A cost-benefit analysis weighs what something costs against its potential benefits. A simple example might be a certificate of deposit. For a fixed amount of money–say $1,000, you get that plus $50 in interest back in one year. This investment cost $1,000, the benefit is $50, the return on investment is 5% and there is a high probability of receiving it back since this kind of investment is insured by the government. Other relevant questions might include what alternatives are available, whether their rate of return is higher and what is the probability of the principal being returned.
This analysis can be extended to more complex investments. For example, the Congressional Budget Office applied cost benefit analysis to the new healthcare bill and the Florida Legislature recently eliminated 29 out of 36 of its economic development programs, including the Governor’s “Closing Fund,” because they failed to have a positive rate of return.
Like many debates on how resources should be allocated, cost-benefit analysis (CBA) can be controversial: some argue that CBAs can help find the most sensible policies while others argue CBAs still contain the political bias of its authors in the assumptions that are made.
Since 1983, the Washington State Institute of Public Policy (WSIPP) carries out non-partisan, public policy analysis for the Washington State Legislature. WSIPP annually publishes cost-benefit analysis on 100+ programs after (1) reviewing high quality studies of social programs, (2) estimating the taxpayer cost to implement those programs and (3) computing the rate of return when benefits are included.
An Example Using Cost Benefit Analysis
One of the more maligned social programs in contemporary history is the Drug Alcohol Resistance Education (D.A.R.E.) program. This article in Scientific American is a nice introduction as to why it doesn’t work. The program remains active in many communities despite the decades of negative research. According to WSIPP’s latest evaluation in August of 2015, the program benefits minus costs were -$478. For every dollar spent in providing the program, a community could expect to absorb an additional -$6.71 in negative outcomes.
Botvin Life Skills
In contrast to D.A.R.E., Botvin Life Skills is one of the most effective interventions in reducing drug and alcohol use among teens. According to WSIPP, it cost $100 to provide the program to each student with $1,736 dollars in future benefits. For every dollar of taxpayer funds, the program yields $17.35 in future benefits. Note that there is 66% chance of implementation with a positive rate of return. (It’s always worth spending some time on fidelity of implementation.) Henderson County Schools introduced this program into its two middle schools in the last couple of years.
Why, in spite of decades of negative research findings, do you think Henderson continues to offer the D.A.R.E. program?
If the school’s implementation of Botvin Life Skills is grant-funded, would you advocate for funding the program using local tax dollars?
Does the recent opiate crisis increase or decrease the value of prevention programming?
What other programs are on the WSIPP’s cost-benefit analysis should be eliminated or started?
What about a Boys and Girls Club?
Cost-benefit analysis might not answer the tough questions on the best way to spend public money, but it will change the way the community talks about it. Summarizing a number of government investment decisions into a simple rate of return can help the community understand the value of the different choices. Using a simple local example of D.A.R.E. versus Botvin Life Skills program demonstrates how cost benefit analysis can identify socially valuable and cost-effective programs. Expanding the use of cost benefit analysis could help Henderson regain its swagger.