In his textbook Public Finance, 7th edition, 2005, Princeton University emeritus professor of economics Harvey S. Rosen, discussing the idea that incentives to monitor are better in the private sector than in government, quotes Adam Smith‘s statement to that effect in The Wealth of Nations. He also gives a famous modern example. Rosen writes:
Anecdotal evidence for this viewpoint abounds. One celebrated case involved New York City, which spent $12 million attempting to rebuild the ice-skating rink in Central Park between 1980 and 1986. [DRH note: think about that–that’s 6 years.] The main problem was that the contractors were trying to use a new technology for making Iceland it did not work. In 1986, after spending $200,000 on a study to find out what went wrong, city officials learned they would have to start all over. In June 1986, real estate developer Donald J. Trump offered to take over the project and have it completed by December of that year for about $2.5 million. Trump finished the rink three weeks ahead of schedule and $750,000 under projected cost.
I remembered this passage when I was preparing for a Zoom interview on Monday with a high school senior in Arizona. He asked good questions and I gave him this example and a number of others.
READER COMMENTS
Thomas Sewell
Feb 25 2021 at 2:48am
And then the NYC Mayor decided that because he didn’t like Trump, he’d order the rink closed early and the lease terminated, despite the fact that the Trump organization has been running it successfully for more than 30 years.
He’s apparently partially relented (allowing them to finish the season) after protests by people who would no longer be able to skate, as he didn’t have any sort of plan for anyone to take the rink over. (https://nypost.com/2021/02/22/de-blasio-admits-nyc-was-too-quick-to-close-trump-ice-rinks/)
But don’t worry, I’m sure the new contracts will go to a friend of the city government, who may run things not as well or not as inexpensively, but will at least have the right political connections.
At least we don’t have political corruption in city contracts in America, unlike all those other countries…
Jose Pablo
Mar 2 2021 at 8:59am
And then … we put the government in charge of the distribution of vaccines against the worst pandemic of our live time … and, like with the ice ring, they manage to do a terrible job … once again
john hare
Feb 25 2021 at 4:43am
I remember reading about this in a Trump bio long before he got into politics. The decisiveness of an individual with his own money on the line compared to CYA committee decisions was stark as I recall. Don’t even remember the name of the book. What I do remember is bragging on several business dealings that left me with the attitude that this is not a man I want to do business with.
robc
Feb 25 2021 at 9:08am
In a private business setting, I agree, but in politics I think the exact opposite.
If, for example, Nancy Pelosi would have shut up 4 years ago about him being illegitimate and “negotiated” with him, she could have probably got, at least mild versions of, nearly everything she and the Democrats wanted. All they had to do is let him claim how great a deal it was, how it was all his idea, and how he had totally won in the negotiations because Pelosi, et al, were idiots.
I think Rand Paul was the only politician who got it.
Matthias
Feb 25 2021 at 8:46pm
Not sure. Mr Trump seemed mighty fickle as well, so might have been hard to hold him to any deal.
Juan Manuel Perez Porrua Perez
Feb 26 2021 at 1:57am
Trump, as in Donald J. Trump (b. 1946) didn’t build anything, rather, the city government hired him to hire some contractors to do it.
He was reimbursed for the costs partially by the city government in addition to the lease to operate the rink, with the city government sharing part of the revenue. Over the years, Trump under-reported its revenue and an audit found other accounting irregularities. Trump convinced the contractors that finished the project ahead of schedule and under-budget to do it at cost, telling them that the publicity would be compensation enough. He stiffed them, however, as he took the credit for the work, and didn’t mention the contractors in all the flummery that followed.
David Henderson
Feb 26 2021 at 3:35pm
Interesting. Thanks.
Mark Z
Feb 26 2021 at 5:12pm
James Q. Wilson discussed this story in detail in his book Bureaucracy, and the legal background explaining it.
These restrictions, which ostensibly prevent corruption, also make it difficult to efficiently contract out projects. There’s also perhaps a ‘public choice’ (or voter irrationality) story to be told. Voters may be more afraid of corruption and the possibility of occasional bid-rigging than they are of waste. The whole passage by Wilson is pretty good, IMO.
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