Sunstein’s Cost-Benefit Revolution is recommended reading

While economists often lament that governments don’t use cost-benefit analysis enough, Harvard Law Professor and former US regulatory czar Cass Sunstein offers a much more optimistic perspective in his excellent 2018 book The Cost-Benefit Revolution, which I’ve only just got around to reading. Sunstein’s first chapter is titled “The Triumph of the Technocrats”. Hurrah!

Sunstein notes that cost-benefit analysis has been increasingly applied to the assessment of regulations in the US since 1981 when the Reagan administration issued Executive Order 12291, making cost-benefit analysis of regulations compulsory. According to Sunstein, the requirement for cost-benefit analysis has been a great success. In chapter 1 (p. 10) he notes:

From 1981 to the present, cost-benefit analysis has often been a decisive decision rule in significant cases.

Unfortunately, as far as I can tell, the book doesn’t elaborate on what those significant cases were. It is very good on theoretical and philosophical issues regarding cost-benefit analysis, but it would have benefited from some detailed case studies, in my view. One of the practical examples the book does provide demonstrates the adverse impacts of failing to undertake a cost-benefit analysis. Sunstein argues that a cost-benefit analysis would have demonstrated that asthma puffers should have been exempt from the Montreal Protocol to ban CFCs. Sunstein is very good at demonstrating situations where cost-benefit analysis can be used, but the book would have been much better with case studies of its successful application.

As the co-author with Richard Thaler of Nudge, you’d expect Sunstein to include a lot of behavioural economics insights in The Cost-Benefit Revolution, and indeed he does. He notes people have a bias toward the present and can be overly optimistic and under-estimate risks. A cost-benefit analysis quantifying the impacts of a regulation, in terms of its costs, level of risk reduction, and the dollar benefits of that risk reduction, can help us avoid those biases.

Sunstein is no over-zealous advocate of cost-benefit analysis, though. He argues equity considerations may be relevant in policy decisions and, in some cases, you can’t adequately forecast what the outcomes of a policy measure may be. In some cases, rather than developing a detailed policy and deciding whether to proceed with it based on an ex ante cost-benefit analysis, policy experiments may be desirable instead. In chapter 5, “The Knowledge Problem”, Sunstein relates how he learned about the measure-and-react strategy from a Silicon Valley member of the US Defense Innovation Board, after he suggested Defense needed to apply cost-benefit analysis more. Sunstein gives clothing manufacturer Zara as an example of a company applying a measure-and-react strategy. As readers may know, Zara is the exemplar of “fast fashion” and has developed a highly efficient production and distribution system which allows it to quickly produce clothes according to what’s on-trend. Sunstein notes (on p. 98):

The measure-and-react strategy is not a randomized controlled trial, but it serves the same functions. It is increasingly used by private-sector actors, who know what they do not know and try to adjust to what people are doing on the fly. Can governments do the same thing? In many contexts, they certainly can.

There may well be benefits from greater policy experimentation by government. The measure-and-react strategy could usefully be applied to what Nicholas Gruen calls policy hacks (e.g. see his Mandarin article What is a ‘policy hack’?). Incidentally, Nicholas will be appearing soon in an upcoming episode of my Economics Explained podcast, which I expect to release this Thursday.

I should note The Reagan Executive Order mentioned above was hugely influential. Indeed, the perceived necessity for cost-benefit analysis spread throughout the world, including to Australia where the Commonwealth and state and territory governments all now typically require cost-benefit analysis of proposed regulations. Cost-benefit analysis studies are also usually required for infrastructure projects. In my first Economics Explained podcast interview, I talked about the importance of cost-benefit analysis in infrastructure decision making:

Economics Explained podcast interview with Craig Lawrence

Regrettably, unfavourable cost-benefit analysis studies are sometimes ignored for politically-driven infrastructure projects, such as the Rookwood Weir, a project which ought to feature in the next season of Utopia (see my post Rookwood Weir business case should be re-worked).

Finally, I’ve also recently read The Education of an Idealist by Sunstein’s wife Samantha Power, former UN ambassador to the UN in the Obama administration. Her book’s worth reading, too, particularly for its frank and revealing account of foreign policy decision making during the Obama years.

CBA_revolution

Posted in Uncategorized | Tagged , , , , , , , , | 8 Comments

Personal finance with Dr Di Johnson episode of Economics Explained

The latest episode of my Economics Explained podcast explores the very important topic of personal finance. There is growing interest in personal finance, as evidenced by the stellar sales of Scott Pape’s Barefoot Investor book, which gets several mentions in this episode. Clearly, many people struggle with managing money. For example, last month, Australian ABC News reported “1.9 million Australians are struggling with credit card debts” and that the average Australian credit card debt is more than $3,000.

To discuss personal finance, I invited Griffith University lecturer Dr Di Johnson onto the program. Issues for discussion included:

  • Credit cards – friend or foe?
  • Is it ok to borrow money to buy a car?
  • Is rent money dead money? Alternatively, should you do everything you can to get into the property market as soon as you can?
  • How do you encourage good financial habits in young people?

Di’s research interests include personal and household finance, behavioural economics, and financial planning. She is a member of the Australian Securities and Investments Commission’s Financial Capability Research Network. In addition to teaching and researching, Di is a regular commentator on financial issues on ABC radio and TV here in Brisbane.

During the conversation, Di noted that, in Australia, free financial counselling is available for people in financial trouble:

Financial Counselling page on ASIC Moneysmart website

Finally, please note this podcast episode contains information of a general nature only and does not constitute financial advice, which always needs to consider people’s individual circumstances.

Economics Explained Logo

Posted in Housing, Uncategorized | Tagged , , , , , , , , , , , | Leave a comment

Money on the Screen – film industry episode of Economics Explained podcast

The latest episode of my Economics Explained podcast, Money on the Screen, explores the economics of the film industry. What affects the return on investment in films? Should governments subsidise film productions as they do in Australia?

In the episode, I discuss the economics of the film industry with my good friend Tim Hughes, who spent ten years working in the film industry in the UK and Australia. Tim worked as a crew member on TV shows such as Peak PracticeThe Bill, and Coronation Street and on film productions including Tomb RaiderScooby-Doo, and Swimming Upstream.

Currently, Tim’s a Brisbane-based businessman who’s had a range of ventures over the years. His latest business is Urban Ergo, a distributor of Humanscale ergonomic products which improve health and comfort at work. Despite his change of career, which he talks about in the interview, Tim has never lost his passion for the film industry.

In our discussion, Tim explains that to maximise the profitability of a film you need to see the money on the screen. You don’t want to waste money on expensive catering or fancy hotels. You want to see the money that’s spent end up on the silver screen, so:

…if you get together a $1 million budget, it looks like a $1 million film or, ideally, it looks like a $10 million film that cost $1 million.

As noted in the conversation, I’m a long-time critic of government subsidies for the film industry. For instance, see my Policy magazine article:

Special rates for special mates: The case against film industry subsidies

Regarding the issue of local Australian content on streaming services such as Netflix, an issue Tim and I discuss in the episode, the latest news is:

Change is coming: Netflix, Amazon, Apple get the jump on regulation

Economics Explained Logo

 

Posted in Gold Coast, Queensland Government, Uncategorized | Tagged , , , , , , , , | Leave a comment

Qld-Commonwealth argy bargy over dam funding & vertical fiscal imbalance

The argy bargy over dam funding between the federal and state government reported by the Courier-Mail (State accuses feds of holding out on dam money) earlier this week is yet another illustration of a big problem in our federation: vertical fiscal imbalance, which blurs accountabilities. In chapter 8 of my book Beautiful One Day, Broke the Next I wrote:

The mismatch between expenses of state and territory governments and their expenditure responsibilities is referred to as vertical fiscal imbalance (VFI). For decades, VFI has been blamed for blurring accountabilities and creating a situation of learned helplessness and an unedifying blame game. The states and territories blame the Commonwealth for not providing sufficient funding to deliver quality services, while the Commonwealth blames the states and territories for poor service delivery. The VFI sets up a patron-supplicant relationship between the Commonwealth and the states and territories. Premier Wayne Goss once compared the relationship to “a dialogue between a begging bowl and a baseball bat”, with the Commonwealth obviously the one holding the baseball bat.

On the issue of dam funding, Federal Water Resources Minister David Littleproud told the Courier-Mail:

“The Queensland Government is going down the path of becoming a dependent state.

“We are reaching the point where the state cannot and will not provide for its own people.

“Queensland can’t just depend on siphoning New South Wales dry.”

Yes, Queensland is highly dependent on Commonwealth transfers (see the grants share of total revenue in the chart below), as are other state governments, and we are not that much more dependent on Commonwealth transfers than other states. For instance, regarding the $70 billion GST revenue pool, Queensland has received 3% more on average than what we’d get under an equal per capita distribution since the GST was introduced in 2000-01, and arguably we deserve it due to NSW and Victoria having wealthier populations and Queensland having high-cost remote communities to service (see my posts Upcoming AiP event on the golden handcuffs of federation and Qld has gained $7bn from GST revenue redistribution since 2000-01).

Qld_govt_revenue_pie_chart

The dependency of all states and territories, not just Queensland, on the federal government should be lessened. Unfortunately, in 2016, state and territory governments rejected what I thought was a very good proposal from our former PM Malcolm Turnbull, that states and territories could piggyback on the national income tax (with a cut to the rates before the states piled on).

We’ve known about the vertical fiscal imbalance problem for decades, but alas we haven’t fixed it and the blame game continues.

cover

You can read all about vertical fiscal imbalance in my book Beautiful One Day, Broke the Next, published by Connor Court.

Posted in Agriculture, Tax, Uncategorized, Water | Tagged , , , , , , , | Leave a comment

The Gig Economy – Economics Explained episode with Darren Brady Nelson

The topic of my latest Economics Explained episode is the so-called gig economy. Across the world, we’ve seen a surge in freelancing and contract work, facilitated by the proliferation of laptops and smartphones, and by web platforms such as Uber and Upwork.

The gig economy benefits consumers through lower prices and greater choice. Check out how many local restaurants are participating in Uber Eats for example. And obviously the gig economy benefits the platform businesses which have multi-billion-dollar valuations. But does the gig economy benefit the workers, the people working gig-by-gig?

This question and others were considered in the conversation I had on 12 October with my good friend Darren Brady Nelson, a professional economist who has worked for many years as a freelancer and contractor. Darren’s professional career began in the NSW Treasury in the 1990s. In addition to his economic consulting work, Darren has contributed regularly to a variety of publications, including the Cayman Financial Review. He has also served as an adviser to politicians. For instance, in 2017, Darren was economic adviser to Queensland Senator Malcolm Roberts.

Darren joined us via Skype from co-working space Work Lofts in Milwaukee, Wisconsin, which has a range of features designed to make freelancers and entrepreneurs comfortable, including beer and sparkling water on tap and coffee (see image below).

Beer on tap at Work Lofts

The following articles were mentioned in the interview:

OECD Working Paper – Gig Economy Platforms: Boon or Bane?

Mises Institute article – Is the Sharing Economy Exploitative?

In the episode, I alluded to the regulators taking a dim view of Uber in London. The latest news is that Uber is effectively on probation in London:

Uber gets two-month operating license in London. It wanted five years

Posted in Labour market, Uncategorized | Tagged , , , , , , , , , , | Leave a comment

Government Budget Analysis Training Day on 22 November at the Johnson, Spring Hill, Brisbane

I’m excited to announce my old friend and colleague Joe Branigan and I will be holding a training day on government budget analysis on Friday 22 November at the Johnson Hotel, Spring Hill, Brisbane. Tickets are available via Eventbrite:

Government Budget Analysis Training

We think there is a real need for a training day like this, given all the debate we see in the media on budget/fiscal policy and the large number of different budget metrics, such as the net operating balance and fiscal balance, which are mentioned.

Topics to be covered at the training day include:

  • Public finance 101 – what governments do; how they tax, spend, manage cash, and borrow money
  • Operating and cash flow statements
  • Balance sheets
  • Pros and cons of different metrics (e.g. gross vs net measures, cash vs accrual, general government vs government-owned corporations)
  • Optimal budget policy
    • – golden rule / debt dynamics
    • – debt brake, etc.
    • – privatisation and so-called asset recycling
  • Debt dynamics modelling in Excel
  • Role models and cautionary tales – i.e. good and bad budget policies through history

Morning tea, lunch, and afternoon tea will be provided. Please join us if you’re interested, and please alert anyone who may be interested in our upcoming training day.

Qld_govt_capital_purchases_19_20_v2

Posted in Budget, Uncategorized | Tagged , , , , , , , | Leave a comment

Economics of Infrastructure with Craig Lawrence podcast discussion – Part 2

I’ve just published part 2 of my Economics Explained podcast discussion on the economics of infrastructure with Craig Lawrence, Managing Director of Brisbane-based Lytton Advisory:

Economics of Infrastructure – Part 2

Craig Lawrence has three decades of experience as a professional economist and has advised on a wide range of infrastructure projects in Australia, the Pacific, and the Middle East. Part 2 of our conversation covers, among other things:

  • public private partnerships or PPPs, their pros and their cons;
  • challenges in infrastructure provision in emerging economies;
  • the merits of quasi-independent infrastructure advisory bodies such as Infrastructure Australia and Building Queensland; and
  • the geopolitics of infrastructure (e.g. Chinese takeover of a Sri Lankan port, Australia blocking Huawei’s involvement in 5G infrastructure, and the 99-year leasing out of Darwin port to a Chinese company).

My new Economics Explained podcast is also available via iTunes/Apple Podcasts and Spotify.

On PPPs, you might be interested in an article written by Adept Economics Research Assistant Ben Scott and me:

Demystifying Brisbane’s Cross-River Rail: a PPP, an alliance, and a traditional procurement

Economics Explained Logo

Posted in Infrastructure, Uncategorized | Tagged , , , , , , , , , | 1 Comment