Cost-Benefit Analysis Crushes GDP

I specialize in trillion-dollar ideas: policy reforms which, if implemented, would generate trillions of dollars of net social benefits. Ideas like open borders, educational austerity, and by-right construction.

While I’m well-aware that my thoughtful critics have thoughtful criticisms, I also maintain that thoughtful critics with thoughtful criticisms are few and far between. When I present my trillion-dollar ideas, most of my critics present emotionally compelling but quantitatively trivial drawbacks.

Open borders? There could be one extra terrorist attack per year.

Educational austerity? A few poor kids might never learn to read as a result.

By-right construction? Some people would no longer have good views of the San Francisco Bay.

I have a standard reply to all such criticisms: Even if you’re totally right, even if the problem is ten times worse than you fear, we should still implement the trillion-dollar proposal under discussion. Why? Because when we’re evaluating policies, we should “put a price tag” on every problem — and the price tag on your problem is a rounding error.

Logically, I think that’s a totally satisfactory answer. But recently I realized that many non-economists misunderstand my point.

When I start talking about “price tags,” non-economists often imagine that I’m talking about GDP. Which leaves open objections like, “Sure, open borders is great for GDP. But I care more about quality of life than quantity of stuff.”

So let me clarify my position. I have never said, nor do I believe, that societies should maximize GDP. Anyone who knows the definition of GDP should realize the absurdity of this position! Consider: GDP doesn’t count the value of leisure, so if you really want to maximize GDP, abolition of the weekend is an obvious place to start.

Even more ludicrously, GDP values all government purchases at cost. So the easiest way to increase GDP is for the government to hire tons of workers to dig and refill holes until the end of time. Which is absurd.

If I’m not advocating GDP maximization, what am I advocating? Let me say it loud and clear: I defend my trillion-dollar reforms not in the name of GDP maximization, but in the name of cost-benefit analysis, technically known as Kaldor-Hicks efficiency.

What’s the difference? While GDP only assigns value to the production of final goods and services sold in the marketplace (plus government spending valued at cost!), cost-benefit analysis assigns value to anything anyone is actually willing to pay for.

That’s why I ask critics to put a “price tag” on their complaints. How much would you actually pay to reduce the murder rate by 1%? To reduce the illiteracy rate by 3%?* To preserve 1000 unobstructed views of the San Francisco Bay?

Since these are marginal changes in outcomes that are barely even perceptible to the vast majority of people, the summed value for everyone in society isn’t in the trillions of dollars or even hundreds of billions of dollars. Probably not even in the tens of billions. As a result, I can casually grant the criticism. I can casually multiply the value of the criticism by a factor of ten. And the cost-benefit case for my trillion-dollar ideas remains overwhelming.

Sure, critics can insist, “I put a trillion-dollar value on every terrorist attack.” Or even, “I put a $100,000 value on every terrorist attack — and so does the average American, so the total value of preventing one such attack multiplies to many trillions of dollars.” But that’s where I invoke the principle that “Actions speak louder than words.” If you really cared that much, you would be willing to take drastic actions in response to minor social problems. Since you barely take any actions at all in response to minor social problems, you don’t really care much. It’s just a heap of pretty lies driven by Social Desirability Bias.

In slogan form, as I’ve said before, my response to such critics is not “I don’t believe you” but “You don’t believe you.” While cost-benefit analysis lets anyone put dollar value on anything, observed behavior tells us far more about dollar value than mere words. For example, people who deeply care about equality would gladly relocate to get more equality. Since almost no one does, almost no one deeply cares. QED, line in the sand.

Once critics understand that I’m appealing to cost-benefit analysis rather than GDP maximization, will they actually change their minds? A few, perhaps. The more common reaction, sadly, is ad hominem: “Caplan is arrogant.”

Look, if it’s arrogant to insist that “Actions speak louder than words,” then point out that critics’ inaction contradicts their heated rhetoric,” then I’m indeed a deeply arrogant man. I prefer to call it “insightful” and “candid,” but I suppose that’s what an arrogant man would say. But it doesn’t really matter. Whatever my character flaws, we can, should, and must dismiss quantitatively trivial objections to trillion-dollar ideas.

* Note: I’m talking about percent changes, not percentage-point changes. A 1 percentage-point fall in the murder rate is a big deal, but a 1% fall is not.