“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Thursday, January 27, 2011

When Is Government Spending Really "Investment"?

Remember when the vaunted near-trillion dollar stimulus bill of 2009 was pitched as government "investment?" "Shovel-ready" and all that?

We now know that it didn't work at all. It didn't create jobs, apparently increased GDP growth tepidly, and, in retrospect, was found to mostly transfer money from the federal government to various social spending programs in the states.

Infrastructure wasn't really affected to any large degree, aside from all those normally-occurring highway repairs with their prominent signage telling you that your share of federal debt increased in order to fund the guy holding the sign.

Wonderboy's trying it again. He's called for more spending in his recent State of the Union address, but, once again, called it "investment."

Yesterday, on CNBC, Alice Rivlin sounded positively surreal as she denied that fellow guest Andy Stern, former head of SEIU, was a socialist. She went on to insist that the new order required government partnership in 'investing' in various sectors. Honestly, it looked like she was on drugs, she was so out of touch with reality.

So, when is government spending really "investment," and when is that moniker just a ploy for unnecessarily larger government?

I've been giving this a lot of thought recently. It seems to me that there is really only one clear-cut instance in which government must or should spend in lieu of the private sector- defense. Defense goods don't have a market use, per se, so it's not reasonable to expect some private party to buy and use military equipment.

Other than that, honestly, I can't think of a single commercial effort which couldn't and shouldn't be privately funded, or at least done by state-level government cooperation with private parties. The usual examples to the contrary are, of course, New Deal projects like the TVA, Eisenhower's interstate highway system, and the space program. Modern examples are touted as alternative energy technologies and railways.

Let's examine them in turn to see if federal 'investment' was really the only, or best, way to have accomplished the tasks.

First, it's important to begin with the principle that projects which aren't commercially profitable in the first place should not be attempted, even by government.

The TVA was billed as bringing electrification benefits to rural Americans. Fine. But why did the federal government need to borrow and spend on something which only benefited several states? If the benefits were compelling, why didn't the affected states cooperate on obtaining the necessary easements, land, etc., then let bids to private power companies to invest in said electrification? Why should all Americans have had to pay for the benefits accruing to a few states and their residents?

This was likely a first example of federal intrusion into commerce, albeit 'interstate,' which was unconstitutional. Former judge Andrew Napolitano, a Fox News contributor, has repeatedly noted that, prior to the income tax, the federal government didn't have direct relationships with each citizen. Nor was it meant to have had one.

Thus, the states bordering or through which the Tennessee river flowed would and should have been completely able, on their own, to affect that regional power project.

Next is the interstate highway system.

On one hand, it was formally proposed as a defense project. If so, then federal funding was reasonable. But maintenance, given the overwhelming commercial and private usage, would not be. Nor would much of the second-generation bypass loops and much more discretionary construction.

So I'd say that an initial build-out of the major interstate routes was acceptable as federal spending, but should have been capitalized, depreciated and treated as a wasting asset to be maintained. Subsequent additions to the network should have been by individual states and municipalities, with code requirements in order to connect to the federal roads. That way, again, each city, state and/or region could choose to take advantage of the existing road net, add to it when it was seen as commercially profitable, and finance that construction locally. States could sell the rights as tollways, as the Illinois-Wisconsin-Indiana Tri-State toll road was financed. Or the Garden State Parkway in New Jersey. Or a state could choose to borrow to build a road, taxing all citizens to pay for the presumed benefits. More likely, though, collecting tolls from commercial and private traffic would more reasonably place costs with those enjoying the benefits. Failing to have done this, and leaving it as a federal debt, merely disguises making everyone pay for the benefits a few enjoy seemingly for free but, in reality, simply for less cost than is fair.

The space program, too, was initially positioned as a defense initiative. As Wonderboy recalled in his address, the Sputnik moment ignited American interest in science, technology, engineering and space exploration. Fair enough. Initially, the space program didn't have a commercial value, per se, so government funded it to maintain defense parity with the Russians.

By now, however, it's reasonable to expect that Air Force interests can fund their own space activity. Other than that, NASA should have been spun off and made commercially self-sustaining. Medium-term debt could have accompanied it, along with equity, the former to be replaced by private bond financing as government debt matured.

Much as I appreciate America's space exploration successes and the associated technology's benefits to society, we have to clearly identify why we are funding the program with taxpayer dollars. If it's merely for technological advancement, then a private concern could do that, too. If it's defense, then it's too broadly positioned now.

Now we are told we must use taxpayer dollars for new energy sources and rail projects. What nonsense.

Did anyone federally subsidize whaling, initial oil, natural gas or coal exploration? Of course not! These were energy sources either already understood, or foreseen by entrepreneurs to be able to create value in the marketplace.

I don't want government hacks making choices with taxpayer dollars to reward favored private entities in favored energy fields. Rather, at best, let the federal government offer to buy defined amounts of power by type, at defined prices, declining over time. Against this demand curve, private enterprise can choose to deploy capital to meet these requirements and, thus, use the initial demand to make the technologies competitive in the rest of the marketplace. But this doesn't require federal 'investment' dollars, only the offering of a level of demand for the products.

Railways are another version of the TVA or interstate highway system. If we have a defense-based need for new railways, so be it. I haven't heard of any yet. Most troop deployments are by air, or over the highways already built with federal dollars.

The railways projects are being foisted on us as more efficient means of transport. But several states' incoming governors have cancelled them for reasons of being too expensive for their proposed benefits.

Once again, there's no reason to believe federally-directed commuter rail spending, called 'investment,' will be profitable. Wouldn't it make more sense for the localities involved to decide that the expected benefits for the projects merit their local governments providing regulatory easements, then letting private companies bid to build and operate the projects? Assuming the projects will be commercially viable, there will be bidders. If not, then they won't attract interest. But you can be sure that private capital won't try to build railways that don't have viable business cases. Such as the one in California which continues to experience rising construction projections, falling ridership and rising fare levels.

No, investment is an activity involving using savings via borrowing, to build long-lived assets which are presumed to have net positive economic value. As such, there will be private sector parties willing to step in and build and/or operate such projects. Government can assist by simplifying regulatory-related aspects, to reduce uncertainty of success.

But rather than debate whether the federal government should, in the current debt and deficit crisis, borrow more money for so-called 'investments,' we should be moving such projects down to regional, state and local levels, to be financed, constructed and operated by private sector entities. Otherwise, without such explicit profit motives, scarce economic resources, such as tax dollars, will be wasted on uneconomically valuable projects simply due to political preferencees.

No comments: