Thursday, January 12, 2006

Costs are always costs to someone 

That title is a line I've used in introductory classes for years (I don't know if I swiped it from Heyne's text, or some flavor of Alchian and Allen, Buchanan, or where. I know I didn't invent it.) One of my training mechanisms for my students is to give them a quote from a news article that says "the costs of X are $YYY" and then ask them "whose costs are these? Why is this article written this way?" Part of it is an appeal to "science" (say it in your Mister Science voice), that we have some objective measure of what X costs, and that enough experts sitting around a room can agree a number that X costs that will be called "the true cost". But costs are actually quite subjective. What is the cost of living in Minnesota? "Whose costs are these?" It depends on tolerance of cold and mosquitoes, love of hockey, preferences for plains or mountains or oceans, one's career choices, origin of spouse, etc. My cost and your cost are not the same.

HedgeFundGuy discusses the Bilmes and Stiglitz paper on the costs of the Iraq war. Referring to the paper as if it was only written by Nobel laureate Joseph Stiglitz,
He ignores any benefits accruing to Iraqis, and in fact proudly notes he did not count the Iraqi's costs. But this is really the crux of the issue. For example, one could also argue this war will lower oil prices in the long run because it has set a limit on how much mischief a wealthy oil state can create.
Why should the U.S. care about the costs to Iraqis, though? Obviously Stiglitz thinks these costs do not count. Were they to count, HFG explains, the U.S. might indeed find the costs not nearly so large.

You fight to protect assets, but you also must align this with some principle, such as liberty or democracy. This may seem a mere pretext, but in fact it is essential. If liberty or democracy is a principle and the malefactor is taking your stuff, you fight because you can sell it to your voters--the long term benefits of principles are generally large, and the short run benefits of protecting one's assets are also large.
This is to say that there is a cost to having democracy not advanced and spread. It dispirits your potential allies and emboldens your enemies. It cuts down on your ability to trade with your neighbors. (For example, see this wonderful story Margaret tells of the coffee wars of Venezuela. I cannot wait for the "no blood for latte!" chants on our campus.) Robust democracies tend towards free trade. You can choose to recognize these costs or not, these benefits but not those depending on what conclusion you wish to draw.

If principles are worth fighting for, surely most of the effects are long-term, large and accrue mainly to whom we are fighting. For example, the net present value of avoiding Nazism was very large, and accrued mainly to Europe, not the US. Thus by ignoring benefits that war proponents articulated (eliminating a threat before it is imminent, humanitarian relief, enforcing UN resolutions, democracy in Iraq, securing Iraq's oil) Stiglitz assumes this war had no valid principles, in which case his conclusion on the cost-benefit axis is preordained.
UPDATE: Tyler Cowen says about as much, and says only the lower end of their estimate is valid. Again, it depends on whose costs you count.