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A Pernicious Logical Fallacy: Government “Investment”

By teaching us to avoid emotional blockages and logical fallacies,
Engineering Thinking helps us make optimum decisions.

Today’s Principle: Comparative Analysis
Quick Summary: Intuition tells us that a decision that creates a desirable outcome is the best decision. This is not necessarily correct. To ensure the best decision, alternatives must be considered.

A Pernicious Logical Fallacy: Government “Investment”

Is the investment really a gain, or could it be a loss?

One of the most pernicious fallacies is the idea that because money was “invested” (spent) by the government, and some benefits were purportedly achieved, the benefits prove the worth of such expenditures. For example, President George Bush said, “My administration has worked with Congress to invest in gas-saving technologies like advanced batteries and hydrogen fuel cells…” And more recently, President Obama has claimed that government investment is responsible for “…creating the Internet that allowed Microsoft and Google and Facebook to thrive.”

Assuming that these investments were worthwhile is a fallacy, because alternatives were not tried.

Claiming that government investments are good, without considering
alternatives, is like claiming a grade of D in school is good because
you never considered the possibility of anything better.

What would the outcome have been if the government did not spend those funds on the Internet or batteries or fuel cells? What if they had been spent elsewhere, or not spent at all? Because no alternatives were tried there is no basis for concluding that the investments were a success. Maybe some apparent good resulted, but it’s possible that even more good may have been achieved if the government had been completely uninvolved.

Because the government does not have competition, and typically does not set up alternative programs for comparison purposes, there is no way to know for sure whether or not a government expenditure was indeed wise. However, there is a way to make an educated guess: look at the track record.

The federal government has spent, and continues to spend, billions of taxpayer dollars on science and health research, space exploration, alternative energy, and many, many other endeavors. An investment, by definition, is supposed to provide a return. But have you, the taxpayer, ever received a check back from the IRS, for example, and been told that the investment of your tax dollars in NASA has resulted in a profit, and here’s your share?

Well then, how about indirect benefits? Has cancer been cured? Are there no more homeless on the streets? Have the ghettos been eradicated? Have our immigration problems been solved? Has the “War On Drugs” been a success? Have government-sponsored “green energy” technologies been successful?

Unfortunately, no.

By contrast, when decisions to spend money are made on a comparative basis, as in the private marketplace (e.g. you can spend your own money as you choose on Option A (Target) or Option B (Walmart)), then eventually you can decide which is the better choice. And if you donate your own dollars (or time) to¬† civic associations, churches, or charities, you can observe for yourself their effectiveness, and if they’re not effective, then you can donate your money and time elsewhere.

When you truly invest dollars in successful private companies, not only does society benefit from the goods and services they provide, you — as an investor — obtain an additional benefit (because of the risk you took in making the investment) by seeing an appreciation in the value of your stock, and oftentimes cash dividends as well.

Would you rather invest in the federal government (which is,
with proper accounting, bankrupt), or in Apple or Microsoft or Google?

Bottom Line: If a politician praises the benefits of a government expenditure, ask a simple question: what alternatives were evaluated? If the speaker does not know the answer (or does not even understand the question), then the speaker’s views are not worthy of your valuable time.

-Ed Walker

p.s. Politicians are prone to committing the fallacy described above, because they define success only as money spent, rather than the proper measurement, which is benefits obtained divided by money spent. For more, please see “An Essential Rule For Not Being A Fool.”

 

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An Antidote For The Folly Of Government “Investment”

As we’ve discussed previously, efficient systems require feedback. Without the feedback of the pain that comes from making an incorrect decision, bureaucrats have no incentive to be good shepherds of taxpayer dollars.

For example, the federal government “invested” $527 million in the solar energy company Solyndra. These dollars have been (according to various accounts) diverted to the pockets of Solyndra corporate officers, squandered, kicked-back to corrupt Obama administration officials, or (at best) lost in a noble effort to put Americans back to work. In any event, taxpayers have seen $527 million of their money go down the drain.

The reason why this sort of outrage happens when the feds “invest” is simple: it’s not their money. As we all know, it’s easy to invest/gamble/have parties with other people’s money. Therefore one could reasonably ask, why not make it a requirement for every government official to have a stake in the outcome of every “investment”? (This is just for argument’s sake. Since there is no apparent Constitutional authority for the federal government to funnel taxpayer money into private enterprises, Solyndra-type expenditures should not even be taking place.)

In other words, if the investment is a bust, as was Solyndra, then the loss comes out of the bureaucrats’ pay checks. Let’s see, $527 million divided by approximately 16,000 direct Department of Energy employees equals about $33,000 per employee. Wow, no bonus this Christmas!

What if the investment is a success? Based on the government’s track record that would be highly unlikely, but if it should ever occur, we the people can work out an appropriate bonus.

-Ed Walker

 

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