Wednesday, February 03, 2010


White House budget director Peter Orszag:
A year later, the economy is back from the brink — and is growing again. This "statistical recovery," however, is cold comfort for the millions of Americans who have lost their job. The president has therefore called for a package to spur job creation now — including small-business tax cuts, and investments in clean energy and infrastructure.

To sustain job creation and economic growth into the years ahead and provide room for the private sector to expand, we are also making tough choices in the budget: cutting what doesn't work or isn't necessary and investing in what will help to expand the economy and employment in the coming years.
Politicians don't spend money anymore, they "invest" it. Anything and everything is an investment. It's little wonder they choose to employ the term, which implies the prudent use of money for productive ends. At least two problems exist with the terminology, however. First off, who in their right mind would hand over management of their 401k, or any other kind of investment, to Barack Obama? Who would invest their money in a company where the CFO/comptroller is Joe Biden? Or John Boehner for that matter?

The second and more substantive point is that investments are expected to produce some kind of return. Money is spent in the hope that it can be profited from later. So what is the government's return on its investments? Typically pretty miserable. While the returns from many government initiatives are unquantifiable and amorphous -- to the benefit of those who administer the spending -- at least some of them are.

Let's begin with the war on poverty. Since the launch of President Johnson's Great Society initiative in 1964 until 2006, anywhere from $8-10 trillion dollars has been spent/invested in anti-poverty programs. What has this accomplished? While it is true that poverty has declined, the real question is whether this due to government wealth transfers. Perhaps this chart can assist:

What we see is that the poverty rate corresponds not with government spending, but economic growth spurts in the 1960s, 80s and 90s. Indeed, it is interesting to note that the decline in the 1990s corresponded with a reduction in public sector anti-poverty spending.

We also see this on a global basis where the dramatic reduction in poverty has corresponded with expanded economic freedom rather than a rise in social welfare spending.

Another classic area government devotes much spending to is education, frequently described as "investing in people". Again, the return on investment is terrible:

Spending goes up while test scores are stagnant. Head Start, a federal program typically supported by both Republicans and Democrats, has been exposed as a multi-billion dollar failure. Private schools are commonly viewed as superior to their government-run counterparts, which is why teacher's unions fight so ferociously against voucher programs.

Government investments are almost invariably failures when returns are measured in a more traditional sense. Government-operated Amtrak loses money while enjoying subsidies 31 times higher per thousand passenger miles than the airline industry (yet further spending on rail is deemed an investment). The U.S. Postal Service loses money despite possessing a monopoly on the delivery of first-class mail. And clean energy -- invariably described as an investment by the Obama Administration -- has lost money for everyone.

Real investment in our citizens is allowing people to keep more of what they earn, not spending on fanciful programs of dubious merit concocted by politicians.

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