Government Investment

John Semmens is an economist with the Laissez Faire Institute in Chandler, Arizona.

The idea that the government should spend money as a means of stimulating the economy and boosting employment has been a formal part of U.S. policy since the Employment Act of 1946. This law was clearly rooted in Keynesian economics. The idea was that government spending would make a splash in the economic pond that would send out ripples that would impact the rest of the economy in a positive way.

The plausibility of this idea is enhanced by the very visible employment of those working on the specific projects funded by the government. For example, government subsidies to public transit are often urged as a means for achieving the dual objectives of improved urban transportation and stimulation of employment.

The buses and trains used to provide this transportation are there for everyone to see. These vehicles have drivers. The systems also employ mechanics, ticket sellers, administrators, accountants, etc. The American Public Transit Association proudly observes that over 300,000 people are employed due to public transit spending programs.

In 1992 around $20 billion was “invested” on public transit in the United States. Because this spending does “ripple” through the economy and eventually become someone else’s income, it could be said that, in all, public transit may account for the employment of 800,000 people.

This sounds very impressive and is, no doubt, part of the reasoning behind plans to boost the U.S. economy by increased spending on public transit. The flaw in this thinking, though, is its failure to account for what economists call the “opportunity cost” of using resources on transit subsidies. That is, what opportunities may have been sacrificed while funds were being spent on public transit? What gains might have resulted if the funds committed to transit “investments” had been invested in something else?

Since 1965, when the federal government began subsidizing transit, U.S. taxpayers have paid over $60 billion into this program. State and local taxpayers have paid a similar amount. In total, over $125 billion in tax dollars have been “invested” in public transit. If the transit subsidy program had not existed and this money had instead been invested in other businesses, would we now be better off in terms of employment and economic activity?

If we assume that our investment alternative produced only average results, our economy and employment options would be far more robust than they are now. Business assets would be nearly $100 billion higher than they now are. Gross domestic production would be $400 billion higher. There would be over 8 million people employed in these alternative business enterprises.

These private sector benefits would have been augmented by substantial public sector gains, as well. Current federal tax receipts could have been $80 billion per year higher than they now are. State and local government tax receipts could have been $60 billion per year higher. These gains from economic growth could have meant fewer tax increases or less government borrowing, either of which would have stimulated economic growth even more than the above estimates.

The reason for the great disparity in results is that it makes a difference whether investments make profits or losses. Since the federal government subsidies began in 1965, public transit has failed to make a profit in any year. In fact, losses have grown larger in every single year since 1965. For 1992, public transit’s financial losses amounted to around $13 billion.

Losses mean that the economy is not being stimulated by transit subsidies. Rather, it is being drained. Every year, other, more profitable business activities have been taxed to provide the funds to prop up public transit. The long-term consequences of this parasitic relationship have been very costly.

The economy is weaker. Virtually every sector, save those directly benefitting from the subsidies, has been harmed. There has been a net loss of over 7 million job opportunities. Wages are lower. Business sales are lower. Interest rates are higher. The federal government’s budget deficit crisis is worse.

These unpleasant consequences are the result of ignoring the essential role of profit in creating resources and stimulating the economy. Profit results when the value of the outputs of an economic enterprise is worth more than the cost of the inputs. Profits mean that the economic enterprise has added to the economy’s wealth. Each increment of profit on each subsequent transaction adds more to the economy’s wealth. The compounding of these increments over time is what enables us to enjoy a higher standard of living than earlier generations.

Profits accrue to those businesses that have satisfied their customers. Profits act as both a message and a means for these businesses to continue and expand. Losses send a different message. Losses indicate that the business’s output is worth less than the cost of its inputs. A business must heed this message by improving its efficiency or changing its product. Failure to heed the message will result in a loss of resources and endanger its ability to remain in business.

The lack of profit in government enterprises should not be surprising. Government’s ability to tax means its businesses are insulated from the need to earn a profit in order to stay alive. Consequently, they don’t earn profits. The absence of profits means that government businesses consume rather than create resources.

Despite consuming a huge quantity of resources over the last 25 years, public transit is still a sickly industry. Its share of the passenger travel market has declined. Most buses and trains run mostly empty most of the time. Passenger fares pay less than 35 percent of the cost of each ride. Today the total number of public transit passengers is barely above where it was before all this government “investment” started.

This pathetic record of non-achievement is all too typical for government “investments.” If we truly want to stimulate our economy we need to stop “investing” in government’s money-losing ventures.