Tyler Cowen links to this Matt Yglesias post from yesterday. The “money” shot is this one:
There are two obvious points the author is making here. First is that most “public investment” happens at the state and local level. While I do respect that this is an underappreciated and misunderstood fact, it is our own fault. The federal government would have you believe it IS doing everything, and nationalizing health insurance and educational standards, for example, doesn’t inspire much thought that anything is beyond the reach of the federal government. Furthermore, this tells us nothing about federal influence on investment expenditures. How much of this is dictated by federal tax policy, block grants, mandates and the like? So while the distance between the red and blue lines is large, and should be more widely understood, that in no way tells us a complete picture of what is going on.
The second point of course is that since the end of the Great Recession, state and local public “investment” has “collapsed.” And this seems to be an issue on both the moderate “right” and “left” with Cowen seemingly in agreement with whatever unspoken conclusion Yglesias intends to have us draw from that picture.
Of course, I think I disagree with that notion. First, it would be nice if the two authors who have so many readers would define exactly how FRED is measuring “investment” and to demonstrate what sort of catastrophic public withdrawal we are seeing. Second, why is “consumption” by states and local governments in there and what does this mean? If you search the FRED site for the series Yglesias presents, you find a link to the National Income and Product Accounts, from where this data come, and there is a short data description that comes with it. In there I found:
Government consumption expenditures and gross investment (1–29), the measure of government sector final demand, consists of two major components: Current consumption expenditures by general government and gross investment by both general government and government enterprises. Consumption 19. Own-account production refers to an asset produced by a business or government for its own use. A Guide to the NIPAs 9
expenditures consists of the goods and services that are produced by general government, less sales to other sectors and own-account investment. As producers of nonmarket services, governments generally provide
services to the general public without charge, for example, law enforcement services, national defense services, and elementary and secondary education. The value of government production, that is, government’s gross output, is measured by the cost of inputs: Compensation of employees, CFC (a partial measure of the services of government capital), and in termediate goods and services purchased.20 Therefore, government consumption expenditures is measured as the sum of these costs of production less sales by government of goods and services to other sectors (which are classified as PCE, if purchased by individuals, or as intermediate inputs, if purchased by businesses) and the value of software and construction that are produced by government for its own use (that is, own-account investment, which is classified as part of gross government investment). Gross investment consists of purchases of new structures and of equipment and software by both general government and government enterprises, net purchases of used structures and equipment, and own-account production of structures and of software. Government consumption expenditures and gross investment does not include current transactions of government enterprises, current transfer payments, interest payments, subsidies, or transactions in financial assets and in nonproduced assets such as land.
So the chart above isn’t a chart of “investment” unless we are now entering the post-modern definition of investment as, “anything the government does that I like.” This measure includes the things government delivers to us in the daily course of activities such as the imputed value of police protection, the court system, government schooling and so on. It ALSO includes a measure of what we think traditionally of as investment in infrastructure, buildings and the like. This chart says nothing about the breakout of these things, nor does it, of course, say anything about where the “cliff” is coming from and whether we ought to be worried. What if, for example, the entire decline in “investment” happened to be because we ended the stupid war on drugs and our prison and law enforcement staffing needs fell by billions? Would this be a crisis? Now, we KNOW that did not happen. But it is worth a mention, isn’t it? In a future post, we are going to show you some data from the National Association of State Budget Officers that tries to uncover what exactly has been going on.
As for collapse and a lost decade? Well, public “investment” peaked in the third quarter of 2009 at $1.574 trillion. It is now at a (local) trough of $1.453 trillion. This is an aggregate decline of 7.7 percent over 3.5 years. Large by historical standards? Yes indeed, and it is back to levels last seen in the recession of 2001. But remember we had a government “investment” blowout during the 90s, which appeared to be way above trend, and if we plot a fitted line through a long term series (longer than FRED reports for now, I can dig one up with harder work at a later time), public “investment” is 24% higher in real terms than it was in 1995 when the series from which Yglesias draws began. That’s a real increase of over 1% per year. Remember what we mean by “real.” Is it clear that in real terms public investment (in presumably “public” goods) should be increasing at all?
A final point today that I think is worth making is whether “investment” has fallen off? Certainly during the recession we know it must have, it is really the major driver of business cycles. But if you look at measures of Real Gross Private investment, it seems that private investment since the Great Recession ended has more than compensated for the “loss” of public “investment:”
Private investment is up $600 billion since the trough it hit during the recession, over 4 times larger than the decline in public “investment” over this same time. Again, this says nothing about how well this has been invested, or whether it has been politically driven, or anything like that. And indeed, depending on which tribe you are in, you can cite this as evidence FOR or AGAINST the multiplier. But I digress.
There is a lot more to uncover here and we shall endeavor to do so by examining what, exactly, state budgets have looked like over time, and how their spending has changed,
Of course you point out something that any person with some knowledge of government expenditures should have picked up: State and local governments do not “invest” 1.5 trillion dollars a year. That’s what they spend. Once one starts putting all sorts of government expenditures in the category of “investment”, then in the minds of most people, there is no reason to reduce “investments”. Investments are good, right?
It is amazing how many times I have had this conversation even with highly educated people. Unfortunately, the Matt Yglesias of the world are winning the arguments. Which is why I think this is an irreversible decline.
By ‘investing,’ the government steals natural investment opportunities from entrepreneurs.
Bare with me as I attempt to explain myself:
Even something as simple and common as roads eliminates natural opportunities for entrepreneurship. The road system is currently “free,” or perhaps “artificially free,” as the collective bears the costs of building and maintaining rather than the individual users. This “artificially” increases the value of automobiles. The marginal value of an automobile is greatly diminished without an accessible and reliable road system. Therefore, the marginal value of an automobile is artificially increased by the collective contribution required to build and upkeep the roads. This directs both public and private funds toward an industry that is partially socialized.
Now, imagine if the government never started building roads ever. I find it hard to believe we wouldn’t find another way to get around. Consider snowmobiling. There is no government subsidized infrastructure to support the existence of snowmobile trails, yet year after year, by some bizarre miracle we sometimes refer to as spontaneous order, a private club of snowmobilers make individual deals with farmers who lease the land to be used for the trails. And, despite the lack of police on the trails, it all works.
Now, I would not go so far as to say that we would all be better off living like dressing eskimos through the winter months to snowmobile to the grocery stores and getting around by horseback in the summer. But if private trails were the exclusive infrastructure for transportation, would the owners of the trails not have a clear incentive to update and expand their infrastructure? Would engineers not have clear incentive to create new and innovative modes of transportation?
Would there be an amphibious plane that could take off from the Genesee River in downtown Rochester to a private runway in downtown Buffalo in 15 minutes for $50? Would there be a special four wheeler that could transport agricultural goods over unpaved private trails to the train station? Would there be a high speed train that could get you from New York to Chicago in 3 hours? Would l own a helicopter?
If private trails were the only mode of transportation, I have no idea what the world would look like and neither do you. However, is there any doubt that public investment influences private investment? Is there any doubt that public investment is not “artificial,” money stolen and spent in pursuit of a political ideal rather than earned and invested to fulfill a real demand?
So, I argue that danger is not that there is no “multiplier effect,” but that the multiplier effect misaligns private investment, possibly for generations, to meet an artificially created demand. The efficiencies of spontaneous order are lost, and we are all poorer because of it.
To provide a more tangible example, the canal corporation of NYS impedes on the freedom of entrepreneurs to have property rights over the highly lucrative inland waterborne freight transportation industry.
I’m not mad because I have taxes. I am mad because I don’t have a helicopter.
Sorry Scott, but your argument isn’t very convincing. Its the traditional Walter Block argument which I have never found convincing or even interesting; but then again there is the much more convincing Richard Epstein response. But even more simply, the helicopter, last time I checked, was developed and perfected for military uses. As were almost all forms of air travel. Were it not for military use of aircraft, we would not have jet transport today, light alloys, composite structures, wide-bodies transports, fly by wire controls, jet fuels etc etc etc.
In short, yes roads are not priced correctly, and therefore produce an artificially high use of certain goods (like cars). However, it does not follow that a superior system would be developed by riding around in snow mobiles and dune buggies. In fact, it almost certainly would be a horrible system. In fact, it may be far more costly to try and develop a system which prices roads appropriately, inducing all sorts of other inefficiencies in our attempt to price this correctly. Transaction costs do precisely that; prevent you from pricing all things accurately. In some situations, like roads, such costs can be large enough to prevent the activity from happening to begin with.
There certainly are certain “investments” that happen outside of the market system for certain reasons. There are, after all, public goods. These are very few in nature, but they do exist. And by “us” going after such things, we undermine our own argument, because we have no other alternative. Because in fact, economics doesn’t allow us to make a better alternative.
Every time a “libertarian” makes the wrong (in my opinion) argument that ALL investment through government is “wrong”, or “wasteful”, they open themselves up to the obvious: What about jet engines? What about computers (the first electronic computers were ballistic computers for aiming battleship guns)? What about nuclear materials? What about roads? What about basic science? Of course, that argument is in itself wrong. Not all government investments are “wrong”. There are 2 classes of government “investments” that are actually beneficial and do not contradict with free markets at all. One is in public goods (roads, basic science etc.) The second is in defense technology (which is the only area of government activity where the government faces competition…from other armies…and therefore produces relatively beneficial outcomes). The market under produces these goods for a reason, yet it does not follow that producing these goods through another mechanism does not increase the efficiency of the market itself.
Of course, the point that Wintercow is making, and that Matt Yglesias seems to miss, is that “investments” in those things above is actually a small single-digit percentile of total government spending, either at the federal or local level. And thus, IF the argument of the Left is that government “investment” is good and needed, then our response ought to be: Fine we agree, now what about the other 95% of government spending?
If all the gov. did was invest in roads and defense, than it’s budget would be about what it was prior to WW2: 5-10% of GDP. I can live with that.
Im sorry Rich but your argument isn’t very convincing.
“In short, yes roads are not priced correctly, and therefore produce an artificially high use of certain goods (like cars). However, it does not follow that a superior system would be developed by riding around in snow mobiles and dune buggies. In fact, it almost certainly would be a horrible system.”
In Fact? Whose fact? How can you say that it would ‘almost certainly’ be horrible, ‘in fact,’ yet provide absolutely no counter? For example, you could have said, “In Africa, there is no central government to provide a road system, and there has emerged no private road system that is superior to a public road system, therefore it is clear that the public road system is better than relying on spontaneous private forces. Or maybe you could have said “I hate snowmobile trails, there are too bumpy and clearly unsafe.”
Your response is that government built the jet engine, therefore it is proven that without government there would be no jet engine. What you do not consider is that perhaps without government, there would be less demand for machines that are designed to fly through the air and while simultaneously destroying lives and property. Maybe the mental energy and physical resources that were required to build the jet engine and the other military technologies you admire would have been better off dedicated to fulfilling a demand that arose from the aggregate demands on individual decision makers.
“If private trails were the only mode of transportation, I have no idea what the world would look like and neither do you. However, is there any doubt that public investment influences private investment? Is there any doubt that public investment is not “artificial,” money stolen and spent in pursuit of a political ideal rather than earned and invested to fulfill a real demand?”
I understand my post may not have been exactly on par with WC, and that I may not be quite intellectual enough to grasp what it means. However, what I am trying to do with my post is to raise what I feel are 2 very important questions that are not asked/answered enough that I was reminded of anytime there is a discussion on public spending. And the 2 questions are:
– Does Public Investment not misalign private spending? My answer is YES
– Is there any way we can identify or quantify the opportunity costs of artificially stimulated private investment? my answer is NO.
Therefore, it is possible that even the wisest government spending causes incalculable damage. So do I really think that we should not have any roads? No, I need them, our lifestyle is built around them. But should we consider the possibility of additional unseen costs associated with government spending (and I am referring to both of your classes of government spending, both the “good class” and the “bad class”)? Yes.
Even if I don’t actually want a helicopter. I can live with that.
Every person in the US that eats, drinks, wears clothing, reads a newspaper, or does absolutely anything other than sitting in the woods staring blankly into the ether is, according to your facile opinion, being “subsidized” by the collective. You posit that roads increase the value of automobiles, yet, conversely, our network of high-speed roadways _reduces_ the cost of every good purchased by every consumer…which category is inclusive of every single American. Auto owners are not free-riders on the backs of non-drivers, either. Gas taxes are levied at the federal, state, and local levels by each gallon of fuel pumped.
“Therefore, it is possible that even the wisest government spending causes incalculable damage.”
If they are incalculable, then how do you know they are not zero? I.e., you must admit to the possibility, that they can in fact be 0, or very small, since you admit that you can’t calculate it. The same argument can be made about the “incalculable benefit”, as well. It could be 0, or it could be infinity. Is it not the trade-off between these two that we care, rather than one or the other independently?
“So do I really think that we should not have any roads? No,”
I believe that is exactly what you said. Now, I didn’t think that I HAD to make a more convincing case of why no better alternative system would have developed if there were no public investment in roads. That’s kind of a given, but more importantly, it is you who have to provide me with the counter-example. It is a given that a system which relies on snow-mobiles and dune buggies to transport food to Wegmans, for example, is not going to be as efficient as one that relies on 18-wheelers and a highway. In fact, there is no doubt that no Wegmans, or Walmart or any modern marketplace would exist if we had to rely on snowmobiles (snowmobiles would not exist if we had to rely on snowmobiles, because cost of transporting the needed raw materials to build a snowmobile would be too expensive).
“– Does Public Investment not misalign private spending? My answer is YES”
But this isn’t a particularly important question. Rather, this question is irrelevant if one doesn’t consider the benefits at the other hand. Also, all investments are misaligned due to uncertainty and costs associated with reducing that uncertainty. “Misalignment” in itself isn’t the issue.
“But should we consider the possibility of additional unseen costs associated with government spending”
Every human activity has “unseen costs”, not just government spending. The existence of opportunity costs is not an argument for doing nothing. As such, it is a pointless argument.
The real questions of interest, I think, that “anarcho-capitalists” should answer are these: Are there no such things as public goods? Are there no situations when provision of such public goods through a “coercive” force leads to beneficial outcomes to those being “coerced”? In short, is “coercion” ALWAYS bad?
These are not trivial questions because anarcho-capitalists insist that ALL taxation is evil. Ok. Fine. Lets assume that it is. Now what happens when there is a public good? Well, in those situations anarcho-capitalists will say, institutions will develop to turn them into private goods!!! Great. Can you provide a justification why no such institutions have ever developed to do precisely that? Aha, they will say, but they did develop in 1345 in Greenland, and in 1997 in Somalia. So, therefore, since Somalia was able to fill in the void of the absence of government through non-governmental institutions which provided the same level of service, that means that so can we. (of course, they conveniently ignore the fact that in Somalia the void was filled by ARMED warlords which were governments in themselves, and the level of service provided was at the basic survival level, and that this does not translate into being able to provide interstate highways).
But these are dead-end arguments. Because you will not convince anyone that the jet engine was a “waste of resources”. So unless a “philosophy” can explain to us not only an “ideal” system, but also why that “ideal” is un-achievable, then it is not a very useful “philosophy”. If it has no boundaries, like anarchism seems to not have, then what use is it?
+1…I should have scrolled down farther before I commented above.
WC, I had a big chuckle over your reference to the multiplier and the tribes.
As far as the debate between public and private roads is concerned, I agree with Rich (sorry, rit_rich, your screen name is tough to type with my thumb on my phone and hereafter I will refer to you as Rich, with your permission) that there other fights more fruitful for libertarians than arguing that roads be privatized.
Rather, it is worth asking whether government expenditures on roads are well-spent, a question that conjures in my mind a crew of fifteen talking next to a crane, three backhoes, two bulldozers, a roller, and six dump trucks, all idle.
At one time our township was able, and still is able, to maintain our roads using its per mile share of liquid fuels taxes, no additional taxes required. This also takes care of the salt and snow plowing.
Yet there is waste everywhere, even though my municipality has done a better job than most, and I am not suggesting we reduce our road crew from five to four. The big money is in walking the fine line between under- and over- maintaining the roads. When my brother was a Supervisor, he would go out with another supervisor and drive all the roads and make an inventory. No need to pay some civil engineers twenty thousand dollars to do this, and, by the way, they looked at the bridge abutments, too. For a long time the township levied zero property taxes, and it was only until a traffic light was needed at an intersection that they levied a “temporary” tax to pay for that.
So I am not wasting my time on privatizing the roads. Let’s work on privatizing property.