Public policy analysis is an inescapably multicriteria undertaking. What do I mean by that? I mean that there are very few if any public policy problems where you can translate “what is the best decision?” into a single question. Nearly every public policy question is about answering multiple questions and then trying to find balance between the answers to these questions.
For instance, say a state government is faced with the public policy problem “should the state implement a universal early childhood education program?” We may be tempted to turn to the policy analyst’s trusty companion: cost-benefit analysis. Using this tool, we can come up with a number that represents the net benefits to society of implementing the policy as opposed to the next best policy.
Sounds good enough, no? We were able to use cost-benefit analysis to translate the question of “should the state implement a universal early childhood education program?” to “would implementing a universal early childhood education program yield net social benefits?” We’ve been able to take a difficult question and make it more specific and thus come up with an answer that can be analyzed.
The problem with this approach is that the net present value of a social cost (the technical term for the number we derive from a cost benefit analysis) tells us the impact of a policy on society as a whole. Policymakers are probably also interested in the distributional impacts of a policy. E.g. “does the policy reduce poverty and inequality?”
A straw man argument against the use of cost-benefit analysis in public policy analysis says that some policies are desirable that yield net social costs. Another way to state this objection is to say policies cannot be reduced to economic costs and benefits and that this makes cost-benefit analysis an unworthy pursuit.
These critiques are actually correct at their core. Their mistake is in assuming that any policymaker uses cost-benefit analysis as a decision rule.
Even in federal regulatory decisionmaking, the part of the government that utilizes rigorous cost-benefit analysis the most, policies are not reduced to only their net present value when judged by regulators. Cost-benefit analysis is only one consideration used along with a number of other analytical tools, including distributional analysis, sensitivity analysis, administrative burden, and others.
The beauty of cost-benefit analysis is that we can use it to put a range of different policies that are seemingly incommensurable on the same scale. We can compare education, health, infrastructure, really any type of policy to another using the criteria of net present value.
This does not, however, mean that cost-benefit analysis gives us a final word on the desirability of a policy. As a matter of fact, for some policies, cost-benefit analysis can distract from the policy goal. This is especially true for redistributional policies, which may reduce economic growth but improve the income distribution.
Does this mean cost-benefit analysis is worthless for evaluating redistributional policies? I don’t think so: it is valuable for policymakers to understand what the extent of economic impact will be, even if that is not the central goal of the policy. Does this mean the policy becomes worthless if it has a negative net present value? Not a chance: it’s just one consideration of many in the crafting of good public policy.