We're about to see the Sunk Cost Fallacy in glorious action again
There are Nudge Units and pronouncements upon human economic fallibility all around us. Us folks don;t, in fact, approach the universe in the supremely calculating manner than certain economic models insist we do.
Except of course the models don’t insist, they just explore what would happen if we did. All of interesting economics is in explaining what happens when behaviour deviates from the model which is why we use such models. So that we can explore the deviations from them.
However, despite all this attention paid to such fallibilities we’re about to see the most monstrous display of the Sunk Cost Fallacy:
Conservative MPs are lining up to denounce HS2 in the Commons after more than 100,000 members of the public secured a debate on scrapping the high-speed rail line.
Senior Tories are preparing to urge ministers to put the project "out of its misery" as they point to spiralling costs and a shift to working from home as evidence that it should be cancelled and the £98 billion budget distributed elsewhere.
We know what’s going to happen next. There will be an outburst of shouting. But, we’ve already spent £1, £1 billion, £10 billion. If we don’t go on then all that will be wasted!
Sunk costs are sunk costs. This is money, those are resources, that have already been applied to this scheme, whatever it is. Whether we proceed with the scheme or not we will never get those resources, that money back. So, that we’ve already spent the cash is an irrelevance to the decision about whether we should proceed.
Our decision should be based upon whether the benefits from proceeding - from our current starting point - are greater than the costs of doing so. The past is indeed past and our decisions are about our path into the future that is.
We really are going to have multitudes shouting that we must not waste what is already spent. The problem with that shout being that what is already spent is already wasted. No decision can bring it back.
Now, whether HS2 should be cancelled or not is another matter. We have, often enough, pointed out that it should never have been started and recent changes just make that more true. But the welcome cancellation isn’t the point here. Rather, that the decision must be taken using the right metrics.
Sunk costs are sunk costs. What has already been spent is irrelevant. The decision must rest upon what is to be gained from spending how much given our current starting point?
This is politics so it won’t be but then bully for politics as a method of spending money then.
This seems entirely sensible, even desirable, to us
A complaint that the Treasury is not greeting each and every green - or climate change related - demand for spending with an open chequebook:
The Treasury is blocking green policies essential to put the UK on track to net zero emissions, imperilling the UK’s own targets and the success of vital UN climate talks, experts have told the Guardian.
A string of policies, from home insulation to new infrastructure spending, have been scrapped, watered down or delayed. Rows about short term costs have dominated over longer term warnings that putting off green spending now will lead to much higher costs in future.
This seems entirely sensible, even desirable, to us. Someone, somewhere, does need to be asking whether any particular piece of expenditure is worth it. Yes, even about climate change. Even if we accept that something must be done it’s still necessary to examine each thing for value:
Boris Johnson is planning to launch a £400 million boiler scrappage scheme offering people £7,000 grants to encourage homeowners to buy low carbon alternatives.
Well, is that worth it?
Energy Catapult Analysis shows that in 2017, the average household generated 2,745 kg of CO2 emissions from heating,
OK, 3 tonnes at the Stern Review’s $80 per tonne is $240 per year. A 2.8% return (note the £7k is sterling) before we even think about the full cost, this is just for the subsidy? No, that might well not be worth it.
Our point though being that someone, somewhere, has to be asking this question. For it is not true that agreement on there being a problem which requires a solution means fiscal incontinence. Quite the opposite - resources are scarce in this universe therefore the larger the problem the more efficient we have to be with our use of said scarce resources.
Even with agreement that climate change must be dealt with it is still true that each bit of dealing with it needs to pass the cost benefit test. If it’s not going to be the Treasury which does this then all wallets are at risk, no?
If only Oxfam would think for a little bit
This is alarmingly ill-thought out:
Oxfam’s version is particularly ill-thought out: “a one-off 99pc levy on billionaires’ wealth gains during the pandemic”.
As is normal - as a result of the creation of a political statistic - these days the measurement of gains is done from March 18 2020. Which was the lowest point for the S&P 500 following a 29% fall as the arrival of the pandemic became obvious. That’s being more than usually aggressive in loading the number by careful choice.
But think a little larger. Taxing - as we do with capital gains taxes - when people crystallize a gain seems reasonable enough. At which point we also allow, as we must, people to count their losses as well. The demand here is to tax uncrystallized gains. At which point we’ve also got to untax uncrystallized losses.
Which produces an interesting example. Bill Hwang just lost $20 billion as Archegos imploded. What’s his tax refund under this new idea then?
That is, it’s entirely true that some billionaires made money over the past 15 months or so. Some other billionaires lost money over that same past 15 months. Just the basic idea of the rule of law insists that profits and losses on the same issue get treated equally.
It’s not actually obvious that taxing changes in wealth over the course of the pandemic would raise any money at all. Which is a pretty bad advertisement for a new tax really, isn’t it?
Not to particularly defend Tyson Chicken here
But there’s an important word missing from The Guardian’s report here:
Tyson and the other three top firms control about 87% of poultry production in the state. Economists and food justice advocates largely agree that consumers, farmers, workers, small companies and the planet lose out if the top four firms control 40% or more of any market.
We’re pretty sure “the planet” is mentioned there just because it’s stylish to do so at present. The missing word though is “some” before “economists”.
For this is actually what the argument about antitrust is. The pencil sketch is that some - note some - are shouting that market concentration is in itself the bad thing. Boo! Hiss! More government power! Others, the more rational, are arguing that only market concentration and thus economic power that is exercised to the detriment of consumers matters and only at that point should government do something.
You might guess which side of the argument we’re on from the language used there.
As an example, Google certainly has a significant portion of the search engine market yet they’ve not deployed that power to try to charge for access. Consumer harm therefore doesn’t seem to exist. Chicken has been getting cheaper for generations - what consumer harm is there here?
That is, by that omission of the word “some” in front of economists there The Guardian has entirely plumped for the one side of the argument. Which is their right, of course, no one in Britain at least expects the press to be impartial, we’re not that silly. But it is worth pointing the bias out.
The heart of the current antitrust disagreements is whether potential economic power needs to be regulated or whether it is only exercised economic power, economic power exercised to the detriment of consumers, which does.
We’re on the side arguing that concentration itself, the potential for economic power, is an interesting marker of when the important thing, the consumer detriment, might be possible. But it is not the thing itself which is to be worried about - nor regulated. For government to leap in requires that the power is being exercised and thereby harming consumers.
Government might not be a sensible way to build infrastructure
We have the news that the American infrastructure bill has passed, passed the Senate at least:
The package will direct $550 billion in new spending towards infrastructure projects including $110 billion for roads and bridges; $66 billion for rail projects; $25 billion for airports and $65 billion to expand high-speed internet access.
We’ve never quite believed those estimates of how many trillions need to be spent on the infrastructure. For the number comes from the American Society of Civil Engineers, the very people who would have lovely jobs spending all the money allocated to infrastructure. That sounds much too much like asking your barber if you need a haircut to us.
It’s possible to note that only about half of the infrastructure bill is actually being spent upon infrastructure. Which does seem more than a little wasteful.
We’d also point out that if there really is a $4 trillion backlog in maintenance then clearly politics isn’t the right way to be managing the maintenance of infrastructure.
We’d add two more little critiques. That money being sent to Amtrack for rail projects:
In remote wilderness expanses along the Canadian border like northern Montana, Amtrak is the only way for non-drivers to get to somewhere else. Southern Montana wants restoration of the route that used to connect its major cities, Billings, Bozeman, Helena, and Missoula, please and thank you. No private rail operator would ever serve the tiny towns of Libby (population 2703) or Browning (population about 1,000), the tribal headquarters of the Blackfeet Nation. Amtrak does.
Running trains between places with 1k and 2k populations simply isn’t sensible whoever is paying for it. What portion of either population wishes to be in the other place 120 miles away on any particular day? Given that this one bill alone is offering $2,000 per annual passenger movement to Amtrack it’s almost certainly cheaper to hire the occasional taxi. Even, just to buy a car and leave it on the edge of town - one or the other - with the keys in.
Allocating this much money to such rail routes simply isn’t sensible - but then that’s politics as an allocation mechanism.
$65 billion to expand internet access also appears ludicrous. That’s $200 per head of population - man woman and child - and the vast majority already have that access. We really are sure that a single contract with just the one LEO supplier - just as an example you understand - could be had at a fraction of that price. Especially since having just the one billing point would remove much of the operating cost of such a system.
Our point is not that no government should ever be involved in any building of infrastructure. Nor that all infrastructure can or should always be built by private economic actors. Rather, we do all need to face up to the truth that government is a really lousy way of building infrastructure. Thus it should only be used to do so when it’s really, really, essential that it be so.
Let’s Get a Life While We Still Can
39 Victoria Street
SW1
“Humphrey.”
“Yes, Minister?”
“This Freedom Day thingy on July 19th has worked out very well.”
“If you say so, Minister.”
“Well, the doom-mongers were saying it would lead to another lockdown but cases are running at over 25,000 a day and nobody gives a damn. Freedom from fear, that’s what it is.”
“We certainly have less to worry about. The NHS is under less pressure, those of us who matter have all been double-jabbed and the young people catching it are out of work anyway.”
“Well really it’s turned out to be freedom from work, for our staff anyway. That’s what I need to discuss with you, Humphrey. As part of my keep-fit regime, I use the stairs instead of the ministers-only private lift and the thing is….the place is empty. There’s no one here.”
“It is indeed the case that work post-pandemic will not resemble the drudgery of the past. I thought the General Secretary of my own union, the First Division Association, put it very well when he said ‘These new working arrangements will bring employees greater flexibility and work-life balance and reduce costs for employers.’ We civil servants are ever the vanguard of change and I am proud that our people are leading the way. I am only here today, in all truth, because I heard you were making one of your periodic visits to the office.”
“Humphrey, it is August, the Queen is at Balmoral and there’s not much point in being in Whitehall if there is no one to talk, I mean work, with. But you guys have already had multiple holidays and you should be slaving away at your desks doing whatever it is you do. I cannot understand how you can supervise your people, if you cannot see them.”
“Our people, as you put it, lead the world in moral rectitude. If they tell me they are working at home, then I can be sure they are both working and at home.”
“Well the PM thinks they should be back in their offices and we should dock their pay if they don’t show up. I agreed with him and I’m sorry he backtracked on the idea. It was only the London weighting he was talking about. Why should we pay the London weighting to people sitting at home in the countryside?”
“Minister, should I get our lawyer to explain that London weighting is to meet market salaries because our jobs are in London, not our people?”
“Spare me lawyers, Humphrey. I get quite enough from them in the House of Commons. The other idea was to withhold promotion from the stay-at-homers. I’m told that, in the Treasury, only 10% of the staff are showing up.”
“I fear that concept is little better, Minister. Promotion has nothing to do with merit or performance; it is what happens after you have had your job for four years and someone above you has also had his or her job for four years. You both move up.”
“What’s magic about four years?”
“About 20 years ago, ministers and the Civil Service Management Board decided civil servants could not be sacked for failing to achieve what no one knew they were supposed to achieve. In 2004 they decided effectiveness would suffer if individuals stayed too long in their post or turnover was too fast. The four-year posting norm was adopted. ”
“I can’t say that has made any difference. The jobsworths stay on and ministers are described as bullies if they get cross when things don’t get done. A friend told me he was recruited from a senior position in the private sector to bring modern methods to a civil service department. He resigned soon after because, whenever he told one of his managers that something needed doing promptly, the manager immediately took some more of his annual leave.”
“There are always a few bad apples, Minister, but I can say, hand on heart, that I’m proud of our team.”
“We have good people, certainly, but they do live in another world. It’s a social world, Humphrey, not a world of work in the way the private sector, or the NHS come to that, understands the word ‘work’. They spend so much time in meetings discussing what they will do, they have no time left actually to do it. They are just ingratiating themselves with the civil service social network, so they can get promotion, and clock up a big enough inflation-proofed pension pot. Then they can retire early and take private sector positions where they can exploit those social network connections. Did you know, Humphrey, that less than 20% of civil servants stay on to retirement age and many get full pensions at 50?”
“As a 49 year-old, that had not escaped my attention but before I leave, we should return to the issue of whether our staff now need all the office space we have available.”
“Your union friend said we should make savings from this stay home situation so we could sell these offices for a start.”
“We could but, would that be wise? The Treasury would cut our budget and we’d be no better off.”
“When they were all here, they raced from meeting to meeting. They did not really need desks of their own. There once was a time when they spent much time answering correspondence from MPs and the general public. But now we have got that digitised and the letters are all produced by AI.”
“Are you telling me that all those letters you make me sign every day have not been composed by our team at all?”
“Yes, Minister. You may have noticed that they are all mellifluously phrased but devoid of any substance. We expect MPs will stop bothering us with their own, or their constituents’, issues once they recognise that it is just a machine batting their balls back to them.”
“You are certainly strengthening my view that we have to see this organisation as a digitally supported society, not a workforce with defined outputs. Talking shops – that’s what we are. I believe we have more quangos than any other Whitehall department. No one would accuse Public Health England of having output of any kind.”
“Indeed, Minister, the pandemic has certainly accelerated the shift to online shopping and working at home but it is not the cause of it. The breakthrough for us was the launch of systems like Zoom and Teams. If the only reasons for commuting to the office were meetings and socialising, the discovery one could do those just as well whilst still wearing one’s pyjama bottoms, was revolutionary. We’ve been told not to use Zoom because the Chinese listen in on that.”
“They are not going to learn anything from that and no doubt they can listen in to Teams too. Of course, with a lot of Covid still about and poor ventilation in our meeting rooms, we need our people to be ultra-cautious, don’t we, Humphrey?”
“Your tongue, Minister, appears to be lodged firmly in your cheek but I have to concede. We face a national reluctance to work and our civil service may be at the forefront of this too. The word ‘work’ has had the r removed and an e added to the end. According to the latest statistics, for every two unemployed, there is nearly one unfilled vacancy and the figure is rising.”
“The young are certainly a worry. They refuse to have jabs but insist on attending mass gatherings. Taking tests or proving vaccinations denies their civil liberties. We conducted those specially authorised events in order to collect and publish the data. We needed the results to plan for ending restrictions. We may have collected the data but I’ve not seen anything published. So we are none the wiser?”
“We’ve had no one in the office to collate the findings, still less publish them.”
“Well, I suppose it doesn’t matter. The scientists tell us the end of the world is at hand so we should all get a life whilst we still can.”
It's always worth examining green and environmental numbers
The examination being to see if they’re telling us what it is said they’re telling us:
The UK’s low carbon economy is now worth more than £200bn, four times the size of the country’s manufacturing sector, with growth expected to accelerate in the coming years, according to new analysis.
That would mean that manufacturing is £50 billion, which in a £2 trillion economy (all rounded numbers, obviously) is 2.5%. We know that manufacturing has shrunk as a portion of the economy even as it is within a whisker of all time production still but it’s not that small. More like 10% or so still.
The report itself is not quite as helpful in explaining its methodology as one might hope. But our impression is that they are counting intermediate sales meaning that this is not comparable to GDP at all - which counts only final sales.
There’s also the obvious point that some goodly part of the “low carbon” economy is in fact manufacturing - folks hammering on windmills is not services now, is it?
But the really big error here is that this is all considered to be admirable.
Despite what experts say has been lacklustre and patchy support from central government, the analysis found more than 75,000 businesses from wind turbine manufacturers to recycling plants employ more than 1.2 million people in the green economy.
Experts say the sector not only has the potential to help tackle the climate crisis but also create sustainable jobs and improve people’s quality of life – with cleaner transport, reduced air pollution and better insulated homes.
Look at how many businesses there are! How much employment!
At which point the correct observation is yes, look at those costs. For the claim - let’s accept here their £200 billion of a £2 trillion economy - is that 10% of all economic efforts within society are being devoted to this low carbon idea. That is, 10% of everything is the cost of the low carbon efforts.
All those people and their labour, all that steel, energy, effort and work cannot be devoted to sating other of our myriad needs and desires. Sure, it might even be righteous that they are being devoted to this specific problem. But opportunity costs are the only true measure of the costs of some activity. What is it that we give up to gain this specific thing?
The portion of our economy that is devoted to low carbon is the cost to us all of low carbon, not the benefit. And here’s the rub. It’s not possible to get even accounting right let alone economics if we get the credits and debits in the wrong column. Which means that we’ve got to stop lauding our costs as our benefits, doesn’t it?
The Berlin Wall at 60
This week’s diamond jubilee is not one to be celebrated, but grimly noted for the lessons its event taught us. It was 60 years ago this week that construction of the infamous Berlin Wall began. It was a concrete barrier erected to seal off the Western half of Berlin from the East. The barrier included guard towers with machine guns, anti-vehicle ditches and beds of nails. Its purpose was to imprison East Berliners by preventing access and possible escape to the West.
The East German Communist puppet regime ludicrously claimed it was built to keep out “fascist” infiltrators who might try to sabotage their attempt to build a socialist paradise in the East. No-one was killed trying to cross the wall into East Germany, while estimates of the number killed trying to leave it range from 140 to well over 200. The machine guns guarding the wall pointed inwards to the East, not outwards to the West.
During the wall’s lifetime, there were many escape attempts as people tried to bypass its defences. Ober 400 people escaped via a series of tunnels, leading the East German authorities to use seismic equipment to detect tunnel construction. Some swam over at night, braving gunfire and searchlights in the darkness. One family famously constructed a homemade hot air balloon and were carried over by favourable winds. One group modified a sports car and laid themselves horizontal as it sped towards the steel barrier, passing underneath it as the top of their car was ripped off by it.
UK Prime Minister Margaret Thatcher commented in 1982: “Every stone bears witness to the moral bankruptcy of the society it encloses.” US Presidents Kennedy and Reagan denounced it.
I went through Checkpoint Charlie with my colleague, Eamonn Butler, in 1982. It was like entering a prison, which indeed it was. The East was dull and lifeless, with many wartime bomb sites still unrepaired. The shops were empty, and such restaurants as existed had little appetizing food and were practically empty. By contrast, the West behind us was a blaze of neon lights, street activity and nightlife. In the East one felt in danger of hostile action by arbitrary authority, and it was a considerable relief to be back in the West.
The wall did not last. In January 1989, the leader of the inappropriately-named German Democratic Republic, Erich Honecker, predicted that the Wall would stand for 50 or 100 more years. It did not last ten more months. Its fall was precipitated by earlier action by the government of Hungary, which stopped preventing people from travelling through to Austria. Tens of thousands did so, and East German saw a great and unsustainable haemorrhage of talent as its citizens fled to the freedom of the West.
The citizens of Berlin tore down the wall in November, 1989. It had stood for 28 years as a reminder that socialism can only be sustained by force directed against the citizens of countries that adopt it. People today who advocate socialism, in ignorance of what results from it, would do well to read up about the Berlin Wall, whose 60th anniversary arrives this week.
Some problems do actually have solutions
In places without private sanitation generally available there should, of course, be some measure of public sanitation provision. This is a public health matter after all. There are problems with this:
Incentivising quality of public infrastructure excludes users and worsens public health
Community toilets in slums are often degraded, dirty, and poorly maintained, but upgrading facilities is difficult because of low willingness to pay among potential users and free riding. This column looks at community toilets in Uttar Pradesh, India, and asks whether externally incentivising maintenance can sustainably improve the quality of public infrastructure. Providing cash incentives to the caretaker and a one-time facility upgrade improved the quality of facilities and reduced free riding, but pushed more residents to practise open defecation, with poor public health outcomes. Fully subsidising basic services is important but measures are needed to prevent overcrowding and degradation.
Making those communal toilets better - cleaner at least - causes problems by itself. One solution is:
As the prevalence of private access to sanitation is low and coordination fails in the presence of overcrowding (Banerjee et al. 2008, Chidambaram 2020), a model with fully subsidised public infrastructure should consider imposing restrictions on the number of users per facility and/or enacting monitoring mechanisms to ensure that facilities are preserved by users.
If we’re going to go that public provision route then we must either have queues and rationing or we must have detailed inspection of how people use them places.
This is Garret Hardin all over again. When there is that open - Marxist - access to a resource and demand is greater than capacity then we’ve only two solutions. Either go private - capitalist - or regulate access - the socialist route. Elinor Ostrom’s caveat, that in small enough groups social restrictions will solve the problem is true, but that depends upon the definition of small enough group. Anyone who has ever lived in a student flat knows that small does mean small here.
Which leaves us with that other solution - private plumbing.
As in Hardin’s original presentation, sometimes public is better than private, sometimes the reverse. Which depends upon the specifics of the issue under discussion. Our disagreement with the modern world is only that private works better much more often than generally believed, public much less.
The national scandal of childcare costs
This assertion from Robert Colville is worthy of a little more examination we think:
Our obscenely expensive childcare costs are treated not as a national scandal but as an unfortunate fact of life.
That examination requiring the splitting of the question of why those obscenely expensive costs into two.
The first is, well, have we made the system more expensive than it need be? Say, limitations on who may provide childcare and how? The ratio of children to carers, the equipment required, the number of clipboard wielders necessary to ensure such rules are followed?
Perhaps this is true. If it were it should indeed be a national scandal. Let us free the market from such restrictions and let rip therefore. We can even test this by looking from the opposite end. Being a nursery or childcare bod is not a well paid occupation. Nurseries, childcare facilities, do not produce vast profits as we can see by the number that go bust. If the workers and the capitalists aren’t making out like bandits then high costs can have only one of two causes. Either the regulations make it expensive or it’s simply an expensive thing to do.
If it’s the regulations then indeed do something about the scandal. If it’s just one of those unfortunate facts about the cost of getting it done, well, then what?
The second part of the question, or the second question, is who should carry these costs? The families wishing childcare for their children? The taxpayer more generally? Employers who wish access to the labour of those with children? Each answer has its own arguments both pro and con.
But this is indeed a very different question from what the costs are. Someone, somewhere, has to bear the high costs. We thus need to work out whether the costs are in fact high - and what we might do about that - before arguing about their allocation.
Our own view tends - note tends - toward the view that those costs are higher than they need be as a result of regulation. So some part of the fix is to change that part of the system. As to the other, well, some at least substantial part of the costs should be shouldered by parents directly. On the basis that we are all opposed to the privatisation of benefits and the socialisation of costs, aren’t we? You know, people should face the full prices of their decisions?