Public Works Don't

by Jim Davies

Exclusive to STR

January 5, 2009

A financial report I encountered says that "President-elect Barack Obama, who takes office Jan. 20, has said his first priority will be to pass an economic stimulus plan that will invest in public works and create or save 3 million jobs." I don't doubt that it's accurate, and so am horrified.  

One thing he and his admirers have glossed over is that almost the entire infrastructure of the United States is already a vast, long-running "public works program." If there is a road so full of potholes that the cost of repairing damage to vehicles that use it exceeds the estimated cost of repairing the road (and they now admit there are plenty), that fact is a stunning indictment of the public works program that put the road down in the first place and failed to maintain it ever since. Government has had 100% control of that infrastructure, ever since the market was almost totally excluded from road ownership" some time early in the19th Century. If it has failed--and now its supporters say it has--then the failure is a failure of government, and of public works. For the almost-President to promise "investment in public works" therefore means that he plans to take a failed strategy and do more of it. Some "change"! Some "hope"! If he was really interested in improving the infrastructure, he would auction it off to free enterprise and repeal all laws that impede its for-profit operation.  

But I dare say his focus is not so much on that objective, as on the idea of putting idle hands to work. Government has caused a major economic downturn, by pumping in artificial money that caused a housing bubble, and by forcing lenders to write unsound mortgages to make sure the bubble burst (I don't say that consequence was intended, just that it was so caused). That financial collapse is already being allegedly solved by more of the same--new injections of artificial money. The patient is bleeding, so bleed him some more, that will do the trick; in medicine, that's called quackery. And now, before even taking office, the activist who took a job in Chicago to urge unreliable borrowers to take advantage of those forced mortgage offers is now proposing to fix the crumbling public works of the last half century by dramatically increasing public works. That, too, is sheer quackery; and to the extent that it puts idle hands to work, it removes those idle hands from the pool of labor available to the productive sector if and when it is allowed to recover and hire people to do something productive.  

Several years ago it was observed that on average, government is much less efficient than profit-seeking enterprise and the "bureaucratic rule of two" was formulated. It says that by and large, if some function can be performed by (a) government or (b) unfettered private enterprise, the former will do it at twice the cost of the latter. It doesn't always hold (sometimes the market does a bad job and sometimes government does a good one), but by and large, over time and over many functions, that's the way it is. It was an empirical observation without systematic proof that it must be so, but it's not hard to see a theoretical underpinning: people tend to work much better when their personal interests are at stake. I grew up near a city known for its earthenware and fine china; my first memory of the world of work was a report that workers in a certain roof-tile factory suddenly became several times more productive when they were changed from hourly labor to piece-work--that is, they were paid by results. Gee, whoever would have guessed.  

So if Obama moves more of America 's labor force into public works and out of free enterprise, the first result will probably be a serious drop in productivity; the Rule of Two will kick in. The nation will prosper less in consequence.  

That's just the start, and it assumes that the objective is worth doing in the first place; it's not hard for example to "solve" unemployment by printing money to pay people, then having them dig large holes in the desert and fill them in again. The Rule of Two merely says that if the hole-digging and refilling were contracted out to profit-seeking companies, twice as many would be dug and refilled than if government did it directly. But ought they to be dug in the first place? That's a key decision that ought not to be left to players the political arena, yet that's exactly where the next President plans to place it. The reason it ought to be taken instead in the market arena is that only there can "demand" be measured and satisfied. "Demand" consists of the wish, plus the money; we all wish to acquire good things, but someone else will work to make them available to us only if we offer something in exchange--most conveniently, money. Why would they do otherwise?  If they did, they would be our slaves, contrary to the self-ownership axiom. So if something (a road, a bridge, an airport, a wind farm, a sewer) is proposed, only the market can judge whether or not it's actually worth building, for only in the market can true demand be measured.  

But Obama's "public works" idea removes all those market indicators and substitutes political decision-making; the choice of what to build (or repair) is left to those without any personal stake in the outcome. Actually that's not always true, for Pols are notorious for finding a way to profit from projects which they have the power to approve--but even they sometimes call that "corruption," and the latest to be caught with his hand in the till is Illinois Governor Blagojevich; but the point is that it's only in the market that a construction proposal is evaluated on the basis of what true demand exists for its completion. To the extent that Obama moves more of them out of the market and into government control, the nation will suffer more waste of resources, more bridges to nowhere and fewer bridges to somewhere useful.  

Then comes the matter of how a project is to be funded, assuming it is worth doing—i.e., that a true demand for it exists, that potential customers are willing to pay for it. That might be a highway from A to B, with users paying a toll high enough to return the construction and maintenance costs as well as a profit to make the project worthwhile. How is the capital to be raised?  The market has an elegant solution ready: Capital is invested on the basis of how sound the business plan appears to those who own the money and will carry the risk, and how well it seems likely to yield profits in comparison to other possible ways to invest the same, fixed chunk of money; in other words, the road-builders have to compete for the money on the basis of excellence, efficiency and anticipated usefulness to the community. Sometimes the judgments made will be wrong; but overall, there can be no finer way to allocate that scarce resource.  

In contrast, in the political or "public works" arena, the capital required is merely stolen, by thieves who have enough guns and prisons to define the theft as non-theft and so get clean away with it. The stealing as we know may be done by compelling the payment of taxes, or by borrowing today and compelling tomorrow's taxpayers to repay the loan, or by simply printing it, which seems to be the current vogue. The bill hits us all tomorrow, in the form of higher prices--and if it's not done with sufficient finesse, the process runs away Mugabe-fashion. That fiat-money scam is perhaps the ultimate "public works" project.  

Public works work all right, but they work only for the greater benefit of the government industry; they extend the tentacles of political control to choke more and more economic life out of society. Possibly Democrats salivate over them more than Republicans, but the difference is trivial; it was the latter who begged the former (on bended knee, if the tale of Paulson and Pelosi is correct) for three quarters of a trillion stolen dollars to prevent the market rescuing the failing finance industry, as it would surely have done, and I cannot think of a single public work that Republicans have returned to the productive sector. For everyone outside government, public works don't.