Wednesday, December 31, 2014

Perceptions of incongruity: when is a "dollar" not worth a dollar?

Bruner and Postman (1949):
Generally speaking, there appear to be four kinds of reaction to rapidly presented incongruities. The first of these we have called the dominance reaction. It consists, essentially, of a "perceptual denial" of the incongruous elements m the stimulus pattern. Faced with a red six of spades, for example, a subject may report with considerable assurance, "the six of spades" or the "six of hearts," depending upon whether he is color or form bound. In the one case the form dominates and the color is assimilated to it; in the other the stimulus color dominates and form is assimilated to it. In both instances the perceptual resultant conforms with past expectations about the "normal" nature of playing cards.
The full title of Bruner and Postman's 1949 article is "ON THE PERCEPTION OF INCONGRUITY: A PARADIGM." In The Structure of Scientific Revolutions, Thomas Kuhn referred to the research as "a psychological experiment that deserves to be far better known outside the trade."

The Walrasian numéraire is incongruous. It is not money. It is, as Orléan explained. "a purely technical device, introduced simply for the purpose of making exchange values [in a barter economy] explicit." It is, in other words, a red six of spades. What Bruner and Postman called the dominance reaction leads the subject to perceive the numéraire as good old dollar-in-the-pocket money. But it is not money because in the model real money does not exist. This incongruity produces "a bit of economic sophistry." (Clark) "unacceptable nonsense," (Little) "a still thicker and more terrifying smoke-screen," (Chipman and Moore) and "rubbish that prevents the flowering of new theory," (Minsky).

Isn't it about time to call a red spade a red spade?

Tuesday, December 30, 2014

Pipe Dreams and Paradigms

On Democracy Now, December 12, 2014, Amy Goodman spoke with Sean Sweeney of the Cornell Global Labor Institute about claims that the Keystone XL pipeline would create 250,000 jobs. The transcript below is from the part of the interview that starts at around time 00:55 on the embedded video.

AMY GOODMAN: ...You have been involved at a high level when it comes to Keystone XL and providing the numbers for President Obama around it, is that right? 
SEAN SWEENEY: That’s correct, yes, the job figures. 
AMY GOODMAN: What have you found?
SEAN SWEENEY: Well, the jobs debate has been severely distorted by TransCanada Corporation and the American Petroleum Institute. They put forward numbers that really cannot stand up to serious scrutiny, based on normal research practices and methodologies. The numbers are far, far higher than it actually—real. The numbers submitted to the State Department were far, far lower. And this is borne out with the State Department’s environmental impact statement. 
AMY GOODMAN: Did you brief President Obama yourselves? 
SEAN SWEENEY: No, but we know that the president read the report — it was called "Pipe Dreams: Jobs Gained, Jobs Lost [by] the Construction of Keystone XL pipeline" — because he made reference to the figures. 
AMY GOODMAN: Because that is the issue that’s raised so often, that environmentalists are killing jobs by killing the Keystone XL. Explain how you arrive at your numbers. And how many jobs would be lost or gained? 
SEAN SWEENEY: Well, in many respects, the numbers were submitted by TransCanada to the State Department, and we simply interrogated the claims of the multiplier effect, which wonky researchers understand is the jobs that—indirect and induced jobs that would be created by a certain amount of dollars spent on a project. The numbers, you’ll notice, Amy, have not gone down with the jobs, even though the project is half-completed. So, the numbers that they originally claimed three years ago have not gone down at all, but at least—or almost half of the pipeline has actually been constructed. [emphasis added]
The point Sandwichman has been trying to make over the last couple of months -- beginning with this post on Public Works, Economic Stabilization and Cost-Benefit Sophistry -- is that secondary or indirect benefits have been excluded from cost-benefit analysis for public works projects. By itself, this exclusion introduces the possibility of undervaluing the benefits of public works projects. However, as the  Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects makes clear, such indirect benefits are "so ramifying, involved and conjectural that the attempt to compute them... cannot properly be regarded as 'measurement'," (see also part 2).

So what are we left with? Exclusion of indirect benefits from cost benefit analysis of public works projects coupled with systematic exaggeration of indirect benefits from private investment. But wait. There's more. Those private investments have social costs that just happen to be estimated according to a formula that discounts future benefits and costs in addition to excluding secondary benefits from current carbon abatement. From "More than Meets the Eye: The Social Cost of Carbon in U.S. Climate Policy, in Plain English" by Ruth Greenspan Bell and Diane Callan:
In the calculation of costs, benefits, and the social cost of carbon, the choice of discount rate has enormous impact, influencing whether economists recommend to invest today or much later. From the policy perspective of the economists who value this calculation, the higher the discount rate, the less significant future costs become.
In 2010 the U.S government's Interagency Working Group on Social Cost of Carbon (IAWG) presented its estimate of the social cost of carbon "to allow agencies to incorporate the social benefits of reducing carbon dioxide (CO2) emissions into cost-benefit analyses of regulatory actions that have small, or 'marginal,' impacts on cumulative global emissions." The IAWG's central estimate for the social cost per ton of CO2 in 2010 was $21 in 2007 dollars, based on a 3% discount rate.

The D.I.C.E. are loaded. Not once. Not twice. But three times.

Monday, December 22, 2014

Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects, Part IIB

Conclusions and Recommendations

B. Summary of Principal Recommendations

This summary does not include all the minor and detailed recommendations and suggestions which appear in Parts III - VI of our report, but concentrates on those of major importance.

1. Secondary benefits are much less certain and calculable than primary, and more dependent on far-reaching hypotheses. moreover, it appears that usable formulas cannot be based on data that are capable of furnishing complete and accurate comparisons of effects "with and without" a given project. In recognition of this, we recommend that, in benefit-cost ratios, primary and secondary benefits be separately shown; e.g., if the total ratio is 1.8:1, but the primary-benefit ratio is 1.15:1, the result be expressed as (1.15 + .65):1.

2. It appears that Manual procedure for determining the scope of projects could result in carrying one project out on a scale such that the last separable increment would have a separate benefit-cost ratio barely more than one whereas early separable increments of some other projects, whose total benefit-cost ratio was lower than the total benefit-cost ratio of the first, might show a higher ratio than that of the final increment of the first project. We therefore recommend that benefit-cost ratios for separable increments be separately stated, in order that appropriations may be so allocated as to produce the combination of increments yielding the greatest total benefits.

3. We find that benefits "induced" by increased demand and benefits "stemming" from increased supply are of such character that, with minor exceptions, it is not proper to add them in figuring total secondary benefits from a given project at a given time, During construction, secondary benefits are all "induced", while during subsequent operation induced benefits (so far as not covered by "stemming" benefits) appear to be limited to identifiable particular cases of minor magnitude, and the main secondary benefits are of sorts for which the "stemming" procedure (with modifications which we will suggest) affords an appropriate rule-of-thumb approach. We therefore recommend that the calculation of benefits be separated between periods of construction and operation of a project, as, explained further in recommendations 4 and 5.

4. As to induced benefits taking the form of employing otherwise-unemployed resources during construction, we recommend that the Bureau explore with other appropriate agencies, such as the President's Council of Economic Advisors or the Bureau of the Budget, the possibility of setting up a sliding scale of such benefits, varying with the probable state of activity in the economy (the construction industry deserving special weight). Such a sliding scale might be made available as a standing formula for guidance in estimating such benefits. The appropriate time to apply the formula would be the last possible moment before decision on the undertaking of a project, when some reasonable forecast of the probable state of economic activity may be feasible. Any such overall national formula should be supplemented by local or area information which may indicate possibilities of mopping up local pools of unemployment or utilizing unused facilities. For the construction period, estimates varying with the probable state of economic activity, to the extent that forecasting is feasible, appear superior to blanket allowances, e.g., of 5% or 6%.

The result might be treated as an "offset to cost" of construction or as a public benefit. We see advantages and disadvantages for each method, and have no firm preference between them.

5. As to benefits "stemming from" increased supply of project products, we consider benefits of this sort exist, to an extent impossible to measure, but far less than the full amounts computed by the Manual procedures, We would accept a more limited form of this procedure as a rough approximate representative, not only of literal "stemming" effects, but also of more general effects, diffused through the economy and not at present measurable. We have in mind gains from lessening pressure of mobile resources on land areas other than project lands, and otherwise in-creasing productivity or lessening its decline. We propose four limitations on existing "stemming" procedure:

(a) Subtraction of full economic costs of "stemming" activities, or some agreed estimate of them, instead of the costs now subtracted.

(b) Reduction of disparities between commodities by exclusion of major processing operations.

(c) Allowance on the "without" side of the "with and without" comparison for benefits "stemming" from alternative uses of resources represented by project costs.

(d) As indicated in recommendation 3, above, induced benefits during operation be not included except in particular cases where a definite showing is made that their inclusion is justified.

6. Inclusion of "public" benefits is justified. We judge that, in the case of municipal water supply in instances where no alternative source is available, public benefits beyond rates charged for water are warranted and recommend further study of this question. In the case of irrigation, we take. exception to the allowance for "settlement opportunity", and recommend that this be treated as a qualitative, "intangibles" factor.

7. As to power, we find that it is proper to assume that, in the absence of a project, power will be supplied from an alternative source, and therefore propose that the total benefit imputed to project power be the cost of power from the next cheapest alternative source. This excludes all benefits of the "stemming" type, specifically those designated in the Manual as B-2, B-3, and C-3. If the B-2 type of benefits (benefits of private distributors of power purchased from a public project) are nevertheless employed, we find them computed on an exaggerated basis and recommend that they be reduced by deducting full allowance for economic return on all capital in accordance with recommendation 5 (a), above.

8. As to qualitative and intangible benefits and costs our study has led us to look toward diminished reliance on quantitative computation and toward attaching greater relative importance to qualitative effects of the alterations in distribution of population, types of community, etc. We therefore suggest that these matters are worth increased attention and study, including sociological aspects. These are, of course, matters that can be described and appraised only by judgment.

Sunday, December 21, 2014

Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects, Part IIA

Conclusions and Recommendations
A. Introduction

The present panel has been engaged as a group of disinterested students to make an objective appraisal of the disputed procedures for evaluating secondary benefits and costs of Federal water-use projects, on which the Bureau of Reclamation has failed to reach agreement with the other five agencies represented in the Subcommittee on Benefits and Costs. We have been engaged by the Bureau of Reclamation, with the knowledge and approval of the other interested agencies. The personnel of the Bureau have given us the fullest assistance and cooperation, in making available to us the pertinent documents in the case, in presenting to us the wide variety of views, to be found among their members, and in answering questions which have arisen from time to time in the course of our study. The members of the panel are impressed with a deep sense of their responsibility in this difficult question. Able minds, more conversant with specific problems than the members of the panel could hope to become in their necessarily limited study, and exhibiting familiarity with the relevant concepts of economic theory, have with time and effort hammered out a considerable amount of agreement on principles and at least, a compromise on general outlines of procedures; and we should feel presumptuous if we undertook, on much briefer study, to propose disturbing any material part of whatever consensus may have been reached, without imperatively strong reasons. In fact, it appears that, in the various documents that form the record of this case, most if not all of the pertinent theoretical concepts are embodied, in one way or another, but they appear with twists and one-sided applications, which alter the meaning of concepts in ways not unrelated to their pragmatic effects. The positions of majority and minority cannot both be right: real agreement necessitates change of one or the other.

Our conclusions are of two sorts. A few are specific and not far reaching, and could, if approved, be put into effect fairly readily. Other's are based on more fundamental questions as to the economics involved in the procedures, and are so far-reaching as to call for further study, and presumably consultation between the interested agencies, before they could be embodied in working procedures. On certain points, we agree with majority positions, on others with the minority; but on some rather fundamental matters we dissent from both. We take the principle of the "with and without" comparison as controlling, but find that certain limitations on its application have prevented the procedures used from truly reporting the results of such a comparison, which they are supposed to report, or to be attempting to approximate.

We seek a method of determining what projects promises net surplus of national benefits over conditions as they would be without these projects; also of ranking different projects, and different increments of project scope, in order of relative economic justifiability. All parties appear to agree that the basic answer sought is the aggregate of quantitative differences in the national real income, with and without a given project, wherever such differences may occur and whether they are plus or minus; to which should be added consideration of qualitative differences and evaluation of them wherever possible. The inescapable difficulty, even for the quantitative differences, is that, for the ramifying secondary effects, accurate and definitive answers require omniscience. Lacking this, some things can still be measured, but not all the hypothetical effects of the presence or absence of a given project. Something short of measurement is inevitable. Methods of meeting this difficulty are subject to several criteria.

First, similar standards should be applied to different projects, and to both sides of the "with and without" comparison.

Second, these standards should be framed in the light of objectively valid conceptions of the essential cause-and-effect relationships and these conceptions should be kept clear and distinct from compromises of procedure that may be necessitated by limitations of evidence or otherwise. If this is done, a range will appear – in some cases quite a wide range – within which the answer may depend on judgment, without possibility of even relatively precise measurement.

Third, in this situation, without pretending an unreal precision, a different kind of end may be served if formulas can be devised calculated to yield results within the general order of magnitude which judgment suggests. Such formulas would at least make for uniformity and comparability, reducing the scope for the vagaries of personal equation or agency bias. This is in itself a weighty consideration.

Lastly, if at all possible, procedures should be simplified. One of the apparent vices of the present situation is the fact that some of the procedures are so complex and involved that the meaning of what lies behind a benefit-cost ratio is accessible only to a select few, even among. the initiated. This hampers what needs facilitating; namely, proper democratic scrutiny of the proposal of executive agencies. The material involves inescapable complexities and uniformity in handling it requires formulas of some sort, at some stage or stages. Democracy has to rely on technicians in matters inscrutable to the non-specialist, but preferably where the specialist is following a well-authenticated technique. In this case, the disagreements among the specialists are evidence that they do not possess such an authenticated technique, for the results of which a representative government can safely take their word. It needs to be able to tell what they are doing, and what their procedures mean.

All this creates a dilemma difficult to resolve, In this dilemma there appear to be two tenable alternatives, The more drastic method would be to abandon the attempt to measure secondary benefits. Computation would then be reduced to the furnishing of evidence on the basis of which secondary benefits may be appraised by a frank exercise of judgment. The less drastic method is to use formulas calculated to give results that fall within the range of reasonable judgment-estimates, but which are with equal frankness treated as rule of thumb, not as definitive measures.

In the first case, regional offices should furnish statistical evidence prepared under rules that are uniform within a given agency and at least comparable as between agencies. The first judgment-estimates would presumably be made in the central office of each agency, as a means to intra-agency uniformity; but inter-agency comparability and equity would be in the hands of higher authorities, who would need to have the evidence passed up to them in usable form. If this seems too indefinite – and the President's Water Resources Policy Commission has asked for greater definiteness and inter-agency uniformity – there is an arguable case for the view that it is better than spurious definiteness, that final decisions actually use judgment rather than implicitly following benefit-cost ratios calculated by different agencies in different ways, and that the suggested method would tend to implement the ultimate decision with better-prepared evidence than it now has. We see force in this view but we recognise also that the pressure for rules of thumb is strong, and the advantages of more definite uniformity great. We therefore propose continued use of formulae, regarded as rules of thumb, and altered from present Bureau practices, for "stemming" and "induced" benefits; but for some elements we propose that they be left to the exercise of judgment, without attempting quantitative measurement.

Saturday, December 20, 2014

Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects, Part IB

B. Summary Response to the Commissioner's Instructions

The Commissioner's instructions to the panel open with a general paragraph calling for an appraisal of Bureau of Reclamation procedures, and for our own recommended basis for procedure. The main subject with which these procedures deal – secondary benefits and costs arising from water-use projects – has been defined to us as consisting of differences, not covered by primary benefits and costs, in the total national output of goods and services with the project as compared to similar output as it would be without the project. We understand that it is as measures of these differences that we are asked to appraise existing or proposed procedures.

Instruction (1) concerns Bureau of Reclamation procedures. After careful consideration, it is our conclusion that these procedures for evaluating secondary or indirect benefits and costs include some elements for which quantitative estimates are warranted, and further elements for which an arguable (but not conclusive) case could be made for limited application of quantitative estimates; but that the applications actually made by the Bureau go far beyond what can be soundly identified as quantitatively measurable secondary benefits (in the above sense) attributable to public water-use projects. More broadly, we believe in the importance of secondary benefits, but find them so ramifying, involved and conjectural that the attempt to compute them as a national total, in dollar terms, by the methods of the Manual or any other methods that appear at present available, cannot properly be regarded as "measurement," though computations of pertinent items may be useful as guides to judgment in rating the importance of these benefits.

Accordingly, we are able to "set forth a recommended basis for the evaluation of secondary benefits and costs" as directed in instruction (2) only on the assumption that "evaluation" can include, for important parts of these benefits and costs, ratings by the exercise of judgment which are not precise enough to justify regarding them as quantitative measurement. As to what secondary benefits and costs should be taken into monetary account, these appear to include the following.

(i) Increased employment during construction, as a non-recurring benefit or offset to cost of construction, dependent on expected economic conditions during the construction period, and subject to offset, in conditions of high-level employment, for the non-measurable impacts of probable inflationary pressures and/or seriously high taxes, including business taxes.

(ii) Locally-accruing gains as a basis for securing reimbursement. The propriety of including these in an appraisal of aggregate national benefits appears to be an arguable question, difficult to settle in favor of either affirmative or negative.

(iii) Local "public" benefits.

(iv) Increased (or decreased) utilization of identifiable existing facilities.

As to the more general question of an aggregate increase in the national product attributable to a project (excess of product with the project over product without it) during the period of operation, as distinct from that of construction, we believe there may be such effects of three general sorts: (a) in the case of irrigation, increase (in the above sense) in productivity of mobile factors of agricultural production resulting from increase in the available supply of arable land, (b) expansion of the field of employment of non-agricultural sorts from a net increase (in the above sense) in the amount of primary agricultural products flowing into the economy, and (c) the furnishing of other basic facilities for production or community life by more economical methods than the cheapest available alternative, the saving representing an amount of productive factors freed for other uses in the general economy. As to (a) above, we think it possible (though far from certain) that current investigations may in future yield results by which the magnitude of the increased marginal productivity might be approximately indicated, but we know of no methods now available which we could conscientiously recommend as accomplishing this. As to secondary increases of product in general, the main methods used by the Bureau are estimates of benefits "stemming from" the disposal and processing of the products grown on a project, and benefits "induced by" by the spending of the primary income received from the sale of the project's raw products. Both of these methods appear to contain some probable validity; but as to how much (i.e., how large an estimate on these scores is warranted) we think that is a matter of judgment and the best check on arbitrary estimate is a survey of the forms in which such an increase in the national product must be embodied (as developed in Part III, Section 3, below).

This being the nature of our judgment, we are hardly in a position to recommend an alternative formula purporting to measure these secondary benefits. We recognize that both the majority and the minority of the Subcommittee on Benefits and Costs have accepted the "stemming" and "induced" formulas as parts of their (conflicting) procedures; and accordingly our specific comments include, in addition to critical examination of these formulas, conditional suggestions that if formulas of these general sorts are to continue in use, certain kinds of limitations should be imposed on them, tending to prevent them from being built up to totals that appear clearly unwarranted. Since the Commissioner's eight particular questions presuppose the use of procedures of these general sorts, and get their operative meaning from this setting, our answers should be understood in the same sense, as what would be applicable if and to the extent that such procedures are to continue to be used, but not as implied by accepting the idea that these procedures constitute quantitative measurement of the aggregate difference between national product with a project and national product without it.

Some of our specific recommendations bear on matters that do not stand or fall with this major question of basic procedure, and the significance that should be attached to it.

With this explanatory comment, we present our answers to the eight questions put by the Commissioner.

1. Basic assumptions and procedures in the Bureau of Reclamation Manual.

These assumptions and procedures appear sound to the extent that they follow what we conceive to be the controlling principle: that of the "with and without" comparison. They appear sound, as against the majority report, in rejecting double deduction of costs of secondary activities, which an unsigned memorandum describes as "netting benefits already net." However, they do not appear sound in adding benefits "stemming from" and benefits "induced by" a project nor in carrying the computation of "stemming" benefits through to the final consumer and giving the project credit for the whole. Our report will weigh alternative proposals for dealing with this difficulty and will make recommendations, the reasoning on which they rest being developed in the appropriate sections.

2. (a) Should it be assumed that needs met by a project would be met if the project were not constructed?

The answer appears to be: "yes, if it appears reasonably clear that this is what will happen – for example, where power will be produced by a steam plant if not by a hydroelectric project." There it is merely a question of what uses private enterprise will make of resources as a result of a project not being undertaken, the probable similarity of the needs met should be examined. In that case it is our judgment, that any assumption of difference in needs met which would carry an assumption of smaller secondary benefits without the project than with it, should bear a definite burden of proof, which burden will not be easy to sustain.

2. (b) "By what procedure should the analysis account for stimulating expansion of the nation's productive capacity?"

We believe this factor to be highly important, but have found no procedure that can properly claim to measure it quantitatively. The choice appears to lie between two courses: (1) treating this as one of the factors which can be described and given weight by judgment; and (2) using procedural rules of thumb, presented as such, without claim that they can truly "measure" this quantity.

3. "Can the procedures for primary benefits and the general principles of the Subcommittee's May 1950 report be logically expanded to provide adequate evaluation of secondary benefits?"

The report of May 1950 commands high respect for its understanding and general soundness, and is an excellent but incomplete guide. For purposes of expansion of primary-benefit procedures to secondary benefits, its statement on page 9 needs clarification on one key point as to the use of costs to represent benefits foregone. This lack of clarity permits a major disagreement as to whether secondary benefits should be counted on both sides of the "with and without" comparison. The same passage in the May 1950 report needs to be qualified or clarified by the proviso that the significant alternatives are not limited to uses of the identical resources, but include any uses of resources that will be made in the economy in the absence of the project. This qualification figures in one of our suggestions on procedure. As to procedure for determining the scope of a proposed project, the report appears to fall into an error, not of basic importance, which can be rectified without difficulty of principle.

As to the question asked about expanding primary-benefit procedures to cover secondary benefits, it appears that a simple "yes" or a simple "no" answer would be about equally misleading. There are common elements, but the more complex features of ramifying and non-marketable secondary impacts require additional analysis. It is notable that "induced" and "stemming" benefits are barely mentioned in the May 1950 report, and are not analyzed, thus avoiding the most thorny differences between primary and secondary procedures.

4. (a). "Should project costs, associated costs, and secondary costs, in terms of market value, be considered an adequate measure of benefits foregone from alternative uses?"

This is a far-reaching question of central importance. Briefly, ordinary accounting costs should not be so considered; full economic costs, including market rates of return on investment and compensation for entrepreneurial services, may be taken as adequately representing the direct and marketable benefits foregone from alternative uses, but not secondary for which private producers cannot collect market compensation. If these secondary benefits are reckoned on one side of the "with and without" comparison, they should properly be reckoned or reflected on the other side also, in one way or another.

4. (b). "Should the effects of alternative uses be compared with or deducted from the benefits of project uses?"

Unless one notes the context out of which this question arises, one is tempted to reply: "What difference does it make?" The question appears to arise, in connection with the dispute over double deduction of costs in reckoning secondary benefits. And the answer appears to be that a single deduction of this sort is warranted, but not a double deduction. The insistence on comparing rather than deducting seems to be intended as a way of avoiding the second deduction made in the example given in the majority report, top of page 9.

5. "Should the same basic assumptions govern the analysis of primary and secondary benefits?"

This appears to have been dealt with in the answers to Questions 3 and 4(a) above.

6. (a). How can measurements of benefits from a local viewpoint be converted to represent the national public viewpoint?"

In principle, the answer appears to be: by making them one side only of a comprehensive national "with and without" comparison, and deducting corresponding benefits that would accrue elsewhere without the project. However, in practice, local benefits are identifiable, and less uncertain than unidentified nation-wide alternative benefits. Where it seems warrantable to assume that there will be a net national balance of benefits larger than the sum of benefits accruing within the locality, it may be warrantable to count the locally-accruing benefits as part of the national sum, provided the rest of the national sum computed is sufficiently limited to safeguard against exceeding the probable national total.

6. (b). "If direct irrigation benefits (increases in net farm income) represent a national as well as a local viewpoint, should increases in net income in secondary activities represent both viewpoints?"

This question appears to be controlled by the answer just given, and also by the answer to Question 4(a) above, in which the economic meaning of "net income" hinges on the kind of costs that are deducted in arriving at it. One answer would be: Neither primary nor secondary net income should be accepted as representing national benefits unless the costs used are such as represent national benefits foregone, and secondary benefits foregone are taken into the reckoning.

7. "Do secondary benefits vary substantially for different types of commodities and different projects?'

There is a strong presumption that national benefits "induced by" spending bear a substantially equal ratio to the spending, or to the income from which the spending is derived, not differing in measurable ways between different commodities or projects. This kind of benefit is generated only by a net increase of spending, and is most clearly applicable to cost of construction during the construction period. Where locally-accruing benefits, "induced" or "stemming", 'are computed during the period of operation, they might be expected to differ between products and projects; but these differences should not affect the factors used to set limits on any national total which may be used as representative of secondary benefits.

National totals of benefits "stemming from" a project may differ slightly for different kinds of products and projects; but we do not believe they differ to anything like the extent, or in the way or for the reasons that appear in the method now accepted. We believe this method seriously distorts the relative benefit-standing of different kinds of products. We believe it is more faithful to the probable facts to adopt the prima facie assumption that these benefits follow the same proportions for different products in the same general class of project, and the, same for products with a project as without it, putting the burden of proof on any claim of quantitative difference. As to differences of view between the water-use agencies, the most controversial bearing of this question is on the disputed method of computation culminating at page 9 of the majority report. The method of the Manual has an effect equivalent to assuming that secondary benefits with the project exceed those without it in the ratio which of "value added" bears to costs in the "stemming" processes. In our judgment, this is too large a difference for the purpose in hand, exaggerating the net total of "stemming' benefits. The costs used in this analysis appear not to afford valid evidence for an answer to this difficult and far-reaching question.

8. (a) "Can an identical procedure be used to evaluate secondary benefits from irrigation, power, municipal and industrial water supply, and other purposes?"

The problems appear sufficiently different to call for variants of specific procedure. It should be possible to place these on a common basis of principle.

8. (b). "Should savings to power consumers from lower power rates be considered a primary or secondary benefit?"

The economic analysis of proposed hydroelectric power developments should be viewed primarily as a comparison of the relative economy of power generation from different possible sources. It is reasonable to assume that power demand in the United States will continue to grow and that if a proposed hydroelectric plant is not built, the demand will be met by power from the most economical alternate source, usually steam. Hence the total benefit figure for comparison with the project costs added by the inclusion of power features in a river basin development should be the cost of equivalent power from the most economical alternate source. The use of such a benefit figure will fully reflect savings to the public resulting from the decision to choose hydro power rather than steam power for generating purposes. This topic is discussed at greater length in Part V of our report. In Part V, we recommend that the total power benefit, namely, the cost of power from the most economical alternate source, be viewed entirely as a primary benefit.

Friday, December 19, 2014

Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects, Part IA

A. Instructions of Michael W. Straus, Commissioner, Bureau of Reclamation, to Panel of Consultants on Secondary or Indirect Benefits

The Panel of Consultants will have as its goal the preparation of a report which (1) will indicate its views on the adequacy of Bureau of Reclamation procedures for recognizing and evaluating secondary or indirect benefits and costs, and (2) will set forth a recommended basis for the evaluation of secondary or indirect benefits and costs. The Panel will study carefully the Bureau of Reclamation's principles and procedures for the identification and measurement of benefits and costs of water resource development projects, and will consider related materials such as reports to the Federal Inter-Agency River Basin Committee by its Subcommittee on Benefits and Costs and reports on the accomplishments of operating Reclamation projects. The Panel should indicate the secondary benefits and costs which it feels should be taken into monetary account and should propose methods of measuring them, particularly for irrigation, hydroelectric power, and municipal and industrial water supply. The report of the Panel should be submitted by July 1, l952.

Some of the more important questions to be resolved by the Panel are as follows:
  1. Are the basic assumptions and procedures contained in the Bureau of Reclamation Manual for the determination of secondary or indirect benefits and costs sound and defensible? If not, where, to what extent, and in what way should they be modified?

  2. Should it be assumed that needs met by a project would be met if the project were not constructed? By what procedure should the analysis account for stimulating expansion of the Nation’s productive capacity?

  3. Can the procedures for primary benefits and the general principles of the Subcommittee’s May 1950 report be logically expanded to provide adequate evaluation of secondary benefits? If so, what procedures and assumptions should be used?

  4. Should project costs, associated costs, and secondary costs, of market value, be considered an adequate measure of benefits foregone from alternative uses? If not, how should such costs be measured? Should the effects of alternative uses be compared with or deducted from the benefits of project uses?

  5. Should the same basic assumptions govern the analysis of primary and secondary benefits?

  6. Federal expenditures are required for water development projects, and therefore it is believed that all benefits should be evaluated from a national public viewpoint. How can measurements of benefits from a local viewpoint be converted to represent the national public viewpoint? If direct irrigation benefits (increases in net farm income) represent a national as well as a local viewpoint, should increases in net income in secondary activities represent both viewpoints?

  7. Do secondary benefits vary substantially for different types of commodities and different projects? If so, how can the analysis take account of such variations?

  8. Can an identical procedure be used to evaluate secondary benefits from irrigation, power, municipal and industrial water supply, and other purposes? If so, what procedure should be used? If not, what procedure should be used for each purpose? Should savings to power consumers from lower power rates be considered a primary or secondary power benefit?

Thursday, December 18, 2014

Cost-benefit analysis as "unacceptable nonsense"

Little, I.M.D.. Ethics, Economics, and Politics: Some Principles of Public Policy, 2002:
Cost-benefit analysis compares states of affairs with and without the project that is being analysed. It is applied welfare economics. Indeed it comprises almost all that is of interest in applying welfare economics. (p. 22)
Doubtless influenced to some extent by Robbins, economists gave up the idea of cardinal utility, claiming that all the propositions of positive demand theory could be derived from ordinal utility. They even tried to base normative economics on ordinal utility and the incommensurability of individual utilities. Thus one state of affairs was held to be better than another if those who gained could overcompensate those who lost. This was unacceptable nonsense, as was soon pointed out. However, the idea of compensation, and its possibility or otherwise, has remained important in applied welfare economics (that is, cost-benefit analysis...). (p. 11)
Little misinterpreted Robbins's 1938 article, which Robbins characterized as "a long story about the genesis of two or three pages in an essay that was written some time ago, and which was never expected to be the subject of much discussion." Robbins wasn't advocating the abandonment of interpersonal comparisons of utility. Rather he was arguing that it was not helpful "to speak as if interpersonal comparisons of utility rest upon scientific foundations..." The justification for making such comparisons, in Robbins's view, was ethical rather than scientific. He concluded his 1938 article affirming that "it is fitting that such assumptions should be made and their implications explored with the aid of the economist's technique."

In light of what Robbins wrote, the "unacceptable nonsense" of the compensation criterion is even more unacceptable and nonsensical. It was an attempt to concoct "scientific foundations" for avoiding the necessity of making ethical judgments. It is hard to say which is more reprehensible -- the pseudo-scientific pretension or the craven ethical evasion. Fortunately, it is not necessary to decide. The compensation criterion at the heart of standard cost-benefit analysis is functionally inept. Any semblance of conclusiveness derives from the arbitrary use of the "same yardstick" as both the standard of measurement and the thing being measured.

"Unacceptable nonsense" is an understatement. The Kaldor-Hicks compensation criterion is Duck Soup. "Now I ask you one: what is it has a trunk with no key, weighs 2000 pounds and lives in a circus?"

"Gentlemen, Chicolini here may talk like an idiot and look like an idiot but don't let that fool you. He really is an idiot."

Wednesday, December 17, 2014

This Just In!

From Timothy Noah at Politico Morning Shift ("your daily speed read on labor and employment policy):
The machines-mean-fewer-jobs view is known as the “lump of labor” fallacy, first articulated in 1908 by an English economist named Sydney Chapman. But Chapman never lived to see the invention of the silicon chip. Is lump of labor still a fallacy?
Somebody's been "speed reading" the Sandwichman but ought to  s l o w  d o w n. No, the lump-of-labor fallacy was not "first articulated" in 1908 by Chapman.

Walker, T. "Why economists dislike a lump of labor," Review of Social Economy, 2007, vol. 65, issue 3, pages 279-291.

Abstract: The lump-of-labor fallacy has been called one of the “best known fallacies in economics.” It is widely cited in disparagement of policies for reducing the standard hours of work, yet the authenticity of the fallacy claim is questionable, and explanations of it are inconsistent and contradictory. This article discusses recent occurrences of the fallacy claim and investigates anomalies in the claim and its history. S.J. Chapman's coherent and formerly highly regarded theory of the hours of labor is reviewed, and it is shown how that theory could lend credence to the job-creating potentiality of shorter working time policies. It concludes that substituting a dubious fallacy claim for an authentic economic theory may have obstructed fruitful dialogue about working time and the appropriate policies for regulating it.

Tuesday, December 16, 2014

I Dunno? ¯\_(ツ)_/¯

Does anybody really give a shit about the "genealogy and critique of applied welfare economics"? Apparently not. Ninety-nine views and no comments. One whole comment ("Important.") on "#NUM!éraire, Shmoo-méraire."

I was going to write a couple of more installments on theory of welfare economics and practice of cost-benefit analysis but what's the use? It has all been said -- and ignored. So if I say it again and it is ignored again what difference does that make?

This is only the nuts and bolts of how total bullshit ("unacceptable nonsense") is molded into unyielding policy certainties. There are no sinister conspiracies lurking in the shadows. Just half-witted theoretical "brilliance," dull-witted bureaucratic appetite for "formulas" and feeble-witted inattentive inertia.

People really don't care that the economic models used to inform international climate negotiations are built with factory-reject tinker-toys? Apparently not.

Motivate me.

Thursday, December 11, 2014

Genealogy and Critique of Applied Welfare Economics

When he was little, Ian Malcolm David Little lived in a big house. It had 20 servants and 23 bedrooms. Little's mother, Iris's grandfather, Thomas Brassey, "was perhaps the greatest 'captain of industry' the world has ever seen." According to Little's obituary in the Independent, his great grandfather was made an earl in 1911, which would have been remarkable since Thomas Brassey Sr. had died forty years earlier.

It was actually I.M.D. Little's great uncle, Thomas Brassey Jr., who was made an earl in 1911. In 1872, Brassey Jr. wrote Work and Wages, an empirical study of wages, hours and output using the extensive labour accounting records accumulated by his father. Brassey's book had quite an impact on economic thinking. The prominent American economist, Francis Amasa Walker, extolled the authoritative status of Brassey's evidence:
[B]y far the most important body of evidence on the varying efficiency of labor is contained in the treatise of Mr. Thomas Brassey, M.P., entitled Work and Wages, published in 1872. Mr. Brassey's father was perhaps the greatest "captain of industry" the world has ever seen… The chief value of Mr. Brassey, Jr.'s work is derived from his possession of the full and authentic labor-accounts of his father's transactions....
Subsequently, in what is "regarded to be the first modern economic textbook," Alfred Marshall credited Walker for "forcing constantly more and more attention to the fact that highly paid labour is generally efficient and therefore not dear labour…" Marshall judged that fact to be "more full of hope for the future of the human race than any other… [although it] will be found to exercise a very complicating influence on the theory of Distribution."
That is to say it was Brassey's evidence that lent weight to Walker's theoretical arguments that "complicated" the theory of distribution. In the early twentieth century, Marshall's star pupil, Sydney Chapman, collaborated with Brassey Jr. on a three-volume continuation of his Work and Wages, which included an analysis of the hours of labour that incorporated the more theoretically-advanced analysis of that topic first elaborated in Chapman's 1909 Economic Journal article, "Hours of Labour." In his 1872 review of Brassey's book, Frederic Harrison had written:
To this first proposition — that the rate of wages affords no indication of the cost of production — Mr. Brassey adds a second, which is quite as significant. "It is equally true," he says, " that the hours of work are no criterion of the amount of work performed." Now this is very instructive, especially at the present time. Throughout the movement to substitute the day of nine hours for that of ten, the public instructors invariably assume that this is equivalent to a loss in productive power of 10 per cent. Nothing can be more utterly belied by facts. 
Chapman's analysis of the hours of labour was reiterated 11 years later in A. C. Pigou's Economics of Welfare, which, according to Little in his Critique of Welfare Economics, "appears to have popularized the use of the word 'welfare' by calling his book The Economics of Welfare." In his footnote (p. 78) discussing the evolution of terminology, Little nominated 'satisfaction' and 'happiness' as precursors to welfare. But why not 'distribution'?

Pigou's discussion of the hours of labour firmly adhered to the empirically-grounded theoretical "complication" of the theory of distribution that was launched with Brassey's Work and Wages and was elaborated by Walker, Marshall, Chapman and finally Pigou. J. R. Hicks and Lionel Robbins shared Pigou's confidence in Chapman's analysis of the hours of labour. In his 1929 article "The economic effects of variations of hours of labour" Robbins wrote:
The days are gone when it was necessary to combat the naïve assumption that the connection between hours and output is one of direct variation, that it is necessarily true that a lengthening of the working day increases output and a curtailment diminishes it.
Of course those days weren't gone. Or if they were gone, they soon returned. The complication was undone by "a simple book-keeping artifice," which is to say by a sleight of hand.

The Otherwise Less Desirable Characteristics of a Hoax

Folks, it's a hoax! It's gotta be a hoax. Quantifying the otherwise more desirable characteristics of unhealthy foods (or the less desirable characteristics of healthy foods) takes Jeremy Bentham's expression "nonsense on stilts" to a new level. It's nonsense on stilts riding a unicycle blindfolded.

Please tell me it's a hoax! Desirability is not an attribute of the object of desire.

Don't take my word for it.

What does Lacan say about desire? "Our desires are not our own, they are the Other’s"

What does Žižek say about desire? "We don’t really want what we think we desire."

What does Rene Girard say about desire? "Desire usually is born out of the contemplation.of someone else who is desiring and who designates to you the object he's desiring as desirable." (1:57)


And what, pray tell, does Luis Buñuel have to show us about That Obscure Object of Desire? Well...
As Mathieu sees her, Conchita is so changeable that Buñuel has cast two lovely new actresses to play her—Carole Bouquet, who looks a little like a young Rita Hayworth, as the coolly enigmatic Conchita, and Angela Molina as the earthy, flamenco-dancing Conchita whom he follows to Seville. 
Poor old Mathieu. The night he succeeds in getting Conchita to his country house, where she has promised to be his mistress, the Conchita who goes into the bathroom to change, changes not only her clothes. Miss Bouquet goes in but Miss Molina comes out.

Wednesday, December 10, 2014

Costs and Benefits of Desire

"Accounting for the facts that healthy foods are otherwise less desirable and that consumers already have some information about health, the net benefit to consumers possible from consuming healthier foods is 30-40% of the value of the gross health benefit from switching to the healthiest possible diet."
What "facts"? A Reuters report on Monday told the story of the $5.27 billion in "lost pleasure" estimated in a U.S. Food and Drug Administration analysis of product labeling. According to the report, to arrive at that estimate, "the agency relied almost solely on a 2011 paper by then-graduate student Jason Abaluck."

In all fairness to Abaluck, the paper strikes this reader as an earnest and diligent graduate student exercise in mathematical modeling. Of course quantifying the "otherwise less desirable" characteristics of healthy foods is sheer nonsense. But that's not an issue for mathematical modeling. Do the conclusions follow rigorously from the assumptions? That's all that counts. Assuming that healthy foods are otherwise less desirable... But why would you?