This was published in newspapers across Indiana late last month. It will also appear in the next issue of the IPR Journal...
use of government for economic “development” and economic “stimulus” is quite
popular. Unfortunately, its popularity greatly exceeds what it deserves, given
both theory and data.
theoretical reasons are easy to understand. In terms of economics, it is
difficult for government to create net economic activity by moving money from
one use to another. But in terms of political economy, the benefits of
government spending are usually concentrated and obvious, while the costs of
government spending are spread through the population and nearly invisible.
Given this combination, one can confidently predict that government will be too
active in attempts to foster economic growth.
any area of life, if you see the obvious — and miss larger but more subtle
consequences — you’ll often end up with bad choices. Quite reasonably, most
people spend little energy in thinking about public policy. When they combine
this ignorance with naive views on political economy, they will tend to see the
benefits of government activism and ignore its costs. Making it worse, members
of the media often make the same mistakes. And of course, in the public arena,
“interest groups” will tend to exaggerate benefits and downplay costs.
me offer four reasons why economic development and stimulus will look better on
paper than in reality.
the benefits are typically exaggerated. We’re often given a success story or
two: Subsidy X led to “economic development” opportunity Z. Or we’re invited to
imagine only the benefits: Giving taxpayer money to others will lead to more
purchases which will stimulate the economy. From a few anecdotes, we imagine
dozens of similar stories. But a few success stories do not necessarily imply
many other success stories. And of course, the recipients of the money are
likely to emphasize its benefits.
Henry Hazlitt’s “Lesson” teaches us to focus more intently on the subtle costs.
In particular, how are we paying for government activism? Let’s say the
government devotes $10 million for local “economic development.” How do
politicians pay for this? First, they can increase taxes by $10 million, moving
economic activity from the private sector to the public sector. How is this a
net gain? Second, they can lower spending elsewhere, moving economic activity
within the public sector. That’s a shell game. Third, they can borrow the $10
million, resulting in higher taxes down the road. Even in a best-case scenario,
this will take prosperity from the future to finance the present.
why do we imagine that government spending will routinely create net economic
activity? Because it’s easier to see the economic activity of the $10 million
in a few hands than to imagine that lower overall tax rates will do the same
thing. It’s difficult to follow the government’s shell game when the benefits
are obvious and the costs are nearly invisible.
the “Austrian Economics” school of thought focuses on “the knowledge problem.”
Do government actors know enough to implement effective policy? With the
Affordable Care Act (ObamaCare), legislators famously bragged about not having
read the bill. This sort of negligence is routine, especially with massive
omnibus legislation. If a politicians haven’t read something, why should we
trust their knowledge?
there’s a larger knowledge problem. For example, ObamaCare purports to know how
to intervene in the markets for healthcare and health insurance at the federal
level in a way that will improve outcomes. What are the odds that federal
legislators will have enough general knowledge — and enough specific knowledge
about people in various states and communities — to impact these markets positively?
Mailing out checks and blowing up stuff is one thing, government is pretty good
at those things. But manipulating healthcare and health insurance is quite
another thing. In the context of economic development, what is the likelihood
that government knows how to “pick winners” better than those spending their
own money in the market?
the “Public Choice Economics” school of thought focuses on incentives and
motives within political markets. Will government actors be incentivized and
motivated to do effective public policy? As we noted above, the media and
especially the general public are not likely to be knowledgeable about the
costs of public policy. What will interest groups and public policy do with
their power and knowledge advantages?
Gruber was recently grilled for saying that voters are “stupid.” In contrast, a
Public Choice economist would say that voters are “rationally ignorant” and
apathetic. It’s not that voters are stupid. Instead, it’s simply not worth
their energy to figure much out in the political realm. In other words, it’s
“rational” to pay little attention to politics. Of course, interest groups and
politicians might not take advantage of our ignorance. But even a casual
observer of today’s politics will have at least the general sense that there’s
more to political markets than benevolence and self-sacrifice.
can we do as voters? We can stop believing in the tooth fairy and Santa Claus
in political markets. Don’t let politicians promise you something for nothing —
or entice you to play a shell game when you get easily distracted from
following the ball.
Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is a
professor of economics at Indiana University Southeast.