Thursday, April 12, 2012

Why Public Choice Analysis is Important

There are a few recent stories that highlight the value of public choice theory. Public investment in large projects is challenging for many reasons. In many cases, public investment is justified and worthwhile, and public agencies are perfectly well suited to carrying out the work. In other cases, the public interest is badly matched with the project at hand. Of course, in all cases the role of individuals and institutions matters, which is why public choice theory is so useful. Public choice theory provides a framework that helps understand the factors that influence public choices, and accounts for self-interested public servants. It is an important frame of analysis but one that is underutilized. (Key scholars of public choice include William Niskanen, James Buchanan, Gary Becker and Elinor Ostrom.)

Just this week there are two examples in transportation policy that beg for rigorous public choice analysis. First, the California High Speed Rail project is getting a congressional investigation. Second, New Jersey Governor Christie is criticized for his rationale and justification for cancelling the ARC tunnel between New Jersey and Manhattan. (Christie pushes back here.) Either of these projects will make a fine case study through the lens of public choice. In both cases the public actors are not acting in the public's (their constituents) best interest, or if they are it is not clear how. (I am making no claims about the value or merits of these projects individually. I am only considering the actions of officials.) These two projects involve large complicated budgets and bureaucracies that span across multiple governments. The presence of federal funds in each project changes the desirability of each project for the local actors (federal money is a plus for California officials and viewed as a minus by Christie).  Understanding the politics of these projects is not straightforward, but is both cases the real and perceived costs and benefits of the projects are subject to political considerations.

Along these lines, Mike Giberson at Knowledge Problem has a nice post about why public projects cost so much and how we measure success. He argues that too often projects are judged based only on how much they cost:
In general, in public policy analysis, you’d like to judge ultimate success or failure of a program by its net results, by actual benefits less the costs involved in achieving those benefits. Admittedly sometimes benefits are hard to measure, but ultimately the point of a policy change is to bring about some improvement in something somewhere. Ultimately it would be nice, once a program is done, to try to find and measure that improvement.
What we often get instead, however, is an attempt to infer a benefit based on the expenditures on the program: how much money was spent, how many people were employed, how many miles of ditches were dug, and so on. This is, more or less, what we see this week from the U.S. Department of Energy in the study it commissioned from the National Renewable Energy Lab on the impact of the Section 1603 Treasury Grant Program.
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The DOE asked NREL to estimate the effects of the 1603 program on jobs and economic expenditures. In NREL’s report they explicitly state that their work is an estimate of “gross jobs, earnings, and economic output.” This means that they don’t consider any private sector crowding out, any disincentives from the taxation needed to support the program, any consequences from duplication of other government incentive programs, and so on. They simply treat the federal resources as if it were manna falling from the heavens, and the jobs, capital, and industries that became involved in building renewable power plants would have otherwise sat idle. (Note that I’m not criticizing NREL in performing just a piece of the overall analysis, they just did the work that DOE asked for and paid them to do.)
But note that this is primarily a study which just measures the expenses of the program and a part of what the expenditures bought. So, it is a partial study of the costs of the Section 1603 program, and not any kind of estimate of any of the benefits of the program.
Nonetheless, in the DOE press release accompanying publication of the study, they said the study found “the program has been a huge success.” How does it justify its claim of success? By noting how much was spent, how many people were employed, and how many things were subsidized by the program. 
In transportation policy and planning, projects are good if they cost a lot in part because more money means more jobs. But for the California HSR and  the ARC tunnel the high costs, which some actors view as a benefit, are problematic and threaten (or killed) the projects. Hopefully in the future we can develop honest measures of success for evaluating projects. Privatization is not the obvious answer as private agencies are also subject to Machiavellian impulses.


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