Budget: cost vs. benefit

Published 4:20pm Friday, August 20, 2010

Well folks, we’ve covered a lot of ground over the last few months and it would be nice to take it one more level.
The next level to me is to do some cost-benefit analysis on the Federal Budget.  There is one problem.  Apparently, no one has attempted to do this and publish any data.  Not the Congressional Budget Office,  not the Treasury,  not the President’s Budget Office, not the Right Wing, not the Left Wing and, to my disappointment, not the pragmatic center.
There are lots of rhetorical articles and discussions about cost-benefit analysis but no numbers. Without the numbers, any arguments about benefits and costs are pretty much meaningless diatribes by people trying to make moral, ideological or patriotic statements to justify expenditures.
That’s not to say that economic analysis and the numbers they produce are the end all with regard to budgeting, it is just a good place to begin discussions and provide some sense of reality.
To make my point on how important it is, I have looked at a subject that provides plenty of data that I can access and do my own little cost – benefit analysis.    I’m sure the subject I’ve chosen won’t create a stir (LOL).  (My apologies to my friends in the field of law enforcement for the subject matter.)
There are lots of ways to look at cost-benefits, but I think the first look should always be on a macro-scale level. Additionally, defining benefits is very difficult because there are so many opinions on what constitutes a benefit.
One concept to grasp is that there are direct benefits and indirect benefits. The first place to look is direct benefits or those that can be simply identified. Indirect benefits are where the strongest disagreements will occur so the analysis has to be more rigorous.  Indirect benefits generally involve aspects that appear related but may not be because of the complexity with which their effects are measured.
Law enforcement is especially difficult because it impacts so many aspects of life — economics, social and political. However, there is always a common “bottom line” aspect that can be used as a benchmark. The first thing we should evaluate is “what would it cost us each to individually pay for the service we get through our government.” Why?  This is a direct benefit that is easily measured.
Also, government should only be involved in providing “services” that the majority of us would be paying for if it wasn’t available through our government(s). And you would have to pay for your own security if law enforcement wasn’t there. And, no knucklehead, owning a loaded gun(s) is not all there is to ensuring your own security.
So, let’s look at the cost side of the equation and don’t worry about any rounding of the numbers that I use. For the upcoming year, the total cost of law enforcement in the U.S. is estimated to be $351 billion ($1,170 per person/year) including what is spent at the Federal, State and local level.
This represents approximately 1.1 million professionals in law enforcement working for 14,167 government agencies.  Doing the math, this means that we spend $319,000 per year per law enforcement professional.  About two-thirds are “police” and one-third is civilian support. This is not just salaries folks; So don’t quit your job yet.
As best as I can deduce from the data available, the average salary is in the range of $45,000 per year with starting salaries in the $30,000 range. Keep in mind that these are extremely dangerous occupations as compared to your average “wall streeter.” Your average private security professional (e.g., unarmed mall cop) makes average wages between $17,000 — $40,000 per year.
However, some of the better private positions make as much as $120,000 per year according to some of the on-line data I’ve seen. My best guess would indicate that a typical police officer (experienced, trained and certified) would be worth somewhere between $40,000 and $120,000 in the private sector (an average of $38.50 per hour).
On the benefit side, you have law enforcement professionals averaging 50 hours per week (yes, they work a 10-hour day standard). Doing “the math” gives us about 2 billion hours (737,000 X 50 X 52) of protection per year or about 6.4 hours per year for each person in the U.S. Assuming a reasonable private industry overhead rate of 2.0, the direct economic benefit would be around $500.
So, in the broad sense, we get $500 per person of direct benefit for $1,170 per person in costs.
Next let’s try and get a handle on indirect benefits. A fellow by the name of David Andersen, author of “The Aggregate Burden of Crime”, estimates the costs of crime to be in the neighborhood of $1.7 trillion dollars. This represents $5,667 per person in costs to society each year. It would take a decrease of 11.8% in this cost to negate the $670 per person gap in costs versus direct benefits.
So how do we assess the value proposition of a lower crime rate with the current rate of expenditures?
Using a declining crime rate as reported by the FBI from 1998 to 2008, shows the rate declining from 4,615 to 3,667 crimes per hundred thousand people, which is a 20.5% decline.  A 20.5% decline in crime rate represents an indirect societal benefit of $1,164 per person or $3,036 per household.
Over this same decade, law enforcement expenditures rose by $200 per person or $521 per household. Adding the direct and indirect benefits gives us a positive cost-benefit of $494 per person or $788 per household. Put into different terms, the annual return on our investment is 42%. It sure beats the 2 – 5% I can get from my other investments nowadays.
Taking the analysis further and making some hard decisions about return could improve the results.  As in the law enforcement example, you can evaluate the different sub-programs in a similar manner to find those programs that are under-performing and pare the expenditures back where the return is insufficient.  We could look at everything from enforcement, drug laws and drunk-driving to determine if the return warrants the expenditures.
Although the concept of benefit-cost analysis is simple, complexity can be introduced to confuse us so that self-serving groups and individuals intentionally mislead the public.  We have limited resources and the future indicates they will be even more limited as our economy continues to decline for several more decades because of decades of poor public policy driven by the misguided economic ideologies: The message to our leaders and aspiring leaders is to treat us with respect.  Use the data and experience we have to spend our money wisely and put our country first.
Rodney Gibson is the former Mayor of Saluda.

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