Can Government Put Idle Resources to Good Use?

“Big chunk of economic stimulus yet to be spent by state, local governments”

This is according to the Washington Post. They write:

The $862 billion package was divided roughly in thirds among tax cuts, aid to states and the unemployed, and investments in infrastructure, health care and other areas. The first two have delivered most of their boost, but much of the investment spending is moving far more slowly. At the end of July, nearly 18 months after the stimulus passed, more than half of the $275 billion in investments had yet to be spent.

Meanwhile, from up in Alaska, I read that that state is slated to receive a piece of the new state aid passed last week, despite the fact that it doesn’t seem to need it:

Alaska is eligible to receive $23.5 million dollars of the $10 billion total, according to the U.S. Department of Education. Alaska’s allocation comes despite a healthy revenue surplus this year that has allowed the state to actually increase school funding.

So money is not being spent that should be spent; meanwhile, other money is being spent that shouldn’t be. Stimulus defenders will say that any time a big organization spends a lot of money, mistakes are bound to be made. And they are right. But I would argue that these sorts of mistakes are far more likely when the organization in question is the government.

Remember the Keynesian story: remove idle resources from the private sector, put them to work, and the economy will grow (provided government borrowing doesn’t crowd-out valuable private investments and provided consumers don’t hold back in anticipation of future tax increases). But the whole Keynesian idea rests on the notion that governments can effectively put resources to higher-valued use than the private sector. This requires government to know what is and is not valuable; to know when and where to spend the money; and to know that – had it been borrowed by someone else in the private sector – the money wouldn’t have been put to better use. Moreover, government has to do all of this without the benefit of the signals that help the private sector allocate resources: no profits, no losses, (almost) no price mechanism.