To Spend or Not To Spend

There's been a lot of talk lately about the role of government in terms of investments, bailouts, spending programs, etc. I know this isn't anything new, but just this morning I've heard this come up a few times. On Meet the Press, there was a debate between Carl Levin (D-MI) and Richard Shelby (R-AL) about a possible bailout (investment) in the U.S. auto industry. On This Week, Arnold Schwarzenegger was arguing for investments in America's, or at least California's, infrastructure of bridges, roads, tunnels, and energy, and health care, and education, and... well, a lot of stuff. Finally, this morning on a local radio show, Inside Indiana Business, they were discussing the "necessary" investment in the community in Speedway, Indiana, home of the Indianapolis 500. Here they are redesigning roads, discussing a new hotel, and other investments to bring "new life" to the community which is more or less dormant for most of the year.

So, I want to take off the chains of my current ideology and analyze this a bit more objectively. As I begin typing this, I'm not sure what conclusions I will draw to be honest. There has been tons of research on this by economists and public policy experts over many decades (if not centuries). I'm not drawing upon that body of work as I write this. Let's dive in...

First, I want to explore the reasoning which supports any level of public financing. Tossing aside the Constitution, I want to think about this void of any existing government policy. There is a school of thought out there, advanced by the anarcho-capitalists, which calls for no government spending at all. The argument rests in that the collective free market will always prevail in determining the most efficient allocations of goods and services. In this extreme case, law enforcement, courts, the military and all functions of society are performed by individuals and privately funded organizations which compete to provide the best value for their services. On the other extreme, broadly, we have communism. Communism has many forms, but for the sake of argument, a collectivist state with a planned economy serves as the polar opposite to anarcho-capitalism. The argument for communism is that the needs of the collective population are considered in making the decisions in the planned economy. In the extreme sense, there would be no private property or individual liberty as all decision in the allocation of goods and services would be made by the state on the behalf of, and for the benefit of, the collective population.

Clearly, each of these systems provide an impractical reality, although each system has its merit as a utopian ideology. The anarcho-capitalist ideology advances a utopia in which the individual is empowered above all. The communist ideology advances a utopia in which the collective is empowered above all. Human nature will prevail in either system, and each system deals with this differently. I'm going to stop here in discussing these systems; volumes could be written. The key point is that the optimal point is (arguably) somewhere in between these two systems.

My initial argument against anarcho-capitalism rests that some investments may well be more suited for a collectivist approach. (I am going to set aside the argument for investments and spending in such services as the police, courts and military, and focus on other debates in the use of public funds.) I think there are a few characteristics of a particular investment (from here on, I will refer only to investment as any spending should be considered as an investment of some sort - it is more obvious to me that government spending should only be for the purpose of investment and not for consumption) which may lend itself to being more suitable and practical for the government.

First, the returns on the investment must be difficult to measure in that there are returns which are expressed in the collective good rather than profits for the investors. This generally would seem to favor large investments, but could also be argued in the case of charity. Second, the investment is one in which the provision of the goods and services may be more conducive to a monopoly (or perhaps cartel) rather than a competitive, free-market system.

The first type of investment I can think of that meets some of these requirements is that of massive infrastructure investments such as roads, bridges and energy infrastructure like power lines. For example, once a road is built, it generally does not make sense for there to be a competing road. In a sense ownership of roads could (or should?) be monopolistic. However, competition amongst modes of transportation does make sense and building roads could be viewed as a de facto subsidy of the automobile industry. That said, there is public demand for roads. While it makes sense for private business to bid for the contracts to build the roads, someone still needs to make the investment in advance to fund the project.

It is important next to analyze who benefits from the roads in our example. Most all citizens use some roads. They use them to get to work and school, drive to the store or to a local restaurant. Both businesses and their consumers benefit. Also, roads allow friends and families to visit with each other more easily. I'm tempted to argue that businesses should then be willing to front the cash for such investments, but no one business would build any significant number of roads. I could then argue that this creates an opportunity for a venture capitalist to serve as a middle man - soliciting capital from businesses to fund the purchase of the roads. This may well be impractical, but would serve as the basis of the ideals advanced by anarcho-capitalists. So, the question becomes, it is more efficient and practical for the government to fund this investment on behalf of the taxpayers, or should private business fill the gap.

Governments can fund investments much more easily than private business. This is especially true for central governments with the benefit of a central bank. Governments can fund with existing funds - courtesy of the taxpayers - or with borrowed money. Most governments enjoy very low interest rates on their loans. But, ultimately, these loans still must be paid back - by the taxpayers. (There is a third option. Central banks can print money. This undoubtedly leads to inflation which serves as another form of taxation.) In each case, the taxpayers are responsible for the bills. I'm not saying this is bad. I'm just saying that this is reality.

The other benefit which governments have over private business is that it is much easier to make an investment decision. Governments only need to follow their appropriations process to gain approval for the expenditure. This is generally far more efficient than a venture capitalist attempting to acquire capital from many sources. Each source would like their piece of the profits which would be very difficult to negotiate in the case of something such as a road.

Let's turn to another example: investment in the community for economic development. This is often the argument used for public financing of a pro sports stadium or, as in the case this morning, community redevelopment to create new business and excitement. In these examples, the argument lies in the fact that the government is called in since their is not enough willingness from private investment. The government comes through on the deal if they (those who control the appropriations) feel it is best for the community. My initial reaction to this argument is that it is without merit. If private business is unwilling to make the investment, then it's probably a bad investment.

Taking a closer look at our two sub-examples, I'm not eager to change my mind.

In the case of a pro sports stadium, people stand to make money. However, the builder of the stadium does not necessarily benefit from the increased revenues experienced by the local businesses which receive the halo effect. Restaurants, hotels, and local merchants all stand to gain from the development of a new stadium. Is it not unreasonable to assume that a potential stadium financier might look to these local businesses to receive additional venture capital? If they do not have existing funds, these could be procured in the way of bonds which repay as the new revenues arrive.

The second example of community investment for economic development puts a slightly different twist on the first. Here, it is not just local businesses which stand to gain. Additionally, local homeowners and residents stand to gain in two ways. First, property values may increase as the demand for property increases due to the new economic activity. Second, it could be argued that crime may decrease as the economic fortunes of the community increase. Here again, we could argue that local businesses and residents could be asked by local entrepreneurs to help with the investment cost. But, on closer examination, this may well be difficult due to the number of people involved and, more importantly, the inability for an investor to receive the returns on their investment felt by reduced crime or other intangibles.

Where does this leave us?

I think it is reasonable to assume that I am for some level of government spending. There you go. I am not an anarchist! :)

However, I think that the costs of the investments need to be repaid by those who benefit from the investments. In the case of roads, some level of corporate investment in the form of taxation should be felt. Also, those who use the roads, should pay more for the roads. In the case of pro sports stadiums, it is difficult for me to agree with public financing. The same goes for community investment for economic development. I suppose in these cases, I would be ok with the investment if the taxes which fund the investment are either a) agreed to by an overwhelming majority of voters (perhaps 75%?), or b) voluntary. I like the second option better. In either case, if the investment if funded by government bonds, then the repayment should be funded by taxes which are more targeted to those who benefit from the investment.

I know this has been a long one. I hope you're still with me. Bottom line, this helps me better articulate my thoughts on the role of government - particularly in the aspect of discretionary spending. Investments should be targeted to those which have the following properties: slow, but beneficial return on investment, intangible benefits, and monopolistic goods or services. I want to be clear that I am generally against monopolies or cartels in any form, but, in some cases it makes sense. Also, investments should be paid for by those who benefit. This should come via creative and targeted taxation on both individuals and businesses.

The prerequisite for intangible benefits leaves a scary door wide open. It means that the benefits are subjective and arbitrary. It means that you place the power in the government to decide and measure the benefits. Since this is the case, I argue for two things. First, wherever practical and possible, there should be a voter referendum on the investment. There should be overwhelming support from the group which may be taxed. Second, it is far better for these decisions to rest in the hands of a government which represents the smallest possible constituency. This way, the voter referendum has the best chance of success - both in terms of the investment as well as future re-election of the officials. Small government. Local government.

By the way, that means that I am against the bailout of the "Big 3" automobile manufacturers.