Shovel Ready or Not

Last week, I opined that too-often, economic debates are characterized as a simplistic “markets work” vs. “markets don’t work” debate. This, I said, misses the point that even if markets don’t work, one must determine whether or not government is capable of improving on the situation. Public choice economics, I believe, is a powerful tool to answer that question (often the answer is “no; government cannot improve the situation”). 

In a similar vein, I (and others) have wondered whether the problems with the stimulus might have more to do with government’s inability to wisely spend than with any flaw in the Keynesian logic. 

Now, the president, it seems, is coming around to my view. In an interview with the New York Times Magazine, the president wondered whether:

He realized too late that “there’s no such thing as shovel-ready projects” when it comes to public works.

Remember, all resources that the government spends are borrowed or taxed out of the private economy. The Keynesian story relies on the idea that—during a recession—these resources aren’t doing anything productive in the private economy anyway (they are “idle”). So, according to Keynesians, it is okay for government to remove these resources from the private economy and put them to work. But in order for this to be a net positive, government must know how to effectively put these resources to more-productive use than the private sector would have. It must know:

  • Which spending items provide the most value to people, and
  • How to effectively deliver this value

But unlike private businesses, the government cannot rely on the price mechanism to help discern what people value. Since it doesn’t actually sell anything, the government cannot rely on consumer-feedback and consumer-price sensitivity to determine whether what it is doing is valuable. Instead, responsible governments must undertake time-consuming “cost-benefit” analyses to guestimate which “shovel-ready” projects are worthy and which are just pork.

So here is the rub: stimulus spending is only effective if it is timely and targeted toward high-valued projects. But by its very nature, government cannot determine which projects are high-valued in a timely manner. We can get timely, or high-value. But as Eileen told the Washington Post in February of 2009, “you can’t have both.”