All Commentary
Friday, January 23, 2009

Boon or Doggle?

Even if government spending in theory could “stimulate the economy” in a genuine, sustainable way, it would not follow that politicians and bureaucrats would know how to spend the money intelligently. The pressures to do something now and the perverse incentives facing those in charge of the money guarantee there would be more doggle than boon.

Government “countercyclical” spending is notorious for kicking in after the recession has passed. The planners’ information is necessarily dated, and their capacity to act quickly is overestimated. The Congressional Budget Office says most of the $355 billion in discretionary spending being planned wouldn’t be used before 2011. Paul Krugman, the loudest cheerleader for trillion-dollar government spending, says that’s okay because we’re in for a long recession. We certainly are if we’re counting on his kind of thinking to get us out of it.

We shouldn’t be surprised that government can’t get the timing right. It’s a political not an economic institution. That’s allegedly its advantage, but we know deep down it’s a handicap. Political incentives are not in sync with the public interest.

Magical Infrastructure

“Infrastructure” has again become a magical word. Who can object to spending on it? Do you want bridges to fall down? You want to bend your rims in potholes? It says something about government management of roads and bridges that politicians don’t talk about them until the economy slows down and they want more money to spend. Private businesses don’t do that. Competition forces them to maintain their properties for the comfort of their customers. Governments have no competition.

Politicians want us to believe they select infrastructure projects on the basis of objective need, even scientifically. But we shouldn’t be so naive. The Public Choice economists are right when they suggest we ignore the civics textbooks and look at how politicians actually behave. The New York Times shed some light last fall. In an article on infrastructure spending, reporter David Leonhardt wrote,

A lack of adequate financing is part of the problem, without doubt. But the bigger problem has been an utter lack of seriousness in deciding how that money gets spent…..

It’s hard to exaggerate how scattershot the current system is. Government agencies usually don’t even have to do a rigorous analysis of a project or how it would affect traffic and the environment, relative to its cost and to the alternatives — before deciding whether to proceed. In one recent survey of local officials, almost 80 percent said they had based their decisions largely on politics, while fewer than 20 percent cited a project’s potential benefits.

Government decisions are based largely on politics? Shocking! (We might ask whether the 20 percent were merely less honest than the 80 percent.)

Think how magnified this problem will be when federal, state, and local politicians are under intense pressure to spend hundreds of billions of dollars as quickly as possible. The little care they may take now will be dispensed with completely. Indeed, judiciousness will be tarred as obstruction. I can imagine the news stories a few years from now describing the pointless projects, the shoddy work, the corruption, and the horrendous waste of resources. We’ve seen it many times before. As Leonhardt noted:

There are monuments to the resulting waste all over the country: the little-traveled Bud Shuster Highway in western Pennsylvania; new highways in suburban St. Louis and suburban Maryland that won’t alleviate traffic; all the fancy government-subsidized sports stadiums that have replaced perfectly good existing stadiums. These are the Bridges to (Almost) Nowhere that actually got built.

They help explain why our infrastructure is in such poor shape even though spending on it, surprisingly enough, has risen at a good clip in recent decades.

That’s something you don’t read every day. The government isn’t starved for tax money. It’s just lousy at spending it intelligently. “Spending is up 50 percent over the last 10 years, after adjusting for inflation. As a share of the economy, it will be higher this year than in any year since 1981,” Leonhardt writes.

So the suggestion that government spending as it happens in the real world will restore the economy is a bad joke. You’ve got to wonder about how people win Nobel Prizes while thinking such ludicrous thoughts.

We’re likely to see some attempt to convince the taxpayers that the money will be well spent. Watch for lots of references to cost-benefit analyses. But keep in mind that deft bureaucrats and staff economists can reach any conclusion they want. You just have to have the “right” assumptions. Garbage in, garbage out. This was confirmed in a refreshingly candid moment reported by the wire services: “Even the president-elect’s own economists acknowledge their two-year  [job-creation] estimates could be wrong. The analysis, posted online, says estimates are ‘subject to significant margins of error’ — because of the assumptions that went into the economic models and because it is not known what might pass Congress.”

Politicized TARP

If you’re still not convinced, realize that the decisions about which banks get money under TARP is heavily politicized. The Wall Street Journal reports that “Bankers, regulators and politicians complain of a secretive and opaque process for deciding which banks get cash and which don’t. The goal of aiding only banks healthy enough to lend — laid out by the Treasury when the program began — clearly seems to have shifted, but in a way that’s hard to pin down and that the Treasury has declined to explain. Part of the problem is that some powerful politicians have used their leverage to try to direct federal millions toward banks in their home states” (Emphasis added.)

Government will be government. As Russell Roberts says, expecting a stimulus bill not to have pork is like expecting a ham sandwich not to have pork.

But even if we make the heroic assumption that good projects can be identified, that won’t mean the spending will fix the economy. As Michael Boskin writes,

While we have legitimate infrastructure needs, public-works spending historically has been too slow, has delayed private and local government spending, and created few jobs for the unemployed. The programs are not labor-intensive and require skills few unemployed have. Public works did not end the Great Depression. Even FDR’s treasury secretary, Henry Morgenthau, said in 1939, “We have tried spending money . . . and it does not work . . . we have just as much unemployment . . . and an enormous debt to boot.” Nor did a decade of infrastructure spending help the Japanese escape three recessions and a decade of stagnation. It did, however, saddle Japan with a national debt burden four times ours.

To this point we’ve been assuming that government spending could work in theory, just not in practice. But it can’t work in theory either. Even omniscient, omnibenevolent beings couldn’t pull it off. Political  interference with economic activity is the problem; it can’t be the solution.

Whatever the government does, it isn’t a stimulus in the way that jump-starting a car is a stimulus. Government borrowing merely moves around money that is already inside the economy. Inflation injects demand into an economy, but increased demand without additional goods is just another way to move existing wealth around. (See my elaboration, “Inflation as Income Distribution,” here.)

Government policies distorted asset prices and induced people to behave differently from how they would have behaved under an honest price system. For example, banks lent mortgage money to people who shouldn’t have been borrowing it. This set off a political shift in the structure of production. (More business for builders and mortgage lenders.) Instead of worrying about aggregate demand, the policymakers ought to get out of the  way and let the market re-price assets according to economic reality. Financial institutions could then be evaluated accurately and treated accordingly. We  need a market rearrangement of scarce  resources to align them with consumer preferences. That will require savings — not artificially stimulated consumption spending — and market-guided investment. Government borrowing and inflation is exactly what we don’t need. No politician, however charismatic, is capable of creating wealth by creating money.

Is there a role for the politicians? By all means. They must radically reduce the burden of government at all levels and in all ways. This includes spending, taxing, borrowing, regulating, subsidizing, and inflating. An economy cannot serve consumers if politicians, pretending to know what they are doing, insist on interfering.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.