Very interesting article by Tim Harford on How not to convert every decision in terms of cost-benefit analysis and reduce everything in terms of money.
The article is written in the context of on going debate over, whether Scotland be separated from United Kingdom, and how each government is persuading the people by offering incentive.
Scottish voters are in the middle of an unseemly bidding war. With the referendum for independence scheduled for September, Scotland’s first minister Alex Salmond is trying to tempt the Scots by promising that they will each be £1,000 a year better off after independence. From London, the UK Treasury has a better offer: it forecasts a dividend of £1,400 per Scot per year if Scotland stays part of the United Kingdom.
As it happens, the big difference between the two forecasts is that the Scottish government forecasts that productivity growth will be 0.3 percentage points higher each year in an independent Scotland. (That is a lot.) A smaller difference is that while both forecasts assign most North Sea oil revenue to Scotland, the UK Treasury is pessimistic about the value of the dwindling resource.
But the weaselly details of all this need not delay us. It’s astonishing that instead of being wooed by romantic ideals expressed with passion, Scots are being promised cash. The debate over the future of the country is being conducted in a style worthy of a clearance sale at a furniture showroom. One can only imagine what politicians are like on a date – presumably they pull out a roll of banknotes and haggle over the hourly rate.
You might ask why an economist, of all people, is shocked by such behaviour. I think the reason is that it’s a superficial impersonation of what economics really is. My two-year-old son happily imitates mum and dad at the stove, but while a knee-high plastic kitchen range may look like the real deal to him, it is not. Too often the debate over public policy becomes a toy argument, dressed up to resemble the grown-up version with financial forecasts serving as the sparkly accessories.
Stated plainly, the Scottish government’s case is that an independent Scotland would enjoy high economic growth thanks to better economic policies. Any costs would be swamped by the benefits of this growth. That is not an absurd claim, although not everyone will find it persuasive. Economic numbers could, in principle, serve as a sanity check – but that is not why the numbers are there. Instead, they’re designed to divert scrutiny away from the plausibility of the underlying argument.
Scottish independence is one of countless examples of toy-oven economic analysis. Consider the old standby that some illnesses – diabetes, dementia, breast cancer – cost “the economy” billions of pounds per year. For example, the Alzheimer’s Society reports that dementia “costs the UK over £23bn a year” – a statement that could mean all sorts of things. Yale’s Rudd Center says that “obesity-related direct and indirect economic costs exceed $100bn annually”, which makes a bit more sense.
In the UK the cliché is that some disease is problematic because it costs the National Health Service money, as if an instant cure for all cancers is desirable largely because it would allow us to stop paying salaries to the radiologists.
There is certainly merit in conducting a cost-benefit analysis of medical treatments. If we understand how well they work and how severe are the symptoms they alleviate, we can set priorities. But something has gone wrong when we say that the problem with a heart attack is that it will be an expensive nuisance for the ambulance service.
Where did we go astray? Three sensible propositions from economics have somehow been crumpled into a mess of public relations and politics.
The first is that opportunity costs matter. Time, money and attention that are poured into something cannot also be lavished on something else. For this reason it’s good to get a sense of how much a proposal is likely to cost and what the benefits might be. But the cost-benefit figures often convey a sense of certitude that is absurd: they are only as solid as the assumptions and forecasts that go into them.
The second proposition is about reducing everything to money. It follows from the first: if you are going to compare the costs and benefits of different things, you need some common unit of measurement. This unit doesn’t have to be money. It is just as true for the UK Treasury to say that independence will cost every Scot the equivalent of one knickerbocker glory a fortnight. But money is a more convenient yardstick than an ice-cream sundae.
The third proposition is that it’s worth paying special attention to spillover costs and benefits. In arguing over HS2, the fantastically controversial proposal to build a faster railway line between London and Manchester, people speculated over the value to passengers of a faster journey. Economics suggests that’s the last thing we should fret about, because passengers can make those benefits known by buying tickets. It’s the costs and benefits for those who don’t buy tickets that need more scrutiny.
Costs and benefits matter, money is a handy measuring rod, and spillovers deserve special attention. These three principles should be respected – but that does not mean the way to make good policy is to stick a price tag on everything.
Also published at ft.com.