Economists have long been challenged by the question: how does one decide if a particular social program is in the national interest (to use the Prime Minister’s favourite expression)?
We economists talk a great deal about cost-benefit evaluations but it is never clear what goes into these calculations. So here is my go at it.
For a social program to “pay off” and meet the national interest test, it needs to meet five conditions.
First, the mix of long term social goals that the program is seeking to achieve (e.g. greater equality, more income mobility, greater participation, self-help etc.) should be broadly in line with community values and priorities.
Secondly, there should be enough hard evidence to suggest that the program can be potentially effective in achieving its social goals i.e. that it can deliver the desired social outcomes in the longer term.
Thirdly, if the aims of the program are well defined up front, it should be possible for a good government to implement it efficiently and effectively (i.e. there are no horrendous administrative complexities or opportunities for surreptitious political abuse).
Fourthly, the cost of providing and delivering the program should not be such that it imposes an unacceptably high and sustained burden on taxpayers in the short/medium term (posing the risk of a strong electoral backlash).
Finally, after allowing for the positive economic effects of the program and the adverse secondary (third party) effects of higher taxation on the economy (even with the best non-distorting revenue instruments available), the net impact on national productivity and economic growth should be small or at least not too detrimental (in the most extreme case, they should not risk making everyone rich and poor alike worse off, thus defeating the whole purpose of the exercise).
The question I am raising for debate is a methodological one. I am not looking to get into an argument over the merits of this or that social program or even how one measures each of these five criteria.