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
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
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
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
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
1. Introduction to CGE modeling: the USAGE model and I-O database
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
USAGE input-output database (contains 11m value flows) Basic Flows Prod- Invest- House- Exports Govt ucers ors holds Size I I 1 1 1 CS. Margins Sales Taxes Labour Capital Land CSN. CS. M 1 1
2. CBA/CGE assessment of the effects of increased highway expenditure in the U.S.
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)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 120000 Chart 1. Paths of federal highway capital expenditure (2010$m) 100000 Policy 80000 60000 Baseline 40000 Exogenous shock in both HERS and USAGE 20000 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 Chart 2. Deviation in highway capital expenditure as % of GDP 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0-0.02-0.04-0.06
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 Chart 3. Maintenance cost saving with increased spending (2010$m) 90 80 70 60 50 40 30 20 10 Endogenous result from HERS, exogenous shock in USAGE 0
-1.2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 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 0-0.2-0.4 Trucking -0.6-0.8-1 Passenger
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 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 0.8 0.7 0.6 Passenger 0.5 0.4 0.3 0.2 Trucking 0.1 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 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 3500 3000 2500 2000 1500 1000 500 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 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 350 300 250 200 Total extra fatalities 150 100 50 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 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 0-0.2-0.4-0.6-0.8-1 Trucking -1.2 Passenger -1.4
Outputs from the CGE model: USAGE
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 0.12 Chart 9. Aggregate employment (percentage deviations from baseline) 0.1 0.08 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 0.06 0.04 0.02 Petroleum tax 0-0.02
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 0.3 Chart 10. Aggregate welfare (% deviations from baseline) Deficit financed 0.25 0.2 0.15 Petroleum tax 0.1 Lump-sum tax 0.05 0-0.05-0.1
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