Driving Investment: Public or Private?

Yesterday’s Statistics Canada release on public and private investment spending intentions noted that: “Canadian public and private organizations reported that they intend to invest $394.1 billion in construction and machinery and equipment in 2012, up 6.2% from investment in 2011.”  Indeed, one story I came across mentioned how important public sector capital spending was going to be as an economic driver next year given that public capital spending was going to be up 6.25 percent compared to 6.23 percent for private capital spending.

With all the talk of public infrastructure spending as a driver for the Canadian economy during the recent recession it piqued my curiosity to see over time how much capital investment spending (construction, machinery and equipment) originates in the public sector and how much in the private sector.  As the accompanying figure shows, both have grown but nominal private investment far outstrips nominal public investment by an average of about 4 to 1.  However, the nominal average annual growth rate for public capital spending over the period 1992-2012 has been fairly close but below that for private capital spending – at 5.1 percent versus 5.9 percent. 

As a result, the public share of total capital spending on construction, machinery and equipment has declined from 25 percent in 1991 to 22 percent by 2012.  These end points however mask the fact that the public share declined from 1991 to 1997, grew ever so slightly from 1997 to 2006 and then grew rather substantially from 2006 to 2009 – but has since declined a bit again (see Figure 2).  A quadratic trend fits the data quite nicely if that is the kind of thing you are inclined to do.   There is a period of decline from 1991 to 2002 and then an increase from 2002 to 2012.

Public sector capital formation over the last twenty years has accounted for a range of 15.8 to 25.0 percent of total capital formation.  Not surprisingly, it was highest during the recession periods of the early 1990s and the late 2000s. 

Comments

[Ryan]

The more important question to ask - in my opinion - is what benefits an economy actually obtains from private versus public capital investment.

Consider: If RIM invests in all new computers and IT infrastructure, RIM workers gain productivity, and this eventually finds its way into the marketplace in the form of either more RIM products at the same price, or the same number of RIM products at a lower price, or some combination thereof. (Or, if you're REALLY cynical, higher profits for RIM executives, which in turn drive more capital investment via the stock markets.)

Yet, if Canada Revenue Agency engages in the same IT infrastructure investment, the market derives absolutely no benefit, other than the sales expenditure transferred to the computer retailer (who also gets that money when RIM does it, so it's not a government-unique stimulus). A more efficient CRA doesn't "improve tax outcomes," bring "more tax products to market," or "decrease the cost of paying taxes." It simply benefits the CRA and no one else.

This is why folks like me say that public capital expenditure is always wasteful. I care if RIM offers me a lower-priced Blackberry. I do not care if the CRA conducts its audits more accurately.

For more on this issue... http://mises.org/daily/5772/

[Jim Sentance]

And of course public investment in roads, sewers and so on don't ever bring benefits to anyone but the government either.

[Determinant]

Yet, if Canada Revenue Agency engages in the same IT infrastructure investment, the market derives absolutely no benefit, other than the sales expenditure transferred to the computer retailer (who also gets that money when RIM does it, so it's not a government-unique stimulus). A more efficient CRA doesn't "improve tax outcomes," bring "more tax products to market," or "decrease the cost of paying taxes." It simply benefits the CRA and no one else.

This is patently and demonstrably false. Do you really want to go back to paper forms for income tax? Or pay H&R Block to fill out those forms? Internet filing programs which are free for low-income Canadians are a net gain for income tax filers as they cost less than H&R Block plus give you the chance to file for free, reduces the cost of tax collection, particularly routine auditing (and who is against technology reducing the need for evil public servants?) and gets you your income tax refund back sooner because of less need for routine auditing. If I recall correctly CRA has reduced staff because electronic filing has increased productivity and efficiency.

Plus the private sector still has the technology gain because CRA contracts for IT development from the private sector.

Your argument suffers from confirmation bias.

[Ryan]

@Jim - Are you suggesting that infrastructure is a "capital investment?"

@Determinant - The conversion to e-forms is over and done with. Setting aside my opinion on the value of income taxation to begin with, and even if I grant that the conversion to e-forms was a major efficiency-gainer, you could hardly argue that every government capital investment (or even the majority of them) has that big a yield to the economy at large. And need I point out that all the organizations that facilitate e-filing are private? I use Intuit's solution. What is the tax filing program that the CRA came up with?

[Determinant]

The entire e-filing service on the back end is an CRA show. The server running it went down two years ago during tax time and it froze returns for two days.

The CRA mandates that all e-filing programs be available at no cost to low-income taxpayers. You pay based on your return and for whatever "optimization" advice the program includes.

The private sector responded to the CRA launching an e-filing system, the private sector response was reactive and this is documented.

Speaking of the private sector, who exactly do we count infrastructure like roads and bridges. Those are paid for by governments but designed by civil engineering firms and built by private contractors. But the entire cost is borne by the taxpayer.

Speaking of such firms, one who bids frequently on municipal contracts in Ontario is known to have a fish pond at its office. They stock it with trout and the municipal councillors from client municipalities are invited to fish from it and the resulting fish fry. Councils who aren't clients don't get an invitation. I am friends with the former mayor of my town. She forbade her council from going, she said "we won't be bought."

Who is milking the public purse here? I have more examples of consulting engineers engaging in shady behaviour to secure government contracts.

[Jim Sentance]

Ryan - What would you call it? Last I looked it comes under the capital part of the budget.

I don't disagree with the notion that a fair bit of public investment in or subsidization of capital is a less than optimal use of resources, but to suggest that "public capital expenditure is always wasteful" is a patently absurd statement to make, as is the corollary you imply that private investment tends not to be.

[Ryan]

@Jim - I would never claim that private investment is never wasteful. In fact, it frequently is so. The difference is that the waste is contained to private expenditure. The rest of the country is not "on the hook" for such waste. As for whether infrastructure is "capital" or not, as far as I'm concerned the term "capital" when used in economics is rather specific and not open for debate. If I am a construction company that produces roads, I am not producing capital; I am producing an end-user good. Your mind may vary.

@Determinant - You are milking this CRA example because it is good for your underlying claim that public capital investment benefits the market. The problem is that facilitating taxation is not "good for the market." Taxes are not "costs." Every tax dollar collected is money that was first generated by a working member of the private sector. We all know this to be so. Taxes are a construct of policy, not of markets. We can end them whenever we please.

[Determinant]

The police are not a cost? Fire services? Border Guards? Taxes are an expense, that is a cost. Any other definition is special pleading.

What about the military-industrial complex? I've worked in several part of it. It is very, very complex. But aerospace has benefited greatly from fighter-jet technology which leads civilian technology. Heads-up displays and "glass cockpits" with computer screens instead of gauges are old hat in the military but are being introduced to the civilian market in the latest airliner models.

How exactly does the accounting work for the myriad of suppliers in the military industrial complex? They are private companies, I assure you, but their client is government. Perhaps it is different when the client is a foreign government but I can't see the difference. Nor can their corporate income statements. Nor can the firm that supplied the bolts just like it did to a thousand other customers.

[Jim Sentance]

Ryan, while at some level I can imagine there might be a use of the term capital in economics that excludes public infrastructure (I'm sure Nick could come up with something like that if he tried), but I'd be interested to see references to that. As far as the current discussion goes - based on the post and the Stats Can data at issue, which I think clearly do include public infrastructure in the definition of capital investment, I'm thinking you're splitting hairs.

[Bob Smith]

Ryan,

I'm not sure the CRA example is a particularly good one. If, to give you a real life example, they install new computer systems they might be able to speed up the processing of returns, tax filings and objections, reduce compliance costs, reduce reliance on (heavily unionized, therefore expensive)manpower, rather more effectively detect evasion (thus allowing the fiscal to collect more taxes at lower rates). All of those are results that benefit joe q public, one way or the other.

On that note, while taxation is indisputably a cost (of valuable public goods) it doesn't follow that doing it more efficiently is bad. Quite the contrary, ideally we want to it as efficiently as possible, since inefficient taxes create compliance cost for taxpayers and further distort the market. If it's a cost, we want it to be as costless as possible.

I have great doubts about the abilities of governments, in practice, to make good investments. And a great deal of what politicians call "investments" are nothing of the sort. But not withstanding that healthy cynicism, you do see governments making capital expenditures that are welfare improving for all concerned.

[Declan]

"I do not care if the CRA conducts its audits more accurately."

Nonsensical comments like this aside, I think one of the primary questions regarding the benefit to investments is not whether they are public or private, but whether they are in pursuit of absolute or relative gains.

e.g. Governments spending money on an arms race is a (collective) waste of resources. Ditto for financial firms spending billions to get the fastest processor to get a microsecond advantage in market trading.

Governments building bridges, doing more accurate audits, processing customs forms more quickly, etc. all provide absolute benefits as do firms building better inventory management systems, developing credit bureaus, etc.

[J.V. Dubois]

Ryan: "As for whether infrastructure is "capital" or not, as far as I'm concerned the term "capital" when used in economics is rather specific and not open for debate."

Really? I strongly disagree. Is nail an example of capital or consumption good? I really do not know. If the nail is used to hang a picture on a wall of some firm, I would think that it can be considered as a consumption. Depending on your opinion how existence of such a picture boosts production capacity of that company. Maybe if the nail is "consumed" to construct a shovel that is in turn used for agriculcure, than maybe we can consider the nail to be capital good? Is food capital or consumption good? What if we have a really good harvest and store a lot of grain in a silo for later usage? Does it not mean that we now have ability to free some resources (capital) from next-year agriculture labor force to work on different projects as we saved enough food to feed make up for lower harvest while farmer are doing something else? Or on more "philosophical" level, is not food a necessary component for people to live and work? It is an essential component that is required for human labor to exist, is it not?

There is another angle that makes your distinction between "private" and "government" capital ridiculous. Look at health care. Do you consider "investment" in a new private US hospital as useful and investment in state hospital for instance in UK as wasteful? Even if they offer at least comparable health services for their "customers". Or do you think that investment in arming a private security company is useful while arming state policemen is wasteful and useless?

[Nick Rowe]

There is more than one way to define "capital". We can debate what is the most useful way to define concepts like "capital".

My guess is that Ryan is coming from Menger's concept of capital goods. According to that conception, IIRC, there are "first order" goods, which are directly consumed. "Second order" goods are used to produce first order goods. "Third order" goods are used to produce second order goods. Etc. Capital goods are seen as goods of higher order (above first order consumption goods).

(This is similar to the "means of production that are themselves produced" definition of capital.)

This Mengerian way of thinking about capital has its uses. But it's different from thinking of capital as the time-structure of production and consumption (which also appears in Austrian economics) where investment is when you undertake (opportunity) costs today for future consumption benefits. Capital is that which yields future benefits at a present cost.

I prefer to think about two distinctions: final goods vs intermediate goods; present costs for present benefits vs future benefits.

In my preferred way of thinking, all consumer durables (like CDs) are capital goods, because they yield future benefits, even if they are final goods (first order goods) rather than intermediate goods (higher order goods).

[Nick Rowe]

As for the ownership question: let me put it this way:

Think back to the Lange/Lerner/Mises/Hayek Central Planning debate. A central planner faces exactly the same question that a market economy faces. What to produce, how to produce it, who gets to consume it? That includes questions of what order of goods to produce (final vs intermediate), and the time-structure of production and consumption. It seems sensible to say that the central planner faces exactly the same questions about consumption vs investment that a market economy faces. It doesn't seem sensible to stop talking about "capital" when we talk about decisions made by government. We would just have to invent a whole new parallel vocabulary of words.

[Ryan]

@Nick - Sorry, I may have expressed myself poorly. I'm not arguing that governments can't invest in capital, I'm arguing that such investments don't offer much to the broader economy. There is no ROI precisely because governments are not interested in seeking a return. That was my point.

The majority viewpoint here in Canada seems to be that government expenditures are net-positive on the economy "even if they might be more efficiently made by the private sector." I am questioning that point of view.

Take for example Declan's claim that an arms race and faster spot-trading technology are equivalent wastes of resources. The key difference - and this is absolutely crucial - is that I pay for the arm's race the minute I am taxed; I do *not* pay for a broker's technology unless I happen to be doing business with that broker. This makes all the difference.

Profits and production benefit the at large economy. Government-mandated and government-supervised capital consumption does not.

Finally, I'm willing to say that spending on "roads" is capital investment of some sort, I'm just not sure what sort that is. I can go for Menger's definition, or I can go with the Chicago-flavored definition of capital I learned in school, i.e. any non-labor production input. Nobody "produces" end-user goods with roads, so I don't see the connection, but I'll accept it if that's how everyone else sees it. I just honestly didn't realize people looked at public infrastructure that way.

[Bob Smith]

Nobody "produces" end-user goods with roads, so I don't see the connection, but I'll accept it if that's how everyone else sees it.

Sorry, but how do you think that inputs get from where they're produced to where final outputs are produced? I don't think you'd dispute that a conveyer belt in a factory is a "capital" good, used in the production of the end-user goods. Roads perform the same role externally to the factory. Every factory in Canada that uses inputs shipped by truck "uses" roads in producing their goods.

"Take for example Declan's claim that an arms race and faster spot-trading technology are equivalent wastes of resources. The key difference - and this is absolutely crucial - is that I pay for the arm's race the minute I am taxed; I do *not* pay for a broker's technology unless I happen to be doing business with that broker."

Sorry, why is that a meaningful distinction? That goes to the greater potential for governments to waste money through lack of accountability, in that they can provide goods and services that less valuable than what "consumers" of those goods or services (i.e., taxpayers) are willing to pay for those services. But it doesn't follow that one form of "waste" is more "wasteful" than another.

"Profits and production benefit the at large economy. Government-mandated and government-supervised capital consumption does not."

That doesn't make any sense. If production benefits the economy at large, does it matter who the producer is, whether it's a company, a government, or an organic fair-trade co-op? Think about that statement critically, does that mean that if a for-profit entrepreneur builds a school, that benefits the economy, but if a government builds the self-same school it doesn't? How does that make any sense? Why does the identity of the investor matter? This argument is the mirror image of the, equally unfounded, claim heard in left-wing circles that if something is done by the government, it's good, but by a for-profit business it isn't.

[Ryan]

@Bob - Very fair questions! I'll answer in order. (By the way, if I'm hijacking the intended topic of this post, let me know, and I'm happy to discuss this via another format! :)

First, roads are certainly useful, but does that mean they are capital? If I am a bicycle courier, I am required to breath in order to courier messages - does that make air capital? My answer is that there are limits to what we are willing to call capital. Wikipedia defines economic capital as, "already-produced durable goods used in production of goods or services." That is consistent with how I understand the term, but not consistent with the idea that infrastructure is capital. In fairness, elsewhere in the same article, Wikipedia notes the use of the term "public capital," defined primarily as infrastructure. I had no idea this term was widely used. Like I said, I'll accept the term, I just had no idea people looked at capital that way. I'm more accustomed to the "durable goods" definition, and have seen it more widely used than the "infrastructure" definition. Just my experience, certainly not the "law!" :)

Second, with regard to waste it is absolutely meaningful (in my opinion) whether a cost is borne by all taxpayers, or by only a subset of them. If my neighbor wants to flush his fortune down the drain, I am okay with that. If the government wants to tax *my* fortune and then flush it down the drain, I see this as a problem.

Third, yes, it does matter to me who the producer is. If the producer is a private company, I get to exercise my consumer choice. If the producer is the government, then my resources are taken away from me and put to some use other than what I would prefer them to be used for. I appreciate this choice very much! If I retain this choice, I live freely and economic resources tend toward their most-desired use, as determined by consumers. If the government takes this choice away from me, along with my resources, then there is a much better chance that I will never reap the benefits of those resources. So, at least to me, the choice is very valuable.

[Bob Smith]

Ryan,

I'm not sure why a road wouldn't be a "already-produced durable goods used in production of goods or services", per your (and my)understanding of what constitutes a "capital good". Is it is a durable good? Yes. Is it used in production of goods or services? Yes, by couriers, factories (delivering inputs/ouputs), etc.

Your 2nd and 3rd points are fair positions, the great virtue of a market economy is choice, but don't really offer any insight into whether or not public investment can create wealth . That's a critique of the form (and distribution) of goods and services that governments choose to produce (rather than what you might choose for yourself), and it's a fair one, but it doesn't mean that governments don't, or can't, create wealth. Moreover, while choice is a virtue, I suspect that outside of the realm of the hardcore libertarian, it is not the sole overriding virtue - other values come into play. We aren't individually given a choice as to how much social assistance, police/judges, or soldiers we choose to "consume" (although we do collectively get to make those deisions) because, in those instances "choice" conflicts with other values (equity, justice, national security).

Finally, I don't think it's helpful to inherently equate government supplied goods and services with a lack of choice. True, governments tend to like one-size fits all policies, but "public" goods and services can be supplied in a manor that respects, at least to a degree, individual choice while achieving other public goals that likely would not be achieved by the market. My favourite examples of this are charter or voucher schools of the sort operated in the US, UK, Sweden or Alberta which split the financing of public goods off from the provision of those goods. That's an example of a hybrid government/market system which give parents choice in terms of the substantive education services their children receive (and, indeed, likely gives most parents more choice than they would have in the absence of government financing), while still achieving the states equity/citizenship objectives.

[Determinant]

Third, yes, it does matter to me who the producer is. If the producer is a private company, I get to exercise my consumer choice. If the producer is the government, then my resources are taken away from me and put to some use other than what I would prefer them to be used for. I appreciate this choice very much! If I retain this choice, I live freely and economic resources tend toward their most-desired use, as determined by consumers. If the government takes this choice away from me, along with my resources, then there is a much better chance that I will never reap the benefits of those resources. So, at least to me, the choice is very valuable.

This position has been utterly refuted by the failure of health insurance in the United States. Living without health insurance there is not freedom. Most find it extremely oppressive. Universal health insurance is a very freedom-affirming action in that it enhances labour mobility. Any given person may be a really good carpenter, or happen to be a store clerk, or maybe an accountant, but their health coverage should not depend on their occupation such that a certain occupation imperils their access to health care.

Or from the employer POV, why should they internalize the costs of their employee's general health? I have discussions with small businessmen and they could not agree more that the business of business is business, that is to make money at their business model, not to be a welfare organization for their staff.

Even Hayek noted that health was a market where your argument falls down, ryan. Like all ideas there is a class of case where the idea fails. Health care is an important example but there are others.

[Determinant]

As a complete tangent, Nick, there is an interesting article in the Globe & Mail today that is right up your professional alley: http://www.theglobeandmail.com/report-on-business/economy/iceland-eyes-loonie-canada-ready-to-talk/article2356634/

Iceland is seriously considering dumping the Icelandic Krona and adopting the Canadian Dollar wholesale. They have approached the Bank of Canada and the Department of Finance and the Canadian Ambassador has cautiously commented on the subject. The answer is not no, but Iceland will give up all power overs its currency and monetary policy.

This happened once before, Newfoundland, then a separate colony, adopted the Canadian Dollar in 1895 after a banking crisis. The Newfoundland Dollar circulated notes but it was tied to the Canadian Dollar and Canadian banks were the banks in Newfoundland. The Bank of Montreal was the fiscal agent for the Government of Newfoundland, just as it was to Canada.

[Ryan]

@Bob - Imagine fitting "roads" into a Cobb-Douglas function. Now do you see my objection? More specifically, take a look at the defintion of durable goods on Investopedia (http://www.investopedia.com/terms/d/durables.asp#axzz1nzcrnxaR); it clearly indicates that durables are consumer goods. So there is at least one widely used definition of durable goods that excludes roads. I think it is a definite stretch to say that roads are "durable goods." Most people who use that term would not immediately think to include public infrastructure in that category.

Whether public investment can create wealth, at least according to the traditional Austrian theory, is a definite no. There is always a loss of potential growth as resources are taken away from their consumer-determined use and applied to public works projects. I did my best to explain this process in the Mises Daily article I linked to in my first post, but I'll concede that others view the situation differently.

But with regard to a lack of choice, the Austrian theory is important. The specific choices to which I refer are the specific ones that I am denied. It's true that I have some choice between tax installments or lump-sum tax payments, so in that sense "I have a choice," but of course this is nowhere near the same thing as being able to retain my money and choose for myself how I spend it. The choice between an array of schooling options that are all forced to conform to the same State standard is again not much of a choice, because I cannot opt for a competing standard. We have to be conscious of the difference between real choice and the illusion of choice. Here in Ontario, I can choose any licensed doctor I want... Of course, nobody is accepting new patients. These kinds of "choices" are really just ways we help ourselves feel better about what we are compelled to do. I concede that this is a libertarian viewpoint, but it is a pretty difficult one to object to. Even if you don't fully agree, you can surely see my point.

[Bob Smith]

"@Bob - Imagine fitting "roads" into a Cobb-Douglas function. Now do you see my objection?"

Not really, how do you fit a drill press into a Cobb-Douglas function? Are drill presses not capital goods? Cobb-Douglas functions don't produce wealth, people and factories do. And they use roads in doing so.

As for the investopedia article, you'll note it refers to "durables" (as in "consumer durables") not "durable goods". A durable good is just a good that does not wear out quickly (like a car, a house, machinery, etc.). It makes no sense to say that "durable goods" are consumer goods because capital goods are, inherently, consumer goods A road is, self-evidently durable (it doesn't disappear when you use it) and it is self-evidently a "good" (admitedly a rather large one).

"There is always a loss of potential growth as resources are taken away from their consumer-determined use and applied to public works projects."

Two points, a "loss of potential growth" isn't the same thing as not creating wealth. It just means that public investment might create less wealth than an alternative private investment (which I'm happy to concede, although conversely, such spending might have other desirable outcomes, e.g., equity, justice, national security). You're essentially conceding the point that public investment can create wealth. Second, never say "always", because it's always easy to come up with a single counter-example to disprove your thesis - for example, do you have any doubt that a public justice system creates wealth (imagine trying to carry on business in the absence of the rule of law and an impartial court system - we'd be Somalia. That's a point that even ardent libertarians concede.)

"The choice between an array of schooling options that are all forced to conform to the same State standard is again not much of a choice, because I cannot opt for a competing standard".

You might want to read up on the literature of the charter school or school voucher movement, because it's generally the anti-thesis of what you're describing. The whole point of charter schools or school voucher is to allow parents to choose schools outside of the "system" (schools which, on their own, they might not be able to afford). Not only do those systems provide families with very real choice (i.e., schools with different religious or pedagogical philosophies, different academic focuses, etc.), but in a very real sense they provide parents with greater choice than they would have in either the absence of a publicly funded school system or in a traditional public school system.

[Nick Rowe]

Determinant: Iceland is on the Greece post.

[Ryan]

@Bob - Sorry, you lost me on the Cobb-Douglas thing. My point is that I have never seen anyone include the cost of public infrastructure in a microeconomic analysis. If you're honestly suggesting that people do it all the time, I'd say you're in the minority viewpoint. At any rate, further discussion along those lines is a little irrelevant considering that I have already stated twice that I am willing to accept the concept of "public capital," I just hadn't ever heard the term before or seen it used. If you're not even willing to admit that I have a point about excluding infrastructure from microeconomic production models, then I have to say that I am rather surprised.

With regard to "durables," I again return to the point above - further discussion along these lines is a waste of time considering I have already conceded the point you're arguing for. I had hoped that you would be able to see where my misunderstanding was, but it appears that you would rather not go there.

With regard to wealth creation, I addressed this in the Mises Daily article I wrote and don't want to re-write it here. All I will say is that 100% of the government's wealth comes from the private sector and any resource used in a way other than consumers' preference is a waste. Of course, as I said above, what's important to me is whether or not the public is on the hook for that waste.

I would, however, like to hear you expand on your claim that the justice system creates wealth. Do tell.

Finally, I'm not sure where you're going with your voucher example. I'm not arguing against vouchers; they're certainly better than the absence of vouchers. I'm just saying it's a far cry from real consumer choice on the free market. If you won't even concede that much then we probably don't have much more to talk about.

[J.V. Dubois]

Ryan: "All I will say is that 100% of the government's wealth comes from the private sector and any resource used in a way other than consumers' preference is a waste."

Please stop inventing and changing your definitions on the run. It really does not help this discussion. The first part is not even true and it can be disproved just by one counterexample. Obviously, in centrally planned communist economy with no private sector your premise cannot hold.

Also the second part, where you define "waste" as any usage of resources that is not made according to market principles, for which I am sure you could invent another definitions on the run, is not true. This is not the way most people think of a “waste”. Some may say, that the waste comes into play if you select inferior alternative from multiple choices to achieve some specific goal. You were reminded several times, that many people do not consider "largest possible output" as the only goal there is. Social justice, fairness and stability of the social contract can be more important aspects of any given economic system than its raw performance in terms of measured output. However with this output focused measure, it is easy to show, that sometimes government can provide superior alternative to purely private arrangement in specific segments. Health care, primary and secondary education, army and police force, judicial system and so forth, all these examples were thoroughly presented by people in this discussion.

Also your example where you shown that you do not care about private waste of resources is not valid. Why? Because of externalities. If a rare resource is privately and “wastefuly” consumed, it still can impose costs on third party beyond the immediate effect on an original "owner" of that resource. If an owner of the land poisons it so that it cannot be used to grow crops anymore, he permanently decreases potential output of the whole society from now on forever. Of course this is an extreme example, in reality not that many people private parties willingly destroy their property. However one can still question the overall impact of some forms of private consumption of resources. There surely is a difference between investment into a new collection of luxury designer clothes, compared to investment into a brand new ways to produce clothes that make it more available for masses. Purchase of a new uxury handbag and life-saving surgery may have similar impact on the output as measured by GDP, but one can still question which of these two alternatives is a "waste" on different grounds.

Just to conclude, I have to go back to your original definition of waste. Because this is a very common issue when discussing something with libertarians. They tend to construct their argument on several untouchable "axioms", such as that market is always and everywhere the best possible way of organizing economic (and sometimes every mundane) activities, or that private ownership is unalienable human right etc. In other words, they consider these principles as ends by themselves, while other people consider them just as means to an end. I will use the private property thing as an example. I for instance tend to think about private ownership as a system that has many unpleasant results. However society as a whole tolerates these bad results because most of the time benefits of this arrangement of production are larger than costs. But we can all imagine situation where the inverse is true and when it is advantageous to temporary suspend the property rights if it is in a "public interest". Most mundane examples are natural disasters or wars, however one can easily think about other situations, or specific activities that warrant such measures on more frequent basis.

[Ryan]

@Dubois - A reminder: We are having a discussion about the wealth-creation potential of public versus private spending. You may measure it in qualitative benchmarks such as your sense of "social justice," (however you may choose to define it) but I measure wealth in income and asset valuation. GDP is an imperfect measure of this, but is currently the best we have at the level of a national aggregate.

Wealth creation does not come down to the definition of "waste" or "social justice." This is not a problem with my definitions, it is a problem with yours: You simply cannot define "social justice" in such a way that higher or lower levels of public spending create higher or lower levels of wealth. They are entirely separate concepts.

If you accept that there are negative externalities in private enterprise, then you ought to be honest and accept that there are also negative externalities in public spending. Two such widely accepted externalities are the crowding out of private spending and the reallocation of capital to purposes other than the intention of their original owners.

That is

not

a definition problem.

[Bob Smith]

"My point is that I have never seen anyone include the cost of public infrastructure in a microeconomic analysis."

Probably because public investment is, inherently, outside the purview of the individual or the firm, which is the level at which most micro analysis takes place. In the traditional cobb-douglas function used in intro micro course, the individual/firm only has to choose between private capital and labour - public investment is implicitly taken as given.

" All I will say is that 100% of the government's wealth comes from the private sector and any resource used in a way other than consumers' preference is a waste."

Except that that's palpably false, as Dubois pointed out. More to the point, the use of public resources is not inconsistent with public preferences - after all, the public wants a justice system, firefighters, the armed forces, etc.. Those services can not be efficiently provided by private actors (for a whole host of reasons which are covered in the standards literature), and therefore are provided by governments through taxation. To say that they don't create wealth is ludicrous, indeed, to a large degree those sorts of public institutions are the basis for the wealth of western countries - again, without them, we'd be Somalia).

"Finally, I'm not sure where you're going with your voucher example. I'm not arguing against vouchers; they're certainly better than the absence of vouchers. I'm just saying it's a far cry from real consumer choice on the free market. If you won't even concede that much then we probably don't have much more to talk about."

Actually, I won't concede that, for the simple reason that it's not true. Realistically, a voucher system provides better access to "real consumer choice" than either a pure public or pure private education system. It's all well and good to say that, in a pure private system, you have "real" consumer choice, but of course, for a good chunk of the populace, that isn't a meaningful choice, since they can't afford to choose any but the cheapest education (if that) - to pretend otherwise is, at best, naive, at worst, disingenuous. The purported choice, in that case, is an illusion. Of course, in a pure public system, there is no choice . A voucher system or a charter school sytem provide meaningful and substantive choice.

"GDP is an imperfect measure of this, but is currently the best we have at the level of a national aggregate".

So last year's earthquake in Japan created a great deal of wealth didn't it? Or maybe not. I'm the first to admit that many alternative measures of "wealth" are flaky measures which reflect the ideological prejudices of their creators, rather than some well accepted notion of well-beeing. But at the same time, I'm not so naive as to worship at the alter of GDP. First, GDP isn't a measure of wealth, it's a measure of income. Second, what matters to inviduals isn't maximizing "wealth", it's maximizing the much woolier notion of "well being" or "happiness". Certainly income or wealth, plays into that "well being" or "happiness", but so do other factors (leisure, family, community, safety, religion, the list is, if not endless, damned nearly so).

To focus solely on "wealth" or GDP as the endgoal is become the embodiment of the caricature of economists favoured by people who don't actually know much about economics. To take that position because GDP "is the best we have" makes it worse. I'm reminded of an old economist joke:

"One night a policeman saw an economist looking for something by a light pole. He asked him is had had lost something there. The economist said, "I lost my keys over in the alley." The policeman asked him why he was looking by the light pole. The economist responded, "it's a lot easier to look over here."

If you're looking at GDP, because "it's the best we have", you're looking for your keys by the light pole.

[Ryan]

Okay, Bob, fair enough. You win.