Planes versus Preschool

With the collapse of any meaningful federal budget process in the 2000s, we have given up all semblance of a rational approach to considering the opportunity cost of significant federal expenditures.

Opportunity cost is one of those quaint economist’s concepts which refers to what is given up or foregone by devoting resources to one activity versus the next best alternative use. In other words, if we spend resources on one thing, whether it be defense, research, Medicare, incarceration, or other purpose, we forego the opportunity to spend it on the next best alternative, be that education, housing, mental health, or other social purpose.

For example, the estimated cost of universal preschool ranges from $2-4 billion a year (a Brookings estimate) to $10 billion a year (the administration’s estimate).^[1] What makes this preschool opportunity so compelling is that there is actual evidence that universal preschool is a bona fide social investment with a long term rate of return. James Heckman argues that preschool is an extraordinarily efficient (in cost benefit terms) social investment, bringing a return on investment of 7 to 10 percent per year.

To put this potential investment in universal preschool in context, it is comparable to the annual spending for acquiring just one very problematic weapon system, the F-35 Joint Strike fighter, estimated at over $10 billion in 2016. According to the GAO, acquisition costs for this aircraft will run roughly $12 billion every year through 2038, when the full complement of 2500 jets will finally be purchased. Other big systems, such as the Navy’s proposed turnover of aircraft carriers (estimated at $12 billion each), are so expensive that they too represent legitimate opportunity costs in other domains of federal policy, including social policy.

There is no patience in the Congress for these kinds of resource allocation comparisons. For our representatives, they are apples and oranges. The F-35 striker is treated as a sacrosanct pillar of our national security; universal preschool is treated as a speculative extension of the welfare state. One has a trillion dollar industry plying the halls, the other no organized or funded constituency. Especially in the aftermath of 9/11, there has been little interest on either side of the aisle for being perceived as soft on defense or limiting our readiness, even though some of these particular weapons systems bear little relationship to the most important modern national security threats.

Nowadays, significant spending and increases in spending routinely occur in our federal policy without visible and critical analysis: tax expenditures, military, agricultural subsidies, criminal justice, etc. Our broken budget process is largely inertial and obscures the real costs of federal policymaking. We deficit finance many initiatives, hiding current costs and future obligations. We obscure the true fiscal implications of public policies in the technicalities and fog of the budget and appropriations processes.

Opportunity Cost of War Spending

Although there has been some recognition in our political campaigns that the continual U.S. war effort in Afghanistan and Iraq has consumed huge resources, the fact that both the size of war spending and its duration have crowded out the possibility of potentially huge and consequential domestic policy has not been fully vetted and appreciated.

Starting in 2008, Joseph Stiglitz and Linda Bilmes have been providing the most systematic analysis of the opportunity costs of the Iraq and Afghanistan wars – at the time estimated at 3 trillion dollars.[2] Stiglitz and Bilmes rightly accounted for long term and often hidden costs, such as the continuing care of wounded veterans.

While there was some controversy amongst economists about their methodology, other estimates have reflected the same order of magnitude. More recently, Stiglitz and Bilmes have updated the costs of the Iraq and Afghanistan wars to be in the range of 5 to 7 trillion dollars.

Lost in our political debate is any appreciation of the magnitude of these costs. If we simply take Stiglitz and Bilmes lower bound estimate, 5 trillion dollars, and convert that into expense per capita, it amounts to $13,404 for every citizen in the United States. Imagine an alternative transfer of these resources that invested in education, public health, and improvements in human capital.

Because the war effort has been financed by debt and obscure appropriations processes, the true tradeoffs for social policy have never been visible. Precisely because war and military expenses have been debt financed, they will be crowding out fiscal opportunities in defense as well as social policy for a long time into the future. It is the charge that keeps on charging.

In addition, long term disabilities incurred by Veterans means that health and social expenses will have a very long tail, and still unknown long term costs. Bilmes and Stiglitz estimate that half of the war veterans are eligible for lifetime disability benefits.

While the meter will be running on Iraq and Afghanistan for many years to come, we are still in the formative stages of the war against ISIS. Once again – at least as reflected in our presidential and congressional campaigns – there seems to be little appetite for critically discussing the totality of human, social, and economic costs of our ongoing and oncoming war efforts.

Follow the Money

Military spending is just one example of an opportunity cost that crowds out social policy.

• In domestic policy, our inability to fundamentally control health care costs means that we spend disproportionate amounts on medical care (relative to other modern economies) and absorb extremely large annual increases in federal and state budgets. If we reduced the annual increase by modest amounts, the “social policy dividend” would be substantial. For example, the increment in outlays for Medicare alone will be about $50 billion in 2016. If that increment were reduced by 20 percent, a dividend of $10 billion, it could roughly cover the cost of universal preschool.

• My Washington University colleagues have recently estimated that the costs of incarceration in the U.S. total over a trillion dollars. Federal budgetary costs alone account for $80 billion. Incarceration too has a long budgetary tail. As we increase the prison population, we are also incurring long term costs of facilities, operations, and care for inmates.

• Tax proposals by our presidential and gubernatorial candidates would further limit resources for social spending. In the parlance of budget analyses, additional deductions, loopholes and givebacks are “tax expenditures.” The magnitudes of some current proposals – in the trillions of dollars long term – swamp the expenses of so many social reforms, such as universal preschool, jobs programs, or substance abuse and mental health coverage.

• Agricultural subsidies, a staple of federal transfers since the 1930s, now account for outlays of over $20 billion per year. These subsidies have lived long past their original policy rationales, but are not subject to a visible, public, and critical review of their merits relative to other social purposes.

It is easy to get lost in the vagueness of trillion dollar discussions, future costs and benefits, and the morass of current federal budgetary policy. Our political rhetoric obscures the fact that some social investments are relatively “cheap,” and are tiny investments compared to big ticket expenditures our legislators are making without serious debate or analysis.

Missing from our modern policy and political discourse are the ideas of opportunity costs and tradeoffs. We need to have “plain talk” policy communication that provides awareness of and vigorous debate about the fiscal and policy choices we are making. A tremendous example of making these budgetary issues and tradeoffs accessible and meaningful is the Brookings Institution’s animated computer game, the Fiscal Ship .

We are passing on the chance at addressing important social priorities because we have hidden the true costs of many of our policy choices and failed to talk openly about tradeoffs. While the old analogy of “guns versus butter” in budget policy may sound naïve and timeworn, it is time we had more open discussion of what we are actually giving up – the opportunity cost – of not investing in evidence based social programs such as universal preschool.

[1] The principle explanation for this discrepancy is Brookings’s assertion that the administration is not accounting for already existing access and use of preschool.

[2] Joseph E. Stiglitz and Linda J. Bilmes, The Three Trillion Dollar War: The True Cost of the Iraq Conflict (NY: W. W. Norton, 2008).