In his State of the Union address, President Biden used his proposal to end “junk fees” to show how his government would take care of Americans.
A few days later, the Los Angeles Times ran a story about California Senate Bill 478, aimed at the same target. As someone who has had faced such surprise fees in areas such as airline tickets, vacation rentals, RV park reservations and even my last water service bill, I can see why politicians might think that would be an electoral winner.
But another article I read the same day reminded me that there is a much more productive way for government to be our fiscal guardian.
The Times article quoted Democratic California Atty. Gen. Rob Bonta on behalf of SB 478, saying, “We all know how frustrating it is to…find out something advertised as one price actually costs, much, much more,” during the bill’s introduction. Then he summarized by saying “The prices advertised should be the price you pay.” Those statements are both true, so it is possible that legislation or regulations could increase pricing transparency and decrease unwelcome surprises.
Unfortunately, government is by far the greatest violator of that principle.
What brought that conclusion home was an editorial in this paper about the bullet train. As we approach the 15th anniversary of Proposition 1A’s $9.95 billion high speed rail bond, the editorial pointed out the original cost of the project was promised to be $33 billion (supposedly to be largely financed by private investors who never materialized because it was always going to be a huge money loser). But now, the estimated bill for the project has risen to $113 billion.
As that clearly indicates, the most valuable way government could protect our financial well-being would be for it to stop low-balling what their profligate plans will cost, then sticking citizen’s with much higher bills many years down the line.
High-speed rail may be the most expensive illustration of that principle in California, which is also paralleled by big-ticket megaprojects elsewhere, but it is far from the only one. It seems that almost every bond measure, highway project, technology or computer upgrade, reform, etc., turns out to cost more than advertised. As a result, citizens could save billions more from truth in government advertising than from efforts to control junk fees.
Federal government cost overrun illustrations are of even longer standing and greater frequency.
Research by Stanley Engerman and Ken Sokoloff (who I had as a professor in graduate school) of major government infrastructure projects throughout American history, which found that “most had substantial cost overruns,” as summarized by the Cato Institute.
Danish professor Bent Flyvbjerg, a leading international expert on cost overruns, has similarly found that “cost overruns of 50 percent to 100 percent in real terms (and even more in dollar terms) are common in megaprojects.” The main cause of these cost overruns is the low-balling budget costs through “strategic misrepresentation.”
Not only is our history replete with examples of the cost of government initiatives vastly exceeding what the political bloviation on its behalf would indicate, but there are many good reasons to expect more such abuse from those pretending to protect us from businesses than from those businesses.
Businesses have their profits at stake from depreciating their trustworthiness reputation, unlike politicians and bureaucrats. And unlike government, which has a captive audience, the punishment is much greater when people can transfer to other suppliers. C-suite executives, whose compensation is highly tied to the expected present values of future profitability, have more to lose than our public servants. In contrast, the long time-horizons of many government projects means that those responsible are often long gone before people discover just how much the reality they created bites.
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In government, misrepresented plans and unjustified spending can also be sustained by its partisans arguing “given how much has already been spent, and is now sunk, we should finish it anyway.” And while business can be sued for false statements, politicians cannot be (and apparently bond issues can’t be successfully either, as misrepresentations in promotion have not sufficed to overturn such measures).
Those promising to protect our pocket books to buy our votes are great at grandstanding about fiscal prudence. But they have created multi-trillion dollar debt, far larger unfunded liabilities in programs like Social Security and Medicare, and a steady stream of new unjustified initiatives that will do still more of the same.
That is why telling citizens the truth of the costs of government programs, so they can exercise appropriate prudence before it is too late, would be a far better reform.
Gary Galles is a professor of economics at Pepperdine University.