Why I think the “funds aren’t fungible” argument is wrong

So the argument goes something like this:

Starry-eyed person who loves train project X: “Why can’t have this wonderful thing?”

Grumpy economist: “Because wonderful thing costs money, and the money is better spent elsewhere.”

Clever transit advocate: “But transport/transit/capital funds are not fungible, so opportunity cost logic doesn’t work here. So, teh Train!”

This has been the cycle for a few years, and I have to admit, I was impressed by the fanboys who finally thought of the “fungible” argument and actually used the word “fungible,” but I still don’t buy it.

Fungible means “interchangeable”. So the basic problem with economists is that they understand that things cost money. (I am kidding; the fact that they understand that things cost money actually make them really useful to public policy because far too many people do not think about costs.) When you gobble up resources for large-budget capital projects, you can’t use the money for something else. That’s the ‘opportunity cost’ argument. Both the opportunity cost argument, and its “not fungible” rejoinder have their limits.

For one, opportunity costs are entirely real; they are one of the few places where personal budgets do rather mirror public ones. So if you spend all your money on ice cream, you will not be able to buy any video games. Public budgets do not have the same constraints as personal budgets do: your salary is your salary, and while you can try to take on extra work or get higher wages, public budgets might be increased through higher tax rates, new taxes, making the base larger, etc. People who say opportunity costs are BS tend to argue that the public tax base can be altered to accommodate their programs and projects. But as recent decades have taught us in the US, it’s not a simple matter to levy new taxes or raid various funds, so that public budget and tax base constraints, while subject to politics, can also be real and binding.

One way the discussion typically goes is: “I personally would rather see the billions they want to put into HSR go to education.” The HSR advocate says “No, the money isn’t fungible, and opportunity cost arguments can always be made, and it’s not HSR’s fault if there isn’t enough money for education.” Well, some is, and some isn’t. Let’s break down both sides.

To some degree, the HSR advocate is correct on both counts. First, you can construct an opportunity cost argument for anything. “I know you’d rather pay your mortgage, but children in Farifistan need that money to eat.” There are worthy priorities around us, everywhere, all the time, and there is every possibility that there is something out there more worthy than the thing (in this case, education) that you thought more worthy than the original proposal. So the fact that there might be more worthy things out there does not necessarily win any arguments. It DOES, however, suggest a democratic preference, and expressing that preference via comparisons of things you would rather put the money towards strikes me as a perfectly reasonable way to express the fact that you think HSR would be fine to have, but it’s just not a priority to you.

Second is the fungibility question, and let’s get this specific to California. In one sense, some of the project funds are not interchangeable. Those are the funds awarded through the federal government–the ARRA funds, for the recovery act. California suddenly can’t say “well, let’s move those monies to education now.”

And now that Prop 1a did pass, the California money set aside for HSR via that bill is not fungible, either.

But it sure the hell was before Prop 1a. Prop 1a used general obligation bonds for the project. That’s money that, prior to getting the public to vote on it, could have gone anywhere. And to the extent that project encumbers state general revenues, it’s entirely possible that it will wind up displacing other projects out of the general fund. Prop 1a was *born* and made possible out of fungibility of general revenues.

So yeah, now we are committed, but it is not as though fungibility just locks money in. Yes, you can only use gas tax money for transportation, but you can stop collecting the funds tomorrow, let people keep their money to optimize as they like, or allow states to pass an increase in their gas tax money to slosh straight into their general funds to use for college funds for foster kids, dental care for seniors, or….their own bike lanes.

Just as ‘obligation cost’ logic both works and can undermine just about any investment, the ‘not fungible’ argument both works and is a bit of canard. One comes down to “I think this rail project too costly” and the other comes down “Now that I’ve won my pot of money, it can never be moved, no matter how worthy, and thus let’s just keep spending on my favorite things!” Both are useful enough concepts, but both can have an element of bullshitting to them, and I now officially call bullshit on the “not fungible” claim as so many have called bullshit on the opportunity cost claim.

Why? I’ve been watching politics and budgeting for 40 years. Arts funding was never “not fungible.” We’ve seen EPA’s budget get hacked to bits. These are political choices, not hard-and-fast-rules.