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Prioritized Public Spending July 9, 2006

Posted by federalist in Economic Policy, Government Spending, Social Politics.
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Resources are limited, so the objective of any agent — individual, corporate, or government — is to spend its limited resources in the best possible way.  What is the “best possible way”?  There is a science (Economics) to answering this question, which roughly begins with the agent assessing its options for resource utilization and determining the expected benefit of each option.

If you’re an individual, you may invest your limited time in either recreation, education, or employment.  You may spend your limited money on consumption or investment.  (It often seems that people do a very poor job of making economic trade-offs.  For example, I can’t imagine that any informed agent would choose to drop out of high school, have two children, watch TV all day and spend every disposable penny leasing a luxury car.  But some people make that choice.  In a world of free people we could probably do a lot more to educate our individual economic agents.  Especially since our economy as a whole accrues the benefits of higher individual education, employment, and investment.)

For-profit corporations are probably the world’s most efficient economic agents.  They are working machines designed to acquire and expend resources as intelligently as possible.

A big problem with government agents is that they seem incapable of either acknowledging that resources are limited, or else that there are intelligent ways of allocating those limited resources.

 

In my ideal world everything would have both a price-tag and a marginal benefit measure assigned to it.  The biggest roll of government, after safeguarding property and preserving market efficiency and individual freedom, would be to coordinate the economic assessment of public goods.  Because once we have determined the dollar cost and benefit of every possible public expenditure, there is no question of how public resources should be allocated.  There would still be plenty of politics to assign those values (e.g., what is the public utility of a nature preserve?), but we would escape the current morass of special interests, perpetual programs, and entrenched bureaucracies built around the allocation of resources without regard to their cost or benefit.

One of my favorite projects in this vein is the Copenhagen Consensus, a project of Bjorn Lomborg.  Kim Strassel interviews Bjorn Lomborg in this weekend’s WSJ, from which I loosely quote:

In 2004, Bjorn Lomborg invited eight of the world’s top economists — including four Nobel Laureates — to Copenhagen, where they were asked to evaluate the world’s problems, think of the costs and efficiencies attached to solving each, and then produce a prioritized list of those most deserving of money. While the economists were from varying political stripes, they largely agreed. $1 spent preventing HIV/AIDS would result in about $40 of social benefits, so the economists put it at the top of the list (followed by malnutrition, free trade and malaria). In contrast, $1 spent to abate global warming would result in only about two cents to 25 cents worth of good; so that project dropped to the bottom.

“Most people, average people, when faced with these clear choices, would pick the $40-of-good project over others — that’s rational,” says Mr. Lomborg. “The problem is that most people are simply presented with a menu of projects, with no prices and no quantities. What the Copenhagen Consensus was trying to do was put the slices and prices on a menu. And then require people to make choices.”

Political figures don’t like to make choices; they don’t like to reward some groups and not others; they don’t like to admit that they can’t do it all. They are political. Not rational.

Mr. Lomborg hopes that prioritization up top will inspire “competition” down below. “Most people work in their own circles — malaria guys talk to malaria guys, malnutrition guys to malnutrition guys. But if they understand that there are other projects out there, and that they also have price tags, and that the ones with the best performance are the ones that will get the extra money — you start to have an Olympics for best projects.

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