Fri, 23 May 2003

Taxes spent badly are wasted

Andrew Sullivan takes a potshot at deficit spending, and deservedly so. A lot of people think that government spending can somehow improve an economy. "Economic development", it's called. No, no, and no. When a government takes money from people in the form of taxes or inflation, it is destroying one kind of spending and replacing it by another.

Now, it may be that the current owners of the money (or more properly, liquid value) don't want to spend it. Maybe they want to keep it as capital. And yet, capital does nobody any good (earns no interest) unless somebody spends it. It's a completely wrong idea to think that government spending does anything other than replace private spending.

So when talking about government spending, the first and foremost question is "is it wise spending"? Is the money going towards capital or consumption? If you educate someone in something useless (e.g. underwater basket-weaving), that is consumption. If you educate them in something useful (and I'm not smart enough to give any examples of what will be useful; only what might be useful, but heck, you can do that as well as I), that is a capital investment.

If a government builds a road, is that capital investment? Not necessarily. If the road goes nowhere anybody wants to go, it's consumption. If the road replaces a congested road, it's capital (maybe; there are better ways of dealing with congestion; public roads are subject to commons tragedies).

Consumption isn't necessarily bad. People consume all the time. Entertainment is consumption. Consuming something which is currently capital is wasteful. Coercing someone's capital away from them, and consuming it is very, very bad. It makes society in general worse off. Unfortunately, most government spending is consumption, simply because governments aren't wise enough to spend other people's money as well as the person would.

Now, of course people consume their own capital, and of course people spend their own money foolishly. No one thinks otherwise. The real concern is whether governments waste money more often and to a larger degree than private spenders. There is plenty of evidence that they do.

A society with a large private sector is more resiliant than a society with a large governmental sector simply because the number of decisions that are being made is larger, and the amount of resources they are made over is smaller. People make mistakes, and the more powerful a person the more significant their mistakes. Oh, if you could get power to wise people, you could address this problem. Unfortunately, wise people don't seek power, being wise after all, you see.

Hrm. I see that I haven't said a word about deficits, have I? That's probably because the real problem with deficits is that they are just another form of government spending. Deficits are bad simply because all government spending is bad (or at least, not as good as the private spending it replaces). Doesn't matter how you get the money, whether by borrowing it (deficits), by coercing it (taxation), or by printing it (inflation).

Please understand that I am completely unswayed by any amount of anecdotal evidence. Sure, you can point to a lot of government spending that has improved people's lives. That's not the point. The point is that people would have been even better off if the money had been spent by its owner.

All of that said: the only problem that a government can solve is transaction costs, and it does so at a cost of its own. Only by comparing those two costs can you properly decide if the government spending makes sense or not. Far too many people look at the end product, value it, ignore the cost of government spending, and skip over the comparison. This is an ineconomic idea. The science of economics exists to answer these questions. Skipping over the question doesn't answer it.

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