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Sunk Costs and Tar Pits

In economic theory, there is a concept called sunk costs. Economic theory informs the self-interested asset owner that the past is gone. All that matters is the present in relation to the future. Economic responsibility is always present responsibility, for we must act in the present. Economic responsibility for the past has already been allocated by the market. There have been winners and losers, a fact made objective by today’s array of prices and the value of assets that is revealed by this array of prices.

This means that today, every owner of assets must compare the value of whatever he owns with his expectations regarding the value of whatever his wealth will be worth tomorrow. Then he must decide what to do with his wealth today. He must allocate it: buy, sell, or hold. As the song says, you’ve got to know when to hold ’em, know when to fold ’em, know when to walk away, know when to run.

Because of ego, the concept of sunk costs is not applied by responsibility-denying owners. They pretend that the market has not already allocated responsibility in an objective manner. Losers pretend that they have not suffered losses. On what logical basis? Because they have not yet sold their assets. But the price of each asset is no less objective. The loss has been sustained, whether the owner admits this or not. Selling has nothing to do with it. The market has imputed a price to every marketable asset.

Economic theory tells owners to face reality or face more losses. “Cut your losses,” says the investor’s slogan. In other words, admit your loss. Don’t make your decision today in terms of your erroneous expectations yesterday. Yesterday is gone forever.

Nevertheless, amateur investors do their best to (1) re-define a visible failure as a success, either present or future; (2) blame someone else for the visible failure — someone who cheated; (3) avoid all reference to the failure, hoping that their wives will not notice. All three strategies are called into question when a husband admits to his wife that his investment strategy has produced a loss.

Amateur investors therefore usually ignore the doctrine of sunk costs. It makes them less efficient investors. Others steadily wind up as the owners of capital owned by inefficient investors.

POLITICIANS VS. SUNK COSTS

Politicians are very much like amateur investors. That is because they, like amateur investors, also seek to evade responsibility for past mistakes. Ego rules them, not objective reality.

They face an objective market: votes. If voters perceive that they have been injured by the past decisions of today’s incumbent politicians, they will withhold their votes or transfer votes to future challengers. So, politicians do their best to (1) re-define visible failure as a success, either present or future; (2) blame someone else for the visible failure — someone who cheated; (3) avoid all reference to the failure, hoping that voters will not notice. All three strategies are called into question when a politician admits publicly that his policies have produced failure.

Colin Powell told President Bush before the invasion of Iraq, “You’ll own it.” That was his way of warning the President. The President paid no attention. This is the singular mark of President Bush: he pays no attention to anyone, except possibly Vice President Cheney.

The next President will not be burdened by such ownership. The next President will not only not own the Iraq war, he will see that if he accepts his inheritance of it, his Presidency will be a four-year sinkhole: of poll ratings, body bags, and debt. It will produce his defeat in 2012. (When I say “he,” I also refer to Mrs. Clinton, who not only wore the pants in that family but succeeded in keeping them on.)

The Democrats who are presently in Congress have a major problem. They have publicly affirmed their subordinate ownership of Iraq. They are like co-signers of a large debt: if the primary signer defaults, they are on the line to make good the debt. The voters extended credit to President Bush in 2003. But they are changing their minds. They show no interest in doing it again for one of the now-trapped co-signers.

Except for Senator Feingold, Democrats in Congress are still promoting some version of John Kerry’s “I would also have sent troops to Iraq, but differently.” Body bags are still body bags, whether the flag covering the casket is red, white, and blue or merely white and blue. Car bombs are still car bombs. Suicide bombers take out just as many victims. To disown the Iraq war, the Democrats must admit their ignorance, gullibility, or poor information when they took possession of whatever it is. Only Feingold has done this.

Meanwhile, President Bush is still telling the voters that they, through him, own Iraq, and that the price is worth it. But voters are now telling pollsters that the price is not worth it. Their public ownership of President Bush after November, 2004 cannot be removed, but the market value of that asset is falling day by day. The invasion of 2003 and the election of 2004 are sunk costs. What matters for the public is the continuing streams of red ink and red blood.

This does not matter to President Bush. No matter what the costs to the country in lost lives and costs to the U.S. government in wealth transfers to American producers of war material, President Bush will ignore the doctrine of sunk costs. He will pour good money after bad to validate his decision to purchase the Iraq war in 2003. He will continue to justify this policy in the name of dead troops, not in the name of his decision to send them into harm’s way. He justifies the war today by means of the sunk costs themselves: six feet under.

Yet he never attends one of these sunk-cost memorials. He never sees a military casket being lowered into the earth. “Out of sight, out of mind.” Or, as the phrase has been translated by a computer, “blind, crazy.”

THE TROOPS WILL BE PULLED OUT IN 2009

Most American troops will be pulled out of Iraq, probably in 2009. The next President will order this. He will not stay the course, as defined by President Bush. He will openly, visibly abandon Bush’s course.

By the time he does this, most voters will support his decision. But those voters who linked the Iraq war to any of the following goals will not forgive the next president.

1. American prestige2. America’s destiny3. Israel’s foreign policy4. “Teaching the wogs a lesson”5. Sticking it to “Old Europe”6. Maintaining cheap oil.7. Stabilizing the Middle East8. Speeding up the Rapture

At best, they will stop promoting these goals publicly because they will know the most voters are unwilling to pay the domestic price to maintain them. But they will not forgive. They will see the pull-out as a betrayal. They are committed to the ideal of empire, though not to the term. They will have their self-definition removed from them. They will deeply resent this.

Most voters accepted one or more of these goals in 2003. That will not change. This is a large sunk cost in American politics, though not as large as the sunk cost of Medicare/Social Security. Most voters, to quote John Kerry’s opening line in his acceptance speech to the Democrats, reported for duty . . . on behalf of other people’s sons and other people’s daughters.

Losers do not like to admit the doctrine of sunk costs. That is why Democrats nominated John Kerry in 2004. That is why most voters have accepted the victory of President Bush. That is why no Democrat except Feingold is saying “let’s cut our losses.”

The legitimacy of both parties is caught in the Iraq quagmire. So is the legitimacy of the media.

When I was a child, I visited a museum that had bones of animals dug out of the La Brea tar pits in Los Angeles. I vividly recall one painting — the only painting of my youth that I remember. It was a painting of a mastodon sinking into the tar, surrounded by predators that were also sinking. Anyway, that’s how I recall it.

Iraq is the equivalent of the La Brea tar pits for today’s incumbent politicians, predators all. The mastodon is the American empire.

CONCLUSION

American politics will be shaped by how voters deal emotionally with the sunk costs of the Iraq war. Will voters forget Iraq because some other problem overshadows Iraq, such as the bankruptcy of Medicare/Social Security? Will they look back and feel duped? Will they abandon the dreams of empire that tempted them to back the President in 2003? Will the media run historical videos of the shock and awe attack on Baghdad, or will they, too, agree to a joint amnesia project — Alzheimer’s for dummies?

Of all photos of the Vietnam War, the photo of the last helicopter out of Saigon is the one that most Americans remember. That photo is very different from the memorable photo of the flag-raising at Iwo Jima, in two ways. First, Iwo Jima was a military victory for America. Second, it was the greatest staged photo op in American history. The real flag raising had taken place hours before. The last helicopter out of Saigon was not staged. It also did not memorialize a victory.

We will see if there is a photo to mark the last troops out of Iraq. Surely, there deserves to be.

There will surely be a poster. It will be of Osama bin Laden. Under it, in Arabic, will be these words: Mission Accomplished.

This is always the price of empire at the point of its reversal. When you think “empire,” think “LaBrea tar pits.”

August 31, 2005

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 17-volume series, An Economic Commentary on the Bible.

Copyright © 2005 LewRockwell.com