Toilet seats

Former Bush adviser and Harvard economics professor N. Gregory Mankiw is questioning the big stimulus plan.  Among his concerns:

“Will the extra spending be on things we need?  If you hire your neighbor for $100 to dig a hole in your backyard and then fill it up, and he hires you to do the same in his yard, the government statisticians report that things are improving. The economy has created two jobs, and the G.D.P. rises by $200. But it is unlikely that, having wasted all that time digging and filling, either of you is better off.

People don’t usually spend their money buying things they don’t want or need, so for private transactions, this kind of inefficient spending is not much of a problem. But the same cannot always be said of the government. If the stimulus package takes the form of bridges to nowhere, a result could be economic expansion as measured by standard statistics but little increase in economic well-being.”

There’s no doubt that people are covninced that government spending is wasteful (see $600 toilet seats, et al).  And it’s true that government sometimes builds bridges to nowhere.  But, here’s the deal, more often it builds bridges to somewhere, and if government doesn’t build bridges to somewhere we won’t have many bridges to anywhere.  In economic terms, not everything I need and want is a PRIVATE GOOD, something that I can go to a store and buy.  Some of the things I need and want are PUBLIC GOODS, like bridges and roads, that private individuals are not selling.  Why?  Because it’s difficult, if not impossible, to exclude non-paying people from using the product.  Over the past 30 years of demonizing government, it’s not surprising to find that public goods have been neglected and private goods delivered.

For example, in my city I have most of the private goods that I want, but I drive across potholed street to get to my house.  If I could go to Home Depot and get a good road, I would.

Another problem with Mankiw’s analysis is the assertion that “for private transactions, this kind of inefficient spending is not much of a problem.”  Let’s think about that for a minute.  In our recent past private individuals purchased a record number of houses they couldn’t afford, and lenders lent a record amount of money without a realistic expectation of being repaid.  These were private transactions.   This scenario was overseen by private companies engaged in the business of finance.  Their job was to minimize and manage risk.  They failed, and now the costs of these poor decisions are being borne by the public.

I’d call this private spending on “things we don’t need”.  On an epic scale.  Kind of like a $1 trillion toilet seat.

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