Wealth, Schmealth, Welfare, and Schmelfare

50 Pages Posted: 10 Apr 2024

See all articles by Daniel J. Hemel

Daniel J. Hemel

New York University School of Law

Date Written: March 11, 2024

Abstract

Traditional cost-benefit analysis is sometimes equated with “wealth maximization,” but the equation is a mischaracterization: traditional cost-benefit analysis’s “sum of compensating variations” test ignores the deadweight loss of redistribution, even though the deadweight loss of redistribution reduces society’s total wealth. Thus, the traditional test measures a regulation’s effect on a quantity other than wealth—what we might call “schmealth” (i.e., wealth minus the deadweight loss of redistribution).

The distinction between the traditional test and wealth maximization takes on renewed relevance in light of the Biden administration’s recent revision to Circular A-4, the framework document for regulatory analysis across federal executive-branch agencies. The new framework encourages (but does not require) agencies to account for distributional benefits in their regulatory analyses—an approach that is intended to capture a regulation’s effect on welfare. But much like the traditional “sum of compensating variations” test, the new framework ignores the deadweight loss of redistribution, even though the deadweight loss of redistribution reduces social welfare. Thus, the new framework measures a regulation’s effect on a quantity other than welfare—what we might call “schmelfare” (i.e., welfare minus the deadweight loss of redistribution).

This article introduces the distinction among wealth, “schmealth,” welfare, and “schmelfare” with the goal of elucidating the reasons why regulatory policymakers might choose one of these standards over the others. “Schmealth” and welfare are symmetrical standards: they treat the costs and benefits of redistribution equally—ignoring both in the former case, accounting for both in the latter. Wealth and “schmelfare” are asymmetrical standards: they account for either redistribution’s costs or its benefits but not for both. The article articulates the normative case for symmetry—and thus for either the traditional “schmealth” standard or a welfare standard. It goes on to show how the choice between “schmealth” and welfare depends upon political conditions and political values, including considerations of electoral accountability and the separation of powers. Ultimately, the conflict between traditional cost-benefit analysis and welfare analysis turns less on different understandings of microeconomics than on different visions of the macro-structure of public law.

Keywords: cost-benefit analysis, deadweight loss, distributional analysis

JEL Classification: K23, K32, K34

Suggested Citation

Hemel, Daniel J., Wealth, Schmealth, Welfare, and Schmelfare (March 11, 2024). NYU Law and Economics Research Paper Forthcoming, NYU School of Law, Public Law Research Paper Forthcoming, Wake Forest Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4755600

Daniel J. Hemel (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

HOME PAGE: http://rb.gy/j5afjp

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
78
Abstract Views
323
Rank
574,922
PlumX Metrics