Costs on the Books

In Jason’s recent post on Waste and Abuse, Density Duck writes:

Ask your husband to explain how SpaceX can build a rocket for half as much as NASA.  Then get back to me on how “waste” is a meaningless term for a nonexistent problem that’s just Republican rhetoric

Okay, some background for those who haven’t been reading this blog for a long time and haven’t pieced together my full backstory. I currently work at Caltech (standard disclaimer: none of the opinions offered herein are in any way official endorsed by my employer, etc., etc.), and my previous place of employment was at Idealab, a company that in many eyes was the poster child for the dot-com boom and bust.

For the record, they’re still around, building companies.

One of the operating companies that was spawned by Idealab during my tenure there was a company called BlastOff! which was founded for the purposes of private-funded space exploration. At one point, this led to me seeing a (rejected, for the record) purchase order request for a $20 million dollar rocket sitting on someone’s desk. This is sort of a surreal experience unless you work at a major aerospace engineering corporation, and certainly out of place when most of the companies around you are selling pet food or jewelry online. The company folded, and the CEO of BlastOff! went on to found the X-Prize foundation.

Yes, that X-Prize foundation. The ones that founded the Ansari X-Prize, which resulted in the successful launch of SpaceShipOne. They’re also running the Northrop Grumman Lunar Lander X-Prize, and the Google Lunar X-Prize, and a whole-bunch of seriously awesome non-space related X-Prizes. If you’ve never looked at the X-Prize site, you should check it out; this is a great model for distributed R&D.

The problem with Duck’s question is that it is framed so that the private company isn’t just going to be the winner, it’s going to be the winner, in all cases, by a really large margin. And this doesn’t have anything at all to do with “government waste” – although there is, in fact, quite a bit of government waste, this is actually clouding the issue quite badly. In fact, this post coinikidikily winds up being remarkably similar to Mr. Thompson’s recent post regarding net worth as a bad measure of wealth disparity. The measurement is bad.

Why?

BlastOff failed. Twenty-six teams entered the Ansari X-Prize competition. Five got all the way to a launch attempt, including the winner. Every single one of those teams had operational expenses, capital expenses, R&D expenses, labor, licensing agreements, office space, overhead, etc. Moreover, unlike NASA (which has a responsibility to report on its activities and keep ridiculous levels of detailed records about even failed research projects), none of them had to go to the effort to track or retain records or justify expenses on anything other than the single project upon which they were working… and since they were all essentially rolling out a beta-project, they could be far less rigorous than NASA needs to be. NASA needs to have a pretty robust method of tracking all of that data for decades, a team that is essentially working on a project that is likely to fail from the beginning (and they know it) don’t have to have document retention policies in place that are going to outlast the organization by a couple of decades.

So, yeah. Maybe Space-X built a rocket for half of what NASA might have spent. But the contest between the private sector and the public sector isn’t a contest between “the one company that won” and “NASA”, it’s a contest between “everybody that seriously tried and was taking a route that was likely to work” and “NASA”. And if Space-X built that rocket for half as much of what NASA would have spent, and those other contestants that had a launch attempt that cost a quarter of what NASA would have spent, and all those other contestants that didn’t even get that far (the remaining 21) spent a tenth of what NASA would have spent, you get…

You get the private market spending more than three times what NASA would have spent to achieve the same goal.

Suddenly, that sounds like kind of a crappy economic trade-off, don’t it?

Now, there are of course complexities involved here. Some of those contestants were undoubtedly duplicating effort – this isn’t necessarily always going to be the case in distributed development efforts. Some of those contestants were undoubtedly taking avenues of research that were very unlikely to yield results… this is both an advantage over the monolithic development effort and a disadvantage. It’s an advantage, because you can sometimes find a methodology that is significantly better simply because it’s far less dependent on existing methods and thus discovers a major efficiency that the monolithic development process would never find, because they wouldn’t even poke their head down that road. It’s a disadvantage, because usually those sorts of research attempts result in dead ends and blown money.

In the private market, that company withers away and nobody pays any attention to its costs. In the public market, that isn’t a company, it’s a division of NASA and Congresscritters are calling for investigations and hauling people in front of committees and demanding the entire project justification in triplicate.

Now, this isn’t in any way meant to be a knock on the public-private R&D partnership model. Distributed R&D is nice for the government because they don’t foot the bill for a lot of the failures: the private market absorbs those costs, with private donors and private investors putting money up for a bunch of schemes… some of which are going to work, some of which are crazy and cockeyed and really unlikely to work but might be huge game changers in the end. People with capital can donate or invest in those efforts, hoping for a nice payout and shouldering some of the risk, which cuts down on the total burden carried by the taxpayer. This is a good thing, I’m a huge fan of the model on that basis. There are still issues with it, but on the whole it’s a great way to do development. Spread the risk, aggregate the real benefit.

But those costs are still there, of course. And historically, the government has carried those costs. This might be a bad idea. Then again, in some problem domains, it might not be a bad idea at all, but that’s a subject for another post.

At any rate, it’s manifestly unfair to the folks at NASA to go poking them in the eye for bearing these costs as if it’s some sort of definitive evidence that people at NASA are half as good at building rockets as the private market is at building rockets. NASA has cultural problems. NASA has efficiency problems. As an organization, there’s a lot that could be done to make NASA a whole lot better at being NASA than they are.

But all that said, when they’ve been carrying the R&D burden of twenty-six organizations on the books as direct costs and producing rockets for only double the price, that’s a sign that they’re quite possibly pretty good at building rockets and identifying research paths that are most likely to produce quality results… not the other way around.

Or, put a shorter way: the success of the X-prize model tells us that when we can get the private market to foot a big chunk of the risk and let the government aggregate the benefit, that’s an obviously awesome way to cut government expenditures. But it’s so entirely different from what we did before that direct comparisons for the purposes of “efficiency” are really limited. If we start comparing what we did before to this model only in “expenses accrued to the taxpayer directly”, it’s going to look like this model is the way to solve every single problem. Silver Bullet Syndrome sets in. The important thing to keep in mind is that in order for it to work… we have to get the private market to foot a big chunk of the risk and let the government aggregate the benefit. If the government starts footing the parts of the bill, or local governments start footing part of the bill to encourage private actors to start up in their location, or we allow the private sector to keep more of the benefits that are accrued out the other end, the whole thing breaks apart.