JLF head John Hood’s column yesterday focused on government spending as an “investment.” A highlight:
Both the Center and the Right disagree with the Left. Instead of focusing on the demand side of the economy, they focus on supply. They argue that economic growth flows from effective investment in capital assets — in plants, equipment, infrastructure, ideas (intellectual capital), and better-educated, better-trained people (human capital). According to supply-side theories of economic growth, recessions occur not because consumers suddenly forget to spend but because of a growing disconnect between what companies produce and what consumers desire. The disconnect may arise from unforeseen changes in technology or consumer preference, the fate that befell even the most efficient, innovative buggy manufacturer of 1910. Or the recession-inducing disconnect may arise from faulty monetary, fiscal, or regulatory policies that bias investment decisions, such as those that favored residential housing over other, more-productive forms of investment during the 1990s and 2000s.
While they share a supply-side focus on investment rather than consumption, the Center and Right disagree about whether policymakers should focus on fostering public investment (government spending on schools and roads) or private investment (capital formation by households and businesses). Virtually no one in the Center believes that only public investment matters. Virtually no one on the Right believes that only private investment matters. The debate is about the proper balance between the two.
The gap is actually far wider between the Center-Right and the Left. There is also a wide gap between the Left and reality. While both the Center and Right can claim some empirical support for their views, the overwhelming majority of peer-reviewed studies show that government spending on consumption subsidies such as Medicaid is a net negative for economic growth, all other things being equal.