The Weaknesses and Corruption of Macro Cost Benefit Analyses in Redistributive Policy

-- By DesireeMoshayedi - 16 May 2021

I) The Structural Issues of Cost Benefit Analysis in Policy Making

Because of the impossibility of calculating the exact result of a policy and the cost of taking everyone’s individual values into consideration, cost benefit analysis is flawed system of decision-making. It often presupposes that the world is a closed and controlled system and that outcomes of policies are calculable and quantifiable through economics. Economics takes as truth that human beings are purely rational beings and take little notice of the immense role that emotions play in decision making. While economics can be useful for guidance in unprecedented situations, results historically do not follow economic predictions exactly, if at all. In addition, the purely administrative difficulty of taking everyone’s individual interests into consideration forces decision makers to consider the costs and benefits on macro scale. Politicians consider the interest of the “average American,” who does not exist. The wage gap has all but eliminated any notion of the “average American.” Considering policy for a country on the macro scale may be efficient, but creates a model divorced from reality.

II) Arguments Based on Incomplete Models

Blindly following economic principles for determining potential outcomes of their policies, politicians fail to consider history, psychology, and the realities of our world. To elaborate, one can consider the contrasting arguments continuously made for and against minimum wage increases.

Increased minimum wages have been argued not to pass cost benefit analysis because it increases the cost of doing business, which lowers production, leads to layoffs, and disincentivizes job creation. In addition, people argue that by raising the minimum wage, companies would increase the price of their goods and services and inflation will follow. Following the laws of economics, increased minimum wage benefits no one.

On the other hand, looking historically, when minimum wages have been raised, inflation has not followed. For businesses, higher minimum wages have been shown to increase productivity, following Akerlof’s “efficiency wage” theory. A study by the International Labor Organization shows that in cities with increased minimum wages, company survival rates increased with no negative repercussions on employment. Higher wages can also result in lower turnover and in turn, reduced training costs - ultimately increasing profits for businesses. Increased wages would also lead to more spending and a greater GDP. Finally, according to a report by the Congressional budget office, increasing the federal minimum wage to $15 an hour by 2025 would raise wages of up to 27.3 million people and help 1.3 million families out of poverty.

With these facts in consideration, it seems obvious that an increased minimum wage will have significant widespread benefits at a minimal cost if any. If so, why are so many politicians against it? Why are minimum wage increases continuously shut down?

III) Corrupt Representation of Inaccurate Models as Truth

The incomplete models of the world used in cost-benefit calculus are tools to misrepresent policy decisions as truths when they are often nothing more than a pretextual justification for decisions made in the best interest of those most powerful in society. It is hard to believe that politicians are not given all of the facts; they likely know that their economic evidence conflicts with reality. Nevertheless, they choose to present their reasoning as undeniable truth. Why? Either they simply do not believe the counterposition, or they are choosing the explanation that best fits their desired result.

The wealthy benefit from income inequality and go to great lengths to ensure its survival. The primary objective of business is profit, and the objective of their leaders is to retain as much of it as they can. Most politicians are elected as a result of business donations, so their objective is to make wealthy businessmen happy and get reelected. Similarly, government officials, particularly business regulators, leave and reenter the business sphere cyclically, making them impartial toward business interests to the detriment of the nation. These interests make redistributive policies incredibly difficult and since the decisionmakers generally have a selfish stake in the decision, they have likely already made it prior to weighing the costs and benefit.

The calculus leaves room for opinions, allowing the most powerful people in society (businessmen, politicians, and government officials) to choose the argument that best fits their self-interest (being, for most men and women in the world, money and power) while portraying it as calculated to be in society’s best interest. It allows politicians to back policy with semi-mathematical arguments, portrayed as undeniable truths, and shield themselves from blame.

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