David R. Henderson  

Don't Make Canadians Poorer

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In short, because the price of oil has fallen, Canadians as a whole are somewhat poorer than if the price had not fallen.

What should government do about this? Not make them poorer. Wasteful government spending is bad enough when the taxpayers who pay for it are doing well. It's even worse when the taxpayers are worse off than they were.

Unfortunately, government officials are often very much like the politician in the British comedy "Yes, Prime Minister." They say, "Something must be done. This is something. Therefore it must be done."

This is from my recent blog post at the Fraser Institute sight.

Here's part of my reasoning:

When government spends on infrastructure, it doesn't use market signals that tell where money is best spent. So the government is flying blind. This means that the odds that even the most well-intentioned government officials will spend it better than people would spend their own money are vanishingly small.

It gets worse. Government officials have perverse incentives because they are spending other people's money. People spend other people's money more carelessly than they spend their own. The result--the odds that the money will be spent well are even closer to zero. More government spending will make Canadians poorer. When you're poorer, it's even more important not to waste resources.

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COMMENTS (15 to date)
Ben H. writes:

This seems to ignore the problem of public goods. It is, arguably, pretty easy to identify public goods for which spending $1 increases total welfare across the population by more than $1, but which no individual person has an incentive to spend their own $1 upon. I would say that such public goods are, indeed, much of the proper role of government. Factoring in the "flying blind" and "perverse incentives" problems certainly makes the picture less rosy, but it still seems pretty clear (to me, at least) that public goods exist that the government ought to spend money on. Indeed, there are lots of studies showing that various public goods exist with large payoffs – spend $1 and get many $$ back! – that we don't presently spend much, if anything on. So there would seem to be a fairly strong case for the idea that *increasing* government spending in Canada would actually make the average member of the populace richer – a particularly enticing idea now, when Canadians are poorer. Obviously there are counterarguments. My point is mostly that your argument seems to be trivially oversimplified and to ignore the best arguments of your opponents.

Mark V Anderson writes:

Ben -- You can find studies that prove that spending on almost any public good will provide many dollars in return. This is not because there are so many good ways to spend gov't money; it is because you can find many academics who can "prove" anything they personally believe in.

In reality, I don't know that there is truly any public spending that is guaranteed to provide a positive return, any more than there is any sure bet in private investing. I would be curious which public goods you believe would provide sure returns.

Ben H. writes:

"In reality, I don't know that there is truly any public spending that is guaranteed to provide a positive return, any more than there is any sure bet in private investing." Guaranteed? Of course not. The question is whether there is any sort of public spending for which the *expected* return is greater than the investment. There are no guarantees, obviously, in the real world. Your confident dismissal of all academic findings that contradict your gut instincts is... well, it's rather sweeping, don't you think? So all of public goods theory, the whole "tragedy of the commons", Pigovian taxation theory, all of that is worthless, created by academics who just wanted to "prove" whatever they personally believed in? Sounds like the pot calling the kettle black, if you ask me. Shrug.

Radford Neal writes:

Lots of opportunities for government to spend $1 and produce social benefits much larger than $1 are exactly what one would expect to see if governments aren't actually very good at spending money wisely.

Most obviously, this will happen because incompetent governments won't identify and fund some good projects.

But beyond that, the fact that corrupt or incompetent governments fund some useless or actually harmful projects will lead to good projects going unfunded because that's a consequence of the electorate trying to limit the damage. It's plausible that the electorate has some control over the total government budget, but much less control over the details of how it is spent. If half the budget is inevitably diverted to wasteful projects, the optimal level of spending from the electorate's point of view will leave some good projects unfunded.

David R. Henderson writes:

@Ben H,
It is, arguably, pretty easy to identify public goods for which spending $1 increases total welfare across the population by more than $1, but which no individual person has an incentive to spend their own $1 upon.
Please provide some cites to studies that do this identification.

Ben H,

It is naive to think that government is spending on projects with a positive return to make all of our lives better. That is a cover story. Any good works are at a minimum.

The nature of the state:
=== ===
[edited] There is a notion that the state is a legitimate agency deserving respect; that despite its flaws, it generally promotes or tries to promote the welfare of its citizens. This is increasingly difficult to understand, much less to accept.

The late Mancur Olson had a far more realistic view: The state is a Stationary Bandit. Ordinary people might have to tolerate this, but they should understand that dealing with the state is dealing with organized thuggery. Obey the state because it can unleash its guns and prisons on you. But, please don’t pretend that the state’s commands are issued with your best interests in mind.
=== ===

I say naive because what government actually does is amazingly innefficient, and much of the time is obviously useless.

Google: stimulus sidewalks

One example among oh so many:

The Stimulus sidewalks of Warren, RI
=== ===
[edited] The Federal Stimulus Plan of “shovel ready” construction built miles of sidewalks in Warren, Rhode Island pretty much just for the sake of building them.

Warren has new sidewalks from the center of town two miles to the Mass border thanks to the Stimulus Plan.

I have driven that road hundreds of times and did not notice any problem with the sidewalks. I never noticed anyone using the sidewalks, particularly outside the very center of town.

Now there are new sidewalks as far as the eye can see. Warren also has plenty of empty storefronts. The sidewalks did not change that, and neither did the Stimulus Plan.

I admit that government sometimes builds a nice park or waterfront. That is, after politicians and cronies have bought large chunks of the site and adjacent property. Property values jump nicely when that park or waterfront is installed.

I leave that Google search as an exercise.

[N.B. the so-described "[edited]" materials from the urls above are quite heavily edited by the commenter. Please go to the original posts for the actual wording.--Econlib Ed.]

Tiago writes:

Would be a great post for the "Yes, Prime Minister" quote alone.

Unce writes:

[Comment removed. Please consult our comment policies and check your email for explanation.--Econlib Ed.]

LD Bottorff writes:

You never want a serious crisis to go to waste.
- Rahm Emmanuel

Jon Murphy writes:

Ben H-

You make a good point that there can be public good situations where individuals may not invest but there is a return.

However, that is actually irrelevant to the point Prof. Henderson is making.

He is highlighting the information problem. That is, even well-intentioned politicians simply do not have all the information necessary to make proper decisions on a consistent basis; the knowledge of a particular time and place, to paraphrase Hayek. Without market prices, it is like flying blind.

This knowledge problem exists either there is a public good problem or not (one other thing: a road is not a public good, but that's a different issue). Even if there is a public good problem, there is no guarantee that the government could properly identify it and act upon it in an efficient manner given the distinct lack of information and incentive.

Mark V Anderson writes:

@Ben. Obviously some studies are better than others. Some might actually make a good case on spending that will likely result in more return than cost. But it is my experience that 95% of such studies out there are exercises in ideological thinking. It is clear what result the "researcher" will arrive at before they even start.

Most of the studies I've seen claim that education or health care or jobs training will clearly result in many times the return of the cost. They are almost always correlational studies showing things like more educated people make more money. The researcher then takes the totally unwarranted step of stating that this proves that more education for everyone will result in more income for everyone.

So if you have an example of one of these 5% studies that actually prove something, that's what you need to cite.

Ben H. writes:

Radford, an interesting point. The pattern you describe is also, of course, what one would expect to see if government is underfunded overall, or if all positive governmental actions are blocked by a political party that does not wish to allow government to achieve positive results for ideological reasons. How do you distinguish those alternative explanations from your preferred explanation? But I think you are also correct to some extent; government is of course somewhat incompetent (like any human endeavor), and the electorate is therefore going to react by restricting the government, resulting in some cases of underfunding of good projects as well as bad ones.

The key word in what you write that I would disagree with is "inevitably". It seems clear that governments can be relatively competent and efficient, or relatively incompetent and inefficient; a comparison of, say, Sweden to Zimbabwe makes that quite clear. So there is nothing "inevitable" about the problem of governmental inefficiency; it doubtless cannot be prevented entirely, but it can certainly be improved. I wish libertarians spent less time arguing that government is always inevitably bad, and more time using their insights into the ways in which government can be problematic to try to improve those aspects of government that need improving (while also working to prune away those aspects that are fundamentally undesirable). That is why, in the end, I call myself a liberaltarian rather than a libertarian; I do believe that government is deeply problematic, but I also believe that public goods and tragedies of the commons exist, and that government is therefore necessary to some extent.

To those demanding citations of specific papers, etc.: sorry, I'm not an expert in public goods theory and I'm not going to try to pretend that I am. It's a vast, vast literature, and Google Scholar can provide you with thousands of citations in less than a second. If you want more curated cites to particular studies that are particularly rigorous and convincing, I'm sure there are lots of public goods theorists out there who you could ask, and who would happily provide you with their opinion on that. If you honestly want to know – if demanding cites is not just a rhetorical tactic intended to shut me up – then I suggest you pursue that avenue.

Mark, of course most studies out there are "exercises in ideological thinking", but of course that is true on both sides of the argument, so it isn't evidence for one side or the other of the argument. But I would say this: when the libertarian side claims that virtually everything that government does is inevitably bad, and the public goods don't even exist in the first place, as some commenters here are claiming – that, to me, seems like an obvious case of "ideological thinking". Those who claim that everything the government does is good, and that the solution to all problems is more government, are obviously also guilty of ideological thinking. I personally think it is pretty obvious that the truth lies somewhere in the middle, and therefore I am much more convinced by arguments about why particular problems may or may not be amenable to governmental solutions, cost/benefit analyses of specific policy proposals, and so forth.

Andrew, yes, of course cases like "stimulus spending" – where large amounts of money suddenly get shoveled toward projects that have to spend the money as quickly as possible or lose the money forever – tend to produce a lot of waste. If you want to argue that nearly all government spending is waste, you need to choose a much less biased example.

Jon, yes, the information problem is a deep problem with governmental action, but not, I think, necessarily a fatal one. For choices that are unclear – where the benefit and the cost are similar – government may make the wrong choice because it is deprived of price signals, yes. For choices that are overwhelmingly clear – where the benefit provided is very large compared to the cost of the policy – price signals are less important. If every person who encounters a given service says "wow, this service has really improved my life greatly, and I've had to pay only a tiny amount in taxes for the government to provide me with this service!", an explicit price signal is really not needed, it seems to me. An obvious example that springs to mind is traffic lights – minimal cost per individual (but a cost much larger than any one individual would be willing to pay for their own personal benefit), and a huge benefit to a huge number of people. Of course one can argue about whether government is needed to provide traffic lights, or whether they could be provided privately through some mechanism. That rapidly devolves into the kind of argument over fundamentalist libertarianism that I find entirely tiresome and pointless. In the world that we live in, government provides most traffic lights, it does so reasonably well, and we all benefit greatly at low individual cost. No explicit price signal is needed for this to be obvious and convincing. The extreme libertarian position that we should, nevertheless, get the government out of the game of providing traffic lights and allow the market to find a way to provide the same service privately is not just an abstract waste of time, it actually gets in the way of the more realistic and potentially beneficial question of how our government-provided traffic lights might be improved.

OK, and with that, I think I've pretty much said all I have to say about this – after this point I'd just be repeating myself in different ways – so I don't think I'm going to spend more time arguing on this post; actual life beckons. :->

Nathan W writes:

I think you misrepresent the way the infrastructure/stimulus spending is being viewed. In the recent election, the party almost immediately gained enormously in the polls after having promised the infrastructure stimulus spending.

ThaomasH writes:

Investing in infrastructure need not be flying blind. Of course like with any kind of investment it can be mistaken if demand for its services do not turn out to be realized. (Bridges to Nowhere do not increase income.) And of course oil price shock makes Canada poorer so demand for infrastructure services will be less.

If infrastructure investment had been optimal according to an NPV criterion, the oil shock would suggest slightly lower levels of investment. But as I understand the policy debate in Canada, the Liberals thought that infrastructure investment was far below that NVP optimal, so an increase may still be warranted.

Jon Murphy writes:

Nathan W-

In the recent election, the party almost immediately gained enormously in the polls after having promised the infrastructure stimulus spending.

I'm afraid I don't understand what that fact has to do with Prof. Henderson's point.

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