Knowing and Making

Brad DeLong complains that Obama is cutting spending in next year's budget . Greg Mankiw complains that Obama is increasing spending in next year's budget . Fortunately there is no discrepancy here, because both of them are saying the same thing: the President isn't doing what I want him to, therefore he's wrong.

I was curious to notice that the UK's aircraft carrier contracts have been allowed to overrun their budget by around 25% . This seems to be a common phenomenon in public sector contracts - but should it be? Why aren't the contracts signed at a fixed cost with the private sector allowed to take the risk? This is a common question in my own field of software development. There are traditionally two ways you can approach a contract - with a third variation now emerging which might solve some of the traditional conflicts between client and supplier. The old-fashioned approach - which I believe is still used in many military contracts - is that the supplier bills on a time and materials basis. This reduces the risk for the supplier and places it all on the client. This may well be appropriate if the client is responsible for specification and design - if that is the case, the supplier might not be able to estimate the timescale accurately enough, and many overruns are caused either ...