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The Student News Site of Stony Brook University

The Statesman

The Student News Site of Stony Brook University

The Statesman


    The Inefficiencies of Government Spending

    Let’s get one thing straight: The government cannot create jobs, invest in infrastructure, and create demand for alternative energy or “save” the economy.

    Generating or saving capital for investment requires some source of production, unless the investment capital is taken from somewhere else. When government increases its budget to finance “public projects” it has to take this money from taxpayers. Every dollar the government spends is a dollar the American people can no longer spend. Every job the government creates is a job that the market can no longer create.

    Lets take a look at the case study of alternative energy. Alternative energy sources are not created equally. There’s wind power, biofuels, solar cells, liquid hydrogen, with dozens of technologies, which use different sources to create them. For every dollar that the government invests in one of these technologies, the opportunity cost is that other technologies go unfunded. So while the government provides massive subsidized for corn to ethanol production, a process which currently requires four times more energy input than is released, perhaps there is some technology which a greater potential that cannot be explored for lack of funds.

    This is how government spending distorts markets. The reason why alternative energies are so expensive is because the initial infrastructure requires a huge amount of capital investments. But, far from being a barrier to desirable alternative energies, this represents a safeguard against over-investing in the wrong technology. Oil is cheap right now, so people are sticking to oil. But, when gas prices rise, people buy less gas. As the oil supply runs out and gas becomes prohibitively expensive the market will require cheap alternative energies. Investors will bet on which one it will be, and the best one will “win.” The result will be the cheapest solution, because investors tend to follow the government’s money, even if this is providing funding to the “wrong” technology. When the consumer rejects the outcome, much more investment capital would be lost than if the market were left to provide the best solution from the beginning.

    This happens in the free market and the result is the best possible outcome desired by consumers. What if the government had subsidized beta max over VHS in the format wars of the 80’s? The result would be an inferior, higher cost technology.

    Obama claims that his plan will “save you, the American taxpayer, billions of dollars each year. It will put people back to work.” This statement is inherently contradictory. The government can possibly spend money now with the hope that it will save money later. But it cannot do so efficiently or without taking the money from taxpayers. Obama’s plan is to raise taxes on the top earners. This will limit the power of the market’s biggest investors to fund the best, most efficient solutions to our nations problems.

    When the government throws money at public investments, especially such things as schools, transportation and health care, much of this money gets wasted in an administrative black hole. Anyone who is familiar with government bureaucracy can tell you about the type of waste that goes on. When private businesses seek to increase profits, it will trim the fat to become more efficient and cut costs and sometimes that means cutting jobs. Government bureaucracy, although technically non-profit, will always try to raise more capital from the taxpayers and justify large budgets.

    So while we’re in the middle of an economic recession, and jobs are being lost, we cannot hope that government spending will succeed in finding the best and cheapest solutions. Companies lay off workers to save money for future investments, the market is correcting for past mistakes by reverting to saving rather than spending. Eventually, if it’s left alone, capital will be diverted to the right places. Innovation from entrepreneurs will continue to reduce costs, provide goods, services and employment to the market. Temporary contraction is necessary to return efficiency to a market.

    In practical terms, Obama’s long-term infrastructure projects is simply bad fiscal policy for short term stimulus. It may provide the perception of increase employment, but without an immediate net benefit in production because projects take too long to come online. If the government wants to save taxpayers some money, cutting government spending and lowering payroll taxes is a better option. This will allow people to save their own money and make investments, which will allow market confidence to return.

    The current rationale behind large scale government spending is that spending now will save us money later. But government spending that doesn’t result in future savings will result in lots of loss. When investors lose money because of mistakes, it is unfortunate, but an investor must accept the possibility of risk before making investment. When the government loses taxpayer money from faulty investments, the government neither apologizes nor learns from its mistakes. Rather, it demands more money and blames errors on “market failures.”

    Obama’s plan has good intentions, but it defies the logic of the free market, which produces the most efficient answers as long as competition is ensured. The government monopoly, which distorts natural investment patterns, doesn’t suffer from competition and therefore has no monetary incentive to act efficiently.

    While it’s true that the government should be doing something during this time of economic instability, this should simply be cutting spending to give people the opportunity and funds to invest their own money. Government interference, when it aims at producing either long- or short-term financial stability, only succeeds at producing the misleading appearance of action that voters mistake for progress.

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