All government spending – if it is not used to protect liberty or enforce contracts – is a misallocation of resources. The qualifier in there is debatable amongst libertarians, but I don’t want that to be the focus of this piece.
If the government is spending money on something, other than anything that actually protects our liberty, then it is money spent on things that consumers would otherwise not have chosen. If the government collected taxes on a voluntary basis, this could be a different story. But since virtually all taxes are collected on the basis of force or threats of force, the state is spending money on something that we would not have chosen, otherwise the taxation wouldn’t have been necessary.
Government also spends money using inflation and debt, but again, this is essentially the same as forced taxation. It may be a more devious form of taxation, but we are essentially being forced into this system.
Even though virtually all government spending is a misallocation of resources, we have to consider that some spending is more wasteful than other spending.
This is a point addressed in a recent piece by Ryan McMaken on the Mises Institute site. He cites an interview of Marc Faber, where Faber points out that much of China’s government spending went into infrastructure. And although this is wasteful spending, Faber points out that at least it could conceivably be useful one day.
I agree with Faber’s general point that the misallocation of resources is worse in some cases than others. I’m not sure if China is the best example because of the massive ghost cities that have been built. All of the roads and expensive buildings don’t do much good if there is nobody living in them. Also, China’s misallocation may be the biggest bubble in human history.
Building an excess of roads in an area that is at least somewhat populated might be a better example. If you have a road that only has about 1,000 cars per day go on it (assuming it is not part of a housing community), then it probably wasn’t worth the expense. But at least it is getting some use, and even possibly relieving a little bit of traffic from other roadways.
Of course, it is impossible to know for sure if a particular road is “worth it” because there is no market mechanism in the form of profits and losses to indicate such.
Still, Faber’s overall point is well taken. I would much rather see government money spent (wasted) on a road that nobody uses than have it spent dropping bombs on a foreign country. I would rather see the government spend money to subsidize electric cars than to see it spend money on funding foreign dictators.
All of this spending is a misallocation of resources, but obviously some spending is more harmful than other spending.
I would probably get a lot of agreement from people on the left that subsidizing electric cars is a far better use of resources than fighting wars.
Unfortunately, the same people on the left can’t understand that subsidizing electric cars is in fact a misallocation of resources. I have nothing against electric cars as long as they operate in a free and voluntary market. The problem is that they don’t. The only way that businesses can be profitable (it seems at this point) is by getting subsidies through the government either directly or given to the consumers.
In conclusion, some government spending is worse than other government spending. But virtually all of it is a misallocation of resources. This hurts our living standards and makes us poorer than we otherwise would have been.