July 31, 2010


Why Keynes Was Wrong (Warren Meyer, 07.29.10, Forbes)

Rather than attempting to make investment easier, almost all government stimulus efforts to date have focused on trying to better optimize how and where investment capital is deployed. The core assumption behind all of these programs is that a few people in government can invest money more productively than the private entities from whom the government took the money.

This is frankly an absurd assumption, something I know from my own experience of trying to make just these sorts of capital allocation decisions, though on a much smaller scale. In various corporate strategic planning and marketing roles, I was in the position for years of helping to make investment decisions in some of America's largest and best-managed corporations.

These corporations were smart enough to know that a small corporate staff did not have the information to identify and rank investment choices in their myriad of different divisions. Instead, the corporate office acted as a sort of bank, where front-line managers who had detailed knowledge of individual markets came to the corporation via the planning process and proposed investments. Through my years in this process, I was always convinced we were sub-optimizing, that these divisions if spun off and in control of their own destiny likely would have made better decisions. If smart business people couldn't make confident capital-allocation decisions for a $20 billion business, how can a few career government staffers do better for a $16 trillion economy?

In their hubris, however, the Congress and this administration believe they can do what even the most successful corporations can't. They take money away from individuals and businesses, either in the form of taxes or borrowing that squeezes out private capital, and claim to invest that money better than would have those individuals, despite much worse information and inferior performance incentives. The stimulus bill is an obvious example, but we see this phenomenon all over the country. The bailout of GM effectively poured taxpayer money into an entity that private investors had determined was no longer worthy of investment. Here in the Phoenix area, taxpayers of various municipalities have been asked to subsidize a new shopping mall for $97.4 million, cover a years-worth of our pro hockey team's operating losses for up to $25 million, and throw money at absolutely anyone who whispers the word “solar.”

To every one of the supporters of these government projects who claim to have created some number of jobs, I encourage the reader to ask a simple question--who was using the money before the government diverted it, and how many jobs were they creating?

Posted by Orrin Judd at July 31, 2010 7:53 AM
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