Tuesday, January 13, 2009

Free Market Fairies

Via Mankiw's blog, Gary Becker writes: "private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative." In the Mankiw-Becker Hyde Park-Cambridge worldview consumption spending by rational agents is perfectly efficient. Government spending is inefficient. They often forget that real people often piss away their money on things which can't possibly have any long-term benefit to society or the economy. The issue, which is often ignored, is that there are really two types of consumption. When I bought my computer, which I use for research and education, it counted as consumption. When I blow money on booze, it also counts as consumption, yet those two consumption activities have very different implications...

Anyone remember where the last round of tax cuts went?

On the other hand, the New Deal money *must* have all been pissed away... Who uses the Oakland Bay Bridge anymore? (Answer: over a quarter million cars per day...)

I think the lesson should be clear, there is no free market fairy that makes all decisions done by private agents (with no oversight) magically more efficient than government agents (with loads of oversight). Certainly, not all government spending is worthwhile, and I hate government waste as much as the next person, but anyone who has been to a country like India, where the government doesn't have the resources to build roads or clean up the trash knows that government spending can be uniquely valuable.

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