Image credit, and a respectable way of defending costliness.
As a follow-up to QE - Financing the Inefficient Sector, consider why one ought to expect the public sector to be economically inferior to private enterprise.
There are, of course, good political reasons to beware of government crowding out private suppliers; and there are - at least three - good economic reasons to keep government-as-producer at bay:
- is an inefficient producer,
- encourages over-consumption, and
- brings about tax distortions,
all of which three factors reduce our wealth.
Public provision of goods and services is politically popular because it appears to furnish us with a free lunch, when in fact it is a highly costly way of delivering, where some may receive a subsidy while overall more must be paid.
Inefficient producer: government is politically exempt from the profit-and-loss system that private producers are relentlessly exposed to. The public sector is capable of production that is not economically viable. It is also often removed from establishing the degree of economic viability of its operations. Being insulated from the rationality and pressures of an economic enterprise, public providers of goods and services are not permanently forced to seek new, better, and more efficient ways of operating.
Over-consumption: When the consumer bears the cost of goods and services, demand is self-limiting. You pay as long as something is (a) worth it - i.e. benefits exceeding costs - and (b) within your budgetary means.
- Replacing self-limiting consumption decisions by its own centralised discretion, and
- being exempted from economic rationality (see "inefficient producer"), which precludes private providers from producing at prices insufficient to cover their fixed and variable costs, while at the same time
- under political pressure to keep up the pretense of a free lunch,
government tends to encourage over-consumption.
Tax distortions: Were government an efficient producer and capable of preventing over-consumption, it would still be lagging private providers in that it depends for its financing on taxes, which are
- expensive to raise both for government itself and for taxpayers, and
- tend to impose further economic costs by punishing and thus discouraging productive economic activities, such as thrift or provision of employment.
In conclusion: substituting public for private spending on providing goods and services is equivalent to shifting more resources to the high-cost producer.
In writing this chapter, I have been leaning heavily on Arnold Kling's "Learning Economics" - Chapter 57: Government: The High-Cost Producer.