Pay Back is one of the most significant principles of economics and decision making, so why is it never mentioned by our politicians? This blog will explain why.
I am going to start right off with the concept of pay back. It means, "How many years does it take to pay back an investment". There are a lot of subtle points that I will cover as we go along, but it is simple. If you "invest" in an item that will produce a profit, how soon will those profits add up to the cost of that "investment"? Our government is now proposing that they take our tax money and "invest" it in building or repairing our roads. Exactly what are they going to do with that money? Let's take a bridge that they want to build over the existing highway so that cross traffic does not need to stop before they cross the highway. The cost is going to be in the millions and it is going to save drivers 30 seconds each crossing and also save them $0.15 in gas. Further, there are 125 cars per day that have to cross that highway. Seems like an easy problem, but the calculation can get a little complicated. Let's see how much is saved per year.
If we figure that a person's time is worth $15.00 per hour, we get $0.125 savings per crossing or $5,703.125 per year. Now gas, which works out too $6,843.75 for a total per year of $12,546.875. If us taxpayers demand that investments like this pay back in 25 years, how much are we willing to pay for that bridge? It works out to $313,671.875, which is about the cost of the average house today. That means we can not afford to build that million dollar bridge. It does not have a good enough pay back. Are you clear on these numbers and why the bridge is a bad investment for the tax payers?
If I were to apply compound interest to this investment the picture would look even worse. Remember we are talking about "compound" interest and the longer it takes to pay back it is worse by an exponential factor. Pay back of 25 years is more than double the cost of a 12 year pay back.
Here is another point. Parents invest in their kids by sending them to school and college to prepare then to pay back their investment in them. Parents start paying at kindergarten, but won't see any payback until their kids are at least 25 years old. That investment is equivalent to putting money in the bank and collecting compound interest on that investment so that after 20 or so years in school that investment is now worth several times what was invested. At $13,000 per year of public school and $40,000 per year of college, the parent's investment is now worth almost half a million dollars. To pay that back the parents kid has 30 or 40 years at best. That means they need to pay their parents or taxpayers more than $25,000 per year for the rest of their life!
It gets more complicated if the kid takes too long to get thru college, which is now happening more and more. It runs up the cost and delays and reduces the number of possible payback years. What if the person chose the wrong profession and at age 45 had to be retrained? In this case it has to be clear that they were not able to pay back that original investment and now at age 45 even a small reinvestment in their education will be difficult to ever pay back before they die. Are you starting to see the problem?
It is even worse given the fact that the value of labor currently and in the future will be driven by intellect, we need our kids to major in STEMS and we know that much of our taxpayer money is not being invested in STEMS because many of our kids and parents are too stupid to see what is facing all of us in the future. In the USA the percentage of USA born students majoring in STEMS is actually going down! At the same time in China more and more of their students and their investment in education is going into STEMS. How could it be more clear?
What we all need to do is to look at our investments from all areas are actually paying back. It also has to be clear that no government knows how to invest our money better than we do. If we would not invest in some project, why should we feel that it is good or OK for our government to invest our tax money in that project? Wake up before it is too late. We are only going to get one shot at this and we can not afford a miss!
