Applying cost-benefit analysis to global warming by mattsteinglass
July 7, 2009, 5:08 am
Filed under: Economics, Environment

Kevin Drum had a very trenchant post the other day responding to Jim Manzi’s much-discussed back-of-the-envelope cost-benefit analysis on the Waxman-Markey bill. Drum’s point was basically that long-term economic estimates are extremely inaccurate, while long-term scientific predictions are fairly accurate. So trying to counterpose a reasonably solid scientific prediction of severe damage to the global climate against an extremely foggy guess about the future of the world economy is bound to yield garbage results.

I thought about this again the other day while talking to an acquaintance here in Amsterdam who’s a senior executive in strategic planning at the Dutch national railroads (Nationale Spoorwegen, or NS for short). He was talking about the different perspectives one has at state-owned companies and pure private ones, and as an example, he noted that the NS’s strategic planning generally runs many decades into the future, and often up to a century. They perform cost-benefit analyses on such long-term projects, he said, but they don’t set much store by them. “They’re so dependent on interest rates,” he said. “You make one tiny change in your expectations about future interest rates, 0.3% one way or the other over 50 years, and suddenly your project is profitable, or not.”

Sasha on train near Amsterdam. © Matt Steinglass

The problem with performing cost-benefit analyses on major infrastructure projects is that you’re actually reshaping the society whose economy is going to be creating those profits or losses. This is particularly vivid in the Netherlands, because the entire country is an infrastructure project. In the picture above of my daughter Sasha on the train south of Amsterdam, one’s subconscious assumption is that the interior of the train represents “state infrastructure” while the exterior represents “natural (private) enterprise”. But this is the Netherlands. The fields those cows are munching on were pulled out of the Rhine delta by exactly the same kind of public investment that created the railroad network. To submit the railroad project to a cost-benefit analysis makes only a little more sense than submitting the entire country to a cost-benefit analysis. Should the Netherlands exist at all? Could the money and labor that was spent pumping those polders free of water, and building the dikes to keep out the sea, have been better employed elsewhere, resulting in a richer global economy? How could one even begin to make such a calculation? Is this a question that even makes sense?

This isn’t to say that cost-benefit analyses on huge infrastructure projects aren’t necessary at all. The NS has made at least one major mistake in the last 20 years, pumping billions into a high-speed freight line to Germany that may never be profitable (though the main problem may have been poor cost control rather than miscalculation of demand). And another major Dutch infrastructure proposal to build an artificial island for a new airport in the North Sea has been rightly rejected as too expensive. But when you’re addressing these kinds of existential questions over a period of many decades and centuries, the cost-benefit analysis seems like an exercise in smoke and mirrors that pretends to hard-headed objectivity.


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