Loss aversion and rationality in cutback management: a deliberative democratic approach to contingent valuation.

Author:Moore, William

    "After a time, you may find that having is not so pleasing a thing, after all, as wanting. It is not logical, but it is often true." Mr. Spock

    "Don't it always seem to go that you don't know what you've got till it's gone?" Joni Mitchell

    Cutting public spending can be painful. Although it is sometimes true that public programs outlive their genuine usefulness, the idea that most of what governments do could as easily be done without is patently foolish. Every public expenditure has an original constituency, and major programs often gain new supporters as they become entrenched. In fact, many public programs are so highly valued that the mere suggestion that they be cut can cause chaos and end careers. Thus there is a certain folk wisdom in politics that, once they are funded, some programs will be virtually impossible to cut. In the United States, Social Security is reputed to be one of these--the third rail of American politics. It is true, of course, that once a program is in place people begin to rely upon it. People plan their patterns of consumption and schedule their work lives around the availability of mass transit. People plan their savings programs based upon the assumption of old-age pensions and health care programs. Parents plan their entire existence around the school calendar. Much of the politics that make budget cutting difficult have to do with resistance to disruptions in the supply of these sorts of public goods--in the absence of which people must work harder, work longer, or work in different ways to achieve their objectives. This much of budgetary politics is both rational and, to a certain extent, predictable.

    Yet, our avatars of popular culture suggest that more than this is going on and that it has to do with an inherent irrationality in human behavior. Mr. Spock advances the notion that anticipation may be sweeter than possession. Human emotions, he might say, get the better of us in the pursuit of our desires. Then, in the cold light of day, what we possess fails to live up to our expectations. Thus the voters support an initiative to fund a new library and then, after the grand opening excitement dies away, fail to use it. Ms. Mitchell, on the other hand, posits the all too familiar experience of finding out how good we had it only when we don't have it so good anymore. Perhaps familiarity does really breed contempt--at least with respect to public goods. We become so accustomed to the city park down the street that we don't think about it until someone paves paradise and puts up a parking lot. Economists and policy analysts are not unfamiliar with irrationality of this sort. It is, however, something with which they often deal poorly.

    With respect to the specific problem of cutting public expenditures, it is easy to be blindsided by the irrationality of the public's response. Our understanding of cutback management has gotten off to a rather slow start. This is, at least in part, because public managers and organizational analysts have long approached this problem burdened by broad assumptions of abundance and continuous economic growth that have dominated administrative thinking since at least the ascendance of Keynesian economics (Fox, 1967). Against this backdrop, it is easy to see existing levels of public spending as a sort of political equilibrium. It is the result of how hard various interest groups were willing to battle for their share of the expenditure pie. This, in turn, was a function of calculations made by countless individuals about how much of their resources they were willing to expend in securing various public goods through the political process (Wildavsky, 1979). The existence of this equilibrium lent a crucial stability to the budgetary process. In this environment, it was possible for budget actors to focus on marginal year-to-year adjustments in spending, to make firm commitments in advance of expenditures, to rely upon the past as a guide to the future, and easily and promptly to evaluate the results of their efforts (Caiden, 1981).

    As the presumption of continued economic growth breaks down, however, the stability of the budgetary process goes with it. Public authorities in developed nations are experiencing the problems of government finance with which their colleagues in the developing world are all too familiar (Caiden and Wildavsky, 1980). Revenues disappear from general funds through earmarking or the establishment of special taxing entities. The regular expenditure of budgeted funds is replaced by ad hoc cash flow management. In the scramble for resources, budgeting techniques perfected in times of plenty reveal the degree to which their success assumed a favorable environment. These challenges have spawned a new literature on cutback management, too vast and varied by far to review even briefly in this paper. (1) But little has been done to address a crucial underlying element of ostensible irrationality in the politics of cutback budgeting--the fact that people may change their view of the value of a public good for no reason other than that it has come into their possession.

    Possession-induced preferences for goods (either public or private) have been generically referred to as "loss aversion." There are many reasons why citizens should wish to avoid losing public goods that are already available to them. In addition to the direct loss of the actual value of the good, citizens may incur additional indirect losses as life-plans they have made (based on an assumption of the continuing presence of the goods) are disrupted. Moreover, citizens may be rationally averse to the uncertainties introduced by the loss of a previously available public good (though this phenomenon is more appropriately thought of as risk aversion). Of course, citizens may also have come to understand that a public good actually has a higher value than they had previously believed that it would--although given that pre-possession estimates of value are likely to vary in both positive and negative directions, it is hard to understand why the new information resulting from possession seems generally to raise the imputed value of goods.

    By its very definition, loss aversion constitutes a failure of the market to price a good accurately. That this failure may be due to circumstances that violate presumptions regarding information and rationality that undergird the science of economics is cold comfort to the budget analyst, who has worked to accurately determine the price of providing a public good only to find that the price of ceasing to provide it seems higher. There is, however, an existing tool of economic analysis that can be pressed into service in addressing this problem. Contingent valuation (CV) is a widely used and well-understood technique for the valuation of non-market resources such as environmental preservation. Although resources of this type do provide people utility, they lack a market price because they cannot be directly sold. For example, people receive a benefit from unspoiled wilderness, but wilderness is difficult to value using price-based models. A contingent valuation survey is a technique used to measure these aspects of a non-market resource. Typically the survey asks how much money people would be "willing to pay" to create or to maintain the existence of such non-market resources and amenities. While contingent valuation is intended to quantify citizens' preferences for non-market goods, techniques of qualitative analysis are sometimes used after CV surveys are conducted to help interpret the results. Elements of group deliberation have been suggested at the stage of drafting a contingent valuation survey to ensure that an appropriate range of resource levels and all policy-relevant tradeoffs are identified by the survey.

    We propose to invert this process of contingent valuation and to add to its deliberative character in order to determine what citizens are "willing to sacrifice" under conditions of fiscal stress. We suggest a procedure in which a group of stakeholders is used in a deliberative fashion to identify the resource constraints faced by a unit of government, the viable options for bringing spending into line with resources, and the consequences of each policy option over both short and long time-frames. Then a representative sample of the population responds to the CV instrument, after which respondents engage in a deliberative exercise designed to elicit, not their bare preferences among alternatives, but their considered judgments after participating in discussions with one another on "citizens juries" of the type that have long been used in Britain, Germany, the United States and elsewhere in other policy arenas. This re-imagined form of contingent valuation, called "deliberative monetary valuation," certainly offers advantages in terms of governmental transparency, analytical accuracy, and democratic legitimacy (Lo and Spash, 2012; Niemeyer and Spash, 2001; Randhir and Shriver, 2009; Soderholm, 2001; Spash, 2008). To the extent that a citizen jury exercise improves information levels about public finance and affects attitudes about the quality of public services, the possibility that this might alter the public's willingness to pay for those services is consistent with the findings about citizen participation (B. Simonsen and Robbins, 2003; W. Simonsen and Robbins, 2000) (2). But it should be particularly valuable in circumstances of cutback management as it would allow practitioners to incorporate important elements of political consensus-building into early stages of the policy process and alert them to the need and opportunity to ameliorate the impacts of spending reductions.

    Before describing such a procedure, however, it is essential to provide a basic understanding of the logic of contingent valuation, its advantages and disadvantages, how it works in practice, and what challenges are likely to...

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