How Good Intentions go Wrong

207
Sun, Sep 15, 2013 - 7:35am
You decide (well not you, but someone you know) to give $100 to the kid who can produce the best business plan for a lemonade stand. So all the neighbourhood kids go off and make business plans, and come back and present them, and your neighbour gives $100 to the kid with the best plan.
Great. All the kids thought about how to run a business, etc., etc. and the best kid won. Healthy competition and they weren’t just wasting their time.
At this level, it really is great. I think....
But for the kids who didn’t get the money, maybe their time would have and could have been better spent than competing for free money. The generous impulse certainly does not scale. When you raise the example up to a government level, where say the City is looking to do some putative good by giving out a grant, and they have a selection process, to make sure it is fair, the people who apply will put more and more effort into the application process, until they spend just under what the grant is worth. And all these people are all bidding for the same little piece of old pie, instead of being out there baking new pies.
It gets much worse as the amounts of money on offer get larger. If a subsidy or grant is worth $100K a year, for 10 years, it is worth spending a considerable amount of money to land it. Money spend legally or illegally - the moral hazard side is another layer of the onion. For example, one can wonder how much being governor of New Jersey was worth to Monsieur Corzine, who apparently spent $100 million of his own bucks to land the “job”. And one can save for later deciding just how many deviant labels we can apply in attempting to understand how he can look in the mirror each day. (Maybe there is no reflection?)
Back to the economics. So a firm decides to spend at least $100K to land a million dollar government grant, let’s say. How many firms will bid for that big a grant? As the numbers get larger and larger, more and more people will bid and be willing to spend more and more money on the fancier and fancier presentations and bribes in their attempt to win the grant. And the fairer and more demanding the selection process becomes, ironically, the more money will be spent trying to get the money. So each firm will spend a little more, until we are up to a bunch of firms spending $99,999 to try to get $100,000. And the entire effort will all be wasted, except for one company. But they too will have spent almost the amount of the grant to win it.
We can extend this model, unfortunately, to politics. And this is actually what reminded me of that economic lesson about the perils of giving out free money, even for a good cause. (No wonder Austrian economics is so hard to make popular!)
Why, we ask, did so many people support such and such a politician? Let’s call him Carpe Deum for a Day. Well, before Carpe gets elected, he has the potential to help an awful lot of people. They are the ones bidding for the grant, be it money, favours, or power, and he is the one who will give it out. An incredible amount of money is spent trying to get one’s own man elected, but once he is elected, he ceases to be a potential giver out of grants and favours and power, as he has mostly given them out; shot his bolt, so to speak.
For every failed green energy company, to pick an example at random, Carpe funded, there were hundreds who bid to be that failed company. And who tried to get the guy elected who would fund their line of business, and of course, changed their line of business so it would be sexy and help Carpe get elected if he was seen to be supporting them. In Northland, where elected people give out ship-building contracts, or might think the economy is fueled by military procurement, for example, the supporters of Carpe North are different, but similarly motivated. But once elected, again, only a few can be satisfied. The rest have wasted their time and money.
In business, they go slowly bankrupt as more and more of their resources go into bidding for free money, and it always appears sensible to spend $99 to get $100, so the maximum amount of money will in fact be wasted, logically.
In politics you get a disgruntled group of supporters who now feel duped. And they were. And then the back-stabbing begins as they begin the hunt for the next Carpe who they will attempt to put forward as he will surely reward them this time.
And so much of it goes into glossy presentations presented in glossy office buildings by glossy people with glossy cars that it helps fuel growth in all the wrong directions. It is an appalling waste of human potential.
So from thinking wouldn’t it be nice to reward the most deserving with x amount of money, and strangely worse, creating a competition to guarantee the selection process is fair, one actually create a bidding war for that free money that will mostly likely more than offset the good one was intending to do. What is a bad idea economically, is much worse politically. For when we create a bidding war for a politicians favours, we have surely found a waste of time and money that is also extremely attractive to a rapacious segment of society, hazardous to one’s moral compass, and generates bitter, disgruntled factions. What could go wrong?

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  207 Comments

Sep 15, 2013 - 8:05am

The monetary value of control

The monetary value of control !

Well maybe the Swiss have got it right by reducing both length of tenure, and absolute power of those actually elected to positions of control.

Step forward the leader who will promote political reform. But we may not see support for such a person until after the masses have endured personal damage and pain for a greater degree and a longer time. The Fourth Turning's thesis certainly suggests that great tumult is required to bring grandchildren to take on the mindset of the grandparents, as regards these matters.

Gold Dog
Sep 15, 2013 - 8:05am

Just had to!

First.

Good morning all! Think it's time to see what our favorite pirate has to say. (Edit to follow.)

Someone could make a lot of money writing software that tells us two finger typers when we have put the caps lock on!

EDIT- Instead of walking the dog, who is currently snoring after inhaling her breakfast I will play Devil's advocate.

I agree that the expense of free money frequently, in the aggregate, exceeds the actual free money being granted, what would be a better system?

Here in Illinois we have seen the abuses on a grand scale, we currently have two Governors in prison. I am 58 and in my lifetime there have only been two that were slippery enough not to end up in the clink. Yet we seem unable to find a better way to cut the melon up sans graft.

Your friend,

Dog

PS- Now that Hawkey is about to start, here is a little sumthin sumthin for our friends in the North to contemplate!

Patrick Kane Stickhandling -- VAPOR APX2 Stick
Deerhunter
Sep 15, 2013 - 8:11am

Dog,  moved  here in 98 from

Dog, moved here in 98 from Cinti. Politics in this state are unbelievable. When ex governors are the butt of late night jokes for their prison terms it is a sad state of affairs. Kane is a great player. Do you think Toews changed dramatically after his concussion?? It looks to me like he wasn't the same player after his comeback. Itching for hockey season. Family in Alberta in the great white north, and hockey is in my blood as well as love for winter. Good luck with the weather today at the BMW.

Gold Dog
Sep 15, 2013 - 8:13am

AM

Having had a parade of kids through here over the last couple of decades I find that the twenty-somethings are pretty pissed off about things in general and gubbmint in particular. All of this touchy feely crap they learned in school may be backfiring, they seem to possess a fierce sense of fairness.

And not in the commie way either, all most of them want is a fair shake. Like religion, we appear to get our politics from our parents and I have seen sons and daughters of friends I know are far lefties come to my home and sound like Reagan and both Pauls.

Could be a change cometh.

YF,

D

Sep 15, 2013 - 8:22am

I think the problem, as so often, lies in scale

Small systems can reduce the unintended consequences much more easily, and can also usually deal fairly well with the problem of people who cannot contribute their full share for whatever reason, mental or physical. Just as one is pretty much running a communist camp in a nuclear family, with Dad as Stalin, Mum and Dad as the Politburo, and the kids as the great unwashed, it doesn't work well when the numbers go up.

As to slicing the melon - indeed. a tricky problem. An extra level of difficulty that was brought up in conversation the other day is that once a big contract has been announced, the losers will do everything in their power to undermine the situation, hoping to drag things out until a different government is elected. I remember visiting Freeport years after a hurricane had flattened their big casino and golf course. The golf course looked perfect, but the hotel complex was still closed, and the nearby market was almost abandoned. It turned out that one government had struck a deal with some financial types to redo the whole shebang, but then they got thrown out in the next election and the new guys had other people that they wanted to "work" with, so the project was on hold. Meanwhile most of the regular inhabitants had moved to Lucaya, where there was a huge and hideous hotel complex that was build during that previous regime.

sierra skier
Sep 15, 2013 - 8:22am

Promoting Business Ideas

That would be a wonderful learning experience for the kids.

Moving this idea to our politicians and business leaders it is incredible how much is spent trying to win office. Why does someone spend a Billion dollars to win the presidency when the salary is only in the $400,000 range. For businesses to put so much cash into many campaigns for such a small amount of return does indicate there is much more at stake.

The bottom line is that the politicians get the office and power to distribute value, the businesses get the favors and the taxpayer gets the shaft.

Thurd

Gold Dog
Sep 15, 2013 - 8:36am

Toews will be fine...

...it frequently takes a year to get back to normal after a major bell-ringing. I am sure that he is skating every day and reconnecting those wires that got loosened up a bit.

XTY- It's always about the money/power......must be in our DNA. Sad.

Looking at the weather forecast I wonder if they will get today's round in, if they do things could get wild. High of 61F and rain all day. (Just got a text from my buddy, says he will throw himself on the grenade and be first in the box so we can have front row inside.) It's who you know!

"All men are dogs and mine is the doggiest"- Mrs. Nina M., good friends of my parents.

YF,

D

القراع عصفور
Sep 15, 2013 - 8:40am

no easy solution

but Argentus is right that term limits would limit the damage.

i know of professional grant writers - what i mean is that firms actually hire staff whose sole purpose is to apply for grant money. it is big business, and is so wasteful in every way.

interesting subject today. thanks Xty!

DeaconBenjamin
Sep 15, 2013 - 8:51am

Japan to be nuclear-free as last reactor switched off

TOKYO: Japan today began switching off its last operating nuclear reactor for an inspection, with no date scheduled for a restart amid strong public hostility towards atomic power. The move will leave the world's third largest economy without atomic energy for the second time since the Fukushima nuclear crisis erupted in March 2011. Nuclear power supplied about one-third of the resource-poor nation's electricity before a tsunami knocked out cooling systems and sparked meltdowns at Fukushima, causing tens of thousands to flee their homes. Prime Minister Shinzo Abe has openly supported a return to the widespread use of atomic energy, but the public remains largely opposed on safety grounds. Kansai Electric Power (KEPCO) today started gradually to take offline the No. 4 reactor at its Oi nuclear plant in the western prefecture of Fukui. "The work started at 4:40pm (0740 GMT)," said a company spokesman. "The reactor will come to a complete stop early tomorrow (Monday)." https://economictimes.indiatimes.com/news/politics-and-nation/japan-to-b...

Sep 15, 2013 - 8:56am

Writing grant applications is big business

absolutely. It was a key skill on a resume of a relation of mine. I remember being shocked. But there is barely a business in Canada that doesn't compete for public money one way or another.

Being asked to comment on a big picture business scenario fairly recently I remember hubby's total frustration that people couldn't understand that seeking free money was why that sector was not competitive. Not a popular business sentiment. And the competition by different levels of government to get businesses to locate within their domain drives a lot of tax unfairness. A strange flip side of the coin, competing to give out free money.

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Key Economic Events Week of 10/14

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