One of the big problems with public goods is choosing which to build. The goods themselves are joint in consumption but the community may not know, indeed is unlikely to know, how much to spend on one pubic good compared with the next. How much should be spent on guide dogs and how should that be traded off against suburban roads.
Of course this is a very important way in which markets for private goods have it all over ‘markets’ for public goods. As Hayek argued following Adam Smith, the answers that emerge from ‘revealed preference’ showing how much people want to buy wheat compared to how much they’ll part with their money for corn, or video games show the market as an information/preference processing machine.
The public sector has trouble with this problem and sometimes it’s proposed that philanthropy does a better job. But how much is philanthropy ‘evidence based’? Apart from the inefficiencies involved in philanthropies – which have an incentive to spend on marketing up to the point at which one dollar’s marketing expenditure generates $1.01 in revenue – if you look at correspondence and advantage from philanthropies, they play on the emotions, not the intellect.
This isn’t me saying that public sector provision is better than state provision, any more than, to quote Woody Allen, the Atlantic Ocean is a better ocean than the Pacific Ocean, but it does show the profound problems of both means of funding public goods and the extent to which public goods provision is dominated by the dark arts of marketing.
I thought of this when looking at the table over the fold from the Washington State Institute for Public Policy which maps the benefit cost of different programs. And the only program that is almost certain to generate more costs than benefits is the only program I’ve heard of “Scared Straight” is the only one that has marketing that’s so good that even I’ve heard of it.
| Program name | Date of last literature review | Total benefits | Taxpayer benefits | Non-taxpayer benefits | Costs | Benefits minus costs (net present value) | Benefit to cost ratio | Odds of a positive net present value | |
|---|---|---|---|---|---|---|---|---|---|
| Functional Family Therapy (youth in state institutions) | Apr. 2012 | $61,374 | $12,982 | $48,392 | ($3,332) | $58,043 | $18.42 | 99 % | |
| Aggression Replacement Training (youth in state institutions) | Apr. 2012 | $57,364 | $11,940 | $45,423 | ($1,543) | $55,821 | $37.19 | 90 % | |
| Functional Family Therapy (youth on probation) | Apr. 2012 | $37,587 | $9,510 | $28,077 | ($3,333) | $34,254 | $11.28 | 99 % | |
| Aggression Replacement Training (youth on probation) | Apr. 2012 | $35,329 | $8,727 | $26,602 | ($1,540) | $33,788 | $22.94 | 86 % | |
| Multidimensional Treatment Foster Care | Apr. 2012 | $39,094 | $8,875 | $30,218 | ($8,059) | $31,035 | $4.85 | 80 % | |
| Family Integrated Transitions (youth on probation) | Apr. 2012 | $38,556 | $10,221 | $28,335 | ($11,469) | $27,087 | $3.36 | 86 % | |
| Multisystemic Therapy | Apr. 2012 | $34,067 | $7,700 | $26,367 | ($7,522) | $26,545 | $4.53 | 93 % | |
| Multidimensional Family Therapy (MDFT) for substance abusers | Dec. 2012 | $21,125 | $5,725 | $15,400 | ($5,835) | $15,289 | $3.62 | 74 % | |
| Family Integrated Transitions (youth in state institutions) | Apr. 2012 | $26,420 | $6,503 | $19,917 | ($11,483) | $14,937 | $2.30 | 75 % | |
| Multisystemic Therapy for substance abusing juvenile offenders | Sep. 2013 | $22,235 | $4,286 | $17,949 | ($7,528) | $14,708 | $2.95 | 71 % | |
| Drug court | Apr. 2012 | $14,692 | $3,810 | $10,882 | ($3,154) | $11,539 | $4.66 | 93 % | |
| Functional Family Parole (with quality assurance) | Jan. 2013 | $14,593 | $3,481 | $11,112 | ($4,425) | $10,168 | $3.30 | 77 % | |
| Coordination of Services | Apr. 2012 | $6,445 | $1,684 | $4,762 | ($403) | $6,043 | $16.01 | 78 % | |
| Therapeutic communities for chemically dependent juvenile offenders | Dec. 2012 | $9,150 | $2,326 | $6,824 | ($4,522) | $4,628 | $2.02 | 64 % | |
| Victim offender mediation | Apr. 2012 | $4,271 | $1,159 | $3,113 | ($589) | $3,682 | $7.25 | 89 % | |
| Drug treatment for juvenile offenders | Dec. 2012 | $6,717 | $2,078 | $4,639 | ($3,704) | $3,013 | $1.81 | 73 % | |
| Other chemical dependency treatment for juveniles (non-therapeutic communities) | Dec. 2012 | $4,105 | $1,382 | $2,723 | ($3,157) | $948 | $1.30 | 56 % | |
| Scared Straight | Apr. 2012 | ($12,932) | ($3,259) | ($9,673) | ($66) | ($12,998) | n/e | 1 % |
I imagine the reason you haven’t heard of them (I haven’t heard of any of them), is, apart from not being programs near where you live and might actually see them, many are probably quite small. This is probably a good thing in many cases, since often they can scoop off the clients they can most likely help. I think once some of these sorts of programs get big, they start getting more and more general, and the initial benefits and cost advantages of targeted interventions are lost. Since the government and so on are rather poor at doing these minor but often very effective programs, I imagine they are not really in competition with philanthropies (presumably excluding small grants).
You can see this in a number of domains. If you look at mental health/family/social programs, there are any number of them. You only ever know about most of them because you happen to work in certain areas (your connecting families program I imagine is one of them). Once they get huge, however, they often run into problems and help less people for more money (I think Patrick Macgory’s Headspace gets into this category, and the governments other mental health initiatives, which are even more broad-based, get rorted a lot). I imagine the same is true of environmental agencies — I’d be happy to bet the waste ratios of huge players like Greenpeace would be much more than the small operators, but Greenpeace has the type of political clout no-one else has, and it can pay lawyers to fight things small agencies never could. So they are really operating on different scales and often different areas.
Being huge and government based also doesn’t mean you get decent evidence based evaluations. For example, you won’t be able to tell me or give me information on how headspace is really going, only the number of clients they’ve seen. Similarly, try finding a good evaluation of the other billions put into mental health in the last few years (c.f., just a big paper trail talking about number of clients etc.). Alternatively, you’ll be able to tell me about everything else they do from their marketing.
Well of course, conrad – the “scooping off” effect is exactly one reason you have to do Randomised Controlled Trials (RCTs) if you can, or use some very fancy and even less reliable microeconometrics if you can’t. Program evaluations that don’t do this properly (as many don’t) are not worth the paper they’re written on.
Arriving at these sort of cost-benefit estimates is a difficult business all around (the whole point of Nicholas’ post), which is just one of the reasons why such estimates mean very little unless they are simultaneously quoted with some indication of their robustness, such as the last column in that table.
There is of course a massive literature on both program evaluation and CBA for public goods; the formal work dates back well over a century and (as Nicholas notes) the informal work more than two. Lots of very smart people have thought very hard about these things for a very long time. Nicholas explains this very well, as usual, but his points ought not to come as a surpise to anyone who’s done some Public Economics at uni.
The issue of marketing is interesting because in some cases money spent on marketing is a beggar-thy-neighbour policy (such as foundations for cancer research attracting money that would otherwise be given to dementia research) and in others, marketing is a core part of what they do. Arguably Amnesty International (a charity I like) is in that category: increasing awareness within and between countries of human rights abuses is their main goal, so in a way they are a professional marketing organisation. And they also mainly play on emotions, rightly so, for it is those emotions that are motivating them and their audience.
Otherwise, I think conrad makes the right point, which is that most philanthropy is local. To the classic economist, every good dad is an unregistered charity.