The Value of the Public Sector
One thing that I think gets a bit lost in discussions of stimulus multipliers and so forth is that this kind of argument doesn’t capture the substantial range of opinions that exists about the actual value of public sector projects. When you’re doing GDP calculations, you’re basically just looking at the price of doing the work. So if it costs $12 million to build a bridge, then all else being equal building the bridge adds $12 million to GDP. That’s the right way to do the national accounts data, but it’s not actually the right way to think about a project. In part, this can even get a bit imponderable. The Golden Gate Bridge looks really cool. When planning your future bridge, you could elect to spend extra money on ensuring that you wind up with an awesome-looking bridge and it would be hard to say definitively whether or not it was “worth it” to spend the extra cash. Someone might look at what you’re doing and say your project is full of “waste.” Alternatively, you might reply that the economy is in need of “stimulus” so it’s smart to do the bridge in the most expensive plausible way. But nobody could quite say whether or not the improved aesthetics are actually improved enough to justify the price. It’s just a decision.
By the same token, you can raise GDP a lot by building pointless crap — giant monuments in the middle of nowhere would be stimulus. But it’d be a bit strange to say you were actually adding to the nation’s wealth by doing that. On the other hand, people like the Gateway Arch and Mount Rushmore and the Eiffel Tower even though all that stuff’s pointless from one point of view. Conversely, public projects can increase well-being by far more than their cost. The New York City Police Department is an expensive undertaking, but to try to save money by eliminating it would be idiotic. Similarly, while we have some schools in this country that are spending a lot of money and accomplishing very little, we have other schools that are creating enormous value by educating children. This difference isn’t well-captured by looking at the difference between the schools’ contributions to GDP.
Thus, one thing people are disagreeing about when they disagree about the stimulus is about the value of public sector activities. I’m told that Amity Shlaes was on Bill Bennett’s radio show earlier and told him “the thing that you might want to do on your website is post those pictures of those cement posts of Japan after its multiple infrastructure programs that doubled unemployment.” That’s perhaps a compelling argument against building cement posts. But Japan entered its “lost decade” with infrastructure that was in many ways much more advanced than America’s. The abysmal quality of our current passenger rail service means, for example, that there’s a lot of low-hanging fruit that would improve things. And it seems to me that increasing the energy efficiency of federal buildings and doing repairs on our schools would be extremely valuable. After all, for decades now the country has been persistently governed by folks ideologically predisposed to underinvestment in the public sector. Individual projects are, however, always going to be subject to debate. What most conservatives seem to be doing, however, is just kind of pounding the table and insisting that any public sector undertaking is, by definition, “pork” and/or “waste” and that’s just not a tenable position.
47 Responses to “The Value of the Public Sector”
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February 10th, 2009 at 5:40 pm
After all, for decades now the country has been persistently governed by folks ideologically predisposed to underinvestment in the public sector… and that’s just not a tenable position.
Fixed!
February 10th, 2009 at 5:45 pm
It’s not that they are against any public sector undertaking. If they thought it would kill some Muslims, then I’m guessing they would be all over it.
February 10th, 2009 at 5:57 pm
When so much of the public spending has more to do with redistribution of resources than spending on actual public goods the conservatives have a point. I mean is it not wasteful to make some poor person spend $5,000 a year on health care when they could very well be better off spending most of that money elsewhere?
February 10th, 2009 at 6:02 pm
The fundamental problem is that government assets are not capitalized. Capitalized means having a value placed on an asset and that value is accounted for on the books. It has some tangible worth at some sort of market price and that is reflected in the stock price. The asset values added into the ‘book value’ of a company. To wit, it is capitalized.
Since that does not happen with government assets almost everyone in the world that is ‘pro business’ assumes they have no worth at all. This presents an insurmountable cognitive dissonance which makes arguments about the issue futile.
Government accounting, such as it is, is simple cash flow accounting. X money in on one side of the page, X money out on the others. This sort of accounting was revolutionary in 1400. Less so now.
So too government workers do not contribute to profit so they do not count as productive. Exactly the same cognitive issue is involved here too.
Conservatives are going to win this battle, and lose the war. They have bankrupted the Treasury, partly because the Treasury is not allowed to capitalized the nations assets. When the Treasury is bankrupt American ceases to exist as we knew it.
I’ve said it before and I will say it again. This crisis is the largest historical event in the lifetimes of most living Americans. ‘Free market’ forces capitalized tens of trillions of dollars of debt into hundreds of trillions of dollars of financial assets, mostly derivatives of those ‘assets’. By mispricing assets, way over pricing private assets, and mispricing public assets, at zero, the stage has been set for anarchy.
February 10th, 2009 at 6:03 pm
Our bridges and levees are in very bad shape. The cost of not repairing and building infrastructure is daunting and inexcusable.
February 10th, 2009 at 6:04 pm
Matt, you are on fire today.
Excellent posts.
Perhaps you should take your European vacations more frequently.
February 10th, 2009 at 6:08 pm
I noticed the most robust applause at O’s recent town halls was when the green economy was mentioned. The average American seems to be more aware than either House that we are without an economy at the moment. It seems to them it’s sitting there, just waiting to get started- a new economy that will create domestic jobs that pay a living wage and get us off fossil fuels. Why not use a lot of the stimulus to get this party started?
And it is also very clear that a whole lot of people want to get back to work ASAP and they’re not picky right now about who’s signing their pay check.
February 10th, 2009 at 6:09 pm
If anything, isn’t it easier to OVERVALUE the benefits of public works? We have the bridge or the highway or the munitions factory. We see the jobs. Even when it’s a $600 toilet seat, there’s a toilet seat factory. Somewhere. It’s harder to see the smaller, diffuse contributions that had to be made for such things to be possible.
Besides, this argument goes both ways. Yes, sometimes we get grand projects like Mt. Rushmore, which has value beyond it’s monetary worth. But the same can be true of all the contributions that made it possible. Yes, it seems reasonable to force contributions from people when you assume that they are dirty, greedy bastards who would otherwise spend it on a lift kit for their Hummer and extra mayo for their freedom fries. But what about the family that had to forego a vacation, or a prom dress, or, you know, college?
Yes, these are sentimental, romantic notions. But this is a sentimental, romantic post. And oddly so. At least for me, as I am far more likely to get my hankerchief all misty over prom dresses and family vacations than large-scale infrastructure projects.
Yeah. It gets tiresome listening to conservatives gripe about toilet seats and midnight basketball and whatever other projects they are railing against this decade. But man, this post shows some of the strange, emotional attachments on the other end of the political spectrum.
February 10th, 2009 at 6:15 pm
Since we don’t have cholera epidemics, we don’t have feelings about the water treatment plants that prevent them. Public works are taken for granted when they work.
February 10th, 2009 at 6:23 pm
At least for me, as I am far more likely to get my hankerchief all misty over prom dresses and family vacations than large-scale infrastructure projects.
Hear, hear. Words to live by. Why, my grandmother used to tell stories of having to stay home on prom night back in 1931 because that mean Mr. Roosevelt wouldn’t let her earn enough to buy a decent dress. What’s even more ironic is that Grandma lived in Sausalito and her prom date—who turned out to be my eventual granddad—lived in the Presidio. Strange how these things work out. Grandma voted Republican the rest of her days, though.
February 10th, 2009 at 6:37 pm
One thing that I think gets a bit lost in discussions of stimulus multipliers and so forth is that this kind of argument doesn’t capture the substantial range of opinions that exists about the actual value of public sector projects.
Matt, what do you think the multiplier is supposed to represent? That’s the whole point of the debate!
Republicans think by-and-large a lot of infrastructure projects that Democrats favor are not productive and therefore have a low multiplier while Democrats take the opposite view.
I agree aesthetic value is among the many things not captured in GDP (or most other economic measures) but I’m not sure how exactly making bridges extra pretty is supposed to end the recession. Not saying it’s a bad idea — it’s just a different conversation.
February 10th, 2009 at 6:41 pm
A real estate pro in San Fran could probably spit out some accurate numbers on how much more renters pay for bridge-view vs. non-view units.
February 10th, 2009 at 6:43 pm
A couple notes on the GG bridge. A look at the plaques put up honoring the wise public officials who took the initiative etc. etc. will show a surprisingly high representation of people from places like Del Norte County. In other words, they were trying to facilitate commerce with the Redwood Empire. I suspect that worked out to be oh, half of a percent of the real usage, and most of the rest, for better or worse, was not anticipated by the original builders and funders.
I don’t believe that the esthetics of the bridge in fact added much to the cost — it’s pretty much contemporary standard decoration (higher than our standards, of course), and the real costs were in getting it built across that very tricky bit of water. An even better example of awesome esthetics that couldn’t have added much to the bridge costs are the Oregon Coast bridges on Highway 101 designed by Conde McCullough (c’mon, I challenge anyone to name another 20th century American civil engineer). I mention this in case MY carries out his threats to explore the West Coast.
Back to costs, in all fairness a large part of the real cost of the Golden Gate Bridge was the lives of the bridge workers who died building it. Think of them for a moment with silent gratitude, and recognize that there are at least some good reasons things cost more nowadays.
By the way, when I went to Mount Rushmore this summer (worth the trip, particularly with Custer State Park and Calvin Coolidge’s summer White House next door), they were sponsoring a public appearance by one of the guys that built it. I was too awestruck to talk to him.
February 10th, 2009 at 6:49 pm
Pounding the table in support of non-tenable positions is pretty much the only thing conservatives are good at anymore.
February 10th, 2009 at 7:16 pm
A real estate pro in San Fran could probably spit out some accurate numbers on how much more renters pay for bridge-view vs. non-view units.
In other words the public asset enhances the private asset. In many cases private assets are completely dependent upon public assets. If NY City didn’t have a public sewer system you could kiss Manhattan goodbye. Think of your own billion other examples.
You can find the budget to see how much it costs to maintain the sewer system but the system has no price. Without a price most are incapable of thinking it has any value.
The entire price/value thing is a semantic jungle as well. A good book should be written. Several generations of effort has gone into convincing everyone that stocks and myriad other assets had ‘values’. What they has were prices. Eventually extremely inflated prices. By always saying ’stock values’ the idea that the prices were inflated was hidden. Hidden the subjetive term ‘value’.
February 10th, 2009 at 7:17 pm
Hear, hear. Words to live by. Why, my grandmother used to tell stories of having to stay home on prom night back in 1931 because that mean Mr. Roosevelt wouldn’t let her earn enough to buy a decent dress.
Odd that Grandma thought the Governor of New York was stopping her from finding work – FDR didn’t become President until March of 1933. Odder still that someone in high school was considering work – even back then high school students didn’t work much. Did anyone ever ask Grandma why she didn’t borrow a dress or make one herself? ….
February 10th, 2009 at 7:22 pm
The abysmal quality of our current passenger rail service means, for example, that there’s a lot of low-hanging fruit that would improve things.
No, it just means Americans don’t care much for rail travel.
February 10th, 2009 at 7:34 pm
In normal circumstances, OMB guidances disallow the use of multipliers as justifications or benefits for federal investments or interventions in the economy. Instead, analysis must assume that resources are fully employed (and hence no multiplier effects matter). Of course, these are not normal times.
See OMB Circular A-94 http://www.whitehouse.gov/omb/circulars/a094/a094.html
Multiplier Effects. Generally, analyses should treat resources as if they were likely to be fully employed. Employment or output multipliers that purport to measure the secondary effects of government expenditures on employment and output should not be included in measured social benefits or costs.
February 10th, 2009 at 7:38 pm
Bravo, Matt. Speaking as a board member in a school district with over $80 million in school improvement projects that could be done in the next 3 to 18 months (roofs, science labs, libraries, water-efficient fixtures, heating efficiency improvements, etc.) I am appalled at the school construction $ being stripped from the stimulus bill. Our projects would create hundreds of local, private sector jobs in a variety of trades and would significantly improve the learning environment for kids. It’s a no-brainer. Then I watch Ben Nelson tell Rachel Maddow they didn’t want “the federal govt getting involved in schools” – oh my god, the hypocrisy is killing me.
I don’t have my hopes high, but if the Dems have any spine at all they will fight to get the state emergency aid and school construction $ back in the final version- paying for it by taking out some of the non-stimulative tax cuts that Nelson’s gang larded it up with.
February 10th, 2009 at 8:17 pm
Since you seem to be on a bender of criticizing GDP (with good reason), I recommend that you post this video of a speech by Robert Kennedy in which he takes on the notion of GNP as a measure of progress: http://www.youtube.com/watch?v=77IdKFqXbUY
February 10th, 2009 at 8:26 pm
“for decades now the country has been persistently governed by folks ideologically predisposed to underinvestment in the public sector.”
Care to back that up with real numbers? Someone has been investing in something…here is total Federal, state, and local spending as percent of GDP:
1950: 23.94%
1960: 28.74%
1970: 30.99%
1980: 33.71%
1990: 36.27%
2000: 33.01% <- did go down a bit here
2006: 35.69%
Let’s look at percent of all government spending on transportation as % of GDP:
1950: 1.53%
1970: 1.81%
2006: 1.51%
So transportation was a bit higher in 1970 than 2006, but not by much.
The story of 1950-2006 is that spending on Social Security retirement, health care, and education have ramped up while spending on defense (even stupid things like Iraq) has actually decreased in terms of percent of total government spending.
“Entitlements” have eclipsed everything. The Republicans have done pretty much nothing to stop this, ramping it up with the Medicare Drug Benefit.
(source: http://www.usgovernmentspending.com)
February 10th, 2009 at 8:27 pm
Ugh, that drove me crazy. He opposes federal funding for school construction because he doesn’t like unfunded mandates? Much like how I oppose receiving paychecks because I don’t like paying my bills.
February 10th, 2009 at 8:52 pm
while we have some schools in this country that are spending a lot of money and accomplishing very little
Really, which ones are those?
Again with the schools, jeebus
February 10th, 2009 at 10:01 pm
Mr. Econotarian,
Interesting, you seem to be arguing in favor of Matt’s opinion that the powers that be are opposed to investing in public sector infrastructure. If these numbers you have are true – and they might not be – we spent less on infrastructure in 2006 as a percent of GDP than in 1950. Kinda says a lot, doesn’t it?
February 10th, 2009 at 10:08 pm
we spent less on infrastructure in 2006 as a percent of GDP than in 1950. Kinda says a lot, doesn’t it?
I don’t think see that. What does it say? And the numbers you’re referring to concerns transportation spending, not infrastructure in total.
February 10th, 2009 at 10:35 pm
We certainly way overvalue the ones that involve killing people and blowing stuff up. I’m happy to start spending a lot less on that any time now.
February 10th, 2009 at 11:22 pm
Right. One of the sectors that is increases a lot in the transition from ideal 1950s to ideal 2000s is government infrastructure. For America it has increased by some, putting us behind.
February 10th, 2009 at 11:38 pm
There’s a sale on the pink exterior latex paint, so use that on all the houses in your neighborhood. It’s cost effective! And will have zero effect on resale values or the utility you get from a nice walk.
February 11th, 2009 at 2:25 am
Well for the Golden Gate, I think it’s safe to say that the increased tourist revenue that such a symbolic project provides a city with is well worth any extra cost.
February 11th, 2009 at 8:24 am
What most conservatives seem to be doing, however, is just kind of pounding the table and insisting that any public sector undertaking is, by definition, “pork” and/or “waste” and that’s just not a tenable position.
Agreed. It is also true that liberals tend to talk in the abstract about education and other sacred cows, without much real analysis of actual programs. For example, there are hundreds of programs in the so-called stimulus bill. Can you please point to an analysis of those programs which has analyzed the utility of each and every proposal? No, and yet you and your commenters are willing to blather on about low hanging fruit. To pick just one example, the quality of our current passenger rail service may well be, as you say, abysmal. I think the so-called stimulus bill just leaves it hanging there, though.
February 11th, 2009 at 9:37 am
Odd that Grandma thought the Governor of New York was stopping her from finding work – FDR didn’t become President until March of 1933. Odder still that someone in high school was considering work – even back then high school students didn’t work much. Did anyone ever ask Grandma why she didn’t borrow a dress or make one herself? ….
If you’re going to be picky, across much of the country, going to high school was still considered a waste of money, particularly for girls. After all, they were just going to get married and raise kids, right?
Our rural county was poor, but northern, back in those days, so we were not as anti-literate as a lot of southern states. However, my father graduated from the 7th grade in 1932 with all the education people felt he needed to be a farmer.
My mother, who was born in 1934 in the most impoverished part of the county, remembers the county nurse coming by to vaccinate her and her ten siblings and getting federal food aid–gallon canisters of peanut butter, among other things. Is saving kids from malnutrition and death from childhood diseases “overvalued” or “undervalued” infrastructure?
When my father was 17, he had no work, no prospects, so he signed up with the Civilian Conservation Corps, an infrastructure program intended to keep kids his age out of trouble. The CCCs built roads, trails, bridges and dams on public land, buildings and parks in town, and planted trees. Regularly, over the next seventy years, my father would drive through stands of white pine he had had helped plant in the national forests spread all over that part of the country. What valuation do you put on a forest reborn, or the sense of self-worth a man can carry all his life?
Of course, the effects of the Depression lasted longer in some parts of the country than others. By the time my mother was 17, she was expected to go to high school—it was the way to get ahead in the world, out of poverty. The high school in her home town was a public school, infrastructure built with state money. She and her sisters didn’t get to go to the prom. They had home-made dresses for school, but only one store-bought dress between the four of them, so only one of them could “go out” at a time.
My father’s family were considered upscale in that neighborhood. Their farm had electricity, thanks to a federal infrastructure project, the Rural Electrical Cooperative. After they were married, my mother decided the farm wasn’t going to pay enough to give her children a future, so she took classes at the local state college. All four of her children got federal loans to go to either the state vocational school or to the state college–upgraded to a state university by Federal infrastructure spending.
My father passed on several years ago. The farm he worked on all his life proved too small to provide for his retirement in our increasingly expensive society, but his social security check and Medicare gave him some measure of dignity in the final years of his life. My mother is retired now, her pension guaranteed by a contract between the state government and the state teachers union. Of course, pensions are now considered a form of welfare by right-wing pundits, but most of us think she earned every penny of it.
A life where hard work is rewarded with dignity, the hope that one can survive a depression and climb up out of poverty. A life’s story worth telling. How much value do you put on that?
February 11th, 2009 at 9:44 am
Agreed. It is also true that liberals tend to talk in the abstract about education and other sacred cows, without much real analysis of actual programs. For example, there are hundreds of programs in the so-called stimulus bill. Can you please point to an analysis of those programs which has analyzed the utility of each and every proposal? No, and yet you and your commenters are willing to blather on about low hanging fruit. To pick just one example, the quality of our current passenger rail service may well be, as you say, abysmal. I think the so-called stimulus bill just leaves it hanging there, though.
Well, if this were a three day seminar at a major university, I’m sure people could produce volumes of paperwork for you to read on these topics.
After all, if something is a “sacred cow,” that by itself implies that the idea has a history, so you are contradicting yourself, a bit. None of the topics or projects discussed here were pulled out of the air a week ago last Tuesday. Most of them have been on the books for years as proposals and exhaustively studied. You could probably do a little Internet searching and find the necessary paperwork yourself, if you really need to see it.
February 11th, 2009 at 10:44 am
Republicans think by-and-large a lot of infrastructure projects that Democrats favor are not productive and therefore have a low multiplier while Democrats take the opposite view.
This is a little off topic, but the multiplier has nothing to do with the value of the asset itself. Multiplier analysis is based on the amount of private sector spending that will be triggered by the public sector spending, and the benefits of the multiplier are *in addition* to any value the public asset may have.
If the government hires Al to build a road, and Al takes his paycheck and buys some food at Betty’s Groceries, and Betty hires Chuck to keep up with the increased business, and Chuck buys an iPod from Diane’s Electronics, and that iPod is shipped from the factory by Ed’s Trucking, the increased income of Betty, Chuck, Diane, Ed, Steve Jobs, and people like them constitute the multiplier. (I’ve left out a lot, most notably materialmen, but that’s the basic idea.) The fact that Ed’s Trucking may happen to use the road that Al built is an additional benefit to Ed and to society in general, but isn’t included in the multiplier analysis.
(Note that it’s assumed that Al and Chuck were previously unemployed, or that their previous jobs were taken by unemployed people. This is why it matters that the economy is in a condition of abnormally high unemployment – otherwise you can’t hire Al or Chuck without taking them away from other jobs, and doing so doesn’t increase their income or productivity nearly as much as hiring unemployed people. That’s called the “crowding out” effect, and it becomes stronger the more people are already employed.)
February 11th, 2009 at 11:22 am
On MSNBC, Pat B. made an interesting point about the current bill: there is nothing big in it. By big, I mean one big monolithic project like going to the moon, a Hoover Dam, a Panama Canal.
But think about it. The new green energy sector will be spread out over the country. Wind mills will be built in factories and spread out over millions of square miles of the Texas-Minnesota I-35 corridor. Solar panels will be on rooftops across the country. Insulation will be inside our walls and ceilings, new science labs will be in schools which already exist, recipients of Pell grants will be on college campuses which already are filled with students, potholes will be fixed on existing streets, bridges will be strengthened without complete replacement and while remaining open, electricity will move along a smart grid which looks no different than the current electrical grid, ports will be improved although most of us have no idea what such an improvement would look like.
Pretty boring stuff. Hopefully we’ll get a lot more of it in the future.
February 11th, 2009 at 12:29 pm
You are such an arrogant prick, yglesias. I cant stand your constant bemoaning the fact that the american people aren’t forced to cough up billions just because you think that trains are really neato. Buy yourself a train set and keep your cheeot stained hands away from the peoples pockets you fat bastard.
February 11th, 2009 at 2:09 pm
“Back to costs, in all fairness a large part of the real cost of the Golden Gate Bridge was the lives of the bridge workers who died building it.”
The Golden Gate bridge was remarkable for how *few* workers died constructing it: nineteen workers were saved by a net the Chief Engineer designed. Eleven died: ten in a single accident where a collapsing scaffold caused the net to fail. As a project, the Golden Gate was way ahead of its time in safety engineering.
February 11th, 2009 at 5:48 pm
I won’t dispute in a sense the GGB was remarkable for how few workers died, but I remember from when I was a kid that those who came from the same ethnic/social groups as the ones that died were still pissed about it. Somewhat (not completely) like saying that TS Eliot wasn’t much of an anti-Semite compared to Ezra Pound.
Since I’m returning to those thrilling days of yesteryear, I also note that no one who was there when it was built or for years afterwards made much of a point of its being fancy or having expensive extras — it was in line with contemporary building practice. By contrast, when I worked at another Bay Area institution that will remain nameless that was building an expensive new facility the big name architect and his frills were sacrosanct, while big dollars came out of features that would enhance employee safety and save maintenance costs by building it right up front.
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