Wednesday, October 23, 2013

What You’re Sold vs. What You Really Get

Have you ever bought your kid a cell phone? You talk yourself into that purchase based on a pretense of what the actual use will be. You convince yourself that you are not buying the phone just to cave into the constant begging, but instead you are doing it for your child’s protection. What if his car breaks down? What if she gets stranded at a party by her drunk friends? What if there is a shooting at her school? What if the zombie apocalypse is coming his way? What if the TIVO fails to record Impracticle Jokers?

But then your son gets that phone. And you quickly realize that all the “what if” scenarios are highly remote, especially given the progress in DVR technologies. And one month later the unaware among us, who thought a plan allowing for 10 texts per day would be plenty for handling ten potential emergencies, find out that our kids classify “emergency” in a slightly different way, such that it is necessary to send 200 texts per day. And what do we do? We don’t yank the phone, we increase the usage limits on the phone. And then we look at our kid in a very puzzled way as he takes a picture of himself with said phone in the chiropractor’s waiting room while seeking treatment for for i-posture.

The actual experience of government is a lot like a parent’s experience of buying that cell phone for Junior. There is in fact a plausible pretext for government – namely that there are certain types of goods, which we call public goods – that may in theory be underprovided in private markets. (As a point in fact the private sector does often provide significant public goods, but that is a point for another day). Public goods have two features: 1) they are non-rivalrous – the benefit you derive from a public good does not preclude me deriving benefit; and 2) they are non-exclusionary – I cannot stop you from enjoying the benefits of a public good even if you have refused to pay. In contrast, if I buy a car, a classic private good, my purchase prevents you from purchasing the same car, and you do not benefit from my use of it. As the theory goes, absent the government instituting compulsory taxation, people will free ride the donations of others for the provision of public goods, and therefore such goods will be underprovided.

Provision of public goods as the central benefit of government is the analog to the zombie apocalypse heading for Junior – it is how you talk yourself into buying government, but it has almost nothing to do what you get from it. With respect to the budget of the Federal government, in his book The End is Near and It’s Going to Be Awesome, Kevin Williamson points out the following:

“…two dollars out of every three dollars the federal government spends is spent on something that does not come close to meeting the definition of a public good. To put that into perspective, if the federal government limited itself to the provision of real public goods, we could abolish the personal income tax and balance the budget (and in fact produce a large surplus) overnight.”

The two out of every three dollars not going to public goods are transfer payments - private goods delivered to some at the expense of others. In an example that is too good to be true for this analogy, at the time of last year’s election we learned that our government must have had the same concerns for the poor that we had for our children – that we’d have no way of getting a hold of them in the event of an emergency – and so the government started giving away cell phones. (Either that or they just like giving shit away for free, which is obviously where the analogy between government and parents breaks down).

In theory with government you get the optimal provision of public goods, and by supplying your kid with an i-phone, you get peace of mind. In reality, in both cases you get a population of ornery teenagers or their equivalent (adults infantilized by their welfare dependency), obsessed with posting pictures of themselves online, and indignant that either their parents or their government thinks they should pay any fraction of the bill.

This is why whenever people start to question the massive redistribution of government, what you hear ad nauseam from the liberal camp is the need to invest or re-invest in things that are public goods (or reasonable approximations thereof). It’s equivalent to threatening your kid with pulling his cell phone, with him adeptly rattling off ten instances of child terror that could have been prevented with a simple speed dial.

Even if all new proposed government spending would be on quasi-public goods like transportation infrastructure, there is every reason to think that the government project is doomed for failure. Similarly, even if your kid promised he would never use his phone unless there was an emergency, the likelihood is that in that event his battery would be dead. Take the pipedream of light rail. Light rail is a textbook example of the inability of the human mind to understand the complexity of large scale projects in the budgeting process, which manifests itself in budgets that are laughably unrealistic, and in forecasts of benefits that are even more absurd. Most light rail projects have yielded the equivalent of literally digging a whole, throwing vast sums of money into said whole, and re-filling it. Dead battery indeed.

Daniel Kahneman refers to this as the planning fallacy, and discusses the persistence of it for rail projects even as experts became aware of it:

A 2005 study examined rail projects undertaken worldwide between 1969 and 1998. In more than 90% of the cases, the number of passengers projected to use the system was overestimated. Even though these passenger shortfalls were widely publicized, forecasts did not improve over those thirty years; on average, planners overestimated how many people would use the new rail projects by 106%, and the average cost overrun was 45%. As more evidence accumulated, the experts did not become more reliant on it.

The private sector is no less inclined toward the planning fallacy, but the pie in the sky plans of the dreamers still need the backing of the skeptical financiers, and even if they have that backing initially, the plug can be pulled prior to creating a business that needs a constant subsidy to maintain. At the end of a project that puts into place a commuter rail, it is typical to have to subsidize rail rates to keep the trains running. No surprise there, since the project was sold with estimates of ridership that more than double the actual ridership, based on a budget that is 50 percent shy of actual the actual costs to construct.

Consider the Hoover Damn. Much fun was had by the conservative press at the expense of Rachel Maddow, who stood atop the Hoover Damn in the lead up to last year’s election, and proclaimed only big Government can build the Hoover Damn. The Hoover Dam was built to generate electricity, which is a private good. If the massive investment in building the damn were justified by the cash flows that could be earned subsequently in the sale of electricity, there would have been private companies willing to make that investment. But the Dam was never a good investment – and so she is correct in saying that only Big Government can make a doomed investment, because they don’t exactly have to convince their “investors.” This is not really a good thing. The Government is uniquely capable and more than happy to throw your money away.

President Obama famously chuckled to the press over the lack of actual shovel ready projects that were to be the cornerstone of his disastrous fiscal stimulus efforts. In truth, there probably were many shovel-ready projects, but government, in addition to robbing from Peter to give to Paul, is also deep into the business of anti-shovel regulation. If you were to try to build the Hoover Damn today, you’d first have to run the gauntlet of the EPA, the National Park Service, OHSA, and various other federal agencies tasked with making sure the private contractors enlisted for the construction have employed the proper union labor, and additionally employ the proper number of minority women veterans maimed in various ways in the service of their country. Odds are there is a lot of economic activity generated in the process – that is, money changes hands from taxpayers to more bloated federal bureaucracies and some high-priced law firms – but ultimately nothing gets built. In the rare case where the project does go through, we get the double whammy – a project that probably didn’t make sense in the first place under ideal conditions is made three times as expensive by the paperwork necessary to get past the regulatory gatekeepers.

Cell phones for kids are useful for entertaining them, and government is good for redistributing money. We shouldn’t suffer from the delusion that it is any other way.


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