The Market and Public Goods

February 2, 2009

“Tax cuts won’t build schools, or any other public good.”
Mark Thoma

I’ve been thinking about this quote for roughly the last week, because while it’s certainly untrue on its face, I believe that even a more charitable interpretation would be untrue as well. Alright, obviously the literal interpretation is false: there are private schools, and it seems to follow that if schools are a normal good, more private income would lead to more private schools. But what Thoma really means is that government spending is more likely to produce public goods, on the margin, than private spending.  This statement is less clearly false, but it’s still false. The problem is two-pronged, in that people typically underestimate the positive externalities from private spending, and overestimate the tendency of government to produce public goods.

The argument that markets don’t produce public goods generally relies on the assumption that private actors will only spend money on something if it benefits them directly. This isn’t true, either, but even if it were true, it still wouldn’t be the case that markets don’t produce public goods. What an argument like this misses is the extent to which packages of goods come bundled together and with different externalities, levels of excludability, and rivalrousness. Think of medicine. Life-saving medicines can be profitably produced because individuals selfishly value their own lives very highly. But most people also consider it a good thing that there are other people in the world. So even if you get medical treatment for purely selfish reasons, that doesn’t mean that you can capture all the benefits of your being alive. I’m glad you’re alive, and that’s not something you necessarily took into account when deciding how much saving your life was worth. To take another example, parents send their children to private schools thinking only of the benefits to themselves or their immediate family, but a better-educated populace is a public good as well. Private goods and public goods are produced complementarily to each other.

To claim that government spending produces public goods of high marginal value just ignores the reality of how laws are made in the United States. The nature of electoral politics means that “dispersed costs, concentrated benefits” is more often an accurate description of government spending than “dispersed costs, dispersed benefits.” Farm subsidies, sugar and steel tariffs, and “the Bridge to Nowhere” are particularly egregious examples. For a person of a certain inclination, the War in Iraq is a no less egregious, if more debatable, example of a government policy designed to benefit a few people while producing horrendous negative externalities. Those examples are, admittedly, cherry-picked, and not all government spending is bad, but it seems to me that the current sentiment, that we have to spend a lot of money fast, will tend to exacerbate the tendency to produce bad policy. As Kevin Murphy says, trying to increase the stimulative aspect of government spending “is gonna hurt you on alpha,” the efficiency of government spending.

I’m not in favor of making the “tax cut” portion of the stimulus bill larger, especially since a tax cut that is not accompanied by a reduction in government spending is just a tax deferment. Still, I don’t think the case that government spending is necessarily more likely to produce public goods than private spending is as cut-and-dried as Thoma implies.


6 Responses to “The Market and Public Goods”

  1. Thomas Says:

    Ok ok — so let’s say you have a terminal illness in America. When you pay the exorbitant fee for prescription drugs, to a mammoth corporation that spends most of its profits on advertising boner pills, you get to live. Plus society benefits from the positive externality, which is that other people get to have you around. Ah, the joys of unfettered capitalism!

    Of course a good response to this would be to say that you have a choice of more than one purveyor of prescription drugs, and that in a free market scenario demand should bring the price down. Too bad there’s no such thing as a free market because of (government enforced) patent protection for drug companies.

    Government spending on health care is not very efficient, sure. But tax cuts so that people might be more likely to be able to afford insanely high prices, fixed by the government-industry cabal? That’s not much better. My point (I think) is that the public/private divide is rarely as clean cut as it seems — government controls the market, industry controls government.

    Oh *and* you should support DC statehood and socialized medicine! :p

  2. The “~T” is for “threadjack.” What the hell are you talking about? The topic is the marginal propensity of private vs. public spending to create public goods. The argument is that because privately purchased goods often come bundled with other beneficial goods, it’s erroneous to claim that “tax cuts [i.e. private spending] will not build schools, or any other public good.”

    I am saying that it is wrong to claim that just because private individuals do not intend to create public goods, they actually don’t create them through their actions. Additionally, it’s also wrong to say that because government intends or says it intends to create public goods, it actually does.

    A reasonable critique would involve something about how companies who only care about profits destroy the environment and routinely kill poor people, and thus negative externalities are much more likely than positive ones, the opposite of what I claim.

    An unreasonable critique would be about something completely irrelevant to the topic at hand, like whether companies spend a lot of money marketing or researching medicine to treat erectile dysfunction.

    If you want to post about why scrapping the patent system and having socialized health care would do a lot of good, by all means, do so. I strongly agree with the first claim and agree, with reservations, with the second. But that’s not what I posted on. You have your own blog, and I read it. So use it.

  3. Thomas Says:

    Hey, if you don’t like my off-topic remarks you can feel free to screen them!

  4. That your remarks are wildly off-topic is my belief, but I could be wrong. I strongly dislike moderated comments sections, as they have on Freakonomics and Econlog. I will leave your comments up so that the nobody else who reads this blog can decide whether they are worthwhile.

  5. Dan Says:

    I think they’re worthwhile. I only read the first two sentences before I skipped to the comments, but I reached 2 conclusions:

    1) I have no idea if “Threadjack”‘s comments are relevant or not. Still, Bill, you should probably not yell at your only commenter. Unless we’re interrupting your private blog party and you’d like to be left alone.

    2) Bill uses the word “literal” nearly as poorly as my teenage brother. Literally. Tax cuts don’t build schools. You can cut taxes and assume some schools will be built later, but the relationship is ambiguous and there’s no guarantee. In a literal sense, passing a tax cut does not directly cause a school to be built. If the government decides to build a school, it generally gets built.

    That’s tangential to your overall point, but I think you are misinterpreting the argument implicit in the quote. The point is not that the private sector CAN’T substitute in some areas, it is that there is no guarantee it will, or will in key areas. And in the current economic context, where people are saving any extra income, it’s reasonable to assume that any schools or bridges or spaceships that need to be built will have to be built by Uncle Sam. With his bare hands. Because he doesn’t understand our modern tools.

  6. Thanks for your insightful commentary, Dan.

    However, your pedantry about the word “literally” relies on the belief that Thoma’s sentence has a unique “literal” interpretation, which it doesn’t. Literally, “tax cuts don’t build schools” is a typographical string, and as such cannot be considered true or false. “Literally” means “under simple interpretation.” You want to privilege your “simple” interpretation of the string over mine, but I don’t see why you should be allowed to do that.

    You already infected me with your nausea vs. nauseated nonsense, and I have a hard enough time accepting 90% of the uses of “beg the question.” Language-related quibbles are a disease, and you are a carrier.

    Phew! Now can we talk about matters of consequence?

    Look, this is not about comparing the best possible government program to tax cuts. The government already spends $3 trillion. Taking that as the baseline, why should we think that there are still high-value uses for government spending that will actually be realized by a new $800 bn spending package?

    I don’t doubt that you can imagine high-value uses for spending, and if you assume that it will all be spent on infrastructure, it’s easy to argue for government spending. But I think the public choice argument that the money will be wasted is strong. You haven’t changed any of the incentives behind government spending, so new spending is likely to resemble the pattern of old spending. The rush to spend is likely to make the inefficiency even greater.

    If you’re still reading, I’m sorry for yelling at you, Thomas.

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