I have started following Charles Marohn’s blog, “Strong Towns,” and am gratified to see that great minds think alike. In his most recent post, Marohn applies the thinking of Nassim Taleb, author of “Antifragility,” to the discipline of building more prosperous, livable and fiscally sustainable communities.  (See my post, “Fragility, Antifragility and Virginia.”)

One of Taleb’s big themes is distrust of “experts” who do not have “skin in the game.” Marohn examines his own career as an engineer, planner and consultant. How often did he have any downside risk if he was wrong, he asks? Would he have damaged his career or earnings if his forecasts proved unfounded? Never, he says.

What makes us so confident that investing someone else’s money to build an entertainment district, expand a highway, extend a utility line or construct a stadium is a good investment? We never calculate — let alone track — the public’s actual return-on-investment (dollars in versus dollars out over multiple life cycles) when we do a project. We never even ask the question. And most critically, we never learn from our mistakes — there is no feedback mechanism other than total collapse (which we would just blame on someone else anyway).

We engineers, planners and other “experts” do projects because that is what we do. Period. There is no other deeper wisdom at work here.

I would add only that politicians, more than anyone (except Wall Street bankers) like to play with other peoples’ money. Unlike Wall Street financiers, they have no skin in the game. Politicians reap the up-front rewards from launching projects but they rarely stick around long enough to deal with the cost overruns. As Marohn rightly says, no one calculates the Return on Investment of public dollars, and the only feedback we get is financial collapse.


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28 responses to “Playing with Other Peoples’ Money”

  1. reed fawell III Avatar
    reed fawell III

    Actually it is worse. Experts do have skin in the game. But it’s skin they can’t lose. It’s fees, collected for various useless and/or absurdly expensive procedures they use to milk the projects. Lawyer’s rig it so they drain all the money out of the estate they promote, or drain the money out of a legal award for damage before clients see a dime.

    Or Engineers rig it so procedures require a world class world wide engineering company to figure out how long it takes a truck to accelerate up a hill after other engineers have learned huge fees designing the structure to get them uphill, except that it doesn’t work cause nobody bothered to check out the grades in neighborhood before doing the design work. So the project gets junked after all the experts have earns fees that amount to no more that wasting taxpayer dollars. All of it for an end result that tells us their project fails for reasons that neighbor who hangs out her wash daily or truck driver could have told us for some $30,000 less.

    And of course we learn today from the Chronicle of Higher education that our kids college tuition skyrockets cause our tenured professors have cut back their hours teaching but not their salaries. So we got to hire far more experts (professors) at higher salaries for far less teachings of far fewer kids. What a Roman Circus.

    1. reed fawell III Avatar
      reed fawell III

      Correction – or truck driver could have told us for some $30,000,000 less

    2. reed fawell III Avatar
      reed fawell III

      Correction – “Lawyer’s rig it so they drain all the money out of the estate they promote” should read “probate…”

  2. reed fawell III Avatar
    reed fawell III

    And of course that does not include the rating agencies that got paid huge fees to tell us we were buying Triple A securities that tanked because they were junk instead, costing us hundreds of billions.

  3. hmmm.. how does crony capitalism figure into this ? you know.. where you have a developer who can leverage off of govt investments in infrastructure?

    How many “experts” with skin in the game, for instance, would build a METRO to get the TOD “benefits”?

    how about those who build subdivisions in exurbia? pure non-govt capitalism, right?

    should we get rid of VDOT and let the developers be responsible for our infrastructure?

  4. Richard Avatar

    1. What’s the alternative?
    2. There are reputation consequences. A better reputation means you make more money and get more work. A bad reputation means you make less. If you lose your reputation, you don’t make anything. Of course this applies only to those who don’t have lifetime jobs (like tenured professors and certain family members).

    1. reed fawell III Avatar
      reed fawell III

      That’s were spin and unintelligible complication comes in to fog everything over, so most have not a clue as to what’s going on. And the rest are either players in the game, or too timid or otherwise afraid to talk straight. Reputations are not made and keep in the same ways they used to be.

  5. Fairfax County spent $1 M plus, plus on consultants to support the Tysons Land Use Task Force, only to find the results unusable. Then the staff started all over and did some real analysis and planning.

    Government simply has too much money, much of which is spent through crony capitalism and to keep the professional caring class happy. Case in point, Fairfax County Public Schools, which showed in its 2012 financials account surpluses of more than $376,000,000. http://www.fcps.edu/fs/comptroller/docs/reports/cafr2012.pdf Page 55

    This disclosure is the result of the adoption of GASB 54. Included in the $376 million are an $8 M “flexibility reserve”; a $57.5 budget carry-over; $72.4 M “Other Schools Operations”; $22.5 M “Unassigned.” Slush funds, anyone?

    The Schools have prepared a proposed budget, not using GASB 54, that shows it needs more money from the County.

    1. reed fawell III Avatar
      reed fawell III

      TMT –

      Much of that Tyson’s Land Use Task Force study could have been better done on napkin in a bar. I am talking here about the allocation, placement, and pacing of various mixes uses within Tysons Corner backed by a plain straight forward analysis of what got us into the mess, and how we could best extract ourselves from the mess, for the benefit of all concerned.

      Okay, that would take three napkins along with 3 experienced decision makers (aided by a few sober helpers (know as experts), in a good bar.

      That’s not what people got. What they got was a boiler plate sales piece dressed up as a final report written to hide facts, consequences, and results, rather than delve into them and come up with real solutions. Instead you got pretty words and pictures ginned up to hide what would lead to opposite results – namely much more of the same Tyson’s Corner there already.

      That’s my opinion.

      1. RF3 – the TLUTF did not engage in any planning. Essentially, it sat around for years pontificating and asking people how much density they wanted. The answer — lots. Under the “Vision,” everyone got density no matter how far or close they were to transit. The staff and the public had to work towards a more reasonable plan. While the adopted Comp Plan is not perfect, it’s a heckuva lot better than the Vision.

        1. reed fawell III Avatar
          reed fawell III

          TMT – I’d call that task force report planning at its most schematic. And agree that “the adopted Comp Plan is not perfect, it’s a heckuva lot better than the Vision.” But it’s still a vision, even if more fully drawn. As such its distinct from law vesting rights. So there remains much distance between the lip and the cup, and those with vested interests who want what a lot of folk like don’t want, know what they’re doing.

  6. I blame Fairfax schools on Fairfax Taxpayers. They’re getting what they want. right?

    we have the same problem down this way. We fund the schools by 70 million more than the State mandates but listening to the school board, it’s the state mandates that cost the money.

    but parents, even “Conservative”, “no-tax”, tea-pot, parents – love the schools and have never seen a program or course that they did not like.

    Oh a few of them get disgruntled and home school or send their kids to a private school but the vast, vast majority fully intend to get every penny back in school services that they pay in taxes – and then some…

    there’s an interesting JLARC publication just released : Virginia Compared to the other States…. surprised that Bacon/DJ/Peter have not referenced it.

    1. DJRippert Avatar

      “I blame Fairfax schools on Fairfax Taxpayers. They’re getting what they want. right?”.

      Ahh …. hmmm ….

      US News & World Report rates US high schools. They rated the top 37 high schools in Virginia.

      8 of the top 10 are Fairfax County public high schools.

      13 of the top 20 are Fairfax County public high schools.

      There are 347 high schools in Virginia rated by USN&WR.

      LarryG – there are only 22 public high schools in Fairfax County. More than half are among the top 20 in the state.

      No Spotsylvania high schools made the top 37.

      6 of the top 100 high schools in the United States are in NoVa. 4 are Fairfax County high schools (I am not counting TJ which spans counties).

      No Virginia high schools from outside NoVa made the top 100.

      In the next 100 (101 – 200) there are 4 more Fairfax County high schools and one Loudoun County high schools. No Virginia high schools from outside of NoVa.

      In the next 100 (201 – 300) there are two more Fairfax County high schools before we get to the first non-NoVa high school (Deep Woods, Glen Allen).

      One more Fairfax County high school follows Deep Woods in the national top 300.

      Let’s review – of the 22,000 high schools rated by USN&WR Fairfax County has 11 of the top 300. Put another way, approximately half of the high schools in Fairfax County are among the top 1% of high schools in the United States.

      Yes, our schools suck. We are very disappointed.


  7. Fairfax County Public Schools are excellent. The central staff is – shall we say – lacking despite its over-abundance. Why does FCPS carry over a $50 M plus operating surplus year after year? Why does it also have an unallocated surplus of more than $22 M? We could have had smaller class sizes or higher teacher pay. We could have shifted more money to transportation. GASB 54 opened the blinds to see the slush funds.

  8. I too think Fairfax County high school are excellent! But they do spend a hell of a lot of money – “other people’s money?) … What is it 15K per student ?

    In poor old Spotsylvania, we spend about 5K less per student and no we are not as good as Fairfax but we also spend a ton of “other people’s money”.

    so I’m pointing out that: 1. – the premise of the blog seems to be that spending other people’s money is not a good thing because the “experts” (say at the Fairfax school system) have “no skin in the game” thus are not careful as they might be with the money).

    DJ points out that apparently the money is well spent by those “experts” so something is not quite meshing here… right?

    Of course…when it comes to nations – the best, most productive nations, on the planet are the ones with the highest literacy rates and low and behold virtually every single dang country with a high literacy rate – accomplishes that by “spending other people’s money (on publicly-financed education).

    Makes me wonder if Mr. Marohn himself was a beneficiary of experts spending other people’s money also….

    oh lord… that would totally gut the premise of the blog, wouldn’t it?

    1. DJRippert Avatar

      FY13 Fairfax County Public Schools, spending per pupil – $13,564.

      FY11 Spotsylvania County Public Schools, spending per pupil – $10,732.

      Couldn’t find more recent data for Spotsylvania County.

      FFX FY11 – $12,567

      Looks like FFX spends 15-20% more per pupil than Spotsylvania.

  9. by the way DJ – have you seen this: http://jlarc.state.va.us/reports/Rpt419.pdf

    excellent doc…. data wonk special….

  10. Richard Avatar

    In my naive youth I suggested that the way to bring some honesty and reliability into a funding decision was to hire an actuary. The elder lawyer among the group spurted out “actuaries are wh_res”; they’ll give you whatever number you pay for. (BTW – I thought that a bit harsh.) That seems to be the problem with experts; they’re just good capitalists trying to make a buck and sometimes the most successful ones are the ones who will reliably give you the answer you want. The only way to deal with this is to have good leaders. If leaders hire experts to give them the answers they want, it’s a failure of leadership. Let’s not blame the experts for giving politicians what they want (and pay for).

    1. reed fawell III Avatar
      reed fawell III

      Well said, Richard. Another iteration of your thought might be: if a leader tries to talk you into something based on what the :experts say”, you can be sure its a con – both by the leader and the expert. Indeed, that iron rule of the con generally goes for most folks, leaders or otherwise, when playing the con.

      1. Richard Avatar

        Reed – glad to be in agreement!

        1. reed fawell III Avatar
          reed fawell III

          Thanks, Richard, I’m complimented!

  11. re: ” That seems to be the problem with experts; they’re just good capitalists trying to make a buck and sometimes the most successful ones are the ones who will reliably give you the answer you want.”

    did someone say something about the non-govt investment rating agencies that told the non-govt Banks that sub-prime MBS were “prime” investment grade securities?

    the “expert” thing has nothing to do with govt and everything to do with “experts” in both the govt and non-govt realms.

    how these things get turned into “govt” problems is amusing… but typical these days… where everything would be honey and roses if the private sector did everything, eh? BARF!

    1. reed fawell III Avatar
      reed fawell III

      I agree with you up to a point. Private enterprise is no more moral that government. Out of control experts can be found in abundance everywhere. They work for governments and private enterprise too. Indeed many private enterprise experts work for government for lots of money. And the successful one all have learned “how to work the system”.
      And the survivors are the ones who have best learned how to win low bids. Then turn those low bids into maximum profits.

      But certain realities acerbate our current expert overreach. For example, you raised a circumstance I earlier raised in my fourth comment to Jim’s article. Your question was “did someone say something about the non-govt investment rating agencies that told the non-govt Banks that sub-prime MBS were “prime” investment grade securities?”

      Yes, I did. I raised the rating agency issue. Great example of experts run amok, and rating exist in large part because of government mandates. Muni bonds being only one of endless examples.

      But where things most likely get bent out of shape is where politics enters the marketplace to achieve political results. In the case of sub-prime mortgages it was Fannie Mae following the dictates of its political masters. In short, a creature of the Federal government, Fannie Mae, was captured by Congressional politics. Congressional mandates shoved Fannie into the business of using its credit to guarantee sub-prime mortgages that were securitized then sold to the public until ever more and ever risky loans polluted the nation’s pool of home mortgages and the scheme collapsed.

      This is a long story. But one could see the risk of these structures being guaranteed by Fannie long before the sub-prime debacle. Real estate is unique. It’s unlike other assets typically used for security. It’s very local and peculiar insofar as its quality as security of loans. So it’s properly the business of local lenders familiar with the unique nature of their local market. Hence the first multifamily Wall Street securities wrapped by a Fannie Mae Guarantee done in the early 1990’s which involved mixing “prime mortgages” from across the nation raised red flags among those knowledgeable about real estate by reason of real experience, rather that Business school financial models. So, at the same time, those doing the deal, the Wall Street folks with their black box computer models, fancy business school PhDs, and endlessly complex esoteric financial structures comprising multiple levels of risk (differently priced tranches cutting across thousands of loans) that no one really understood were at base untethered to the dynamics of the real estate securing them. Experienced real people could see this. The experts, enthralled with their financial modeling could not. And of course would not lessen. Too much pride and money was involved.

      And of course as always happens the crooks (smelling blood on the water) arrived for the killing. But this happened mostly later. Still, from the get go, people were making tons of money for getting these troubled assets off the books of troubled lenders as required by yet another government program of 1990’s regulations, so everyone forged ahead.

      Money corrupts. So experts began to run amok, fueled by the fact the experts who were creating the problem earned huge fees doing it before they offloaded the “hidden risk” to the public. Fannie Mae provided the perfect cover, giving triple A credit to less than triple A product. Thus a federally created program that for decades had built a liquid highly efficient mortgage market for properly underwritten home loans that was rightfully the envy of the world, was hijacked.

      The problem was further turbo-charged by more politics and government intervention. The ruse behind this maneuver was as American as Apple pie. Every citizen gets to own a home of his or her own, irrespective of their ability to pay for it. (a simplified overstatement but not by much.)

      Of course, Wall Street and conduit bundlers of sub-prime loans (all private) were only to happy to jump in, make a bundle, then offload even more junk onto the public, leaving Fannie Mae holding the bag by reason of its federally mandated guarantee.

      It was a perfect deal by Federal government and Wall Street standards. The politicians got all the credit. Wall Street and conduits that packaged the mortgages got high risk free cash profits up front. The taxpayer got the shaft (gigantic losses) in the back. The sub-prime homeowner got his own bankruptcy by reason of his federal government feeding him and/or her financial crack cocaine, all for political advantage.

      One great tragedy was the near ruination of Fannie Mae, which up until the early 90s was a poster child of successful government at work. The benefits that Fannie brought to this nation are incalculable. One can say this institution, as much as or more than any other, brought the American Dream to the the American people. Every credit worthy family got a home of their own, one they could afford, from a starter home, right up the ladder. No other country enjoys the success that Fannie Mae created for us. But how easily even the greatest of Federal government programs can be twisted out of shape, and then used for purposes that poison the financial health of a nation, its individual families and citizens. And this poison goes right to the core of the American dreams, our homes.

      Another lesson here is that there is a brake on experts taking undue advantage of private companies. Private companies cannot afford to go broke. That rule gets blurred if private companies get tangled up with government regulations and mandates that twists this iron rule (can’t go broke) out of shape by perverted the free functioning of a properly regulated marketplace.

      1. reed fawell III Avatar
        reed fawell III

        Clarification: Multi-family securitization refers to bundling large numbers of big commercial individual mortgage loans, each secured a rental housing project. Securitizion in early 90s might mix weaker credit loans with stronger loans, matching risks, to get the weaker loans off the books of troubled S&Ls as defined by federal law.

        Here a gov. program twisted the market. It was also a logical first step to later securitizition of sub-prime individual home loans whose gigantic failure shows how gov. intervention as a player in the market, tilting the free markets towards government mandated results, so often results in unintended consequences, often catastrophic ones.

        Government who become players in free markets play with fire.

      2. private companies do go broke and some get bailed out by the govt .

        but I do not believe govt forced the MBS, credit-default folks to get the rating agencies to rate their stuff as investment grade AND sell it overseas to unsuspecting over there…

        you can rightly blame the govt buying bad paper but no one force these companies to get into conflict-of-interest situations with rating agencies and vice versa.

        I would say that they did that because there were no regs – like there are with FDIC banks.

        The “free market” is what initially spawned the creation of the FDIC.

        Prior to that the free market without govt help was running amok and innocent people with their savings in banks got wiped out and people who had mortgages paid up – were foreclosed on with the terms were changed.. and banks took people’s deposits and gambled them…etc..

        all of this without significant govt regulation….

        I just don’t buy the basic premise that the sub-prime meltdown was a product of govt regulation because if we look back and then look forward and ask how to keep it from happening again – we know that if we don’t require the non-FDIC banks to start being held to similar standards as FDIC banks, they will once again run amok.

        we also have a lot of angst over govt bailouts of recent vintage – GM but a long history of govt bailouts of industries as well as the Pension Benefit Guaranty Corp that has had to step in to help many innocent workers who were cheated out of their own pensions… by corrupt corporations.

        we also know that without govt – the polluters would run amok – as they did with virtual impunity before regs were passed.

        the food & drug act – passed a long time ago was the direct result of serious threats to the public from bad drugs and bad food products.

        I could go on and on.. but govt as bad as it can be and has been pales in comparison to what private industry has done.

  12. FDIC seems to be a govt role in the free market that works pretty good compared to banks that were not FDIC.

  13. “We never calculate — let alone track — the public’s actual return-on-investment (dollars in versus dollars out over multiple life cycles) when we do a project. We never even ask the question. And most critically, we never learn from our mistakes — there is no feedback mechanism other than total collapse (which we would just blame on someone else anyway).”

    Gee, how many times have I said that here? Problem is, most don’t have a clue what it would cost. My rule of thumb is that it takes 2% of the amount spent to adequately track and analyze the results, and that may be way too low.

  14. Private companies cannot afford to go broke, but unlike government they can pocket what they have and simply stop doing business. going out of business does not, and should not mean going broke. But making a rational decision to fold is a hard one, and most entrepreneurs are too ego invested to do it.

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