legitimate and illegitimate transfers: dealing with “political” cost-benefit analysis

ELSEVIER

Legitimate and Illegitimate Transfers: Dealing with "Political" Cost-Benefit Analysis

PHILIP JONES a n d JOHN CULLIS*

Centre For Fiscal Studies, University of Bath

In this journal, McChesney engaged Lewin and Trumbell in a debate concerning the reasons why criminal "gains" are excluded in a cost-benefit analysis of investment in maintaining law and order. 1 Theft might be perceived as a mechanism for transferring property (so that loss to victims appears offset by "gain" to criminals). However, criminal "gains" can be excluded from CBA simply on the grounds that they arise from illicit activity or, following McChesney, because the "gains" are offset, in total, by the rent- seeking costs involved in securing the transfer. 2 The appropriate rationale remains an issue of debate, but the debate is one that has broader currency than has been noted to date. In this paper McChesney's argument is extended to explain why legitimate "gains" from public sector investment are typically ignored in CBA. Public choice literature identifies the different ways in which actors in the political process acquire rents at the expense of voter-taxpayers. 3 For example, public spending may increase salary and improve working conditions of bureaucrats 4 or it may enhance politicians' career prospects. 5 Such gains are excluded from a CBA although they need not be illicit. The questions posed in the following sections of this paper are: (1) Why is this so? (2) Can all of such "gains" be excluded? and (3) Is there a case for constructing a CBA (or "political" CBA) that would include them?

I. Introduction

Klarman describes the first objective of cost benefit analysis as being " . . . to include all costs and all benefits of a programme, no matter to whosoever they accrue, over as long a period as is pertinent and practicable. ''6 However, this recommendation is open to different interpretations. Cost benefit analysis is a technique that can be applied in different ways. Jones-Lee distinguishes between the "restrictive" and the "Olympian"

7 view of CBA. The restrictive view is concerned with identifying whether an allocative change represents a potential Pareto improvement. In this case, efficiency is the only

*Helpful comments from Professor A. Ogus and from two anonymous referees are gratefully acknowledged. The authors are solely responsible should errors remain.

International Review of Law and Economics 16:247-257, 1996 © 1996 by Elsevier Science Inc. 655 Avenue of the Americas, New York, NY 10010

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248 Political cost benefit analysis

issue of direct concern; the question of whether or not a proposed investment is "eq- uitable" is deferred for separate consideration. In a restrictive CBA gains and losses to different individuals in the community are weighted equally s and, for many, this is the "correct" approach to CBA. 9 By contrast, the Olympian view goes further and, in such a study, if benefits exceed costs, it is possible to conclude that the " . . . change is, on balance, desirable when judged by all the relevant criteria . . . . " In the Olympian framework equity considerations are addressed directly and different equity weights for different groups may be adopted. Efficiency is not the only consideration; assessment is meant to reflect " . . . the relative importance placed upon each category of benefit and cost by the social decision maker. ''11 In this paper the question is whether or not "governmental rents" should be included within a "restrictive" CBA. The focus is on efficiency, but, even in these restrictive terms, it is not satisfactory to ignore examples of non-pecuniary gains (e.g., the prestige and power enjoyed by bureaucrats and politicians) simply on the grounds that they are difficult to quantify. It is assumed that such rents are not offset directly by nonpecuniary (or "psychological") losses to consumer voters, e.g., it is not the case that power and prestige to bureaucrats are gains that are matched by a psychological loss to voter-taxpayers who feel that society is overadmin- istered. In this case, why are such rents (nonpecuniary and pecuniary) ignored in a restrictive CBA?

In later sections of the paper distributional issues are considered, but they are considered in terms of a distribution between voter-taxpayers and their agents in government. Even if governmental rents are excluded in a restrictive CBA, it is difficult to imagine that they will not emerge (at least implicitly) in the process of project selec- tion. 12 The problem of excluding such potential bias haunts a public choice approach to policy making, is It will be argued, therefore, that a cost benefit analysis that includes governmental rents might assist decision making. A restrictive CBA might be extended, for example, to incorporate gains that bureaucrats, politicians, and specific pressure groups enjoy as a consequence of a particular spending program. Such rents might be estimated either in terms of the increased costs of producing particular services or in terms of "willingness to pay" to secure particular programs (i.e., as expressed in rent- seeking costs). A restrictive CBA focuses on the relative efficiency of different outcomes, and an Olympian CBA considers outcomes against a much broader set of criteria. A "political" CBA extends the analysis in a restrictive CBA to include transfers between taxpayer-voters and suppliers of services in the public sector. Comparison of net present benefit in a restrictive and in a political CBA would be an important means of revealing potential inefficiencies in the public sector decision-making process.

H. Public Choice and Cost Benefit Analysis

One of the key insights from public choice literature is the observation that various parties involved in government pursue their own self-interest. Government is not a benign omniscient despot, interested only in maximizing the public interest. Politicians, bureaucrats, and other interested parties advance their self-interests via decisions that are taken with regard to public spending. This frequently implies that costs of providing services in the public sector are greater than they might otherwise be. While no allowance is made for the value of the rents enjoyed by those involved in public sector provision, no explicit distributional weight (of zero) has ever been suggested for the legitimate gains to agents in the political process.

McChesney would ignore rents when the value of rents are matched by rent-seeking

JONES AND CULLIS 249

costs. To illustrate, consider the following expenditure decision. A government department has been instructed to contract out the provision of a particular service. 14

In Figure 1 the demand for this service is shown as D and the marginal costs of supplying the good are constant. A private firm offers to supply 0ql units of the good at a price of 0P1 per unit, requiring that the government provide a budget of 0Plaql. The government department has, until recently, provided the service itself, by employing workers and equipment directly. To supply 0ql within the public sector has required a budget of OP2bql (>0/'1 aql). The cost benefit analyst is, therefore, likely to conclude that contracting out the supply of the good to the private firm is a sound decision. Con- sumers' surplus is greater (by area PiP~ba), and the financial (or exchequer) costs for the government are reduced.

Now add some of the ingredients often found in a public choice critique of public expenditure. Retaining the assumption (implicit above) that private sector provision is efficient, 15 assume that X-inefficiency in the public sector explains the public-private sector cost difference and that it arises because workers in the public sector enjoy "on the job" leisure (rather than arising as a result of any difference in the costs of other resources). The additional area P1P2ba is now an estimate of the rent enjoyed by workers in the public domain. It increases their welfare and, therefore, is not an outright lOSS. 16

Assume also that the bureaucrats of the government department gain utility from control and administration of a large budget, ff production is contracted out, the

P2

P1

b

C1

Price

ql ox/t FIG. 1. Costs and benefits of contracting out.


budget is handed over to the private firm, and the bureaucrats' role is little more than that of an intermediary. However, if production of the service is retained within the public sector, then, based on Niskanen's critique, bureaucrats administer a greater budget and also greater management control. They therefore, enjoy greater power and prestige among their peers from this arrangement. In this case, the additional gain (the utility from managing a large budget Ub) will be some function of the size of the budget administered in the provision of this service (i.e., U b = j~OP2bql)). It has been noted that the inefficiencies identified by a public choice critique yield welfare gains to those that enjoy them, 17 but this consideration is absent in any further discussion of the welfare effects of government failure. If the inefficiencies in public sector provision yield welfare gains, how would this affect an analysis of government provision?

A comparison of costs and benefits of the above proposal is provided in Table 1. With private production, the assumption of efficiency means that a competitive output is the relevant benchmark. Comparing this outcome with Case A, a benign government might note only the net benefits to voter-taxpayers. Here, government 's interest is the pursuit of the "public interest" defined only in terms of the interests of consumer-taxpayers. In Case B the government is classified as benign but sees the "public interest" not simply in terms of the welfare of the consumer-taxpayer but, more generally, in terms of the welfare of everyone including those working within the public sector. There is another possible case (not included in Table 1), whereby the only consideration to decision makers would be the welfare of those within government and within the public sector (such a case might be labeled the "Leviathan" case), is

It is evident that the choice of whether to supply the good within the public sector or to contract out is sensitive to the question of whether the welfare gains experienced by actors in the political process are given weight in the objective function that is to be maximized. Comparing private and public sector provision, when the consumer- taxpayer's interests are paramount (i.e., private production as compared with Case A), private production has greater net benefit. However, a comparison of private provision with Case B (when the rents to public sector workers and to bureaucrats are also perceived as benefits) would suggest that public production is preferable on net benefit grounds. On first consideration it might be argued that the gains (pecuniary and nonpecuniary) to those in government are real enough to them and should be included. These individuals are not criminals and cannot be excluded by arguments developed in Lewin and Trumbrel. 19

TABLE 1. Costs and benefits

Private Production Public Production (competitive) (benign government)

Case A Case B ~,neJit~ Ocaql 0caql

Costs OPlaql

Ocaq, PlP2ba U b = f(0P2bql )

OPxaql OPlaql P1P2ba PaP2ba

Net Benefit Pica P2ce Paca + Ub

JoNEs ANt) CULLIS 251

McChesney's argument, however, still applies (i.e., that such gains should be excluded if costs are expanded in acquiring the monopoly position from which such rents can be enjoyed). For example, with reference to Table 1, Cullis and Jones have argued that there are two elements of costs associated with area P1P2ba: first, the additional cost to the consumer of the service and second, rent-seeking cost on the part of those that utilize a monopoly position to enjoy the cost differential, s° If this is so, the additional benefit of this area, in terms of X-inefficient on the job leisure, would be eliminated by rent-seeking costs, leaving the costs to consumer-taxpayers (as recorded in Case A). Moreover, if bureaucrats had to expend resources to safeguard their public monopoly position, the gains U b = j(OP2bql) would also be negated. In effect, allowing for rent- seeking costs transforms Case B into Case A, without any explicit need to restrict arbitrarily the social welfare function. A cost benefit analysis constructed on standard "restrictive" lines would exclude the gains to public choice actors.

HI. Rents and Rent-Seeking Costs

Implicit in McChesney's argument (and the above discussion) is the assumption that rent-seeking costs equal the value of the rents. However, with respect to Table 1, must the benefits of PiP, ha equal the costs incurred in their acquisition? Posner identifies the conditions in which this would be the case. ~1 Suppose, for simplicity, that the value of PiP~ba to one individual is £100,000 and there are ten individuals chasing the position from which such rent is derived. Each individual would spend up to £10,000 in an attempt to secure such a position, and rent-seeking costs would equal the value of rents if there were: (1) a competitive process; (2) risk-neutral competitors; (3) no collusion; (4) no externalities in the rent-seeking process; (5) perfectly elastic supply of resources used in the rent-seeking process; and (6) the rent was enjoyed for one period only. Posner assumes that each rent seeker invests the expected value of a random game, in which the probability of wining is determined by the number of participants. In this case, dissipation of rents by rent-seeking costs is complete.

However, while this assumption simplifies matters considerably, there are reasons to be wary that it will always apply. First, there are other models to explain competition for rents. For example, Tullock presents a model in which each rent seeker's chance of winning is determined by the ratio of an individual's resource commitment to the investment of all other rent seekers, and, in this case, rents may not be fully dissipated. 22

Second, in equating rents to rent-seeking costs, it is necessary to assume away any other market distortion. For example, with reference to Figure 1, suppose that there were industries in the private sector that were protected by import tariffs from foreign competition. If resources used in rent seeking would otherwise have been used in such industries, rent seeking might offset some of ,th, e welfare losses from overexpansion of the tariff-protected sector.2~In a second-best world, rent-seeking costs may not equal rents. Quibria identifies one positive externality that might result from rent seeking by noting the value of information generated by such activity. 24

There are many reasons for expecting "Tullockian rents" to exceed "Tullockian rent seeking costs." De Vanssay and Spindler claim, "If gains and losses are uncertain or unknown, risk-averse reform players may either not rent seek or incur lower rent- seeking costs . . . . Further, surreptitious bribery may allow lower rent seeking costs than those for open competitions . . . . -25 However, there is no guarantee that rent-seeking costs may exceed rents. 26 Paul and Wilhite consider the case where " . . . external costs exceed the undissipated portion of the Tullock cost, the social cost of rent seeking is


greater than the sum of Tullock and Harberger costs. ''27 Rent-seeking costs may be less than, or greater than, the value of rents that criminals or legitimate rent seekers enjoy.

In this way, in restrictive CBA adjustment may well be needed to a rule that would exclude rents on the grounds that they equal rent-seeking costs. McChesney acknowl- edges this, but here we would emphasize that the practical problems of making such an adjustment are formidable. For example, Foster argues that " . . . when there is competitive rent seeking, there should be no correction to the factor cost of a project to account for changes in r e n t s . . . ," but he notes that to make adjustment for noncom- petitive rent seeking requires a " . . . more elaborate m o d e l . . . " than had been used to date. ~s Even in a restrictive CBA there is no simple robust conclusion that the full value of governmental rents can be excluded when representative agents within the political process and others employed in the public sector undertake actions that are deemed to be legitimate.

IV. The Case for a Political Cost Benef i t Analysis

While the issue of whether or not rent-seeking costs perfectly outweigh the value of rents is important in an analysis of whether some part of these legitimate gains should be included in CBA, there still remains the problem that rents will influence public expenditure appraisal regardless of whether or not they are formally and explicitly included. Many of those in government who would profit from governmental rents occupy a position from which they are able to accept or reject prescriptions drawn from CBA. This means that, in the absence of benign government, the prescriptions drawn from an analysis based on consumer sovereignty may diverge from the decisions taken when governmental interests are sovereign. For example, Peacock reports that, having submitted a cost benefit analysis that showed that the net present value of additional production of the Concorde aircraft would be negative, the politician responsible re- jected the calculations on the grounds that the test rate of discount was too high. 29 The politician would not be persuaded: "Concordes were being built in his constituency and his majority was not secure. ' 's° Though the electoral rents to politicians had not fea- tured explicitly in the analysts' report, they were still internalized implicitly into the decision-making process. In this case, surely the welfare gains to agents in the political process must always be relevant. (If not for inclusion in a CBA report, then for decisions that are taken in the public sector.) In a similar vein, Downs argues that politicians will choose projects that perform best over a four- to five-year electoral cycle (rather than follow Klarman's advice of looking for the best project over a longer time horizon). Politicians are sensitive to the rents that accrue from political office. 3a Choices will be made as though such gains were explicit in the CBA. 32

There are a number of reasons for assuming that such rents count, even if they have not been formally included in a CBA report. First, the political process is unlikely to prove sufficiently competitive to deter politicians from internalizing their interests into the decision process. If the political market was competitive, politicians would focus solely on the interests of vo te rsy but government failures make this unlikely to apply, a4 Second, while political competition may fail to enforce discipline, the existence of constitutions may also fall to constrain decision making. 35 Given that both these mechanisms are less than fully effective, we would propose that a political cost benefit analysis be constructed to accompany decision making. A political cost benefit analysis would include all rents. In this way it would look more like Case B than Case A in Table 1. While a traditional CBA format would be used to select investment projects, a political cost

JoNEs AND CULraS 253

benef i t analysis would assist in a di f ferent way. It would be used to reveal any inhe ren t interest or bias on the par t of polit icians, bureaucrats , or o the r agents in a representative democracy. The funct ion o f such a cost benef i t analysis would then be similar to the par l iamentary r equ i r emen t in the U.K. that poli t icians dec lare thei r outside interests. s6

A poli t ical CBA would prove useful in at least three respects. First, and foremost , it might be used to cons ider any possible bias on the par t o f the decis ion takers. In this way it might be expec ted to restrain any predi lec t ion to pursue pol i t ical-bureaucrat ic rents at the expense o f "eff iciency." Second, it would be useful analytically, for it would call into quest ion the concep t of equity as app l i ed by some cost benef i t analysts. Econo- mists using CBA have been all too ready to assume that, if the most efficient project is no t selected, it must be because poli t icians have ascr ibed different equity weights to different groups (by income, ethical background, o r region) in the community . In fact, one m e t h o d o f de t e rmin ing equity weights has been to draw implici t weights f rom past decisions when it is clear that the most efficient project has been re jected in favor of another . 37 Of course, such weights may easily include a weight given by the decision maker to his (her) own interests. Select ion o f relatively inefficient projects may no t have been because of equity considera t ions (as in the case of a benevolen t despot) bu t because of the self-interest o f the decis ion maker (as in the publ ic choice theory), and recogni t ion o f this dis t inct ion is impor t an t when discussing equity weights for future cost benef i t analysis.

Thi rd , a polit ical CBA would prove a useful re ference when reflecting on the status of rent-seeking costs. To some, they represen t an ou t r igh t waste. To others, they are a sdmulus to en t r ep reneur i a l innovation. W h e n they are used simply to effect transfers they are r ega rded as a waste, but, when used as an incentive for socially product ive legislation, they are seen as a necessary const i tuent par t o f any dynamic economy. Bs The status of ren t seeking depends sensitively on value judgments . 39 If the most efficient projects are chosen, the payment of rents may well be d e e m e d as par t of the cost of " g o o d " publ ic sector management . However, if inefficient projects are chosen so that the rents of actors in the polit ical process can be maximized, then surely there can be no dispute over the wastes of rent seeking.

We do no t ant ic ipate that the const ruct ion of a polit ical CBA would be easy or that it would be costless (a l though, having said this, ident i f icat ion and evaluat ion of costs and benefi ts in a s tandard CBA is by no means a s imple exercise). At a practical level, the const ruct ion o f a polit ical CBA might be reserved for those cases in which the results of restrictive CBA appea r at odds with the policy d i rec t ion chosen by politicians. For purposes of i l lustration, take a recen t policy issue on which the prescr ipt ions of CBA are

40 said to be at odds with those of p, oliticians. Assessing European mone ta ry and economic union, De Grauwe asserts: 41

As long as the cost benefit analysis does not clearly show that monetary union would be beneficial for Europe's citizens, there is no point in pursuing monetary union. As of today. . , it has not been shown that a monetary union makes sense from an economic point of view [our emphasis].

Yet recognizing a difference between such evaluation and the con t inued interests of na t ion states, he continues4~:

If despite the warnings of economists, countries condnue to pursue the idea that monetary union is worth having, then these economists should take the same attitude they take when they analyse the behaviour of consumers. Consumers are

254 Political cost ber~fit analysis

sovereign and economists should respect the goals pursued by them. The same holds for nations.

But can consumer sovereignty be subsumed to some broader consideration? For some, a "na t ion" cannot exist as anything other than the interests of the individuals it com- prises, and the question would be: If cost benefit analysis shows monetary union to be detrimental, what sense does it make for a "na t ion" to choose it? For others, a way of reconciling matters would be to argue that other national interests imply deferring consumer sovereignty (to some degree) to the wider considerations of political representatives who are able to reflect an "Olympian" view. Our response would be that, if such conflict arises, there may be grounds for reworking the restrictive CBA (based on consumer sovereignty) by including governmental rents. If the evaluation of policy options were found to be sensitive to the inclusion of governmental rents, automatic deference o f consumer sovereignty to the national interests would be a suspect response. Inclusion of rents would now signal the need to inspect very closely those factors which appear to cause an alleged "Olympian" view to differ f rom a restrictive appraisal.

V. Conclusions

A number of conclusions follow. First, with respect to the debate between McChesney and Lewin and Trumbell, it has been argued that the existence o f rent-seeking costs means that, within a restrictive cost benefit analysis, gains f rom transfers are omitted but not loss, irrespective of whether or not the transfer is deemed legitimate or illegitimate. 4s Second, it has been argued that McChesney's reasoning can be applied in order to explain why legitimate gains to public choice actors are absent in any cost benefit analysis. In a restrictive CBA, where the objective is to consider efficiency, rents may be excluded where they are equal in value to the associated rent-seeking costs. However, it is important to emphasize that allowance may have to be made for the possibility that rent-seeking costs under- or overdissipate the value of the rents.

A third conclusion drawn from the above discussion is that, while governmental rents may have no place in restrictive CBA, it may prove unwise to ignore them completely because ultimately they may affect decision making. The purpose o f a political cost benefit analysis would be to reveal the vested interests of those who are party to decisions (and to management) concerning public expenditure. An ever-growing body of evidence suggests that the application of cost benefit analysis can be corrupted by the

4 4 interests of democratic representatives within the decision-making process. While we would not propose that the exercise of constructing a political cost benefit analysis can guarantee safety from such bias, 4~ an explicit statement of the vested interests o f political-bureaucratic agents can be used to question the evaluation of public projects.

Even if transfers f rom consumer-taxpayers to those in government are not illicit, they are not included in CBA when equal to rent-seeking costs. However, the irony is that excluding them from consideration will not necessarily remove their influence on public sector decision making. An explicit statement of the different prescriptions that emerge from a restrictive CBA with those that emerge f rom a political CBA will be explained by rents, and such an explicit statement may prove instrumental in explain- ing the recommendat ions of government.

Notes

1. F.S. McChesney, "Boxed in: Economists and benefits from crime," International Rada~ of Law & Econom/cs 13(1993):225; and J.L. Lewin and W.N. Trumbell, "Neither Boxed in nor Circular: A Reply to Professor McChesney," International Review of Law & Economics 13(1993):233.

JONES Am) CULHS 255

2. Lewin and Trumbell maintain that rent-seeking considerations are insufficient to exclude gains from illegitimate transfers.

3. J.G. Cullis and P.R. Jones, Public Finance and Public Choice (London: McGraw-Hill, 1992). 4. W.A. Niskanen, "'The Peculiar Economics of Bureaucracy," American Economic Review 57(1968) :293.

For a survey of this literature seeJ.G. Cullis and P.R.Jones, "The Economics of Bureaucracy," in The Growth of the t~ l i c Sector: Theot~s and International Evidawe, ed. N. Gemmel (1993).

5. A. Downs, An Economic Theory of Danocracy (New York: Harper and Row, 1957). 6. H.E. Klarman, "Application of Cost Benefit Analysis to Health Services: The Special Case of Tech-

nological Innovation," International Journal of Health Services 4(1974):326. 7. M.W. Jones-Lee, The Value of Life: An Economic Analysis (London: Martin Robertson, 1976). 8. D.W. Pearce and C.A. Nash, The Social Appraisal of Projects: A Text in Cost Benefit Analysis (London:

Macmillan, 1981). 9. See, in particular, E.J. Mishan Cost Benefit Analysis, 4th ed. (London: Unwin, Hyman, 1988).

10. M.W. Jones-Lee, The Value of Life: An Economic Analysis, p. 15. 11. Ibid. 12. Criminals are not party to decision making on investment in law and order, but political represen-

tatives are involved in decision making. 13. For example, S. Baker and C. Elliot, Readings in Public Sector Economics (Washington, D.C.: Heath and

Co Lexingtion, 1990), note that Wicksell warns " . . . economists not to offer advice as if a benevolent dictator were listening."

14. There are many comparative studies of private and public sector provision. See D. Mueller, Public Choice I1 (Cambridge: Cambridge University Press, 1989) for a survey.

15. This assumption may not be realistic but it assists exposition. 16. Rents do not exhaust all consumer surplus in the case illustrated. 17. w.J. Samuels and N. Mercurio, "A Critique of Rent Seeking Theory," in NeoclassicalPoliticalEconomy:

The Analysis of Rent Seeking and DUP Activities, ed. D.C. Colander (1984). 18. See, for example, G. Brennan andJ.M. Buchanan, The Power to Tax: Analytical Foundations of Fiscal

Constitutions (Cambridge: Cambridge University Press, 1980). 19. J.L. Lewin and W.N. Trnmbull, "The Social Value of Crime?" Inta'nationalReview of Law &Economics

10(1990):271. 20. J.G. Cullis and P.R. Jones, "Does it Make Sense to Double Count? Problems in Assessing Rent

Seeking Costs," Public Finance Quarterly 20(1992):378. 21. R.A. Posner, "The Social Costs of Monopoly and Regulation," Journal of PoliticalEconomy 83(1975):

807. 22. G. TuUock, "Efficient Rent Seeking," in Toward a Theory of the Rent Seeking Society, eds.J. Buchanan,

R.D. Tollison, and G. Tullock (1980), considers a situation where " . . . individuals can figure out the correct strategy, if there is a correct strategy, and that they also assume that the other people will be able to figure it out, also" (p. 101). W.P. Rogerson, The Social Costs of Monopoly and Regula- tion: A Game Theoretic Analysis," The Bell Journal of Economics 13(1982):391, follows this approach, whileJ. Hirschleifer, "Conflict and Rent Seeking Success Functions: Ratio versus Difference Models of Relative Success," Public Choice 63 (1989):101, suggests that relative success is determined by input differences.

23. See, for example, J. Bhagwati and T.N. Srinivason, "Revenue Seeking: A Generalisation of the Theory of Tariffs," Journal of PoliticalEconomy 88 (1980): 1069, and J.N. Bhagwati and T.N. Srinivason, "Revenue Seeking: A Generalisation of the Theory of Tafiffs---A Correction," Journal of Political Economy 90(1982):188.

24. M.S. Quibria, "Neoclassical Political Economy: An Application to Trade Policies," Journal of Eco- nomic Suroeys 3(1989):107. In the case of political lobbying this effect is obvious. In the case of rent-seeking activity by criminals, it may emerge via the technological innovations designed to combat theft, etc.

25. X. de Vanssay and Z.A. Spindler, "Is Tax Reform in the Public Interest? A Rent Seeking Perspec- tive," Public Finance Quarterly 22(1994):10.

26. J.R. Lott and R.D. Roberts, "Why Comply? Onesided Enforcement of Price Controls and Victimless


Crime Laws," Journal of Legal Studies 18(1989):411, with specific reference to illegal markets, argue that as participants, themselves, are left to enforce contracts in illegal markets, the use of coercion and " . . violence imposes negative externalities on the rest of society. The gang warfare in 1988 over cocaine in Los Angeles claimed many victims unrelated to the drug trade." These external costs would make rent-seeking costs exceed rents.

27. C. Paul and A. Wilhite, "Illegal Markets and the Social Costs of Rent Seeking," Public Choice 79 (1994): 105, argue that rent-seeking costs may be greater than both the value of the rents and any aUocative ("Harberger") cost.

28. E. Foster, "The Treatment of Rents in Cost Benefit Analysis," American Economic Review 71 (1981): 177.

29. A.T. Peacock, "An Economic Analysis of Economic Advice-Giving," Atlanta Economic Journal 16(1988).

30. /b/d. p. 6. On a more recent occasion advice was sought on the future of the retirement pension in the U.K., Sir Alan Peacock commented on the need to remind politicians that the problem of finance of retirement was not solely one of pensions provision, for there were other services that the elderly availed themselves of as well as tax concessions. Politicians seemed happy to discount this observation because " . . . as any public choice analyst will know the government influences on the real income of the retired are not simply a reflection of the myopia of policymakers but of the substantial voting power of senior citizens." A. Peacock, "The Credibility of Economic Advice to Government," Economic Journal 102(1992):1220.

31. A. Downs, An Economic Theory of Democracy, (New York: Harper and Row, 1957). 32. A. Boardman, A. Vining, and W.G. Waters II, "Costs and Benefits through Bureaucratic Lenses:

Example of a Highway Project," (1993) Journal of Policy Analysis and Management 12(1993):532, argue that what constitutes "benefits" and "costs" in any CBA depends on the "bureaucratic lense" through which they are observed. A distinction is made between Analysts, Spenders, and Guardians. The perspective of an Analyst is that of "standard CBA." By comparison, the perspective of Spend- ers is oriented towards the interests of their constituents. Spenders will classify expenditure on constituents as benefits and regard expenditure by constituents as costs. Guardians are concerned with the control of financial flows. Therefore, they tend to see benefits as revenue inflows and costs as revenue outflows. The countervailing interests of Spenders and Guardians will not necessarily cancel out to insure that estimates used in a CBA are consistent with those of the Analyst.

33. D. Wittman, "Why Democracies Produce Efficient Results," Journal of Political Economy 97(1989): 1395, illustrates how mechanisms within the political process may ensure competition.

34. For example, C. Wolf Jr., "A Theory of Non-Market Failure: Framework for Implementation Analy- sis," Journal of Law and Economics 22(1979):101, provides a taxonomy of such failings.

35. Even when constructed under "idealized" conditions they are likely to prove ineffective restraints on the indulgences of politicians. See R.G. Holcombe, The Economic Foundations of Government, (New York: New York University Press, 1994).

36. In the U.K. the House of Commons agreed to two resolutions in 1974. First, that Members of Parliament be expected to make an oral declaration as to any personal interest in debates of the House or its committees. Second, that members' interests be entered on a Register of Members' Interests, which would be available for inspection by the public (J.A.G. Griffith, M. Ryle, and M.A.J. Wheeler-Booth, Parliament Functions Practice and Procedures, Sweet and Maxwell, 1989). James Cal- laghan, former Prime Minister, stressed the difficulties that vested interest can pose for decision making, saying of opposition Members of Parliament: "I have almost forgotton their constituencies, but I shall never forget their interest. I wonder sometimes who they represent? The constituents or their own friends' particular interest?" [3July 1965, reported in A. Roth The Business Background of MPs, Parliamentary Profiles, London (1981) 25].

37. There are many examples of this argument, but perhaps one of the best known is B. Weisbrod, "Income Redistribution Effects and Cost Benefit Analysis," in Problems in Public Expenditure Analysis, ed. S. Chase (1966).

38. See, for example, M. Ricketts, "Rent Seeking Entrepreneurship, Subjectivism and Property Rights," Journal of Institutional and Theoretical Economies 143 (1987) :457.

JoNEs ~a,rD C u w s 257

39. TJ. DiLorenzo, "Property Rights: Information Costs and the Economics of Rent Seeking," Journal of Institutional and Theoretical Economics 144(1988):318.

40. We offer no comment on the "correct" policy direction. Our interest here is simply that the "correct" decision is said to be in dispute when comparing the results of a cost benefit analysis based on consumer sovereignty with that emerging from a "broader" assessment.

41. P. De Grauwe, "Towards Monetary Union without the EMS European Policy," Economic Policy 19(1994):173.

42. Ibid. p. 174. 43. Lewin and Tumbrell may maintain their insistence that more is required for discussion of illegiti-

mate transfers, and on this we offer no comment. Like the issue of equity weights in CBA this may call for stronger normative judgments appropriate in an Olympian CBA.

44. For further examples, see B.R. Weingast, K.A. Shepsle, and C. Johnsen, "The Political Economy of Benefits and Cost: A Neoclassical Approach to Distribution Politics," Journal of Political Economy 89(1981) :642 and D.R. Lee, "Monitoring and Budget Maximization in the Control of Pollution," Economic Inquiry 21 (1983):565.

45. For example, professional economists and others who compile CBAs may, themselves, be guilty of introducing their self-interest bias at any earlier stage.

legitimate and illegitimate transfers: dealing with “political” cost-benefit analysis

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