On his inauguration day, January 20, 2025, President Donald Trump issued an executive order to immediately rescind 78 Biden-era executive orders. Among these was Executive Order 14094, the Biden Administration’s revision of Circular A-4, the guiding document of the use of cost-benefit analysis in federal regulatory activity. This reinstated the previous Circular A-4 language, adopted in 2003 during the Bush Administration.
Cost-benefit analysis has been in standardized use in U.S. federal regulatory decisionmaking since the Reagan Administration, though most trace its roots back at least to Army Corps of Engineer dam projects during the New Deal era of the Great Depression. Cost-benefit analysis has been affirmed by the seven administrations in the United States since, with each adding their own spin while keeping to the spirit of the Reagan Administration’s original executive order.
Cost-benefit analysis is also widely used in the United Kingdom. Its practice began in public infrastructure and defense projects during post-WWII economic planning and later became a central part of HM Treasury’s Green Book, the official guidance for appraisal of policies, programmes, and projects for central government policymaking.
Where did the idea of cost-benefit analysis come from? In the United States, many trace cost-benefit analysis to a letter penned by Benjamin Franklin.
…my Way is to divide half a Sheet of Paper by a Line into two Columns; writing over the one Pro, and over the other Con. Then during three or four Days Consideration, I put down under the different Heads short Hints of the different Motives, that at different Times occur to me, for or against the Measure. When I have thus got them all together in one View, I endeavor to estimate their respective Weights; and where I find two, one on each side, that seem equal, I strike them both out. If I find a Reason pro equal to some two Reasons con, I strike out all three…
…’tho the Weight of Reasons cannot be taken with the Precision of Algebraic Quantities…I think I can judge better, and am less liable to make a rash Step; and in fact I have found great Advantage from this kind of Equation, in what may be called Moral or Prudential Algebra.
While Franklin lays forth a practical approach to analyzing costs and benefits on a personal level, why should we apply this to a society? For this answer, I turn to two great European thinkers: Jeremy Bentham and Vilfredo Pareto.
Bentham famously characterized his ethical framework of utilitarianism as “the greatest happiness of the greatest number that is the measure of right and wrong.” He argued this was a “fundamental axiom” of moral thinking.
Anyone who has taken an introductory philosophy of ethics course can tell you how fraught this claim is, but its simplicity is timeless and alluring. All other things being equal, a state of greater happiness for a greater number is desirable to a state of less happiness overall.
The Italian polymath Vilfred Pareto aimed to devise a more narrow definition of moral rectitude, defining a “Pareto improvement” as an improvement of the state of affairs that makes at least one member of society better off without making any members of society worse off.
Seeing this as too high of a threshold to meet for public policy, British Economists John Hicks and Nicholas Kaldor each devised an alternate test: if a state of affairs can come about where the winners could hypothetically compensate the losers from the policy, that can be seen as a policy improvement. So it’s not an actual Pareto improvement that justifies public policy, it is a potential Pareto improvement that does.
Okay, so there is your history of what brought us to the point we have arrived at today. Cost-benefit analysis is an analytical approach that puts the Hicks-Kaldor criterion into operation. It does this by ascribing value using our classic welfare economic tools: what do people themselves value according to their willingness to pay for goods produced?
While some may argue that it is not obvious what a “cost” or a “benefit” is, in the practice of formalized cost-benefit analysis, costs and benefits are clearly defined terms. Costs and benefits are what people who are affected by a policy are willing to pay or to accept for the outcomes of the policy.
Let’s use a practical example. Say a national environmental protection agency is considering whether to require coal-powered electricity plants to install technology that will reduce their particulate matter emissions. The agency conducts a cost-benefit analysis to determine the costs and benefits of the policy. Analysts estimate (a) the cost of installing and adopting the technology, which will lead to lower yields for investors or higher costs for ratepayers and (b) the benefits to local residents of lower risk of death due to less particulate matter exposure.
Estimating the cost of installing and adopting the technology is a technical–but possible–undertaking. Similarly, estimating how many lives can be saved will not be easy per se, but is possible.
What is difficult to the non-economist is how we put a value on those lives. What economists do is say “we won’t put a value on lives, because people do that themselves.” The current approach to valuing reductions in risk of death is to use labor market data to estimate how much people trade off lower incomes for lower risk of death. This way they can elicit what price people themselves place on incremental reductions in risk of death achieved by policy interventions such as this.
From this example, you should be able to see some of the limitations of cost-benefit analysis. I don’t think you need to buy into Hicks-Kaldor, Pareto, or even Bentham to see what analysts are doing: they are estimating the economic costs and benefits of a policy intervention. This type of analysis does not claim to tell us anything about cultural values, fairness, or democracy. At its heart, it focuses on a narrow question: do the economic benefits of a policy exceed its economic costs?
I would endeavor to say this is a question worth answering for policymakers making large decisions about economic policies. No, it is not the only question worth asking when evaluating a public policy. But to be fair…I have never heard of a policymaker, analyst, journalist, philosopher, podcaster, blogger, dinner-table contrarian, or any other person saying that it is. Whether economic benefits outweigh economic costs needs to be a part of the policymaking process, but it will never be the sole factor of the policymaking process outside of some sort of fantasy dystopian technocracy which we are far from living in today.
At its heart, cost-benefit analysis is about its method.
This means comprehensively measuring direct costs. Understanding direct costs of a policy will help us understand the magnitude of the economic impact of a policy and who will be impacted by it.
This means comprehensively measuring indirect costs. Understanding what unintended consequences could be borne by members of society helps policymakers understand the broader impacts of public policy and how its impacts can be felt in unexpected ways.
This means monetizing tangible benefits. Monetization helps policymakers understand the scale of the policy and how much economic benefit could be generated by a policy, even if its costs are high.
This means monetizing intangible benefits. Putting dollar figures on impacts to health, environment, and other goods that we have rigorously-derived valuation for puts them on equal economic footing with more traditional economic benefits and costs.
This means measuring benefits and costs against alternatives or a baseline. Comparing policies to what will happen without implementation helps policymakers conceive what the costs and benefits of inaction are.
This means discounting benefits and costs to current year values. Discounting helps policymakers understand risks and opportunities inherent with policymaking with multiyear impacts.
This means disclosing key assumptions. Transparency helps policymakers understand the weak points in analysis.
This means conducting sensitivity analysis. Analyzing how results change with different assumptions helps policymakers understand how sensitive a model is to its assumptions and how it will change if assumptions change.
While books and dissertations have been written on cost-benefit analysis, conferences are put on by professional societies on the topic, and government administrations fight over different ways to carry out this project, the eight points listed above are the core of what makes a good cost-benefit analysis.
The goal of cost-benefit analysis is not to distill the science of decisionmaking into a simple formula. If anything, cost-benefit analysis does the opposite: it lays bare the complexities of decisionmaking. By understanding what economic costs are levied on society, unintended consequences of a policy, who directly benefits, what spillover benefits are felt, when costs and benefits are incurred, and what happens if we don’t act, policymakers gain key information that helps them make better decisions.
No, cost-benefit analysis is not a perfect formula for knowing definitively if a policy is “good.” Policymakers still need information on the impacts of policies on poverty, inequality, health, education, and subjective well-being. And all other things being equal, having a society with more of the things people want is a good thing. Finding out how to create that world deserves focus for analysis of public policy.