That there will be a huge “stimulus” package in the early days of the Obama administration is a certainty. Nearly everyone thinks the government must do something drastic to, using President-elect Obama’s word, “jolt” the economy into recovery. That something is deficit spending on “infrastructure.” But it’s not as simple as it sounds. A big debate is shaping up over whether the program should concentrate on big, transformative projects or boring bridge repairs and pothole filling.
Either way, it is taken for granted that deficit spending will stimulate a sustainable recovery. But it won’t. A real recovery requires real savings and investment to correct for years of government-induced waste. Government spending, however, displaces savings and investment. Whether the government borrows, taxes, or creates money through the Federal Reserve, real wealth will be commandeered by bureaucrats. Jobs thus created in the parasitic sector will mean fewer jobs created in the productive sector. That can hardly be a recipe for recovery.
Moreover, real danger lurks in the Obama administration’s plan to use the recession as a cover for “transforming” the economy, particularly with respect to energy. “Transforming the economy,” of course, is a euphemism for the discredited idea of central planning. What Obama has in mind is not full-out central planning, but, given how pervasive energy is, government direction of that sector is not far from planning the entire economy. We should have learned from the Soviet experience that no one can plan an economy. The knowledge required to redesign something as complex as an economy is not available to anyone. An economic system is not a machine but a dynamic process resulting from countless micro decisions made by billions of producers and consumers worldwide. Much of the knowledge they act on is never written down or even discovered until they improvise in the face of unexpected market alternatives. How could a planner hope to succeed?
Obama believes the government should engineer a move away from a carbon-based economy by creating incentives for “green” technologies. But he can’t know that that would be a good cost-benefit move. Even if the hypothesis of serious man-made global warming had no empirical or theoretical problems, Obama and his “experts” couldn’t rationally determine which of the many alternatives or combinations of alternatives should be adopted. After all, the real questions are not the broad abstract ones such as, “Should we use non-carbon-based fuels?” Rather, they are the countless smaller questions such as, “Should we build a high-speed rail line?”
Even if we knew the answer was yes, that would tell us nothing about where the line should be located or how it should be built. Such decisions would involve many choices, but only markets can inform us about the tradeoffs in an intelligent way. Further, do we know that a line should be built at all? Building it would take a huge amount of resources that could be used for any number of alternative purposes. There are no grounds for believing that Obama and a few “experts” can know whether the line is really the “best choice” among all the available options. In contrast, the genius of the free market is that it answers such questions by drawing on the knowledge and preferences of the multitude, rather than by leaving them to a few myopic government operatives. The market also relies on consent, while government uses coercion. That’s no small consideration.
Does this mean that the new administration’s stimulus plan should stick to mundane infrastructure repair? Actually, no. As noted, such spending would merely displace private investment. But further, such projects are not neutral; they also contain elements of central planning. Should tax money fund projects to relieve traffic congestion in urban areas? Someone with a “green” agenda would say no, hoping traffic jams will encourage the use of buses and subways. All government spending has an agenda behind it, and there’s no reason to think the politicians’ agendas would make the best use of scarce resources.
Better to privatize the infrastructure and let the market’s “wisdom of crowds” make the decisions.