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How Sunk Costs Keep Government Deficits Growing

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(spukkato/Getty Images) Politicians are loath to end programs that have already wasted money with nothing to show for it.

As the Biden administration promises the most ambitious spending package in the nation’s history, conservatives have quickly pointed out how inefficient and wasteful such packages are. While these critiques tell us how or why the government is wasteful, we need an understanding of government inefficiency that helps us find a solution. Americans already agree that the way to tackle our budget deficit is by cutting “waste and fraud,” and that citing Milton Friedman or repeating “the government is inefficient” won’t solve the problem. One reason government spending is so needlessly costly is somewhat paradoxical: The state is wasteful precisely because people are so concerned about wasting money.

Beginning in 2009, the Department of Defense and the Veterans Affairs Department spent four years and $1 billion fruitlessly trying to build an integrated health-record system. Eventually, a report came out revealing that wildly overpaid contractors, along with “staffing challenges [and] bureaucratic red tape,” created the issue. This familiar tale has an even more concerning ending, though: Democrat Bernie Sanders and Republican Jeff Miller both criticized the decision to cancel the project because so much money had already been spent.

This is a classic sunk-cost fallacy: Costs that can’t be recovered are “sunk,” and therefore irrelevant for future decision-making. But while this fallacy is well known in economics, sunk costs are a big deal in the practical world of politics. Nobody wants to waste money, and politicians don’t want to cause waste directly. No member of Congress wants to be publicly responsible for a half-built bridge, especially when they have to tell taxpayers they still have to foot the bill for it.

This phenomenon can be seen most acutely in spheres where extensive R&D is needed because it’s hard to estimate costs, but unused research feels wasted. Take the James Webb Space Telescope, a NASA project significantly over budget and severely delayed. When Congress considered cutting the program in 2011, there was an outcry from researchers claiming that cutting

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