John Edward teaches economics at Bentley and UMass Lowell. He’s a frequent contributor of columns on economic issues.
A low-risk security with a 4 percent yield is a good return on investment. Using the money to pay off credit-card debt with a 20 percent interest rate is a better investment.
Good leaders look at how much their policies will cost. Better leaders also consider other investment opportunities before spending money. Here are a few examples of the importance of bearing in mind opportunity cost.
The first example – the initiative to hold the 2024 Summer Olympics in Boston. There has been plenty of talk as to how much it would cost. We need to pay more attention to the opportunities that will be lost if we try to bring the games to Boston.
According to The Boston Globe, “Bid documents suggest price tag of $10 billion.” That does not include upgrades to public transportation. Bids notoriously underestimate costs. According to Andrew Zimbalist, Professor of Economics at Smith College, “every single Olympic Games has experienced massive cost overruns. The Summer Games have an average cost overrun of 252 percent in real terms since 1976.”
Shirley Leung, business columnist for the Globe, has been making the argument that governments and business leaders need a deadline to spur them into action. The 2024 Olympics is an arbitrary target that will focus policy makers on the wrong finish line.
Olympic spending will include infrastructure improvements. However, planners will fixate on getting people to the games for three weeks, not on helping people get to work for the next thirty years.
Olympic spending will provide temporary housing for athletes, some of which may benefit UMass Boston. Building an Olympic village will divert attention and resources from delivering on Mayor Walsh’s promise of expanding the housing needed to make Boston an affordable and inclusive city.
Olympic spending will deliver a temporary boom to the construction industry. People with resources and connections will make a lot of money. Meanwhile, the mayor, Governor Baker, and presidential candidates are saying we should focus on inequality. Holding the games in Boston will most likely worsen inequality in the Commonwealth.
Another example — the roughly $650 billion we will spend on national defense and homeland security this year. It adds up to almost 60 percent of discretionary spending. We need national defense. We need a reasonably secure homeland. However, every extra $10 billion spent on weapons of mass destruction, domestic spying, and covert operations is a lost opportunity.
According to a Globe Op-ed by Stephen Kinzer, a fellow in International Studies at Brown University, since the 9/11 attacks:
• more than 100,000 people in the United States were shot to death,
• around 400,000 died in car crashes, and
• around 500,000 committed suicide.
Meanwhile, he estimates that two-dozen people have died as the result of terror attacks in our homeland during the same period. Every dollar spent trying to stop domestic “terrorism” is a dollar that could be used for suicide prevention, highway safety, or domestic violence programs.
Locally, another opportunity to address a long-standing problem was lost in Chelmsford. A few months ago the town spent $490,000 on a 2-acre piece of property previously owned by the Merrimack Education Center.
Ironically, so-called “fiscal conservatives” who have tried to reduce spending for education and public works pushed for the expenditure. They did not have a specific plan for the property. The Board of Selectman formed a committee to see if they can figure out a good use for it. They may or may not come up with an idea worth spending a half-million dollars on.
Nothing they come up with would be as good an idea as full-day kindergarten. Organizations as diverse as the National Education Association, the Federal Reserve Bank, and Fortune magazine have extoled the extensive benefits of early education.
Yet, Chelmsford continues to suffer the embarrassment of being one of only nine school systems in Massachusetts that does not provide full-day kindergarten. By spending money on a piece of property with no clear intent, Chelmsford is losing an opportunity to protect our children’s future.
Should the City of Lowell consider buying the Boott Hydropower plant? It would be better to invest money to fix the visibly crumbling bridge over the canal about 100 feet away. (The same company that owns the Hydro plant owns the bridge. The city and UMass Lowell have proposed purchasing bridges using federal funds).
Should Massachusetts be spending so much time, resources, and money regulating marijuana dispensaries? Doing something about the 1,000 deaths in 2014 from opioid abuse would be a better investment. (Last year there were over 200 opioid-related deaths in Middlesex County. The sale and use of marijuana is still illegal under federal law.)
Recently, one of my students told me his favorite economic topic was opportunity cost. He explained how he was able to apply it to his decision making process on a daily basis. It made me realize I needed to write this column.
Public policy makers need to learn the same lesson as my student. There are plenty of fiscal conservatives ready to question whether the government should spend money. What we need are economic rationalists finding opportunities to better invest in promoting the common wealth.