Why public investment is rigged to fail

Dr. The Treasury’s dependence on flawed market benchmarks undermines long-term public investment, writes James Schuurmans-Stekhoven.

When a proposal for a vital public infrastructure project, a regional hospital upgrade, or a long-term social program is quietly flushed down the toilet by our state or federal treasury, the weapon of enforcement is always a single, bloodless number: the social discount rate.

Corporate bureaucrats, faced with angry community groups or citizens who foolishly believe that taxes should fund public civilization, put on their best technocratic expressions and make vague marks on their spreadsheets. They assure us with practical seriousness that mathematics is objective, unyielding and completely free of ideology.

To ensure that taxpayers do not “waste” money, the government must evaluate public investments against the opportunity cost of private sector capital. What better measure of private sector productivity than the stock market’s historical rate of return?

It looks like solid and stubborn financial discipline. In reality, it is a magnificent accounting fiction. Our governments hold themselves to a mythological standard by comparing public investment to the stock market; a curated “winners gallery” that completely ignores the structural count of private enterprise and the massive social wreckage that corporations routinely dump on the public ledger.

Consider the mathematical sleight of hand known as survivorship bias. When such an index ASX200 It boasts a healthy compound long-term return of 7-10% and presents a highly exaggerated track record. It appears to be a perpetual wealth machine as the bankrupt, stagnant and completely liquidated are silently erased from the data. When a private company goes bankrupt, it is delisted. When the index rebalances, the losers are thrown into a forgotten grave and replaced by rising corporate stars.

The stock market index is not a reflection of every dollar ever invested in the private economy; It is the notebook of the lucky survivors. But when the government uses this inflated figure as the hurdle rate, it subjects public goods to an impossible and fraudulent test.

High discount rates aggressively evaporate the present value of future benefits. Under a standard 7% discount rate, a huge environmental or social benefit that would accrue 30 years from now becomes almost worthless on today’s balance sheet. This mathematical mechanism systematically decapitates projects with long-term horizons, from high-speed rail to climate change mitigation to early childhood intervention, ensuring they never survive Treasury scrutiny.

The Treasury’s message is clear: if your grandchildren can’t make money from it by next Tuesday, it’s not worth building.

But the asymmetry runs much deeper than selective index accounting. High rates of return from the private sector are often purchased by actively generating social costs that the state will then have to clean up.

Consider the current corporate stampede towards AI. When an organization replaces 30% of its workforce with AI algorithms, operating expenses drop, net income increases, and stock prices soar. On a corporate balance sheet, laying off people is recorded as a shiny efficiency gain that rewards shareholders.

But from a macroeconomic perspective, these displaced workers don’t just evaporate. Their costs are simply removed from the corporate spreadsheet and transferred to a public spreadsheet. The state must now pick up the tab for the underlying mental and physical health crises that inevitably follow from structural unemployment, regional economic decline, retraining programs and the deprivation of people’s identities and livelihoods.

Herein lies the great absurdity of modern public finance: Corporate maneuvers that increase stock market returns also increase the fiscal burden of the state. But under the current technocratic logic, as corporate returns increase due to the inexorable displacement of the workforce, the Government’s reference hurdle rate also increases. The state’s capacity to invest in society is actively crippled by an indicator that rises higher each time corporations externalize their collateral damage.

The harsh truth, long understood by economic historians but aggressively ignored in treasury offices, is that “pure capitalism” is a fairy tale for the gullible. The private sector has never been an autonomous, self-sustaining wealth generator. It relies on a permanent, uncredited public subsidy to stay afloat.

Private businesses do not pay the capital expenses necessary to raise, feed and educate healthy people they recruit from public schools and health systems. Some pay fuel taxes, but these do not cover the huge capital depreciation on the roads, ports and rail lines that carry their supply chains.

Moreover, the key technologies that tech barons claim to have invented in their garages—from the internet and GPS to basic pharmaceutical compounds—were largely incubated through high-risk, long-term public research grants before being turned over to private profit motives.

More fundamentally, the state acts as the corporate insurer of last resort. The concept of a limited company itself is a state-enacted law that protects investors from personal ruin, legally shifting the downside risk of business failure to creditors, workers and society. And when systemic crises inevitably hit – be it a global financial crisis or a pandemic – the free market purists instantly disappear, replaced by corporate executives who hang their hats on public debt to save themselves from their own fragility.

So why do our corporate bureaucracies insist on this ridiculous accounting? Because separating “economy” from “political economy” serves an extremely effective political purpose.

For much of the 19th century, the discipline was explicitly called political economy. Practitioners like: Adam Smith And Karl Marx You realized that you cannot separate the distribution of wealth from state power and class interests. The modern shift to rebrand the field as a hard science, complete with complex mathematics and Greek-letter variables, was a deliberate attempt to portray the distribution of wealth as a neutral law of nature, akin to gravity.

Framing public investment through the lens of neutral mathematical models beautifully removes it from the democratic sphere. This allows governments to shrug their shoulders and say, “We would love to fund this hospital, but mathematical models show the Net Present Value is negative.” It turns the deep conflict between social values ​​and power into a boring arithmetic problem, safely isolated from the electorate.

If a private company had to fully compensate every worker it displaced, pay the true cost of environmental degradation, and finance the holistic maintenance of the civilization that sustains it, its rate of return would plummet.

It’s time for our treasuries to give up on the free market fantasy. The state is a steward for generations, not a short-term hedge fund. We must replace market-mimicking hurdle rates with social discount rates that reflect reality, not the selective memory of the stock market index.

Until we change the boundaries of the spreadsheet, our public policy will remain one giant laundering scheme: subsidizing private profit at the expense of our collective future.

Dr James Schuurmans-Stekhoven has had a career defined by a high level of academic rigor, a polymatic research approach and a commitment to strategic optimization across many disciplines.

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