More Congratulations to Emmanuel Saez
Bad Banks Are Not an Adverse Supply Shock

Benefit-Cost Analysis

The extremely sharp-witted Rob Stavins gets one wrong.


Harvard UniversityAn Economic View of the Environment: Does economic analysis shortchange the future?: Much skepticism about discounting and, more broadly, the use of benefit-cost analysis, is connected to uncertainties in estimating future impacts.... Benefits also depend on the values future generations would attach.... But how can we predict future generations’ values?  Economists and other social scientists try to infer them through surveys and by inferring preferences from individuals’ behavior. But these approaches are far from perfect, and at best they indicate only the values or tastes of people alive today. The uncertainties are substantial and unavoidable, but they do not invalidate the use of discounting (or benefit-cost analysis).  They do oblige analysts, however, to assess and acknowledge those uncertainties in their policy assessments, a topic I discussed in my last post (“What Baseball Can Teach Policymakers”), and a topic to which I will return in the future...

But he does not mention the elephant in the room: cost-benefit analysis sums up Benthamite utilities of individuals weighting each one's by the inverse of their personal marginal utility of wealth. The richer you are, the lower your marginal utility of wealth, and the more weight your preferences get in benefit-cost analysis. This is a problem. This is especially a problem when real interest rates are high, for when real interest rates are high the future is (relatively) poor and thus gets (relatively) little weight.