July 11, 2011

Austerity and Wasting Money

#8 The U.S. Department of Veterans Affairs spent $175 million during 2010 to maintain hundreds of buildings that it does not even use.  This includes a pink, octagonal monkey house in the city of Dayton, Ohio.
#16 A professor at Dartmouth University received $137,530 to create a "recession-themed" video game entitled "Layoff". 
Finding examples of government waste like this is like shooting fish in a barrel.  That said, in the big picture, dubious projects like this really don't amount to that much in the overall government budget.  Even if all of the waste were eliminated, healthcare costs and other so-called entitlement spending are scheduled to overwhelm us anyway.  So why bring it up?

Well apparently it's common economics knowledge that "you don't cut government spending in the middle of a recession".  That spending adds to GDP, and so eliminating it contracts the economy.  So by this theory, that esteemed professor from Dartmouth will spend his $137,530 into the economy and promote growth, which is good.  If he didn't get it, we won't get the economic multiplier effect, tax receipts will go down, and such "austerity" measures will ultimately be self-defeating and not actually save the government money.  Keynes famously said that at some point it doesn't matter if the government paid people to dig holes and fill them in again, the government (i.e. fiscal policy) needs to inject money into the economy to promote demand.

Those who question this point of view are being labeled promoters of "austerity".

To the extent that there are public investment opportunities that will provide positive economic or social return, and we are in a very favorable interest rate environment for the government to borrow in, then government should clearly make the investment.  There are any number of "big idea" national initiatives that fit the criteria of a positive return:
  • Modernization of the air traffic control system
  • Roadway and bridge infrastructure repair
  • High-speed rail between economically sustainable routes (major metros 200-500 miles apart)
  • Nationwide wireless and fiber communications infrastructure available to the public
  • Revamped educational system including trade schools, public school choice modeled after European and Asian systems
  • Universal day care
  • Grant programs to add 1,000,00 new general practice doctors
  • Healthcare reform that breaks the health insurance oligopoly that runs up costs in the US--if nationalizing the industry is the answer, then it needs to be done
  • A publicly-owned sustainable power grid to reduce the cost of electric power, transmission losses and dependency on fossil fuels and central power plants
  • Execute one of the great water diversion projects (see GRAND and NAWAPA) to divert water from Canada and end the US West's water shortages forever
Instead, proponents of Keynesian fiscal policy mostly defend transfer payments, rebates for various politically correct behaviors, and the occasional "shovel-ready" construction project.  Whatever it takes to fill the supposed "demand gap" in the short term, by use of the national credit card as necessary.  This isn't a good use of resources.

To those who would say we can't afford it--it's always a good time to make a sound investment.  Separate bonds could be sold to fund the infrastructure projects (much like municipal bonds or even WWII war bonds) separate from the general fund, and the investment would be a no-brainer due to the obvious return on investment.  To those who worry about government crowding out private enterprise--what's wrong with government taking resources to fund worthwhile projects?  Also, capital for good private enterprise is always available, at worst government may take up resources that might have otherwise ended up in marginal enterprises like Pets.com.

The neo-Keynesian focus on spending-for-spending's sake in order to pump up the short-term economy with ephemeral consumer spending is foolhardy.  The GDP equation regards spending and investment as synonymous, but in the long-term, investment without future returns is a waste of resources.  I'm all for what economist Joseph Stiglitz calls a "well-designed stimulus" package that invests in the future.  But the Keynesians don't do themselves any favors when they just focus on filling the "demand gap" with mindless short-term fiscal spending that has zero long-term returns--we owe it to future generations to invest present resources wisely.