What Do They Teach?

My reaction on reading Alexander William Salter’s Wall Street Journal op-ed87 was pretty much the same as my reaction when my wife and I watch Jeopardy and none of the contestants know the answer to a simple question about history, geography, movies, TV, literature, etc. What do they teach young people nowadays? The sad thing about it is that I agree materially with many of his observations. But he’s either grossly oversimplifying or he simply does not know.

Whether public or private, spending doesn’t cause growth. Mr. Stiglitz and his allies have it backward: Consumption is downstream from production. Growth is about increasing the supply of goods over time; you can’t spend if the goods haven’t been produced. Production grows as technology and production processes improve. Such improvement requires saving and investing rather than consuming.

The early details on Mr. Biden’s infrastructure plan aren’t promising in terms of incentives for saving and investment. The bill includes significant tax increases on corporations, which would also hurt households and investors. The president and his team deserve credit for attempting to pay for the plan. But raising taxes, especially on businesses, weakens incentives to invest. The result is lost growth.

Mr. Biden’s plan also largely directs resources away from uses that would increase productivity. Improvements in roads and bridges may boost how much companies can produce, and hence growth, by making it easier to move labor and goods across the nation. But that’s a minority of the bill’s spending; other expenditures will have the opposite effect. Take the proposal to invest in expanding clean energy and electric-vehicle charging stations. This is a rather elastic interpretation of infrastructure, and a wealth-wasting one besides.

He concludes:

The government is not good at picking investments. President Obama promised smart green projects. What we got was the Solyndra debacle, which consumed hundreds of millions of taxpayer dollars while producing little of value. Those dollars are resources that could have been invested elsewhere. What Mr. Biden proposes amounts to a great many Solyndras. That’s an enormous amount of productive capital to squander.

Mr. Biden positions himself as the inaugurator of a Newer New Deal and a Greater Great Society, but there’s nothing new or great about the politicization of investment. Policy makers have tried many times, and it’s clear that all the financing in the world won’t boost productivity if it isn’t channeled correctly. More-efficient producers, not partisan spending, create economic flourishing. Though the president’s plans will consume plenty, they’ll produce only disappointment.

As I’ve mentioned before when I was in college and took economics courses Keynes was king. His teachings were Holy Writ. I went farther than most undergraduates and, apparently, most graduate students these days and read primary sources. Not only did I read The Wealth of Nations and Keynes’s General Theory of Employment, Interest, and Money but David Ricardo’s On the Principles of Political Economy and Taxation and many, many others. That’s one of the things that I learned in high school: don’t rely on secondary or tertiary sources. Keynes’s assumption is that there’s a gap between potential product and actual product. The purpose of the spending is to incentivize bringing unused assets back into production.

I don’t believe that unused assets are our problem today. I think that our problem is that we’re not producing enough of what we consume and under the circumstances massive deficit spending will cause an increase in asset prices, promoting increasing income and wealthy inequality, increase general prices, or worse.

Federal spending could, indeed, incentivize additional investment and increasing of productive assets but a) not in the near term and b) as Dr. Salter notes, the government is not good at picking investments. That’s why I support what I’ve characterized as “mass engineering projects”. Examples of those are the Manhattan Project, the Mercury and Apollo projects, Boulder Dam, and the like. Medical research is good but may take a long time to bear fruit. Nixon began his “war on cancer” in 1971 and it’s still going on. Given the length of time it takes to become a medical researcher, the mostly likely near term consequence of investing more money in medical research will be to increase the wages of medical researchers, producing the paradoxical result of getting fewer results per dollar spent. Such increases need to be done much more slowly and carefully.

And, as has been mentioned here before, the “infrastructure spending” plan of which about 5% is devoted to increased infrastructure and about 95% is devoted to consumption is likely to increase deadweight loss, another paradoxical result.