Many people look at the headlines and just see stories about missile defense systems and the ballooning Powerball lottery. Economists like me see people weighing known costs against uncertain payoffs.
In both the missile story and the Powerball story in yesterday’s newspaper, people were making decisions to spend money in the hope of achieving some favorable outcome that is yet unknown.
I don’t buy lottery tickets or go to casinos, but buying a Powerball ticket when the odds and payoff are like those this week approaches a smart decision. I doubt the missile defense system deployment is as prudent. But I can never know because, while Powerball probabilities can be calculated, those of a major defense system cannot be.
Despite this difference, the motivation to buy a lottery ticket and to deploy a missile system is not all that different. Both give the decision-maker some psychic satisfaction that transcends whatever cost/payoff matrix anyone can calculate.
It is well known that the payout percentages in state lotteries are much lower than at casinos. And while it’s acknowledged that at casinos every game favors the house, skeptics like me believe that if any private gaming establishment ran anything that was as stacked against the customer as a state lottery, government regulators would shut it down.
Most people know, at least at some level, that like casinos, states run lotteries to take in money, not pay it out. But people continue to play, rationally knowing they have little chance of coming out ahead, yet buying the ticket anyway because it gives them a thrill.
According to the paper, if you spend $1 on a Powerball ticket you have a one in 121 million chance of winning a prize with a present value, before taxes, of about $86.5 million. So, statistically you can expect to get about 71 cents back for each dollar spent.
The odds vary a bit by how many tickets are sold in the last day before the drawing, but the return is pretty precise compared to a missile system.
It is hard to estimate the total cost of missile defense. However, the administration is specific about spending $17.5 billion over the next two years to construct the initial 10 missiles and necessary facilities.
For an economy that produces more than $10 trillion in goods and services each year, $17.5 billion is not much. It is about the same amount that we will spend under the latest farm bill making well-off farmers wealthier and poor farmers poorer.
But it is not chicken feed, either. We could buy more than 300 F/A-18 fighter planes for that sum. And it would fund an additional $150 per month in food stamps for the poorest 5 million U.S. households.
The problem with such defense systems is estimating the benefit. If North Korea would launch an ICBM at San Francisco in a couple of years and this system intercepted it, most taxpayers would look at the $17.5 billion as money well spent. From my point of view, the probability of North Korea actually launching a missile against the United States is pretty small.
But I am just an old infantryman, not a rocket scientist. Different experts can make different subjective estimates of the likelihood of a missile attack on our country. But such estimates are inherently subjective. That is why decisions about defense systems inevitably must be personal judgments answerable through our democratic political system.
There is more, however, to the process than just saying, “We cannot estimate the benefit of this system, but we think it is worth spending $17.5 billion on it.” There is also the matter of opportunity cost. Spending $17.5 billion on an anti-missile system means there will be $17.5 billion less to spend on anti-terrorist measures, port and border security and so forth.
In announcing the missile decision, Defense Secretary Donald Rumsfeld and others in the administration are implicitly stating the expenditure has a higher likely return than all other defense alternatives.
I fear they’re like lottery ticket buyers. They know the likely benefits of an anti-missile system fall well short of the costs, but they get some psychic, or political, satisfaction in believing the contrary.
The French got intangible satisfaction from the Maginot line of forts constructed between World War I and World War II. But the long-run consequence was a humiliating defeat and a bitter occupation by Germany, which made for better decisions about military spending. I hope we do not repeat their experience.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.