Earmarks and Transportation
April 23, 2008
by: Rick Geddes, Cornell University

Government WasteWatch, Spring/Summer 2008

Congressionally-mandated earmarks are on the rise.  From 1995 to 2008, congressional earmarks grew from 1,439 to 11,610, almost a 700 percent increase, with a high water mark of 13,997 in 2005 according to Citizens Against Government Waste.  A few of the most egregiously wasteful earmarks have galvanized voter concern, such as the “Bridge to Nowhere” in Alaska and Coconut Road in Florida.  Fortunately, earmarks in general are receiving renewed national attention. Sens. Jim DeMint (R-S.C.) and John McCain (R-Ariz.) recently offered an amendment to the 2009 budget resolution that would impose a one-year moratorium on congressional earmarks.  It was co-sponsored by three prominent Democrats: Sens.  Hillary Clinton (D-N.Y.), Claire McCaskill (D-Missouri), and Barack Obama (D-Ill.).

Although there is a general consensus that earmarks are bad, the conceptual case against them appears to be underappreciated. There are several powerful economic and political arguments for why earmarks should be discouraged.

First the economic. Whenever a firm or a household decides to spend money, the first thing it will do is assess what it stands to gain from that spending and how much, exactly, it will cost.  That is, either explicitly or implicitly, in deciding on what and how much to spend firms and households conduct a cost-benefit analysis on their spending. Suppose a railroad is considering adding a new rail line between two cities.  If the benefits exceed the costs of that line, it means that the spending will create positive new value for the firm, i.e. the railroad’s value will rise.  If the railroad is shareholder owned, the spending raises the stock price and makes shareholders better off.  Suppose a household is considering whether or not to spend on a family vacation.  If that spending generates benefits, perhaps in terms of fun, in excess of costs then the household gets net benefits from the vacation.

Of course, both firms and households may do this poorly. Some firms may spend on wasteful projects and households may be profligate. Two points are noteworthy here. Unlike government, both households and firms face the threat of bankruptcy, which will serve to discipline those who consistently bungle their cost-benefit calculations. For shareholder-owned firms this threat is even more immediate. If the firm wastes money shareholders will sell shares and the stock price will fall, which is likely to directly affect the managers who approved the spending (if they are paid in stock or options).  Governments that engage in spending that fails a cost-benefit test face no such immediate penalties.  Rather than fearing bankruptcy, a government that runs persistent deficits may point to those deficits as evidence that it needs more revenue, and that taxes should be higher still.

The second noteworthy point is that some spending can destroy value.  Spending for which the costs (properly measured), exceed benefits (properly measured), actually reduces the welfare of society.  Indeed, there is perhaps no better one-sentence explanation for the collapse of the Soviet Union.  Earmarks do not need to pass any formal cost-benefit test; they only need to be politically feasible.  Since they only create net value by happenstance, there is a strong likelihood that earmarks actually destroy economic value.  After all, if an earmark did create substantial net value, it begs the question of why the state or locality to which it is directed did not capture that value though public spending already.

But firms and households subject spending to a stronger test than cost-benefit. Railroads may be able to conceive of many new rail lines for which the benefits would exceed costs, and households can think of many possible vacations that would generate fun in excess of cost.  However, they both lack the resources to pay for all those projects. Firms and households are forced think about their spending by saying, “Is this the best use of those dollars relative to all the other things we could spend on?”  That is, is this the rail line that would create the most value or the vacation that would create the most fun? Firms and households, either implicitly, or better, explicitly, rely on the basic economic concept of opportunity cost, or the next highest valued use for that spending.  Any family that has considered alternative vacation destinations is familiar with this reasoning.  An additional reason to be concerned about the efficacy of congressional earmarks is that they do not go through any similar process.  They are not considered in light of the alternative uses for those dollars, nor does that spending pass a cost-benefit assessment.

Finally, what are the effects of earmarking on the political process?  They are deleterious.  Earmarks convert what should be one of the nation’s highest callings into a competition to “bring home the bacon” to satisfy parochial interests.  The fact that earmarking has become widespread, and apparently accepted, makes it tempting for lobbyists to ply politicians with a variety of benefits in an attempt to secure their preferred earmark.

Earmarks are by definition focused on narrow, precisely defined projects, usually local in nature.  They thus divert scarce revenue (as well as congressional attention and energy), away from issues that are truly of national concern, and raise the question of why federal government resources are not being devoted to projects with a national focus. A one-year moratorium on earmarks is therefore an important first step toward reforming this wasteful process.  Elimination would even be better.

Rick Geddes is an Associate Professor in the Department of Policy Analysis & Management at Cornell University. He was a member of the National Surface Transportation Policy and Revenue Study Commission.