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.
Image credit. A question of which system is better adapted to which task.
Law of Markets argues:
With QE we are not talking about troubled assets or dealing with an emergency. It is just straight out inflation.
Second, inflation has now come to mean rises in prices when once it meant printing money. The Keynesians switched the terminology to movements in prices in the 1930s so that their policies would no longer be immediately described as inflation (discussed in the 2nd ed of my Free Market Economics [FME2] pages 406-408). But let’s not quibble about this. What ought to be understood instead is that the effect of inflating the money supply to fund public spending has a number of possible effects of which higher prices is only one. Without militant unions and continuous labour market pressures to push wages up, inflation in the form of price increases is subdued. And whatever else may be the case at the moment pretty well everywhere, only those in very protected environments are in the mood to be pushing for significantly higher wages that would put their jobs at risk.
The real issue is that the way in which the re-direction of expenditure to the public sector is and will continue to manifest itself in a crumbling capital stock (see FME2: p410). The economy of the United States is falling to bits. It will take a longish time since it has a massive asset base but it is being eroded fast enough, which is evident in the median income data and elsewhere.
Is this view in conflict with what Arnold Kling - in The Segmented Wealth of Nations (see especially the paragraph at the bottom of the post) - identifies as the sources of crisis and contemporary economic change? I don't think so.
For a reminder why shifting toward public sector provision of goods and services is a decision for high cost production, take a look at Government - High-Cost Producer.
The US economy has a competitive intensity problem, and [a] decline in startups is at its core. Startups are the straw that stirs the drink. They generate new innovation (and new jobs) and force incumbents to improve or die. They change everything, creating a healthier, more vibrant economy in the process.
In the US economic ecosystem, startups are wolves. And we need more of them, and the creative destruction they bring, to transform our stagnating economy.
I like the discernment in Arnold Kling's three-pronged argument according to which:
(1) economy-wide wage growth is too highly aggregated a performance figure for analysing the economy,
(2) the Fed is trailing the real economy,
(3) the economy can be and presently is segmented so that certain layers of it experience vibrant economic activity, while others are mired in recession.
On (1), I would note that a few years ago wage growth was violating the Phillips Curve on the high side [meaning, I suppose: too high employment relative to the level of inflation, with strong demand for labour and correspondingly high wage growth, G.T.], and now it is violating the Phillips Curve on the low side [employment is too low given the level of inflation, with insufficient demand for labour and correspondingly weak wage growth, G.T.]. And yet mainstream macroeconomists stick to the Phillips Curve like white on rice. I would emphasize that the very concept of “the” wage rate is a snare and a delusion. Yes, the Bureau of Labor Statistics measures such a thing.
Instead, think of our economy as consisting of multiple labor market segments, not tightly connected to one another. There are many different types of workers and many different types of jobs, and the mix keeps shifting. I would bet that in recent years the official statistics on “the” wage rate have been affected more by mix shifts than by a systematic relationship between “the” wage rate and “the” unemployment rate.
On (2), I view this as evidence for my minority view that the Fed is not a big factor in the bond market. Instead, the Fed is mostly just following the bond markets. When it actually tries to affect the bond market, what you get are “anomalies,” i.e., the failure of the bond market to do as expected by the Fed.
On (3), I think that we are seeing a Charles Murray economy. In Murray’s Belmont, where the affluent, high-skilled workers live, I am hearing stories of young people quitting jobs for better jobs. On the basis of anecdotes, I would say that for young graduates of top-200 colleges, the recession is finally over. The machinery of finding sustainable patterns of specialization and trade is finally cranking again.
In Murray’s Fishtown, on the other hand, the recession is not over. I would suggest that we are seeing the cumulative effects of regulations, taxes, and means-tested benefits that reduce the incentive for firms to hire low-skilled workers as well as the incentive for those workers to take jobs. As Sumner points out, President Obama’s policies have moved in the direction of making these incentives worse.
Read the whole post on Arnold Kling's theory of the segmented wealth of nations.
For a broader context of Kling's take, consider his intriguing account of contemporary economic change:
I am inclined to treat the financial crisis as a blip, one whose apparent macroeconomic impact was made somewhat worse by the very policies that mainstream economists claim were successful.
This blip took place in the context of key multi-decade trends:
–the transition away from goods-producing sectors and toward the New Commanding Heights of education and health care
–the transition of successful men away from marrying housekeepers and toward marrying successful women
–the integration of workers in other nations, most notably China and India, into the U.S. production system
–the increasing power of computer technology that is more complementary to some workers than others
These trends are what explain the patterns of employment and relative wages that we observe. The financial crisis, and the government panic in response, pushed the impact of some of these developments forward in time.
The belief that had (mistakenly) evolved among mainstream economists at the time [Austrian economics elicited a correcting view of the economy, G.T.] was that the goal of market competition was to bring about a general equilibrium in which all the facets of an economy are balanced with each other and all the resources are efficiently allocated. These economists thought it realistic to expect central planners to be able to replicate, and perhaps even improve upon, that equilibrium state. The Austrians were meanwhile busy reminding people that market competition is a process that creates value precisely when an economy is in disequilibrium.
In equilibrium, profits converge to zero—there can be no new profit opportunities by definition. But outside of a perfect equilibrium, people who are clever enough can find gaps in the market and fill them. Entrepreneurs are therefore able to drive societal improvements through dynamic competition—to literally innovate their way to greater wealth.
Markets are a process, not an equilibrium state, Hayek said. More specifically, they are a process for discovering new knowledge. The absolute best a central planner can hope to do is to aggregate the information that already exists at a given moment. But the market process not only gathers and makes sense of vast, disparate information—it ushers into being knowledge that was not there before at all. Vernon Smith, [...] a [...] Nobel laureate in economics, quoted Hayek as saying, "I propose to consider competition as a procedure for the discovery of facts as [otherwise] would not be known to anyone."
This was actually a fresh and exciting revelation, Kirzner concluded [at the conference on which Slade is reporting], and it came at the very moment most onlookers were declaring the Austrian tradition dead. Mainstream economists at the time truly believed it was possible for central planners to acquire the requisite information and construct from it a utopia. Fortunately, Hayek and his Austrian school contemporaries were there to show the economics profession that the journey—an ongoing process of experimentation and discovery driven by the pursuit of profits—is far more important than the destination.
In the New York Times, Arnold Kling presents an outline of his intriguing theory of the conditions of economic health and dislocation, an approach to business cycles which he abbreviates as patterns of sustainable specialization and trade (PSST):
How are jobs created?
For Keynesians, job creation is simple. Entrepreneurs have knowledge of how and what to produce. All that is required is more demand, in order to induce them to undertake more hiring.
In contrast, in our Smith-Ricardo story, the knowledge of how and what to produce has to be discovered. Entrepreneurs have to figure out ways to utilize resources that satisfy wants in an efficient way. The market mechanism first must undertake trial and error to create production processes that exploit comparative advantage. Until these new patterns of sustainable specialization and trade are discovered, there are no job slots.
Experimenting with new patterns of specialization and trade is relatively easy. Discovering patterns of sustainable specialization and trade is much harder. Our economic well-being depends on the ability of entrepreneurs to make these discoveries.
Since water is one of the vital ingredients for life on Earth, scientists want to know how it got here. One theory is that the water in our solar system was created in the chemical afterbirth of the Sun. If that were the case, it would suggest that water might only be common around certain stars that form in certain ways. But a new study, published today in Science, suggests that at least some of Earth’s water actually existed before the Sun was born -- and that it came from interstellar space.
That’s certainly something to ponder the next time you drink a glass of water. But the discovery is also cool because it means water -- and maybe life -- may be ubiquitous throughout the galaxy.
As for us earthlings, the inestimable Coyote has a lot to complain about the way in which we deal with the precious resource.
Virtually every product and service we purchase has its supply and demand match by prices. Higher prices tell buyers they should conserve, and tell suppliers to expend extra effort finding more.
Except for water.
Every water shortage you ever read about is the result of refusing to let prices float to dynamically match supply and demand. And more specifically, are the result of a populist political desire to keep water prices below what would be a market clearing price (or perhaps more accurately, a price that maintains reservoir levels both above and below ground at target levels). [...]
Commenting on a 100,000 prize to help solve the water shortage in Arizona, the Coyte notes:
I will say that it is nice to see supply side solutions suggested rather than the usual demand side command and control and guilt-tripping. But how can we possibly evaluate new water supply solutions like desalinization if we don't know the real price of water? Accurate prices are critical for evaluating large investments.
If I find the time, I am going to tilt at a windmill here and submit an entry. They want graphics of your communications and advertising materials -- I'll just show a copy of a water bill with a higher price on it. It costs zero (since bills are already going out) and unlike advertising, it reaches everyone and has direct impact on behavior. If you want to steal my idea and submit, you are welcome to because 1. The more the merrier and 2. Intelligent market-based solutions are never ever going to win because the judges are the people who benefit from the current authoritarian system.
PS- the site has lots of useful data for those of you who want to play authoritarian planner -- let some users have all the water they want, while deciding that other uses are frivolous! Much better you decide than let users decide for themselves using accurate prices.
New York City is not only poorer than the New York State average, its median household income is, in absolute dollar terms, lower than that of such dramatically less expensive areas as Austin, Texas, or Cleveland County, Okla., where the typical household income is a few thousand dollars a year more than in New York City but the typical house costs less than a third of what the typical New York City home costs
So [- asks Arnold Kling -] why don’t people move from NY to cheaper cities, until something closer to parity is restored in the cost of living?