Professor Mark J. Perry's Blog for Economics and Finance
A fundamental fallacy is the notion that politicians can "grow the economy" by taking money out of the private sector and spending it wherever it is politically expedient to spend it -- so long as they call spending "investment."
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
43 Comments:
Amen!
Sowell: A fundamental fallacy is the notion that politicians can "grow the economy" by taking money out of the private sector and spending it wherever it is politically expedient to spend it -- so long as they call spending "investment."
It's very situational. However, government has successfully invested in the economy in the past, such as the GI Bill which educated millions and helped them buy homes leading to the rise of the middle class and the Affluent Society, the Marshall Plan which helped rebuild Europe, the superhighway system, and the space program.
Often, the investment is also meant as a stimulus, but again, that can be very situational.
Like the government funded R&D that lead to the development of computers? Computers have had no impact on the growth in our economy?
I'm not sure Sowell knows what a fallacy is.
@ Jon.
Yea.....and let's not forget Al Gore's invention of the internet. :)
Free2Choose: Yea.....and let's not forget Al Gore's invention of the internet. :)
Excellent example. ARPANET, the precusor to the Internet, was developed by the government. Gore, seeing the technological possibilities, shepherded laws through Congress that made the Internet possible.
http://www.eecs.umich.edu/~fessler/misc/funny/gore,net.txt
Al Gore's "invention of the Internet" quote @ 51 seconds.
Yes, the government did provide basic funding for Defense Department research (@ DOD and universities) that ultimately led to the public Internet.
No, Al Gore did not invent the internet.
No, government should not confiscate money for investment.
If Congress funded the Internet, as we know it, then it would be hyper-links to nowhere.
there is a fundamental issue here with governmental "investment".
darpanet etc was not "an investment in private indusrty".
it was the government paying private companies to build something they needed.
the government was acting as a customer, not an investor.
this is a critical disticncion.
when they "invest" in products they think we want or should want, mostly, it's solyndra. it's a wipeout.
the GI bill was not an investment. it was an inducement for people to join the military.
the space program was a flop as an investment. what has manned space exploration produced? remember all that cool moon technology we got? yeah, me either. it was a vanity project, not an investment.
highways are a bit of a special case. without the power of emminent domain, no private actor could build them. they get trotted out all the time as an example of good government investment, but they are the exception, not the rule.
for every highway system, there are 10 TVA's that displaced the private sector and did great harm to property rights and business confidence.
worst, threats of such investments freeze private investing.
recent federal activism is accomplishing exactly what FDR did in the 30s' - freezing private investment with fear of fascist policies, regulation, and market manipulation.
far from "investing" government mostly distorts and disrupts markets and we wind up with lakes of corn ethanol and a big deadweight loss.
Double Amen--and applies especially to defense spending.
Zachriel,
Although the liberal media have promoted the myth, Apranet was not an internet. It was not even close. It was also not the first packet-switching network. Several private packet switching networks were developed at exactly the same time as Arpanet. Using taxes to fund Arpanet was not a necessary step in the evolution of the internet.
Zachriel,
What causes you to categorize the space program as a "successful" investment in the economy? It is true that the many billions of dollars spent resulted in some technological advances which later benefitted the general economy. But most of the funds "invested" in space travel were simply a waste.
Please consider what is not seen: the drag on the economy because so many billions of dollars were taken from the private sector.
This comment has been removed by the author.
'... leading to the rise of the middle class and the Affluent Society" -- Zachriel
Complete bullshit. The "middle class", as defined at the time of the G.I. Bill, was the product of the industrial revolution. And the U.S. was already a "middle class" nation well before that. The allocation, or more correctly the misallocation, of resources by the government into housing, education, "green technology", etc. does not translate into affluence. The resources taken from one economic activity are denied to another. You simply see the result of the activity which benefits from government largesse in the absence of economic activity in other parts of the economy that would have grown if they had not been denied the necessary resources.
it was the government paying private companies to build something they needed.
And that is what Sowell is criticizing. He doesn't want the government paying private companies to build things. He pretends it doesn't work. But it does.
highways are a bit of a special case. without the power of emminent domain, no private actor could build them. they get trotted out all the time as an example of good government investment, but they are the exception, not the rule.
Here are some more "exceptions". Satellite communication. GPS. Lasers. Semiconductors. Commercial aviation. Shipping containers. Today it's nano technology and bioengineering. It's hard to find major industries that are the driving force of the world's most powerful economy that don't have their root in government funded R&D.
And let's talk about some more government intervention in the economy that is key to the salary of all Americans, though it's a bit of a separate category. Immigration control. True enough that a lot of people on the right argue on behalf of open borders. But those discussions seem a lot more muted. Whoever you are and whatever you do, a foreigner would be happy to come here and do it cheaper. And there are foreigners that could do your job. But that is limited by our government, for your benefit.
Government intervention that helps you? Not a lot of objections. Government intervention that would help presently suffering people now that you've already gotten yours? That's a big problem. It's called kicking away the ladder.
Let's de-license lawyers and doctors. They have become abusive.
Medical cost for Dodger Stadium beating victim Bryan Stow placed at $50 million
From wire service reports
Posted: 09/13/2011 06:49:39 AM PDT
Stow family files suit against McCourt, Dodgers over attack
Attorneys for Dodger Stadium beating victim Bryan Stow contend in court papers that their client's medical care is expected to cost more than $50 million.
The damage estimate was included in papers filed Friday in Los Angeles Superior Court as part of a statement aimed at helping Judge Abraham Khan supervise the complaint through trial.
"Satellite communication. GPS. Lasers. Semiconductors. Commercial aviation. Shipping containers. Today it's nano technology and bioengineering. It's hard to find major industries that are the driving force of the world's most powerful economy that don't have their root in government funded R&D.... blah, blah, blah." -- Jon
Yes, there have been very successful commercial applications of government funded R&D. And for every one of those there is also a government boondoggle that wipes out an equal or greater amount of wealth. We are living through several of those right now. The housing crisis, which has destroyed trillions of dollars of wealth, is largely the result of government interference in the housing market. The government has "invested" more than a trillion dollars trying to encourage private demand to no effect and pissed away billions more on failed "green technologies" while erecting barriers to wealth producing private sector energy investment. The governments "investment" in health care and education has resulted in a massive misallocation of resources and skyrocketing prices for both. Your arguments assume that absent the government, private industry would not have created the things that you list. I suggest that they would have, but only at a time when it would have been profitable to do so.
The housing crisis, which has destroyed trillions of dollars of wealth, is largely the result of government interference in the housing market.
No it isn't.
The governments "investment" in health care and education has resulted in a massive misallocation of resources and skyrocketing prices for both.
Ours is the only one in the industrialized world with as much privatization. Every other country provides publicly provided care. And yet ours costs twice as much and produces the worst outcomes.
Well, private industry would have done it eventually you say. When is Haiti, which lacks all that government intervention, going to produce impressive technology? People get to keep their own money there without the government "wasting" it. When is the neoliberal paradise that is Africa, which has undergone austerity and cuts in the scope of government for the last 30 years, when are they going to produce the next technological break throughs? The pattern is pretty consistent. Countries that today are prosperous likewise had massive government intervention in the economy. The countries that suck have none. Go live in Haiti if lack of government intervention is so great.
"And that is what Sowell is criticizing. He doesn't want the government paying private companies to build things. He pretends it doesn't work. But it does." -Jon
Where did Sowell say this?
Sowell said that government spending doesn't grow the economy.
That means, even if the government happened across some spending that appears to work -- which it does on occasion (even entrepreneurs get lucky every now and then and create value) -- it doesn't account for the opportunity cost of removing those resources from the economy to begin with. So, net-net, there's no benefit. Bastiat called this the unseen.
Time frame, time frame, time frame.
There's (a) before the election and (b) after the election.
If you limit the analysis to the time period between now and the next election, then I would argue that Thomas Sowell is incorrect.
jon-
"And that is what Sowell is criticizing. He doesn't want the government paying private companies to build things. He pretends it doesn't work. But it does."
no. you have totally missed the point. the government wanted darpanet for it's own use, not for ours. they know what it needed to do, and the demand was there because the government was demanding it and could make an informed cost benefit decision.
that is not true of the projects you are discussing. bridges, trains, solar, etc are not like they. the government is not the demand, they are assuming it. it is not a voluntary transaction, my taxes are taken and spent on something i may not want without regard to whether or not i think it's a good idea or a good value.
this is why government spending tends to be so wasteful.
"
Here are some more "exceptions". Satellite communication. GPS. Lasers. Semiconductors. Commercial aviation. Shipping containers. Today it's nano technology and bioengineering. It's hard to find major industries that are the driving force of the world's most powerful economy that don't have their root in government funded R&D."
what color is the sky on your world?
those projects are almost ALL private. GSP was the government acting as a customer, and has several competitors.
lasers were first made commercial by bell labs. they also made the first transistor.
you have a very strange sense of technology history.
the government created neither of these.
sure, early cat whisker diodes were developed to replace tubes in radar (among a dozen other things like radio) but that at best was the government wanting a capability.
they never said "i need a laser or i need a semiconductor". they said, we'd like higher frequency radar, and bell labs invented transistors because tubes were too slow.
that's private innovation, not public.
if it hadn't worked, bell would have eaten the loss.
nanotech and bioenginerring? you have to be kidding. that has been driven by universities and private industry.
now you are just flat out making stuff up.
i have worked with technology companies for 20 years. they are doing the innovating, not the government.
the government wasn't even involved in most of the innovations that make the internet work.
absent erbium doped fiber amplifiers, there would be no net as we know it. without them, you cannot phase accurately amplify multiple wavelenghts of light in a single fiber (wave division mulitplexing). without that, you'd have 0.5% the capacity we do.
d/arpanet was a crummy little backwater that was barely adequate for simple text files. i know because i used to use it. it was not the government that made it useful, nor that joined the networks together.
you are playing awfully loose with the facts jon. i'd recommend getting an education in technology as opposed to believing statist pundits. almost everyhting you have said id wrong.
jon-
you are also 100% wrong on the housing crisis.
the CRA made banks lend to the uncreditworthy. frddy and fannie bought it up, slapped the federal AAA on it and securitized it, keeping the flow going. then, they cut standards and things really got out of hand. the fed aided and abetted this with wildly loose money.
the result was a horrific bubble and a massive bust.
this whole "it was evil banks" nonsense just doesn't hold water. it fails to explain "why then"? banks have always sought profit. suddenly it causes a bubble after centuries? right at the same time they were forced to lend and F+F took over the market and profited by selling the US credit rating?
pretty implausible.
Zachriel,
Why do u think space program was helpful for economy?
Though some general advances were made using space technology but if u see by broader perspective , it is the wastage of money only
And after all private sector was the one who took the severe hit...
To avoid the risks, I follow http://www.forecastfortomorrow.com/ they give an accurate predictions about the market and other happenings
A National Review writer embraces nominal GDP targeting by the Fed.
Very worth reading.
http://www.nationalreview.com/articles/276940/case-nominal-growth-targeting-joshua-r-hendrickson
damn eisenhower with that interstate highway system he built...what a waste...
Where did Sowell say this?
The link to Sowell is not working for me right now, but he talks about transportation jobs and sectors. Nobody is proposing that a separate wing of the government be created to develop trains. What Obama is suggesting is taking money and soliciting private companies to develop trains.
Sowell said that government spending doesn't grow the economy.
He did say that and he's dead wrong. Look at the industry associated with commercial aviation. The entire travel industry relies on it in addition to the aircraft development. A huge sector of our economy.
if it hadn't worked, bell would have eaten the loss.
Not true. Bell Labs was a government sanctioned monopoly. That means government intervention to protect them from the ravages of the market and demand for short term profits required by Wall St. They are able to transfer the R&D costs to their customers without the threat of competition. This is what made this kind of research possible.
Yes, the government was the customer for GPS. That's the point. Again, neither I nor Sowell are necessarily talking about government employees doing the work. The government provides the funding and the product is developed by private companies. Sometimes. Other times not, like the developments at Los Alamos or the National Institute of Health.
You are simply confused about what I mean. If you work in hi tech you either implement technologies already developed with government funding (possibly by private companies, or possibly by public employees) or the money you are getting is taxpayer money. About half the R&D done in this country is funded by taxpaers. That's why we are the leading economy in the world. We lead the world in hi tech.
"damn eisenhower with that interstate highway system he built...what a waste..." -- rjs
Obama has spent - sorry, "invested" - more than a TRILLION dollars so far. Where is our new interstate highway system, Hoover Dam, Bay Bridge, etc.?
Obama's spending was not enough to offset the reductions in state expenditures. On net there has been no stimulus.
"No it isn't." -- Jon
I could hit you with scores of links that would destroy these arguments, but it's not worth the time. Suffice it to say that if you are leaning on Ritholtz or Min for support you need to look further.
You could start with this book.
Reviewed: Here, Here, Here, and Here.
re: Eisenhower - he originally wanted the IHS to be totally tolled but he was convinced that the rural sections could not be built on that premise.
re: govt spending...
what is the difference between the govt using taxes to build a bridge verses building a drone?
Government does a great job spending $2 for something worth $1.
Also, fiscal policy can help smooth-out business cycles.
Unfortunately, government keeps spending too much.
We'll all pay, one way or another.
Government hindered growth of the Internet?:
A Brief History of the Internet
Since the Internet was initially funded by the government, it was originally limited to research, education, and government uses. Commercial uses were prohibited unless they directly served the goals of research and education.
This policy continued until the early 90's, when independent commercial networks began to grow. It then became possible to route traffic across the country from one commercial site to another without passing through the government funded NSFNet Internet backbone.
So far, the only thing the politicians have grown is my desire to hide my wealth from them.
It's very situational. However, government has successfully invested in the economy in the past, such as the GI Bill which educated millions and helped them buy homes leading to the rise of the middle class and the Affluent Society, the Marshall Plan which helped rebuild Europe, the superhighway system, and the space program.
Nonsense. Government has never been able to allocate capital better than the private sector.
The Marshall Plan was small and not exactly a resounding success. As Tyler Cowen pointed out, the allied countries that got the most money (Sweden, Britain, and Greece) grew very slowly while the countries that received the least money (Italy, Germany, Austria) grew much faster.
jon quoting the ever questionable Riholtz says: "No it isn't"...
Really? Are you sure it wasn't government influence playing a rather major role also?
Courtesy of YouTube: How The Democrats Caused The Financial Crisis: Starring Bill Clinton's HUD Secretary Andrew Cuomo
Buddy R Pacifico: No, Al Gore did not invent the internet.
Nor did he say he did. But the guys who had more do to with it than anyone said "Moreover,
there is no question in our minds that while serving as Senator, Gore's initiatives had a significant and beneficial effect on the still-evolving Internet. The fact of the matter is that Gore was talking about and promoting the Internet long before most people were listening... As far back as the 1970s Congressman Gore promoted the idea of high speed telecommunications as an engine for both economic growth and the
improvement of our educational system... No one in public life has been more intellectually engaged in helping to create the climate for a thriving Internet than the Vice President. Gore has been a clear champion of this effort, both in the councils of government and with the public at large.
http://www.eecs.umich.edu/~fessler/misc/funny/gore,net.txt
morganovich: the GI bill was not an investment. it was an inducement for people to join the military.
The GI Bill was instituted in 1944 for people who were already in the military, most of whom were drafted in the fight against fascism. The program was explicitly designed to avoid the problems in the wake of the First World War, when millions of veterans returned home to unemployment, lack of opportunity and neglect.
morganovich: the space program was a flop as an investment. what has manned space exploration produced?
It produced what are known as spinoffs, including many advances in computer technology and communications.
Jet Beagle: Although the liberal media have promoted the myth, Apranet was not an internet.
Of course it wasn't. That's why it's called the precursor to the Internet. It was funded by the Defense Department.
Jet Beagle: What causes you to categorize the space program as a "successful" investment in the economy? It is true that the many billions of dollars spent resulted in some technological advances which later benefitted the general economy. But most of the funds "invested" in space travel were simply a waste.
It's sort of like government investing in exploration. You never know what Columbus might discover.
There were multiple spinoffs from the space program that more than justified the effort. Of course, it's primary purpose was political, a way to bend the competition between the superpowers into peaceful purposes.
Che is dead: The "middle class", as defined at the time of the G.I. Bill, was the product of the industrial revolution.
The U.S. was fully industrialized during the Great Depression, but the majority of Americans struggled. Unemployment hit a quarter of the population before the New Deal set in, and poverty was rampant. Therefore, industrialization is not sufficient. After WWII, the middle class grew substantially, fueled in part by college education and home ownership.
morganovich: the CRA made banks lend to the uncreditworthy.
The housing bubble was demand driven.
“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower" — Greenspan.
A shadow-market grew up outside the purview of regulators, and the prevailing wisdom was that markets were self-correcting.
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief" — Greenspan.
morganovich: it fails to explain "why then"? banks have always sought profit. suddenly it causes a bubble after centuries?
Bubbles are a common occurrence in unregulated markets.
PeakTrader: Since the Internet was initially funded by the government, it was originally limited to research, education, and government uses. Commercial uses were prohibited unless they directly served the goals of research and education.
That's right. Gore saw the potential, and over a period of years, worked for privatization of the network.
VangelV: Nonsense. Government has never been able to allocate capital better than the private sector.
There are many things the private sector just doesn't do well. That's why most roads are built by government, as well as most police and fire protection. Of course, you may be interested to know that Rome had private sector fire brigade.
"The first Roman fire brigade of which we have any substantial history was created by Marcus Licinius Crassus... One of his most lucrative schemes took advantage of the fact that Rome had no fire department. Crassus filled this void by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the fire fighters did nothing while their employer bargained over the price of their services with the distressed property owner. If Crassus could not negotiate a satisfactory price, his men simply let the structure burn to the ground, after which he offered to purchase it for a fraction of its value."
VangelV: The Marshall Plan was small and not exactly a resounding success.
Five percent of a year's GDP of the largest economy in the world is hardly small. Industrial production in Europe grew faster than at any time in history. Importantly, it created new markets for American producers, and forged lasting bonds between the U.S. and Europe.
"Obama's spending was not enough to offset the reductions in state expenditures. On net there has been no stimulus."
HAHAHAHAHAHAHAHAHAHAHA!!!
There are many things the private sector just doesn't do well. That's why most roads are built by government, as well as most police and fire protection. Of course, you may be interested to know that Rome had private sector fire brigade.
Most urban roads were built and are still built by private developers. This happened long before there were any planning departments in cities. The first interstate highways were built by private capital, in many cases without the expectation of any profit from the use of the roads. Most of the trusts were set up to collect enough in tolls to cover the maintenance, not to offer a return. This was done because private companies and individuals wanted the extra business and trade that improved transportation would bring. In the US the government financed railroads all went bankrupt while James Hill's privately financed railway, Great Northern Railway, survived.
Ignorance is easily dispensed with by doing some research. Here you go.
The Voluntary City: Choice, Community, and Civil Society
Privatization of Roads and Highways
Five percent of a year's GDP of the largest economy in the world is hardly small. Industrial production in Europe grew faster than at any time in history. Importantly, it created new markets for American producers, and forged lasting bonds between the U.S. and Europe.
It was tiny given the requirement for capital. But you are also ignoring the facts. The countries that got the most funds did not grow as fast as those that got the least. Why do you suppose that would be the case if stimulus was supposed to be a good thing?
VangelV: Most urban roads were built and are still built by private developers.
You're not very consistent. First you say roads are private, but then you point to books about privatizing the government monopoly on roads.
Yes, the government did provide basic funding for Defense Department research (@ DOD and universities) that ultimately led to the public Internet.
===========================
Also face recognition, which pivate companies are now using.
etc. etc. etc.
The first interstate highways were built by private capital, in many cases without the expectation of any profit from the use of the roads.
==============================
And there wee so many problems with that system that the government hasd to take it ovver.
VangelV: Tyler Cowen pointed out, the allied countries that got the most money (Sweden, Britain, and Greece) grew very slowly while the countries that received the least money (Italy, Germany, Austria) grew much faster.
Germany and Italy received more than Sweden or Greece, so we have to assume you mean investment per capita. Austria doesn't belong in the latter grouping, receiving more per capita ($67) than any other country in the group. Greece and Sweden both experienced huge economic expansions after WWII. The U.K. struggled with debt and decolonization.
http://en.wikipedia.org/wiki/Greek_economic_miracle
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