Kentucky Wired’s sunk-cost fallacy
Published 6:27 am Friday, October 19, 2018
By JIM WATERS
Lifehack writer Michael Davidson could have been describing the failed Kentucky Wired project when he told how he “once made the mistake of staying in the theater during Diner For Schmucks despite quickly realizing how terrible it was. It never got better, and I wasted even more of my time by staying.”
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Davidson included the scenario in an article describing how the “sunk cost fallacy” often leads to “irrational decisions.”
Sunk costs are past unrecoverable expenditures. The fallacy is in making future decisions based on these past costs.
When a business, for example, invests a million dollars into new hardware, the money’s gone, can’t be recovered and, as Davidson rightly notes, “shouldn’t figure into the business’s decision making process.”
Davidson’s sunk-cost fallacy isn’t just about economics, either.
It’s about continuing to eat the meal at the restaurant even after filling full.
“After all, I paid for it,” we reason.
It’s about one party justifying remaining in a toxic relationship by continuing to date someone they know is bad for them because.
“I’ve already invested so much in the relationship, which I lose if I leave” she reasons.
“Why doesn’t she just leave that jerk?” everyone wonders.
It’s not that she doesn’t know; it’s that her past emotional investment makes it hard to cut the ties.
And it’s not that the Bevin administration and Republicans who now control the legislature don’t know Kentucky Wired is bad for our commonwealth.
But they’re allowing the nearly half-billion dollars already sunk into this economic behemoth to dominate their future decisions instead of pulling its plug and limiting their Kentucky Wired discussions solely to campaigning on a narrative that lays the blame for this corrupt failure squarely where it belongs: at the feet of the previous Beshear administration.
“We tried to make it work,” Republicans can say. “But it’s time to cut our losses.”
Auditor Mike Harmon’s recent 125-page report gives them strong cover, revealing how this statewide government-owned network was sold as costing taxpayers no more than the $30 million originally sunk into it as part of the 2014 state budget but is now becoming a $1.5 billion burden.
Harmon in an interview with WYMT-TV describes how Macquarie Capital, the state’s incompetent bedfellow for the project, didn’t keep its commitment to handle the risk inherent in such important matters as securing private financing and getting pole attachments in place.
Instead, in what the auditor called a “bait and switch,” huge amounts of money were spent on unauthorized project agreements – putting Kentucky Wired on the path toward becoming the commonwealth’s version of Boston’s Big Dig.
“They went from $30 million to $1.5 billion with one signature and the General Assembly had no idea – there was no additional authorization in that regard,” Harmon said. “That in and of itself is troubling, but certainly the additional obligation to the state and risking our bond rating and putting all that risk on the taxpayers is to me just mortifying; the bait and switch is terrible.”
Harmon’s audit also uncovered serious cronyism – including some agreement made allowing Congressman Hal Rogers’ Center for Rural Development (CRD) to receive many future Kentucky Wired revenues, if any are ever produced.
Yet it was Rogers who secured federal funding for Kentucky Wired while promising it would help poor families get connected to high-speed broadband.
Despite adding around a half-billion dollar burden to our state and falling years behind schedule, this appalling project hasn’t connected a single poor family’s home to high-speed internet, which was its stated purpose in the first place.
That may be the worst bait and switch of all.
Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. He can be reached at firstname.lastname@example.org and @bipps on Twitter.