Why ‘Costs’ and ‘Savings’ Are Often an Illusion
Most public policy decisions are best described as transfers of wealth where somebody wins and somebody loses.
For most of my adult life, I have clung to some unorthodox beliefs about government and economics that most economists and public policy experts don’t much care for. I sometimes think that talking about these subjects to specialists is like waving a red flag in front of a bull.
Nevertheless, I am tempted to try one more time.
I think that, contrary to what many of us want to believe, most public policy decisions are best described as transfers of wealth or other forms of value from one party to another. Somebody wins and somebody loses. Most of the time, it’s misleading to talk in terms of “costs” or “savings.” It’s legitimate to tally up all the transfers and decide that a policy choice was wise or foolish, fair or unfair. Some transfers are clearly in the public interest. But we shouldn’t ignore the fact that there are victories and defeats on both sides of almost any ledger, even if they don’t come out 50/50.
At the moment, this may be clearest when it comes to health care. As its costs have spiraled seemingly out of control, governments at all levels have looked for ways to spend less money. They have called for an end to extended hospital stays, for example, and set up incentives for doctors to order fewer tests. Both of these may be intelligent policy decisions.
But ultimately they are transfers, from doctors or hospitals to other players in the game, sometimes to Medicaid patients, sometimes in very tiny increments to taxpayers as a whole. When doctors stop conducting tests in borderline situations, they aren’t just “saving” money. They are being forced to take money out of their pockets and give it to someone else. That’s one reason we haven’t saved all that much up to now.
Something similar happens in the use of energy. Nearly every month, when I open up my gas bill, I find a message from the gas company telling me how I can reduce my energy costs. I don’t know how sincere they are or how many of their customers pay attention to the message. But I do know, as they do, that in many cases energy conservation costs them money. If enough people take drastic measures to lower their utility costs, the utility can find itself in serious financial trouble.
This is actually happening for some local water utilities. Water usage drops to the point where the utility no longer has enough money to maintain and modernize its equipment. Wall Street rating agencies downgrade the utility’s bonds. Management raises prices, which leads to more conservation, which leads to a further loss of revenue. Taxpayers save money, at least initially, by using less water, but they lose money when their rates go up. Any analysis that doesn’t look at both sides of this transfer isn’t telling the real story.
There is nothing new about this form of economic myopia. A quarter-century ago, the United States was experiencing the pain of the savings and loan collapse. Over a period of almost a decade, for a variety of complex reasons, 1,043 of the nation’s 3,234 savings and loan associations failed, and the crisis had to be resolved by the federal government at enormous cost to taxpayers.
How much did it cost? That number is easy to find. According to the Government Accountability Office, the bailout cost $160 billion, and $132 billion of this came out of the taxpayers’ wallets. Where did the money go, exactly? That’s not so easy to track down, and I haven’t seen a precise accounting of it. But we do know one thing: Assets were being transferred from one set of American taxpayers to another, smaller set.
As a few renegade economists pointed out at the time, this wasn’t exactly a “cost.” It was a redistribution within the larger American economy. It’s not as if the money were shipped to Saudi Arabia in exchange for oil.
At the risk of sounding callous, I can’t help bringing up the issue of smoking. We know that longtime smokers who develop lung cancer, emphysema and other life-threatening conditions use up enormous amounts of health-care money. The Centers for Disease Control and Prevention reports that the total cost is more than $300 billion a year. Here, too, some less-than-reverent economic thinkers have sounded a cautionary note. Most of the increase in the nation’s health-care bill comes from treating elderly patients who need continuous and expensive treatment. People who die prematurely as a result of smoking don’t live long enough to require this kind of treatment. So in a ghoulish sense they are saving taxpayers money. How much? I don’t know. Nor would I recommend that more people smoke in order to save public funds. But it’s further evidence that costs and savings in the American economy are a more complex proposition than most of us are willing to admit.
An old proverb says, “It’s an ill wind that does nobody any good.” Like most proverbs, it has some wisdom to it. Almost any event you can think of is beneficial to someone. We ought to pay more attention to that in seeking to make sense of economic misfortunes.
When I try to explain these ideas about costs, savings and transfers, people sometimes bring up the economists’ notion of “dead weight losses” -- events that seem to bring no tangible benefit to any person or interest involved. What about, for example, traffic jams? The consulting firms INRIX and the Centre for Economics & Business Research reported in 2014 that traffic congestion had cost the American people $124 billion in the preceding year and said that if the problem isn’t solved, the direct and indirect costs will rise to $186 billion a year by 2030.
Direct costs refer to wasted time and fuel; indirect costs are those that businesses pass along to consumers. Well, if we are talking about indirect effects, what about the extra pay the truck drivers and messengers get for spending all those hours in traffic? What about the additional employees who have jobs because of the longer trips that need to be made? I’m not in favor of traffic jams any more than I am of smoking, but counting up the delays and slapping a simple numerical cost on them doesn’t capture all the effects on the economy.
Or, to take a truly difficult one, let’s think for a minute about Hurricane Katrina. We all know that Katrina was a profound tragedy in many ways: more than 1,800 lives lost, 300,000 homes destroyed, entire sections of New Orleans reduced to waterlogged rubble. A common estimate places the total damage at $150 billion. Another puts it at $250 billion, allowing for disrupted energy production and a decline in national economic productivity.
Did Hurricane Katrina benefit anyone? It may be in poor taste even to raise that question. But it’s also a matter of record that the federal government provided more than $100 billion in aid to the stricken communities, that thousands of people were put to work on rebuilding and reclamation, and that some economic players, such as the manufactured-home industry, ended up with a windfall. No sane person would argue that Katrina was a net plus for the economy or society. But no one number can be an accurate reflection of the myriad transfers and redistributions that any natural cataclysm leaves in its wake.
Finally there is the notion of waste. Candidates at every level of government run for office promising to get rid of it. They talk as if it’s a line item in the budget that they can just pencil out. But a moment’s reflection ought to convince us that, practically speaking, there is no such thing as government waste. Every dollar a government spends, even on bridges to nowhere, represents a claim made successfully by an identifiable person, institution or interest group. They may be undeserving claimants. The benefit they receive may be an unwise distribution of public resources. But to the recipient, it is a benefit worth fighting for and lobbying to protect. There are no spending programs without beneficiaries. As Emanuel Cleaver, the congressman and former mayor of Kansas City, Mo., once put it, “All that fat belongs to somebody.”
If I’m right, and words like “cost,” “saving” and “waste” are misleading concepts at best, then why are they embedded so deeply in our public discourse? The short answer is that they fit snugly into the toolbox of politicians and advocates at every point on the spectrum. It’s politically helpful to supporters of Obamacare to look at transfers involving the health-care system and tout them as savings. It’s helpful to advocates of more spending on roads to study traffic delays and come up with a figure purporting to represent the exact amount of money congestion costs. It’s more difficult and less satisfying in all these cases to examine the larger network of transfers and redistributions and identify outcomes in a balanced way.
Beyond that, most of us want to believe in the existence of win-win situations. Economists use the concept of efficiency to describe two-sided transactions in which both sides are better off than if the deal hadn’t been made. I understand that exchanges such as these take place in the real world every day. But it isn’t the best way to describe most of the things governments do. We’d be more honest if we talked less about costs and savings and more about winners and losers.