Is it valid to insist that government take long-term financing costs into account and directly allocate these costs to Corrections Department budgets when considering a new corrections facility? That depends upon what costs are understood to be. Economists may not know much, but they do know what costs are. Production costs are the value of alternative goods and services foregone by virtue of choosing to use scarce economic resources for the production of one good or service over other goods and services which these resources could have produced. Private firms act as if they understood this. Therefore, when planning a major construction project they know that they must take account of financing costs for the simple reason that those who supply them with credit will demand that the project show promise of generating additional sales revenues from, consumers sufficient to attract and hold scarce economic resources – e.g., lenders have numerous opportunities to allocate credit to all kinds of projects which use scarce economic resources for the production of goods and services desired by consumers and will ration the supply of credit to one borrower against another based on their evaluation of the value consumers place on the product of these projects. Therefore, such costs must be paid or financing cannot be obtained. Those denied credit or those forced to obtain credit on less favorable terms may not like this, but that' s the way it works in a world where resources are scarce relative to the uses to which resources can be put.

It is standard textbook procedure for a private firm to introduce financing costs into the equation when calculating the 'net present discounted value" of a new plant or building and then to follow with a calculation of the "net present discounted value" of expected future revenues produced by the new facility. If "present cost" exceeds "present estimated net revenues", the building will not be built – unless, of course, the firm, intends to go bankrupt. But since governments are not private firms, what useful purpose is served by insisting that financing costs be calculated and directly allocated before a new jail is constructed?

Even though governments do not "sell" anything in the sense in which private firms sell things, they do incur financing costs and have to obtain funds to coverthese costs in the same credit markets used by private firms. These funds must come either from additional taxes or from reductions in outlays on other government programs. To the extent that citizens' resistance to higher taxes can be overcome, financing costs are likely to be "paid" through increased resistance to future taxes for competing programsit; non-law-enforcement areas of government. Why? Because citizens desire private sector goods and services in addition to public sector goods and services.

When citizens consent to pay higher taxes they have consented to having fewer private goods and services than they otherwise could have had. But this does not mean that they have given up their desire for more private goods and services. The continuing desire to have more, rather than less, private goods and services is so pervasive that once increased taxes have been granted, the ability of local governments to acquire additional future taxes for other public sector projects is virtually eliminated. Therefore a new ;ail can be said to have been paid for through the sacrifice of not only private goods and services but also through the sacrifice of other future public sector physical infrastructure.

If, as is often the case, new taxes cannot be obtained and other government programs have to be cut back to release funds for prison construction, again the full cost of a new jail facility may be said to have been "paid" through the sacrifice of other worthwhile government services. Therefore a local government which acts as if financing costs are not part of the cost of building a new jail or prison and fails to calculate these costs "up-front" before moving forward with the project will find, sooner or later, that the significantly higher demands on government cash flows occasioned by financing costs will make it difficult, if no impossible, for them to fund other areas of government at the same old annual rates of increase. If and when that happens, the new jail or prison may some day come to be surrounded by a community in which all other elements of public infrastructure have receded into a state of advanced physical decay. The unhappy moral of the story is that costs are costs and will be paid one way or the other whether we like it or not.

Even if we have taken financing costs into account and think we know what it will cost to build a new prison facility , we may find that there is even more to jail costs than initially meets the eye. In a study which surveyed 15 states, Cory and Gettinger, [17] found that cost overruns on prison construction averaged 39 percent over the amounts initially estimated and budgeted. The cost overruns they found included the effects of inflation during the years from bid to completion and other "hidden costs" such as architect and agency fees, government construction supervision, equipment and insurance. Unlike the private sector which is compelled to be "product focused', the public sector is constrained by numerous procedural requirements which force it to be heavily focused on "process'". Therefore when attention has to be given to having all elements of government "sign-off" on each and every aspect of financial outlay decisions, significant amounts of time will be consumed. The larger the project (and jails and prisons are not small' projects) the larger the amount of time consumed in meeting the requirements of 'process" and 'procedure' and the higher the cost of final product. In the specific case of a proposed Connecticut prison facility, Cory and Gettinger found that an initial cost estimate of $50,000 per bed actually ended up costing the state $62,000 per bed, a near-25% increase. [18]

Taking all these factors into account, economist Gerald Funke has argued that a 500 bed prison which costs $30 million to build and which has conservatively estimated per-bed annual operating costs of S14,000 , could end up costing $350 million over a thirty-year period. [19]