Cead mile failte romhat – one hundred thousand greetings to you from Dublin. My UMKC economics department colleague and I are presenting ideas on how Ireland could respond to its banking, budget, and financial crises. This is the second part of my series of articles on benefit-cost analysis, prompted by a discussion at CIFA’s recent ninth annual meeting in Monaco. This part focuses on the logic employed by the nation’s leading advocate of requiring benefit-cost tests before allowing any regulatory actions. Governor Daniels (R. Indiana) previously served as President Bush’s Director of the Office of Management and Budget (OMB). In 2002, OMB Director Daniels explained to a Competitive Enterprise Institute (CEI) audience why formal benefit-cost analyses by OMB mirrored “everyday life.”
“We need to remind people, that cost benefit analysis is part of everyday life. Perhaps you’ve heard of the couple out dining one evening, when a lovely, much younger lady passed by the table and visibly winked at the husband. His wife, not missing a thing, said, “Who was that?” After some hemming and hawing, he finally confesses: it’s his mistress. She said, “That’s it! I always feared and suspected. It’s over, I want a divorce.” “Now dear, not so fast. You [do] realise if that happens, no more diamonds on your birthday, fewer of those shopping trips to New York, what about the country club charge account?” About that time, another couple passed by and she said, “Isn’t that your friend Jim from the office?” He said, “Yes.” “Well who’s that young woman with him?” “Well, that’s Jim’s mistress.” She says, “Aha! Ours is prettier.” [laughter]”
Mitchell E. Daniels, Jr., Competitive Enterprise Institute Speech, 05/22/2002
Again, one cannot compete with unintentional self-parody. Daniels chose a metaphor to defend benefit-cost tests that lays bare many of the worst aspects of formal benefit-cost tests by economists. Daniels delights in his tale of how an unfaithful, rich, powerful, and older man cheats on his wife, humiliates her in public, and essentially prostitutes his wife and his mistress. Perhaps the worst aspect – and here Daniels is simultaneously acute and clueless – is the wife’s use of the word “ours.” When elites use their dominant power to exploit and corrupt less powerful people they also seek to impose a false construct on their victims that makes them appear to be beneficiaries rather than victims. The macho male meme is that his domineering control of his wife’s life and decisions constitutes “protecting” his wife. She is supposed to perceive and express a debt of gratitude rather than resentment to her oppressor.
The wife in Daniels’ ode to benefit-cost tests is not looking for a “three-way.” She gains nothing from the mistress except the humiliation of having the affair rubbed publicly in her face. Her husband is not interested in her. She is simply useful to his career in certain social roles. He wants to avoid an expensive divorce that might hurt his social standing. He is willing to cheat on the woman with whom he has exchanged the most sacred vows and shared the closest relationship. He is someone who makes it clear he cares only about his pleasure — shareholders, creditors, and customers are simply suckers to be looted. His wife may well know about how he cheated them and the IRS. Elite husbands that cheat have special reasons to fear the fury of a woman scorned, deceived, humiliated, and divorced. So what is this “ours” nonsense? The “lovely, much younger woman” is her husband’s mistress. The husband’s complete degradation of his wife occurs if he can use his power and wealth to cause her to come to view the “lovely, much younger woman” as “our” mistress.
Daniels’ decision to use this degrading illustration as his exemplar of benefit-cost analysis is also unintentionally revealing about absurd applications of such analyses in which they create the illusion of rational decision-making but recurrently produce tragedy. First, why did the wife have only two choices – accede to the husband’s taking of a mistress or seek a divorce that would cause her a dramatic loss of wealth? The husband could have ended his affair or he could have agreed to a divorce in which he provided her with far greater support. She could have remained married but taken a lover. (Would the husband have viewed him as “our” lover?) OMB economists can frame the alternatives considered (and excluded) to secure the result of the benefit-cost “test” that they desire. Second, for most women, the critical factors that they would weigh in deciding how to respond to learning that their husband had taken a mistress would be impossible to quantify. Do they have kids? What will be the effects of the divorce on them? Would the harm to the kids be reduced if they were older? Does she want to try to save the marriage? How probable is it that he will end the affair and become faithful to her? Does she love him? Can she live and her children live independently without his income and assets?
Assume that the wife is initially so desirous of continuing to avoid the end of: “diamonds on your birthday, fewer of those shopping trips to New York , [and] … the country club charge account?” that she decides not to divorce him. How long can this last? As the husband and mistress become even more open about their sexual and relationship, as the mistress increasingly receives the jewels and shopping trips and maxes out the country club charge account – will the wife view the relationship as a “net benefit” and the mistress as “ours”? As she is progressively humiliated in front of her children, relatives, and friends by the relationship will she view the relationship as a net benefit? I think virtually all of us believe that the scenario that Daniels’ sets up as the optimal decision derived from benefit-cost analysis will end badly and harm her and kids severely. In the end, economic benefits and costs are rarely as important as human views of love, respect, and dignity. Formal benefit-cost tests run by economists are typically driven by the economic benefits and costs rather than the aspects of life more important to humans. This creates a systematic bias that makes benefit-cost tests more likely than not to produce the wrong answer as to net benefits.
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.