At Scioto Analysis, we perform policy analysis through an economic lens. While that is a true statement, it doesn’t do a great job of actually describing our work. You could use that exact sentence to describe what organizations like the World Bank or the Federal Reserve do in their research. I bring this up because I wanted to describe in more detail what it is we actually do at Scioto Analysis and what some of the theoretical underpinnings are.
A better description of our work would be something like this: we perform policy analysis at the state and local level using microeconomic tools rooted in the ideas of welfare economics. Policy analysis at the state and local level is fairly self explanatory, that is just an issue of scope. The more interesting part to discuss and what I want to explain in more detail today is what welfare economics is and why it has the tools that we like to use when it comes to policy analysis.
What is welfare economics?
Welfare economics is a branch of microeconomics that focuses on measuring how a society as a whole allocates its resources and how well-off that makes its local residents. Microeconomics gives us the toolbox to evaluate individual decision making, and welfare economics provides the framework to make assessments about how those individual decisions impact society as a whole.
One of the challenges in welfare economics is that there is no objective way to measure or compare one person's wellbeing against another's. There is the field of subjective wellbeing research and that data could be an extremely valuable input into a welfare calculation, but we’d need more and better data to really dig much deeper.
Because of this, welfare economics relies on assumptions about how individual wellbeing should be aggregated into a measure of society's overall wellbeing. Different assumptions lead to different conclusions about which policies are desirable, which is why economists have developed a variety of social welfare functions that reflect different views about fairness, efficiency, and the tradeoffs between them.
Types of social welfare functions
While you could technically have any social welfare function you wanted, in order to be useful it should probably use the individual welfare functions of everyone in a society as an input. Most commonly, we use some form of a utilitarian social welfare function as our starting point.
Under a simple utilitarian social welfare function, the total wellbeing of a society is calculated as the sum of all individual welfare functions. This has some useful features that lend themselves to cost-benefit analysis. If we are agnostic about who in society is benefiting from a change, then it makes sense that we’d prefer policy options so long as the net change in individual wellbeing is positive.
A natural extension of the utilitarian model is to account for diminishing marginal returns of income. In other words, $100 given to a millionaire doesn’t increase their wellbeing by very much at all, while that same $100 given to a person in poverty could significantly improve their wellbeing. The end result is that taking $100 from a super wealthy person and giving it to a poor person increases total social welfare.
One of the most important contrasts to utilitarian social welfare is the Rawlsian social welfare function. This concept is based on the ideas of philosopher John Rawls whose work centered around ideas of social justice. The economic framework named after him is that a society is only as well off as its least well off member. Mathematically, this is represented as Social Utility = min(U1 , … , Un). Under this framework, a policy change would only be worth it if it benefits the least well off person.
Having a well defined social welfare function is an essential part of policy analysis. It is the heart of how we assess the tradeoffs of a policy. This is not to say that this is the only approach for policy analysts to use. Some evaluations might not explicitly rely on welfare economics, and reasonable people can disagree about which social welfare function best reflects society's values. At Scioto Analysis, however, welfare economics provides the foundation for much of our work because it offers a consistent framework for comparing the costs and benefits of different policy options and making those tradeoffs explicit.
