Sorry Economists, Politicians Do Not Invest, They Just Spend

In short, there is nothing more opposed to true investment than government spending

By J.T. Young

Despite liberal rhetoric to the contrary, government does not invest, it simply spends. With another fiscal showdown looming expect to hear a litany from the left labeling federal spending as “investment” and as the reason why it cannot be cut. Don’t believe it. At no stage of the process does public sector spending resemble private sector investment.

First, the private sector differentiates its expenditures. Neither necessities nor discretionary spending are expected to return a profit. Only investments are expected to and they make up a relatively small amount for most individuals.

These investments are expected to return at least market-based returns, if not more. Of course, they may not, but the intent is clear and the defining reason for these resources.

Such investment money is freely given – either by a single individual or many individuals giving it to others to invest. Throughout its life, investment money must conform to market rules. When it ceases to, losses accumulate and investors flee.

If successful, profit is returned to the investors and, if unsuccessful, these investors absorb losses. In both cases, the results advance the economy – concentrating resources in the hands of those making good decisions and shifting them away from those making bad ones.

The public sector’s use of resources differs from the private’s at each step.

The public sector does not differentiate its own spending. Everything becomes “necessity” – while individual citizens may label different items differently, government simply absorbs all these verdicts and casts the whole as vital. It is for this reason that government on its own finds it so hard to cut spending.

None of the public sector’s resources are freely given. Governments obtain their resources from taxing. Even when government borrows, it can do so only on its ability to obtain money by fiat.

These resources are therefore not excess or disposable to those from whom they are taken. It is the government, not the individual who determines their amount. As a result, few individuals or businesses have as high a percentage of income that they invest as they pay in taxes.

None of the public sector’s resources are dispersed with the intent of making a profit. Often, just the opposite rationale for public sector spending is given – doing what the private sector does not. As a result, public sector resources are distributed based on politics, with no government program not having powerful political allies supporting it.

The public sector expressly ignores economic criteria when allocating its resources. When by chance its allocations do coincide with economic criteria, it crowds out more efficient private sector investment by subsidization or outright monopoly.

Because its resources are neither allocated based on an expected profit, nor maintained based on competition, government rarely earns a profit, or does so for very long.

As a result there is never a return to “investors” – any return is generally dispersed throughout the citizen body and often expressly directed away from taxpayers as part of intended income redistribution.
Losses in contrast flow immediately back to the taxpayer. Because the taxpayer does not freely choose to “invest” his resources with the government in the first place, the money will keep on coming, regardless of how it is spent. Because the public sector does not allocate its resources based on economic criteria, it can and does continue to allocate resources to under-performing programs – so much so that poor performance becomes a rationale for additional resources.

While the private sector allocates resources in a pro-economic way, the public sector distributes them in an anti-economic way. Not only is the process of obtaining, determining, and investing private and public resources different, the outcomes from the two processes are diametrically opposed.

Government does not invest in any sense of the word or replicate any stage of the private sector investment process. Government just spends.

Its ability to spend rests on its power to tax. Its power to tax helps isolate it from pro-economic decisions and this isolation is only reinforced by the political process and competition’s absence after allocation.

In short, there is nothing more opposed to true investment than government spending. This is not to say that America is not in need of more real investment, just that government is not the entity it needs to do it.