In 1988, Medicare’s new home health‐care benefit was projected to cost $4 billion by 1993; the actual 1993 cost was $10 billion. Congress is now considering a prescription drug bill with a $400‐billion price tag. If enacted, the actual cost will almost certainly be much higher.
Large cost overruns are commonplace in government construction projects, procurement and entitlement programs. Officials routinely low‐ball costs of proposals to win initial spending approval. When programs go over budget and do not work as promised, politicians blame blunders by the bureaucracy or private contractors. In reality, cost overruns and program failure are systematic and widespread across the federal government.
Federally funded projects often turn into debacles. One key problem with Boston’s Big Dig project revealed in a Boston Globe investigation was that rather than demand accountability, the government bailed out bungling contractors with added cash 3,200 times when work didn’t go as planned.
Large cost overruns occur in many areas of federal activity. In the 1980s, Denver’s mayor, Federico Pena, pushed for a new international airport on the basis of bad cost estimates. The public agreed to a $1.7-billion airport in a 1989 referendum, but the cost mushroomed to $4.8 billion by the time the airport was opened in 1995.
Overspending also permeates Pentagon procurement and Department of Energy contracting. DOE’s $18 billion a year of contracting was put on the General Accounting Office’s watch list for waste, fraud and abuse more than a decade ago. A recent GAO review found that 38% of projects examined had more than doubled in cost.
What causes the cost overruns? A study by Danish economists published in the Journal of the American Planning Assn. last year looked at 258 government projects in the U.S. and abroad. They found that cost overruns stem from government deceit, not honest errors.
Nine out of 10 projects in their sample had cost overruns, with an average overrun of 28%. The study concluded that intentional deception by public officials was the source of the problem: “Project promoters routinely ignore, hide or otherwise leave out important project costs and risks in order to make total costs appear low.” Politicians use “salami tactics” whereby costs are revealed to taxpayers one slice at a time in the hope that the project is too far along to turn back when true costs are revealed.
Another problem with federal spending is that the states compete with each other to secure federal dollars and are prone to exaggerate project benefits and minimize costs. When cost overruns occur, state officials seek to cover up poor contractor performance to conceal their own bad oversight.
Federal entitlement programs are like nationwide Big Digs. Initially, politicians low‐ball costs to gain approval of new benefits for Medicare, Medicaid, farm subsidies and other programs. They do this by putting supposed cost limits into legislation, but the limits do not work, are evaded or are later repealed. When costs soar and programs do not work, politicians hold hearings to cast blame elsewhere, such as on drug firms or hospitals. But that is a charade; Congress should know by now that high costs and poor performance are to be expected when central planning, as in Medicare, is substituted for private competitive markets. When Medicare Part A was enacted in 1965, costs were projected to rise to $9 billion by 1990, but actual costs reached $67 billion by 1990. When the Medicaid special hospitals subsidy was added in 1987, annual costs were projected to be $100 million. By 1992, annual costs were $11 billion.
Today, most analysts are projecting that the $400‐billion prescription drug plan will end up costing far more. Some supporters already are saying that they plan to seek further drug spending after an initial bill is passed.
Governments will always be wasteful because they tend to replace competition with monopoly and market pricing with bureaucratic regulations.
In addition, because public officials do not risk their own personal funds, they are more likely to support unsound schemes and are less interested in making sure programs stay on budget.
As a consequence, we would be better off if Congress scaled back entitlement programs rather expanded them, privatized infrastructure such as airports and energy projects and let entrepreneurs put up their own capital for risky pursuits such as space exploration.