Given that The Cost-Benefit Revolution (UK) (US) has emerged from the pen of the co-author of Nudge (UK) (US) — the 2008 book that showed how to pull the levers of behavioural science to persuade us to eat less, save more and donate our kidneys — we should start with the obvious: this is a drier topic. Nevertheless, it is important — and, at times, Cass Sunstein manages to convince the reader that the word “revolution” is justified.
According to Sunstein, cost-benefit analysis asks, “What are the bad and good effects of imaginable policies? Will we save one life, 10 lives, or 1,000 lives? Will we impose costs?” In other words, cost-benefit analysis prompts us to judge policies not by whether they are popular or ideologically pure, but through technocratic scrutiny of quantified pros and cons.
It is hard to argue against this method in the abstract: who could be in favour of policies with small benefits and large costs? But when a specific policy is on the table, tempers are fraying and the political temperature is rising, many people will view cost-benefit analysis as foolish pedantry.
When Sunstein was running the White House Office of Information and Regulatory Affairs for Barack Obama, the White House rejected a regulation to control ozone and supported a regulation to control mercury. Environmental groups were perplexed: did Obama want to save the planet or didn’t he? Was there cynical political triangulation at play? For Sunstein, the answer is nothing so Machiavellian: ozone regulation was expensive and would do little good; mercury regulation was cheaper and would prevent a great deal of harm.
This example sums up the challenge for defenders of cost-benefit analysis: it’s important, but it is dull.
The book makes three valuable contributions: it relates the history of cost-benefit analysis in US policymaking ; it tackles the economist Friedrich Hayek’s argument that technocrats simply don’t know enough to weigh costs and benefits; and it makes a case that cost-benefit analysis could reduce political tribalism.
The history lesson is briskly delivered, and from a front-row seat — Sunstein worked in the Reagan White House as well as for President Obama. In 1981, Ronald Reagan signed Executive Order 12291, requiring administrative decisions to weigh the costs and benefits of action and maximise net benefits. This order, writes Sunstein, “placed the technocrats squarely in charge”, giving them the authority to reject pointless rules. Subsequent leaders, including Obama and Donald Trump, have taken a similar approach — although President Trump has added deregulatory flourishes that, Sunstein mildly comments, “are hard to defend”.
What of Hayek’s “knowledge problem”? Hayek’s objection to central planning is that it cannot work because the planners will never have enough information. Cost-benefit analysis is a kind of central planning, appealing in principle, but delusional in practice. Hayek memorably wanted economics “to demonstrate to men how little they really know about what they imagine they can design”.
Sunstein acknowledges the problem, but thinks the difficulty is exaggerated. Do we really know so little about costs and benefits that it is futile to even ask? He argues, plausibly, that the right response to Hayek’s warning is to regulate with humility rather than to give up. He argues that regulators should routinely seek comment, experiment, measure the effect of current rules and react if things can be improved.
Perhaps most intriguing is the book’s argument that cost-benefit analysis may help to reduce tribalism in politics. The method makes us reflect, consider the system as a whole rather than some salient part, ask good questions and notice where we do or don’t have good answers.
Of course, if cost-benefit analysis is to have these beneficial effects, we must first agree to use it. Perhaps we already have. The method was retained by every president since Reagan and is one of the few Obama-era principles that survived contact with the Trump administration. It works away, often unnoticed, in the heart of US government, and seems far more likely to do good than harm.
Perhaps there is hope that this quiet revolution will continue.
Written for and first published in the Financial Times on 17 September 2018.