I don't usually link to and excerpt from opinion pieces in publications like The American Prospect, but something in me insists that David Hayden's piece entitled "Death of an Economic Theory" needs to be remarked on.
His whole framing of why we should debate a government role in the country's economic activity has a strong whiff of disingenuousness about it.
But let's look at the framing first:
The remarkable changes in manufacturing construction over the past year, since the passage of two key Biden administration industrial-policy laws, is rapidly putting to rest a concept that has been embedded into the old understanding of the economy.
The concept is called “crowd-out,” and it asserts that increases in government involvement in a business sector lead to reductions in private spending in that sector. For decades in Washington, this was not just an economic theory but something of an iron law. The Penn Wharton Budget Model, which is heavily influential in Washington, maintains that any government investment will reduce private capital investment. The model continually rated Biden administration policies that directed public spending as reducing GDP and private productive capital.
Even government economic modelers regard government investment as wasteful by definition. As the Prospect noted in its special issue on economic modeling, the Congressional Budget Office explicitly assumes that public-sector investments are half as productive as investments in the private sector. If a private-sector investment returns 10 percent on an annual basis, public spending of the exact same amount is supposed to return 5 percent.
This was never a particularly robust theory. It’s rooted in biases about government waste and private-sector efficiency, and it neglects the perfectly reasonable concept that private businesses, seeing the interest from public-sector investment in a particular sector, will crowd into it, if only to earn some of the spoils of all that public money.
He provides some pretty solid substantiation for the premise from which he wants to argue for a government role:
The remarkable changes in manufacturing construction over the past year, since the passage of two key Biden administration industrial-policy laws, is rapidly putting to rest a concept that has been embedded into the old understanding of the economy.
The concept is called “crowd-out,” and it asserts that increases in government involvement in a business sector lead to reductions in private spending in that sector. For decades in Washington, this was not just an economic theory but something of an iron law. The Penn Wharton Budget Model, which is heavily influential in Washington, maintains that any government investment will reduce private capital investment. The model continually rated Biden administration policies that directed public spending as reducing GDP and private productive capital.
Even government economic modelers regard government investment as wasteful by definition. As the Prospect noted in its special issue on economic modeling, the Congressional Budget Office explicitly assumes that public-sector investments are half as productive as investments in the private sector. If a private-sector investment returns 10 percent on an annual basis, public spending of the exact same amount is supposed to return 5 percent.
This was never a particularly robust theory. It’s rooted in biases about government waste and private-sector efficiency, and it neglects the perfectly reasonable concept that private businesses, seeing the interest from public-sector investment in a particular sector, will crowd into it, if only to earn some of the spoils of all that public money.
And then he gets pretty wonky, saying that there are differing schools of thought about the relationships between "public investment," inflation, residual effects from the pandemic, and interest rates.
Interesting, but beside the point.
Here's the glaring fact that anybody without a bias for collectivism can see from the get-go: Money for "public investment" is coerced out of citizens who may or may not be on board with what's being invested in.
In a country that really valued freedom, there'd be a common understanding among policymakers - certainly Congress, but also in executive-branch entities such as the Office of Management and Budget - that taxation is a government function that ought to be handled as gingerly as possible, that government ought to have to puke all over itself to justify taking the first red cent from any of us.
Longtime LITD readers know that if I had my druthers, we'd go back to a strictly Madisonian model of the scope of government. We'd jettison everything that progressives have done to expand that scope in the last 130 or so years.
The argument can be made that my argument is hopelessly quixotic. It may indeed be impossible to convince the American populace at this late date that it would be better off without the myriad means by which government "improves" lives.
But someone has to inject the element of freedom into the discussion.
As an individual, I can invest in organizations that I think will be sufficiently profitable to show me a return. But the operative term in the above sentence is "can." Any investing I do is voluntary.
Not so with "public investment."
Along with this egregious erosion of the individual's freedom to keep what is his or hers, there are two other considerations at play here.
One is that everything we obligate the government to do adds to our debt and deficit crisis that is going to cause interest costs to outpace defense and non-defense discretionary spending buy 2030.
Now, there's some crowding out for ya.
In addition, this money from the big spending bills of which Dayden is so enamored is, for the most part, going to the bolstering of play-like energy forms that can't vie for themselves in a free market.
I'm pretty sure none of this is important to the typical American Prospect reader. The presumption of government participation in the country's economic life is so deeply ingrained in him or her that questions of freedom and financial abyss don't show up on the radar screen.
But the question is not a matter of juxtaposing waste against efficiency. It's one of what has distinguished the United States from the other nations of the Earth and why we should abandon that.
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