Wednesday, January 7, 2009

The Fantasy of Eliminating Wasteful Spending

How many times have we been promised that government would be reinvented, made more efficient and wasteful spending eliminated, only to be disappointed?  Well, he we go again.  Anyone who believes the effort of the upcoming Obama administration to reform the federal government will succeed, I would posit, has a deficient understanding of both the theory and history of government, for neither should fill one with hope.  

In Power and Market Murray Rothbard derided the idea of government investment; there simply is no such thing.  All government spending is consumption spending by politicians.   True investors risk their own money, or money voluntarily entrusted to them, to make money in a market.  Risking one's own money or earning a living risking the money of others doesn't guarantee successful investing; having "skin" in the game does usually ensure that care will be exercised since carelessness can be punished with losses.  A market investor can also tell when he's been successful and when he has not.  He's made monetary gain or suffered a monetary loss.  Profit and loss guide the investor.  

Contrast the true investor with the politician trying to wisely invest government money.  The money was taken through taxation; its expenditure will not be in system of profit and loss but into a world of calculational chaos with no concrete way to know either ex ante or ex post whether the expenditure is worthwhile.  So even if a politician sincerely wanted to invest tax revenue, how would he know what to invest in?  He will simply pander to the whatever interests he sees as likely to reelect him.  Profitable enterprises will be taxed to fund this economically blind, politically driven spending, distorting the economy's structure of production.

Ludwig von Mises described in Bureaucracy the basic problem with the idea that government can be run like a business:

"The plain citizen compares the operation of the bureaus with the working of the profit system, which is more familiar to him. Then he discovers that bureaucratic management is wasteful, inefficient, slow, and rolled up in red tape. He simply cannot understand how reasonable people allow such a mischievous system to endure. Why not adopt the well-tried methods of private business?

However, such criticisms are not sensible. They misconstrue the features peculiar to public administration. They are not aware of the fundamental difference between government and profit-seeking private enterprise. What they call deficiencies and faults of the management of administrative agencies are necessary properties. A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation; it has to solve problems which are unknown to business management. It is out of the question to improve its management by reshaping it according to the pattern of private business. It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors."

Making the call of candidate Obama to reform government more absurd is the current crisis.  On the one hand Obama pledged to cut wasteful spending, while now he has pledged massive infrastructure spending to be financed by deficit spending (this on top of the trillion dollar deficit he will inherit from the Bush administration).  It is one thing to finance current expenditures with current taxes, but deficit financing burdens later generations and exacerbates the fiscal crisis rapidly bearing down on us from Medicare and Social Security.  

No matter what kind of infrastructure projects are signed into law by the next administration, remember that they will be driven not by market forces for the benefit of the general economy but rather by political forces to benefit special interests.  Do not believe any nonsense about the stimulus package being rational; government taxing and spending are done in the darkness of calculational chaos.  The great Frank Shostak sums up the historical case against the kind of massive pump-priming deficit spending that we have embarked on: "If it were possible to lift real economic growth by means of money pumping, world poverty would have been eradicated a long time ago."

Amen.



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