John Coates wrote a valuable paper criticizing the use of cost-benefit analysis for financial regulations. Glen and I have now written a response, which is posted on SSRN. We make six arguments:

1. The uncertainty of valuations–the major reason Coates cites for his opposition to financial CBA–is not an argument against CBA but a reason to support research to produce better valuations.

2. The “centrality” of the financial system, which for Coates is a reason not to use financial CBA, is in fact a reason for using it. The greater the impact of a proposed regulation, the more likely that an expensive CBA is cost-justified.

3. Against Coates, we argue that the focus on people (rather than things) does not distinguish financial regulation from other types of regulation.

4. Also against Coates, we argue that the speed with which financial markets change does not distinguish it from other types of regulation for which CBA is used (notably, antitrust regulation).

5. Ultimately, the objections that Coates raises to financial CBA are really objections to CBA (in general) or even regulation (in general). They are too broad to single out financial CBA.

6. Alternatives to CBA proposed by Coates–reliance on “expert judgment” or “conceptual CBA”–are either circular or not that different from CBA after all.

All that said, we share Coates’ skepticism about judicial enforcement of financial CBAs, and prefer instead to see development of institutional capacity in the executive branch.