduct of such an exercise as “ethically indefensible and arises merely from the weakness of the imagination.”
The better operating principle is to reverse the current and long-standing emphasis in U.S. public policy characterized by the late John Kenneth Galbraith as favoring “private affluence and public squalor.”