The new OMB Social Welfare Function – Healthcare Economist

The Office of Management and Budget has introduced a new Social Welfare Function that aims to assess government regulation and economic policies based on income inequality. This innovative approach weights the benefits and costs of regulations and policies according to the income levels of individuals impacted. The goal is to reduce inequality by giving more weight to costs and benefits that affect low-income individuals and less weight to those impacting high-income individuals.

Viscusi et al. (2024) explain this novel policy and its challenges. The policy assigns explicit weights to policies based on income groups, as shown in the provided formula. This weighting system results in lower weights for high-income individuals and higher weights for low-income individuals.

However, while the goal of reducing inequality is commendable, there are potential inefficiencies that may arise from this approach. For example, the weighting of house values based on income levels could lead to counterintuitive results. Wealthier individuals may see their house values downweighted, creating potential issues in policy implementation.

Viscusi’s paper highlights six key conclusions regarding the new OMB Social Welfare Function:

1. Quantitative distributional weights created: The OMB approach establishes explicit and operational distributional weights.
2. Major impact: The weights are expected to have profound effects on benefit-cost analyses.
3. Inefficient: The application of the weights could be inefficient due to the highly right-skewed nature of income distribution.
4. Grouping matters: How OMB groups policies by income levels will impact the analysis, especially in areas with mixed-income neighborhoods.
5. Mortality risks: OMB excludes health benefits and risks from the inequality weighting, potentially undervaluing health benefits for low-income individuals.
6. Interaction with other policies: There is a need to consider how these weights interact with other progressive elements of administration policy.

It is important to understand the implications of the new OMB Social Welfare Function and how it may impact policy decisions. To delve deeper into this topic, we recommend reading the full paper by Viscusi et al. (2024).