Politics and Government “Investment”

I hope that you are as tired as I am of hearing politicians trot out the term “investment” to justify spending the taxpayers’ money on such things as high-speed rail, “green” energy alternatives to fossil fuels, innovative R&D projects and highways, more widespread Internet access and other so-called infrastructure.

The public sector does not invest in any meaningful sense. The act of investing implies careful consideration of expected streams of future benefits produced by current outlays, not only for the project under consideration, but also weighing anticipated net returns against the next best alternative uses of funds, with suitable adjustments for relative risk.

Because government can only spend the money it has borrowed from or taxed away from the private sector and, moreover, has no bottom line for measuring the economic soundness of the projects it undertakes, politicians have little or no incentive to allocate the resources under their control cost-effectively. Investment decisions by the public sector are primarily shaped by politicians’ and bureaucrats’ goals of being reelected or reappointed to office.

Following the imperatives of the vote motive, public spending initiatives, whether characterized as investments or not, are designed to benefit important electoral constituencies – labor unions, public school teachers, groups that support forcing Americans to pursue healthy lifestyles, and so on. Economic benefit-cost analyses play no role in these decisions. And, for obvious reasons, such investments rarely, if ever, are evaluated after the fact to determine whether they actually fulfilled their ostensible purposes of “creating jobs” and spurring economic development.

A public proposal to spend money on high-speed rail is no different from one to expand eligibility for Medicare or Medicaid. In all such cases, special-interest groups benefit at the expense of the taxpaying public.

The private sector invests knowing full well that the costs and benefits of its actions will fall on the shoulders of business owners. In the public sector, those costs and benefits will be borne by others. Just as the words “government” and “efficiency” should never appear in the same sentence, so is true of “government” and “investment”.