Are We Spending Our Limited Fiscal Resources Wisely?

Using benefit-cost analysis (or its equivalent, cost-benefit analysis) to evaluate projects not only increases the value of government spending, but increases equity as well.  

Republicans believe (mostly) that government money should be spent wisely, if spent at all. Democrats, on the other hand, believe (mostly) that it’s better to spend wisely than not.  

To satisfy this desire for efficiency in government, as well as equity, requires that the rate of return on government spending be as great as the investment value of the money it displaces.
So, the question is: “Can we ensure that the rate of return on government spending represents wise investment?”

If budget decisions were made on this basis, I believe that wasteful government spending would be curtailed, and more socially useful spending would occur.  

Despite the rational logic, why isn’t this happening?  

In most cases, it’s politics.

A government representative will spend other peoples’ money for his or her district or state, even if it’s wasteful. And his or her colleague from another district or state will vote to approve the spending, as long as the first representative agrees to vote for similar wasteful programs that benefit the second representative’s district or state.   

The legislative branch as a whole could agree to take politics out of government spending by subjecting appropriations proposals to independent financial evaluation.
But this makes for hard work.

Indeed, when the Center for Benefit-Cost Analysis asked local governments why they didn’t do more investment analysis, they were frank enough to tell us that “it interfered with politics.”
To be sure, once an independent analysis is done, supporters and critics of a spending proposal are forced to address the financial issues in much greater detail—which is work. And what’s the use of having political power if you can’t reward your supporters so that you are reelected?  
Putting politics aside, though—and I acknowledge that this is certainly difficult—it’s worth bringing a fundamental concept of social well being into this discussion. And here I’m talking about Pareto optimal improvements. Named for a 19th century Italian economist, a Pareto improvement is one where at least someone gains and no one loses.  

It’s difficult to think of spending projects that satisfy the Pareto criteria. But it’s not difficult to conceive of policy approaches that do.  

In recent work here at the Center for Benefit-Cost Analysis at the Evans School of Public Affairs, University of Washington, we’re asking what impact a financial evaluation requirement would have on government investment.  

We’ve found that using benefit-cost analysis (or its equivalent, cost-benefit analysis) to evaluate projects not only increases the value of government spending, but increases equity as well.  
Benefit-cost analysis (BCA) involves a return on investment calculation made by looking at benefits and costs of projects. Our evaluation of this technique—as opposed to looking at particular projects—indicates that almost no one loses from it.

Those who pay for a valuable government project today, but do not gain from it, will, in all probability, gain from some other government project in the future. Fully 90 percent of all taxpayers ultimately gain; the only losers are those in the higher income tax brackets, who would, in fact, pay more in tax dollars to support spending that would benefit those less well off. Even here, however, these taxpayers do not lose if they support the gains in social equity.  
The federal government uses benefit-cost analysis through the Office of Management and Budget to evaluate new proposed government regulations. The U.S. Army Corps of Engineers and the Bureau of Reclamation also use benefit-cost analysis. In addition, the current administration is increasingly using BCA, in part, to evaluate its education spending. This is a start, but it leaves vast areas of government spending unanalyzed—in the transportation, housing, and environmental areas, for example.

In truth, there are important spending items for which investment returns can only be imperfectly calculated; a good example is defense spending. And then there’s politics. We can’t—and shouldn’t—totally eliminate politics. Yet politics that reduces our national income through waste is simply not good politics.  

What should be done?  

I propose that BCA be employed at the earliest possible point in the congressional appropriations process. The Congressional Budget Office (CBO) currently offers “scores” for congressional bills in an effort to help lawmakers practice fiscal prudence. In addition to these scores, we should add BCA evaluations. And we should have a bipartisan agreement that government-spending bills can’t go forward without scores and BCA evaluations. Finally, we should require that both the scores and BCA evaluations are made public prior to congressional votes on spending bills.
The use of BCA is, of course, costly—because it requires the collection and evaluation of data. But I strongly believe that the savings will far exceed the costs over time, because this will help us spend our limited fiscal resources more wisely.

Editor's Note: This article is part of a publication by the Evans School of Public Affairs at the University of Washington entitled "Making a World of Difference in a Very Different World." 

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Caplan & Horowitz/arXiv

Diagrams illustrating the different types of so-called nuclear pasta.

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