Cost-benefit analysis and impartial umpires

James Zuccollo writes on the UK's Office for Budget Responsibility:

In contrast to his fiscal rules, Osborne has had enormous success with his greatest fiscal innovation: the Office for Budget Responsibility (OBR). It was created in 2010 and has been successful in curbing the problems of over-optimistic forecasts that plagued the Treasury through the 2000s. Its ruthless transparency has lent credibility to the government’s plans and, in only a few years, it has grown in stature to the point that it can openly rebuke the Prime Minister and force changes in the Budget with its forecasts.

Expanding the role of the OBR, commensurate with its growing stature, would help overcome the fits and starts of UK fiscal policy. Where rules are fragile and inflexible, institutions grow and evolve in response to circumstances. As the OBR continues to perform effectively and its credibility rises, it can sustain a greater burden of responsibility for holding the government to account. Already, it has cross-party respect and support: last year, the shadow chancellor Ed Balls asked it to inspect the budgetary pledges of each major party ahead of the election. That is surely a good idea.

Assessment of opposition and government policies is a role already performed by similar bodies overseas, such as the Dutch CPB. The CPB is nearly 70 years old and has gradually taken on a central role in analysing the implications of election manifestos and Budget promises. In America, the Congressional Budget Office has also expanded its purview over time. Both provide indispensable analysis of the implications of the government’s policies and proposals, describing the trade-offs and estimating the costs.

Bryce Wilkinson and Khyaati Acharya here at the Initiative made the case for a New Zealand version.

I'd love such a body to act as clearinghouse for cost-benefit analyses. Regulatory Impact Statements vary in the quality of cost-benefit analysis; there are always ways of getting the number over the line if the Ministry's particularly keen - just consider the Australian East-West rail road link. You need an impartial arbiter to make sure that the cost-benefit analyses are being undertaken to a common standard across Ministries.

Further, since few Ministries have in-house capability to conduct these analyses, they often have to outsource it to private consultancies. At least one of these consultancies has a reputation for providing the number that the client wants rather than one that's sound. But Ministries can't pay the piper unless they know the tune, or unless somebody who can read sheet-music has a look over things afterwards.

Here's a simple rule that could work. Submitted Regulatory Impact Statements would be required to include a cost-benefit analysis for any rules with substantial effect. That cost-benefit analysis must be vetted by Treasury, or by a new Fiscal Council, with enough of the workings provided by the Ministry or the consultants to allow for replication and sensitivity tests. Treasury is working up new guidelines for cost-benefit assessment; that would be the benchmark. If the cost-benefit analysis fails to pass muster, it's sent back to the Ministry. And consultancies that produce cost-benefit assessments that fail to meet the standard more than, say, one time for every ten reports produced, are put on a naughty sheet barring Ministries, government agencies, SOEs, local governments, regional governments, or any other part of the government I've missed here, from engaging their services for a few years.

Further, for a cost-recovery fee, that same agency should be able to vet analyses produced for private sector clients. A failed report there could get the tagline "Had this been produced for the public sector, the consultancy producing it would be barred from producing further analyses for any government agency for two years." And that tagline could follow it in all public discussion of that report.

I think the naughty sheet would do a lot to improve the standard of cost-benefit analyses in New Zealand.

A bit of hope

The MOOCs are coming, the MOOCs are coming... batten the hatches and fire half the staff!

Well, maybe not. Or at least not yet.

Recall that, from the student's perspective, universities deliver a complicated mix of learnings, discipline, socialisation, enculturation, and perhaps the chance to find a suitable mate. It's not hard to see online education being able to provide some of the straight information-delivery part, but that's only part of the bundle offered by traditional institutions.

James Zuccollo at TVHE helpfully points to some recent work putting numbers on it. Universities compete for students on quality of its academic staff, quality of teaching, and a big pile of student amenities. And, students have heterogeneous preferences. They find:

• Students saying they value campus social life are attracted by more spending on student services but repelled by spending on academics; those who care about academics prefer universities that weight spending towards academics relative to student services. 
• Students planning on living at home while at university are less sensitive to university spending on consumption amenities than those living on their own.
• Spending on student services correlates with student evaluations of campus life and also improves student assessment of the academic environment; spending on instruction improves measures of the academic environment but not measures of subjective quality of life.

They conclude:

More generally, our results suggest that colleges compete for students on many dimensions –  price, distance, consumption amenities, academics  –  and that different students respond differently to these attributes because preferences are so heterogeneous. The importance of  market pressure  to the behavior of higher education institutions has not been thoroughly examined and the slim prior literature on the topic has focused exclusively on the role of academic quality and cost, ignoring other dimensions on which colleges compete. One important implication of our analysis is that for many institutions, demand-side market pressure may not compel investment in academic quality, but rather in  consumption  amenities. This is an important finding given that quality assurance is primarily provided by demand-side pressure: the fear of losing students is believed to compel colleges to provide high levels of academic quality. Our findings call this accountability mechanism into question. However, our findings do not speak to the normative issue of whether consumption amenities are good or bad for students and taxpayers.

James concluded:

As summarised by the Economic Logician, “except for the top students, high school graduates do not care about academics at all. All they want is excellent “college consumption amenities.” And this likely explains why they learn so little while in college. Their focus is on the university as a consumption good, not an investment good.” The policy-maker’s view of the value of university and the student’s view are very different.

What does this mean for policy, then? Well, if the private value of university is largely in the consumption value then the total value is far higher than most estimates suggest since they are usually based entirely on investment value. That has implications for the level of the subsidy we want to provide to tertiary students. In addition to the efficiency questions we also need to ask whether,as a society, we want to heavily subsidise most students on an extended holiday?

I conclude that MOOCs aren't likely to eat a substantial part of our academic lunch barring substantial changes in tertiary funding, or unless parents start balking at the large cost differential between online and on-campus options.

But I do worry about a model that could blend consumption amenities and lower cost structures: replacing a lot of standard university courses with MOOC equivalents, with local tutorial support. Core papers in a lot of disciplines follow an international standard curriculum. Were those moved to MOOCs with local tutorials, and locally based academics teaching the electives that have more local application, universities could move to a lower cost curve without as much harm to the other parts of the bundle.

No, you can't tax your way to happiness

Imagine that you have a meta-preference against smoking, but your day-to-day preference is always to delay quitting. If only you had some way of stopping yourself, you'd be better off. In the absence of other commitment mechanisms, regulatory or tax measures can make this particular type of smoker better off: the smoker who seriously and honestly wants to quit and who hasn't been able to figure out how to use any of the available pre-commitment mechanisms or other stop-smoking aids.

As consequence of behavioural models of this sort, some folks have pushed for tobacco restrictions based on the idea that they make the smoker himself better off - they allow him to do what he's always wanted to do anyway but couldn't do on his own. 

But there are big problems.

First, even if the model holds for that class of smoker, there are other classes of smokers who will be made worse off. Some smokers don't even claim they want to quit: they love smoking and wouldn't quit if there were a free and effective way of doing it. Even if the model works, the policy only works if the gains to the winners outweigh losses to the losers. And, it's never quite been clear to me how we know that the alleged meta-preference is the thing that should be respected rather than the demonstrated preference. It's possible that some smokers who claim to want to quit are lying - they know that smoking draws social disapproval, and claiming that they really do want to quit alleviates some of the stigma. And even if there were a real me-tomorrow who wanted to beat up me-today, why does the government get to step in and take that guy's side? It seems just as reasonable to say that me-tomorrow discounts too heavily the fun I'm having today.

Second, there are other precommitment devices available that could let those smokers who really do want to quit do so. Go to Stickk, make a commitment, and start using e-cigarettes instead. The ones who really want to quit get to do it; the ones who don't, don't have to. Or, pick up a copy of Jon Elster's Ulysses Unbound and consider alternative precommitment mechanisms. 

James Zucollo at TVHE points to a new study by Odermatt and Stutzer showing that hikes in cigarette taxes make likely smokers worse off in life satisfaction surveys. They even hurt those smokers who want to quit. 

From the paper:

Higher cigarette prices are related to overall lower reported levels of satisfaction with life, ceteris paribus. The partial correlation is, however, measured with a large standard error. Still, the effect is economically meaningful (and corroborated by our differential analysis for people with different smoking propensities). For a fifty percent price increase, we estimate a reduction in average life satisfaction of 0.02 points (on a four point scale). This is about one tenth of the effect of being unemployed rather than employed or equivalent to the effect of a 2.4 percentage points higher rate of unemployment on the population at large. This finding does not lend support to the effectiveness of cigarette taxes as an internalization strategy.

And public smoking bans only improve outcomes for smokers who recently tried to quit smoking and failed; some specifications show harms to other smokers, others don't. Finding benefits for wants-to-quit smokers is consistent with some behavioural models where a wants-to-quit smoker is made worse off by seeing people smoking. But, again, we have to wonder why those smokers didn't choose non-smoking establishments prior to the ban.