2017 Conference - Session 4

Session 4 - Thursday, March 16, 3:45 - 5:15pm

A.4: Advice to Policymakers for Interpreting BCA (Roundtable)

Chair: Kerry Krutilla, Indiana University

While numerous technical guidelines exist to aid those responsible for developing benefit-cost analyses (e.g., OMB, 2003; OECD, 2008), none is geared toward the policymakers who are responsible for interpreting those analyses and forming policy decisions. This panel of current and former analysts and policy officials will discuss relevant technical, policy, legal and institutional issues and offer advice to policymakers on what to look for when reviewing a benefit-cost analysis and what questions to ask.

Panelists:

Susan Dudley, The George Washington University
Heidi King
Randall Lutter, University of Virginia / Resources for the Future
Brian Mannix, The George Washington University
Al McGartland, U.S. Environmental Protection Agency

B.4: Methodological Issues in the Application of BCA

Chair: Lynn Karoly, RAND Corporation

Discussant: Joseph Cordes, The George Washington University

Presentations:

1. Distributionally Weighted Cost-Benefit-Analysis: A Three-Step Method, Merits and Limitations; Thomas van der Pol*, CPB Netherlands Bureau for Economic Policy Analysis

In cost-benefit analysis (CBA) practices all over the world, benefits and costs are aggregated irrespective of who benefits or loses. This is commonly known as the Kaldor-Hicks compensation principle. Actual compensation, however, may be infeasible, costly or absent in practice. This paper investigates how CBA would look like when inequality aversion and decreasing marginal utility of consumption or income are taken into account. To this end, a three-step method is developed to perform a distributionally weighted CBA. In the first step, weighting schemes are identified. For this purpose, a selection of Social Marginal Welfare Weights (SMWWs) is proposed, including smoothened SMWWs from the inverse of an optimal taxation model. In a second step, income and weighting distributions are discretized. This, amongst others, has an impact on the weights applied to low income households. In a final step, the weighting schemes are to be rescaled or normalized, for which different alternatives exist. These choices are illustrated with a Dutch case study on child care benefits. The paper concludes that guidelines are needed for this type of CBA to consistently aggregate the effects of an investment project, social reform or tax policy on disposable income. The usefulness and limitations of the results of SMWW applications are discussed, as well as less ambitious ways to show distributive effects in CBAs. These include stakeholder analysis and a report of unweighted net benefits for different income groups.

2. Hurdle Rates, Declining Discount Rates, and Uncertain Opportunity Cost; Daniel Wilmoth*, U.S. Small Business Administration

The appropriate discount rate for policy analysis is uncertain. Some economists have argued that the uncertainty implies that impacts should be discounted using declining discount rates, and declining discount rates have been adopted in some countries. The appropriate discount rate for evaluating private projects is also uncertain, and a discounting method that can be used to address uncertainty has been adopted by some firms. However, those firms use hurdle rates rather than declining discount rates. For a given sequence of costs and benefits, uncertainty about the appropriate discount rate creates uncertainty about net benefits after discounting. This presentation compares hurdle rates and declining discount rates as methods for characterizing a probability distribution of net benefits after discounting. Declining discount rates correspond to the expected value. However, positive net benefits under a declining discount rate can be consistent with a very small probability that the realized value will be positive. Hurdle rates correspond to the probability that the realized value will be positive. However, negative net benefits under a hurdle rate can be consistent with an arbitrarily large expected value. Hurdle rates and declining discount rates each capture a different aspect of the probability distribution of net benefits after discounting.

3. Macroeconomic Effects of Sterilized Intervention; Yuxuan Huang*, The George Washington University

Accumulation of foreign reserves enables a country to maintain a stable exchange rate and to meet its foreign debt obligations. However, an increase in foreign exchange increases the reserve money (money base) and thus causes monetary expansion and which brings inflationary pressures to the economy. To offset the expansionary effect of the increasing foreign reserves, the central bank can sterilize the foreign assets by taking intervention using both non-market and market-based tools. In this paper, I construct a DSGE model with working capital constraint for an open economy to study the macroeconomic effects of sterilized foreign exchange intervention under reserve accumulation scenario. The model explicitly includes the central bank and financial intermediary to capture the crowding out effect of the sterilized intervention on private sectors that has been documented in the empirical literature. It also allows the comparison between different sterilization tools and incorporates economic differences between advanced and developing countries. The main aim of this research is to study and compare the different cost and benefit of sterilized intervention policy and find out the optimal policy for conducting sterilized intervention under different economic conditions. The preliminary result suggests capital control can reduce the crowding out effect on investment, countries with higher economic growth are encouraged to conduct a higher degree of sterilization.

C.4: Economic Valuation for Environment and Natural Resource Policy

Chair: Robin Jenkins, U.S. Environmental Protection Agency

Presentations:

1. Practice What You Preach: The Effectiveness of Recreational Use Value Estimates in Policy Analysis; Martha Rogers* and Mark Berkman, The Brattle Group

Contingent valuation methods are often viewed as the “Cadillac” of natural resource damage assessments in part because they are able to capture the “passive use” value of natural resources. Although there are some strong critiques of this method, a major impediment to its widespread use appears to be the extremely high implementation costs. As a result of these impediments, benefit transfer methods remain the most frequently used valuation method. A substantial academic literature has developed on the most appropriate methods of implementing benefit transfer analyses but little of these findings have transferred over to policy work.

We review 57 of the most recent oil spills involving the National Oceanic and Atmospheric Administration and show that benefit transfer is used as the primary lost recreation valuation method in nearly 75 percent of all spills with a specified valuation method. Despite the academic literature’s focus on the implementation of function transfer estimates these policy applications tend to use a more straightforward average-value transfer approach. In this paper, we provide a method for empirically testing the validity of average-value transfers. We apply a “jackknife-in-jackknife” approach to a 2011 database compiled by Rosenberger (see http://recvaluation.forestry.oregonstate.edu/) that contains 2,703 recreational values drawn from 352 studies to show that a study’s estimated recreational value falls in the 95 percent confidence interval of the average-value transfer from the remaining studies less than 30 percent of the time, well below the 95 percent threshold one would expect. We then expand on these results using a larger benefit transfer database, the Environmental Valuation Reference Inventory, which contains information on over 4,000 valuation studies. These results suggest that additional research needs to be done on the implementation and use of benefit transfer methods in policy analysis, particularly as they relate to average-value transfers.

2. Value of Reusing Remediated Land as Greenspace: A Benefit Transfer Application to EPA’s Superfund Sites; Karen Sullivan, Achyut Kafle* and Jacqueline Waite, U.S. Environmental Protection Agency

United States Environmental Protection Agency (US EPA) and its state and territorial partners have developed a variety of land cleanup programs to assess and, where necessary, clean up contaminated land sites such as Superfund and Brownfields sites across the country. After cleanup many previously contaminated land sites are reused as greenspace for local communities to use as parks, playgrounds, trails, community gardens, natural habitats, and other recreational open spaces. Greenspace provides a multitude of benefits—opportunities for recreational uses or amenity values for local communities, may provide habitats for native plants and wildlife, may sequester carbon to contribute to efforts to address climate change, etc. Benefits of converting such sites to greenspace after cleanup have only been captured qualitatively by the US EPA, for example, in success stories or case studies. This study estimates the value of reusing remediated Superfund and Brownfields sites as greenspace. To do this, a meta-dataset of empirical hedonic studies that evaluate the impact of greenspace on nearby residential property values is compiled and a benefit transfer function is developed using a meta-regression model. Hedonic property value models have long been used to estimate willingness to pay (WTP) for marginal changes in greenspace in a revealed preference framework. This study uses WTP estimates from empirical hedonic studies that value greenspace conducted in the late 1990s or later in the United States. The meta-analysis is in progress. Results will identify the value of greenspace reuse on remediated Superfund and Brownfield sites across the nation. This will increase our understanding of the benefits accruing to local communities as a result of the US EPA’s cleanup programs. Results may also be of interest to stakeholders engaged in the redevelopment of remediated Superfund and Brownfield sites when considering different reuse options.

3. Bad Air Days: On the Valuation of Air Quality Using Different Measures of Subjective Wellbeing; Kate Laffan* and Paul Dolan, London School of Economics

A new approach to benefit cost analysis has emerged from the growing field of subjective wellbeing (SWB) economics. This approach – commonly referred to as wellbeing valuation-- involves using the variations in SWB reports associated with both income and the non-market good of interest, to calculate the income- EQ trade-off when maintains the same level of SWB. The appeal of this approach is that it avoids some of the key limitations than more traditional approaches to non-market good valuation; it does not rely on market assumptions and it is unaffected by biases such as those arising from strategic responses or the framing of the questions. As a result, this method of benefit costs analysis is gaining traction in policy circles; for example the UK’s Green book, which contains guidance on how to appraise and evaluate policies, was amended in 2011 to incorporate the wellbeing valuation approach. To date work in this area has mostly focused on valuing elements of environmental quality, such as pollution and the effects of drought, using reports of life satisfaction as the measure of SWB. There is a growing consensus in the literature, however, that wellbeing is a multidimensional construct and that beyond life satisfaction, both affective measures which capture positive and negative experiential wellbeing, and eudemonic measures which can relate to purpose and meaningfulness of an activity or life overall, provide additional insights into how an individual’s life is going. This paper explores whether the measure matters in the wellbeing valuation of local air pollution and finds that the monetary valuations vary greatly across different measures of SWB, begging the question which SWB measure is fit for purpose in the context of the valuation of non-market goods relating to the environment?

D.4: Application of BCA in Europe: Experiences, Challenges, and the Future

Chair: Daniel Perez, The George Washington University

Discussant: Bahman Kashi, Queen’s University

Presentations:

1. Trends in Non-Market Valuation in the UK; Ben Groom*, London School of Economics

The future has become more important, according to the recent guidelines on Cost Benefit Analysis and the social discount rate, with the advent of declining discount rates (DDRs). The changes on government policy followed from numerous academic advances in the theory and empirics of DDRs. But how pivotal were academic contributions to the evolution of government policies and guidelines? How pivotal are they in general? Clearly, academics are on the supply side of the policy making process, providing important inputs, which can be viewed as technological innovations. But what of the demand side, and the way in which policies are adopted to address political and other practical needs within government? Then, between the demand and the supply side, how important are the policy brokers who bridge and coordinate between willing "buyers" and willing "sellers" of ideas. In this paper we use the recent rolling-out of new discounting guidance within countries, and its diffusion across countries, to study these questions and determine the roles of papers, presentations, political preconditions and personalities on policy. We study the UK, US, Norway, France and the Netherlands and present evidence from semi-structured interviews with key officials in their governments and key academics. For sure, academics have an important role to play in policy, we argue, but the success of this role is conditioned on many demand side factors, the way in which ideas are brokered, and sometimes just good fortune.

2. Evolution of BCA-based Decisionmaking – the Example of the Swedish Transport Sector; Gunnar Lindberg*, Norwegian Institute of Transport Economics

BCA has a long tradition in planning of national transportation infrastructure in Sweden. Beginning as a planning tool within the national road administration in the 1960’s, BCA became a pillar stone of national transport policy as a result of strategic choices made by the national parliament in the late 70s and 80s.The 1979 decision adopted marginal cost, instead of average cost, as the overarching principle for pricing of transport, which implied that investment decisions could not be based on business-case considerations. The separation of rail infrastructure from the business management of the train-service providers in 1988 is another case. Therefore, a foregone conclusion in both cases were that efficient investment priorities should be made based on societal BCA. No one asked whether the political decision makers, or the BCA models, were apt to that task. In this paper, we review the current state of BCA for transport in Sweden. Especially we focus on a number of design issues which have been very much debated over the years, and to some extent still are.

3. BCA on Health Risks in France; Henrik Andersson*, Toulouse School of Economics, on behalf of Luc Baumstark, University of Lyon

E.4: Issues in the Use of Economic Evaluation in Public Sector Decision-making

Chair: Margaret Kuklinski, University of Washington

Discussant: Gary VanLandingham, Florida State University

Presentations:

1. Can Analysis Facilitate Public Participation; Stuart Shapiro*, Rutgers University

Many forms of policy analysis, including benefit-cost analysis, tout the virtues of analysis as a tool to improve the transparency of government decisions. But these discussion often have a "if you analyze it, they will participate' quality about them. Rarely is the success of analysis in stimulating participation evaluated and rarely are the factors that determine whether analysis stimulates participation analyzed.

This paper hopes to fill this gap. I conducted interviews with 48 high level analysts (including economists, risk assessors, and environmental impact assessors) and a case study of a panel under the Small Business Regulatory Enforcement Fairness Act (SBREFA). The interviews showed examples of analysis facilitating participation and analysis deterring participation.

Analysis can make government decisions more transparent or more opaque. Placing analysis early in the decision-making process makes it more likely that it will be helpful to outside parties hoping to weigh in on policy decisions. Making the analysis simpler and clearer also enhances transparency and in doing so facilitates public participation.

Many of these qualities are present in the SBREFA panel process. The case study of an OSHA regulation subject to the SBREFA panel requirement revealed that the analysis was clear even for lay people and allowed them to weigh in meaningfully on the regulation in question. However SBREFA is geared to a particular constituency so its generalizability is in question. In any case the principles of early analysis, simplicity, and focused participation are important for the ability of any kind of analysis to help secure public input on government decisions.

2. Implementing Results First: Adventures in Capacity-building to Produce Benefit-Cost Analysis for Policymaking; Steven Lize*, The Pew Charitable Trusts

The Pew-MacArthur Results First Initiative (Results First) provides intensive technical assistance to states and counties to develop their capacity to produce benefit-cost analyses (BCAs) of evidence-based programs and policies. Using an econometric model created by the Washington State Institute for Public Policy applied in a cloud-based software application, the Results First technical assistance team trains partners to use the model and customize it to reflect local criminal justice, juvenile justice, education, and public health systems. Key components of technical assistance include instruction in BCA concepts, cost analysis methods, analyzing administrative data to produce outcome trends, and communicating findings.

This presentation will highlight lessons learned about preferred methods, typical challenges, and common solutions for supporting BCA in state and local policymaking. Marginal cost estimates are preferred to represent the values of unit changes through government systems. Yet, government analysts have limited backgrounds and training in economic methods, requiring an iterative process to whittle down average costs with “top-down” and “bottom-up” methods. Furthermore, many jurisdictions do not have rich, high-quality administrative data for estimating unit quantities, requiring adjustments to model assumptions or exclusions that limit the perspectives for monetary impacts. The approach trades methodological rigor for face validity whereby stakeholders accept estimates as agreeable from their practical perspective. Communicating findings requires balancing brevity and relevance with maintaining detail and clarity in documenting methods and assumptions.

Results: First partner jurisdictions have included, to various degrees, BCAs in policymaking. Noteworthy examples include Illinois, Iowa, Mississippi, Massachusetts, New York, Rhode Island, and Vermont, which have used findings from BCAs to make budget and programmatic decisions across a range of social policy areas. 

3. Unbundling Political and Economic Rationality: A Non-Parametric Approach Tested on Spain; Salvador Bertoméu-Sánchez*, ECARES - Université Libre de Bruxelles

Approaches such as cost-benefit analysis are commonly used to analyze the strengths and weaknesses of different policy alternatives. We propose a simple method to complement such analyses in ex-post evaluations to rank the various objectives that often underpin investment and policy decisions. We illustrate the method in the Spanish transport sector context and use it to assess the extent to which political concerns dominated economic concerns or vice versa over time. The true motivation can be revealed by modeling each policy goal as the focus of the optimization anchoring a data envelopment analysis of the efficiency of the observed implementation. The method clearly shows that investments have generally been more consistent with a political objective (the centralization of economic power) than with an economic objective (maximizing mobility).

F.4: Considerations in Developing High-Quality BCA Estimates

Chair: Judy Temple, University of Minnesota

Discussant: Lindsay Abate, U.S. Small Business Administration

Presentations:

1. Understanding and Avoiding Pitfalls of Benefit/Cost Analysis; Ernest Forman*, The George Washington University

Mathematically meaningful and accurate, proportionate, measurement of both tangible and intangible benefits is fundamental to any benefit cost analysis. Approaches such as converting intangible benefits to dollars with multiple regression analysis do not work well. However, measurement methods based on pairwise comparisons, as practiced in the Analytic Hierarchy process, have been successfully used for decision making and resource allocation for more than 30 years and are becoming widely available in commercial software tools. This paper will describe the underlying theory behind deriving accurate ratio scale measures of both tangible and intangible benefits. Ratio scale measures are required in benefit cost analysis in order for benefit cost ratios to be mathematically meaningful. We will discuss benefit cost considerations in choice decisions as well as in portfolio decisions. We will examine why, in choice decisions, selecting by benefit/cost ratio may be shortsighted, and why in portfolio decisions, optimization of benefits subject to cost and other constraints is superior to deciding based on benefit cost ratios. We will also discuss approaches to deriving benefit measures for alternatives that differ by several orders of magnitude in cost -- such that low cost alternatives do not dominate a portfolio.

2. Forecasting Affected Populations for Benefit-Cost Analyses; Douglas Scheffler*, U.S. Coast Guard

Many cost-benefit analysis studies involve forecasting of affected populations, which becomes a key input into the costs and benefits analyses. A regulatory analysis under Executive Order 12866, “Regulatory Planning and Review.” typically covers 10 years after the rule comes into effect. A simple approach with regard to the affected populations is to assume that the population is steady throughout the analysis period. However, that can overlook important trends in areas such as demographics, economics, and developments in the industry under study. This leads to an inaccurate forecast of affected populations and consequently errors in the estimates of costs and benefits.

This proposed presentation has two parts. The first will present examples from recent Coast Guard projects on examples of forecasting affected populations. These examples will discuss why a “steady state” model was inappropriate, the methodologies developed for forecasting the populations, and the data used to make the forecasts.

The second part will discuss general problems with forecasting demographic and economic data, such as population shifts and business cycles. This part also will provide sources for demographic and economic data such as the U.S. Census Bureau, the Department of Energy’s Energy Information Administration, and the National Bureau of Economic Research.

3. Should CBAs Include a Correction for the Marginal Excess Burden?; Frits Bos*, CPB Netherlands Bureau for Economic Policy Analysis

In some countries, like the USA and Norway, a cost correction factor of 20-30% is applied in CBAs for the marginal excess burden (MEB) of taxation. This is also in line with the recommendations by some CBA textbooks. However, in most countries no such corrections are made. In the Netherlands, this issue was subject to intense debate in a national economic journal and remained unresolved. The recently revised Dutch CBA guidelines only state that the issue still has to be clarified. Therefore, the Dutch government has asked a special CBA-Working group to advice on this issue. In line with the Working group’s report, this paper investigates the theoretical, empirical and practical arguments in favor or against a MEB correction. It argues that the distortions by taxation are often the consequence of the wish to reduce income inequality. Including a correction for the costs of taxation while ignoring offsetting benefits from income redistribution would therefore be misleading. Moreover, estimates of their relative sizes are uncertain. A simple and pragmatic solution is to assume that the MEB is broadly counterbalanced by the benefits of redistribution of these taxes. This is consistent with the preferences for equality in a country’s current tax system. As a consequence, the marginal cost of public funds is equal to one and no correction is needed in CBAs for the MEB. This is also consistent with CBA practice based on the Hicks-Kaldor criterion provided that the policy measure’s distributional effects are also taken serious, i.e. net benefits are shown for different income groups whenever substantial and relevant.

4. A Benefit-Cost Analysis of the Multiplier Effect; Erik Rose*, Oregon State University

The ability of currency to circulate within an economic network is analogous to the circulation of blood through a body. Currency that escapes the network, like blood through a cut, ceases to perform work within the system, reducing growth. The average US resident spends 65 cents of each dollar they earn locally, and the recipient spends 65% of that until a total of $1.84 in re-spending takes place annually.

What happens if people are able to spend a higher percentage of each dollar locally? At 80%, a 15 cent increase, total re-spending doubles in size, growing to $3.95. At 86%, re-spending would grow by another two dollars to $6.07. As the re-spending percentage increases, growth increases at an exponential rate. The current research of Erik Rose as a PhD student at Oregon State University studies the ability of tight circulation patterns to capture currency within economic networks, achieving higher local re-spending rates.

This presentation concerns the analysis of financial instruments that invest in re-spending growth. Discuss methods to compare the return on investment in ‘re-spending instruments’ at various re-spending rates to the returns of traditional loans at various rates and terms. Using the hypothetical example of disaster relief funding, compare the benefits of traditional relief funding to the benefits of re-spending instruments under a range of performance scenarios.