Computable General Equilibrium (CGE) Modelling and Cost-Benefit Analysis (CBA) presented by

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1 Computable General Equilibrium (CGE) Modelling and Cost-Benefit Analysis (CBA) presented by Peter B. Dixon Centre of Policy Studies, Victoria University to the Cost Benefit Analysis Forum Sydney July 17, 2015

2 CBA and CGE CBA is concerned with particular projects, e.g. staging an event such as the Olympic games; imposing an environmental regulation, such as a ban on clear felling in a native forest ; improving public infrastructure, e.g. highways CBA outputs include: effects on economic variables such as revenues (e.g. ticket sales, TV rights) and costs (e.g. stadium construction); and effects on non-economic variables such as health, air quality, and leisure time. CBA outputs are focused on variables close to the particular project

3 CBA and CGE CGE is concerned with the whole economy. Traditional applications are in the analysis of broad economic policies, e.g. taxes, tariffs, trade, immigration CGE outputs include effects on economic variables such as real consumption, welfare, GDP, exports and imports, aggregate employment, average wage rates, and output by industries CGE outputs include variables that seem far from the policy under consideration

4 Connection between CBA and CGE Project, e.g. Improved highways CBA Effects on project related variables, e.g. trucking costs CGE Effects on economy-wide variables, e.g. GDP

5 Topics 1. Introduction to CGE modeling: the USAGE model of the U.S. and the input-output database 2. CBA/CGE assessment of the effects of highway expenditure in the U.S. 3. Concluding remarks

6 1. Introduction to CGE modeling: the USAGE model and I-O database

7 USAGE applied by and on behalf of U.S. International Trade Commission, U.S. Treasury, U.S. Departments of Commerce, Agriculture, Homeland Security and Energy, the Cato Institute and the Canadian Government in analyses of trade policies, the Obama stimulus package, the national export initiative, illegal immigration, terrorism threats, epidemics, biofuels and other greenhouse policies, environmental regulations, oil prices, U.S. jobs from trade with Canada and North American integration Also used in traditional CBA areas e.g. analyses for: Mitre Corporation on airport infrastructure (NextGen) Dept. of Transportation on costs/benefits of road infrastructure

8 USAGE input-output database (contains 11m value flows) Basic Flows Prod- Invest- House- Exports Govt ucers ors holds Size I I CS. Margins Sales Taxes Labour Capital Land CSN. CS. M 1 1

9 2. CBA/CGE assessment of the effects of increased highway expenditure in the U.S.

10 Inputs and outputs of a CBA model and translation into shocks for a CGE model CBA model: Highway Economic Requirements System (HERS) CGE Model: U.S. Applied General Equilibrium (USAGE)

11 Chart 1. Paths of federal highway capital expenditure (2010$m) Policy Baseline Exogenous shock in both HERS and USAGE

12 Chart 2. Deviation in highway capital expenditure as % of GDP

13 Chart 3. Maintenance cost saving with increased spending (2010$m) Endogenous result from HERS, exogenous shock in USAGE 0

14 Chart 4. Percentage effects of policy on vehicle operating costs per mile travelled Endogenous result from HERS, exogenous shock in USAGE introduced as general input-saving technical change in trucking and public & private passenger transport Trucking Passenger

15 Chart 5. Percentage changes in fuel use per mile, specific category of operating costs Endogenous result from HERS, exogenous shock in USAGE introduced as fuel-using technical change in trucking and public & private passenger transport Passenger Trucking 0.1 0

16 Chart 6. Extra medical costs associated with increased highway investment expenditure ($m 2010 prices) Endogenous result from HERS, exogenous shock in USAGE introduced as nonwelfare enhancing increase in medical expenditures by households

17 Chart 7. Extra fatalities associated with increased highway investment expenditure Endogenous result from HERS, exogenous shock in USAGE introduced as welfare reduction of $7m (2010 prices) per fatality Total extra fatalities

18 Chart 8. Percentage reductions in time per VMT associated with increased highway investment Endogenous result from HERS, exogenous shock in USAGE introduced as change in labour productivity in trucking and leisure & labour supply for households Trucking -1.2 Passenger -1.4

19 Outputs from the CGE model: USAGE

20 Chart 9. Aggregate employment (percentage deviations from baseline) Deficit financed Lump-sum tax Factors determining employment paths: (1) Multi-factor productivity (2) Terms of trade (3) Labour intensity of expenditures (4) Labour supply Petroleum tax

21 Chart 10. Aggregate welfare (% deviations from baseline) Deficit financed Petroleum tax 0.1 Lump-sum tax

22 3. Concluding remarks CBA models such as HERS include expertize beyond economics and cover variables (e.g. travel time, vehicle operating costs, highway maintenance, transport-related medical costs, fatalities) not usually included in economic models We modified USAGE so that it could accept HERS variables. Required interaction with engineers - moving outside the comfort zone for economists CGE offers a method for translating CBA results into economy-wide outcomes This translation is aimed at improving the political effectiveness of detailed cost/benefit analysis carried out by the U.S. Department of Transportation

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