Friday, January 27, 2012

Alex Tabarrok: Public goods, public goods, public goods!!!

It is difficult to overstate the intensity of the warm glow that fills my heart to see Alex Tabarrok writing this in the pages of the Atlantic:
To build an economy for the 21st century we need to increase the rate of innovation and to do that we need to put innovation at the center of our national vision...Innovation, however, is not a priority of our massive federal government. Nearly two-thirds of the U.S. federal budget, $2.2 trillion annually, is spent on the four biggest warfare and welfare programs, Medicaid, Medicare, Defense and Social Security. In contrast, the National Institutes of Health, which funds medical research, spends $31 billion annually, and the National Science Foundation spends just $7 billion... 
The federal government does spend some money on innovation, but mostly for innovation in warfare...The basic and applied non-weapons research that has the best chance of creating beneficial spillovers is a small minority of defense R&D. DARPA, the Defense Advanced Research Projects Agency, for example, helped to develop the Internet but DARPA's budget is only $3 billion. Even when we lump all federal R&D spending together regardless of quality it amounts to just $150 billion, a mere 4 percent of the budget... 
Our ancestors were bold and industrious. They built a significant portion of our energy and road infrastructure more than half a century ago. It would be almost impossible to build that system today. Could we build the Hoover Dam today? We have the technology. We seem to lack the will. Unfortunately, we cannot rely on the infrastructure of our past to travel to our future. Airports, an electricity smart grid that doesn't throw millions into the dark every few years, and ubiquitous Wi-Fi are among the important infrastructures of the 21st century, and they are caught in the regulatory thicket... 
To restore our economy and our spirits we need to become an innovation nation. An innovative nation would improve the prospects for economic growth but could do much more. The warfare-welfare state divides the pie and also divides Americans. Americans, however, are an innovative, forward-thinking people and the prospects are good for uniting them on a pro-growth, pro-innovation agenda. 

Also known as "public investment," "government investment," "public capital," "government capital," "partially nonrival production inputs," etc, public goods have been a major theme of this blog.

To see Alex Tabarrok trumpeting the importance of public goods is particularly gratifying to me, since Alex writes for Marginal Revolution, a blog whose leanings I would characterize as "libertarian," and works for George Mason University, an institution whose intellectual climate I would characterize as "libertarian." Which means that this article is part of the growing libertarian push for public goods, which first came to my attention from Peter Thiel.

In the 1970s and 1980s, libertarians and conservatives were so focused on shrinking the regulatory and welfare states that they were willing to throw the baby out with the bathwater. The crucial role of research and infrastructure in an advanced economy was ignored by cries to "drown the government in a bathtub," or that "government is the problem." The price of this epochal oversimplification is today's crumbling infrastructure and shrinking research budgets. 

Republican politicians, meanwhile, focused almost exclusively on distributional issues instead of on growing national wealth - "dividing the pie and dividing Americans," to use Tabarrok's pithy phrase. The national-greatness conservatism of a century ago was forgotten, replaced with a complacent belief that America's greatness was on autopilot.

I have no idea how politically conservative Alex Tabarrok is, but I do know that the conservative movement desperately needs him as a thought leader. America needs more and better public goods, and we need conservatives on board if we are going to get those goods. But conservatives are never going to listen to liberals. If Paul Krugman gets up and says "We need a strong social safety net AND more spending on research and infrastructure," conservatives are going to see public goods as a Trojan Horse for socialism. But if libertarian George Mason profs and Silicon Valley venture capitalists get up and say "We need to shift resources from the social safety net to research and infrastructure," then conservatives just may perk up and listen.

What we need in this country is an Alex Tabarrok conservatism.

(Note: I do actually have one quibble with Tabarrok's excellent article. He lumps Social Security in with the "welfare state," but most Social Security spending is really just forced saving. To maintain payroll taxes at current levels but shift Social Security spending from pension benefits to public goods would be to invest the savings of a large chunk of Americans in a set of risky projects whose payoffs would be distributed very unevenly. Not a lot of Americans are going to go for that. So I recommend leaving Social Security out of the discussion, and focusing instead on shifting resources away from health care spending.) 


  1. Ah, but public goods cater to the public, which includes the brown, the non-English-speaking, and the otherwise "undeserving." This may not matter to relatively high-brow conservatives, but it matters very much indeed to the conservative "base." So don't get your hopes up for conservative leadership in this regard.

  2. Anonymous3:56 PM

    Sounds good, but....Regarding the Hoover Dam, you might want to look at this post, which takes a pretty good swipe at Cochrane and the whole idea that we as a society can't afford to make collective investments for the future.

    Dam the Economists at:

    Unfortunately, it's hard to see how a rentier economy is ever going to bring itself to make or even allow such collective productive investments, and are far more likely to get the Gov't to 'privatize' the Hoover Dam at a discount to give a solid return to the rentiers. Any attempt to follow Roosevelt's call for "bold, persistent experimentation" will be greeted with cries from the right of 'Solyndra'. Not heartwarming, but realistic.

    John H.

  3. Economics is the study of scarcity...but your posts sure don't seem to reflect that. What was that term again for determining the efficient allocation of scarce resources? Oh wait... I remember... opportunity costs. Yes Noah... everything we want in life has opportunity costs...even public goods.

    Let's try from a different angle. How many of us does it take to answer the question of what the private sector should produce? If you answered "every single one of us" then you are correct! Here's the bonus many of us does it take to answer the question of what the public sector should produce?


    The correct answer is: Subject to constitutional limitations on some issues it requires 50% + 1.

    Given the opportunity for constitutional amendment another correct answer would be: In a democracy a 75% majority can do pretty much anything it chooses to do.

  5. Absalon...are your "correct" answers referring to the public or private sector? They would seem to be referring to the public sector but the question you quoted was regarding the private sector.

    We all figuratively vote for what the private sector should produce and many people literally vote for what the public sector should produce.

    My point was...literal voting reveals absolutely nothing about opportunity is of no use to economists. Just because Noah and Alex say..."these public goods should be our priorities!!!" in no way indicates that they should indeed be our priorities. Anybody who thinks they could truly know what the priorities of an entire nation should be suffers from a malaise called the "Fatal Conceit".

    The only way we could truly determine our priorities with regards to public goods would be to allow people to figuratively vote with their taxes.

  6. My point was...literal voting reveals absolutely nothing about opportunity is of no use to economists.

    I do not agree. Political parties are entrepreneurial trying to assemble a package of policies which will attract swing voters while holding on to as much of the base as possible. When voters choose between the competing packages it tells which of the competing cost benefit trade-off packages voters prefer. That gives us some information about what they see their individual opportunity cost as being.

    We know from experience that collective action can be extremely powerful and that anarchy does not work. (Every time you flush a toilet into a public sewer system you accept the validity of collective action.} Under that circumstance it is perfectly legitimate if someone says: here is what I think we should do as a group, vote for me and we will force everyone else to go along even if they would rather that we do more or less or different as a group. He might be right or wrong but he is still legitimate because the only way for the group to act is by voting.

  7. Absalon, do you think that people should be allowed to sell their votes?

  8. Xerographica

    I think it is a bad idea to feed a troll.

  9. I agree that it is nice to see Alex Tabarrok stating the obvious. I would not get too excited if I were you, however.

    The key is not to convince conservatives. That is a nearly hopeless task, given their general retreat into crude generalizations. The entire line about how "government is bad" is an article of faith more than reason. Alex Tabarrok (if he is a conservative) is not representative of conservatives.

    The key is for institutional reform to occur (i.e. the elimination of the filibuster) so that the party that wins an election can actually implement its agenda. Only by learning from success and failure, will the country be able to move forward. Now, our institutional arrangement practically guarantee paralysis.

  10. Absalon, how was it trolling? My point is really straightforward. Voting just asks people what they want...but it doesn't ask them what they would be willing to sacrifice for what they want.

    In the private sector there are a gazillion things that we want but we are limited by the amount of money in our wallet. Therefore... we are forced to prioritize our spending decisions. This is how resources are efficiently allocated...aka the opportunity cost concept...aka econ 101.

    Unfortunately...Noah seems to have missed econ 101 because he operates on the premise that government shouldn't be forced to prioritize its spending. Or maybe he thinks that by asking voters what they want we'll have a good idea of people's priorities.

    It's really not rocket science. Just see how long you can ignore price tags before you run into problems. Figure out why they put price tags on everything and perhaps you'll understand why economics is the study of scarcity.

    Don't get me wrong...all the things that Noah wants are awesome...but if he wants them then he...and everybody else...should be forced to put their taxes where their mouths are. That's the only way we'll be able to guarantee the best possible use of limited public resources.

  11. Xerographica writes:


    Prove how this is a reasonable interpretation of anything that Noah has ever said.

    Xerographica writes:

    "That's the only way we'll be able to guarantee the best possible use of limited public resources."

    Who is living in a fantasy land. You want to live in a world where there is a GUARANTEE that resources will be used in the BEST way possible.

    First of all, people won't even agree on what is BEST. Much less is ANY political system capable of providing a GUARANTEE.

    You need to grow up and accept that the real world will never be perfect, much less will it ever be GUARANTEED to be perfect. Furthermore, you have to recognize that people are going to have their own ideas about what BEST is. There is no Platonic ideal that everyone will agree on.

  12. Xerographica

    Of course you are trolling when you ask a question about selling votes.

    Of course voting asks what people would be willing to sacrifice. Every political platform has express or implicit trade-offs. The fact that sometimes politicians don't understand the trade-offs they are proposing (Dick Cheney "deficits don't matter") or lie about them does not make those trade-offs any less real.

    I expect that Noah understands very well the trade-offs and need for prioritization. He just has a different view on where the trade-off should be from yours.

    I think Noah and I would agree pretty quickly on most of those trade-offs despite our different circumstances:
    1) I am old enough to be his father
    2) he is a (presumably poor) student and I am a moderately wealthy self-employed professional
    3) he is close to entering the work force and I am close to leaving it.
    4) he is probably smarter than I am by about 10 or 20 IQ points and is certainly more articulate.

    Maybe its because Noah and I both studied physics before changing to other career paths.

  13. David Welker, the concept of opportunity cost is arguably the most important economic concept...yet do a google search within Noah's blog to see how many times he's mentioned it.

    Learn about the opportunity cost concept before you accuse me of living in fantasy land.

    Absalon, what's trolling about asking you whether people should be allowed to sell their votes? Clearly my point has to do with revealing preferences...which is entirely relevant to the discussion.

    Do you have any evidence to back up your argument that resources can be efficiently allocated by proxy/representation? You really don't think it makes any difference whether people have skin in the game?

    Politicians don't get elected by telling people that they'll have to decide between having their cake and eating it...they get elected by telling voters that they'll cut taxes and provide more public goods.

    When it comes to allocating public goods...the only explanation for congress's role is historical. It's ridiculous to think that 538 congresspeople could allocate resources more efficiently than millions and millions of taxpayers could.

    Congress has never met could they know my values and interests better than I do? Do they know your interests and values better than you do?

  14. Xerographica:

    The idea that Noah Smith doesn't understand the concept of opportunity cost or trade offs is just plain stupid. It isn't plausible.

    Go away.

  15. David Welker, oh, I'm sure even you get the idea of opportunity costs. We all learned early on that you can't have your cake and it it too.

    The issue is understanding how millions and millions and millions of consumers making hard decisions with their own money leads to the efficient allocation of limited resources. Is it important for resources to be efficiently allocated? Would you give a kidney to somebody with two perfectly healthy kidneys?

    Having subscribed to Noah's blog for quite some time now I'm fairly certain that this is a concept that he still hasn't grasped. When he answers my question regarding whether taxpayers should be allowed to directly allocate their taxes then I'll be able to say for certain.

    Why don't I go away? Well...when he writes a post titled "PUBLIC GOODS PUBLIC GOODS PUBLIC GOODS!!!" then I feel an obligation to bring up the issue of how we are supposed to determine the most efficient allocation of public funds.

  16. Xerographica

    Noah talked about two types of public goods: research and infrastructure.

    Some research will basically only be done with public funding because either the research is too uncertain of a payoff to attract the private sector or the private sector has no way to capture the benefits. There was a time when the regulators basically paid Bell Labs to do massive amounts of research (and gave us transistors, charge coupled devices, Unix etc.) but those days are gone. Public funding gave us the Internet, the web, and, through the Darpa's VLSI project, the microprocessors we have today.

    In medicine we still need research to build tools and techniques to do research. Tools and techniques are an appropriate area of public research.

    Research into the diseases of the poor is something that is probably best done with public money. What would a cure for alcoholism or drug addiction be worth to the economy?

    Roads and bridges, water and sewer, and other large scale infrastructure is probably best left to public spending because: there are serious co-ordination and free rider problems, the public sector has a longer time horizon and a lower cost of funds than the private sector.

    No one is saying that the public sector should supply everything but there are some goods that the public sector is best at delivering.

    As to your suggestion that each person should be able to direct where their tax money goes - you either believe in democracy or you don't. I believe, you apparently do not.

  17. It's interesting that Taborrok would say this. I truly hope this is a new direction for libertarians. It's certainly something I and most Democrats support wholeheartedly. I'd agree to a profound, massive increase in basic scientific and medical research, smart infrastructure, alternative energy,…, and so would Obama and congressional Democrats if there was a change in libertarian and Republican thinking.

    This, if it pans out, is a giant piece of common ground between libertarians and Democrats and utilitarians, but let's see what other libertarians say, or at least other libertarian economists. Does Kling agree? What about Taylor? Mankiw? Caplan? And how enthused are they? Is it kicking and screaming, only when the costs of not doing it are ridiculously grievous? Or is it an actual desire to really capitalize on the enormous amount of highly positive social NPV investment that we don't take, to really improve our world, current people's lives and our children's and grandchildren's.

    Otherwise (and anyway), I agree strongly with Welker. One of the most important things we can do is eliminate the modern filibuster, so try-and-see can decimate ignorance and disinformation, with the good things tending to be lasting (like the New Deal, Medicare), and the bad being exposed and temporary. See:

  18. Absalon, my argument wasn't that we should get rid of taxes...I could care less if the tax rate was long as taxpayers were allowed to directly allocate their taxes. So there's really no need to try and defend public spending.

    Why do you say that I do not believe in democracy? How is undemocratic for me to argue that people should have more of a say? If it was undemocratic would they have published this article on the Democracy Journal website...Your Money, Your Choice?


    Try reading the US Constitution. It isn't perfect (what is?!) but it sure beats your lame-brained monomania...

  20. mattski, on one hand you have a small committee determining the proper scope of government...and on the other hand you have millions and millions and millions of taxpayers determining the proper scope of government.

    Can you explain why my advocacy for taxpayers is "lame-brained monomania" while your advocacy for a small committee of dead politicians is not?


    You are not advocating for taxpayers. You are wasting people's time. Why have a government if the government cannot appropriate funds? If you had any notion of how silly you sound...

  22. mattski, my issue isn't the's the spending. If you think that resources can be efficiently allocated by proxy then just give your credit card to your closest friend or relative and let me know how happy you are with their spending decisions.


    My wife of twenty-five years is my closest friend and relative. She makes almost all the routine spending decisions and I make most of the big decisions. It seems to work for us.

    I used to be in a partnership where the decisions were made by a majority after discussion and that worked pretty well too.

    What would not work in either case (the family or the partnership) is unco-ordinated spending where everyone pursued their own personal agenda.

  24. Absalon, for some time now I've been asking people whether taxpayers should be allowed to directly allocate their taxes. Here's my blog entry where I've compiled a list of responses that have something to do with coordination problems...Unglamorous but Important Things.

    You can see and understand the division of labor between you and your wife...but you have trouble visualizing the division of labor that would develop between all the taxpayers. If you get a chance you should really read my entry on Unglamorous but Important Things.

  25. Xerographica

    I do not need to read your blog to know that I oppose the idea of taxpayers individually directing the use of their taxes.

    If a tax payer wants to do good works he can make a contribution to the charity of his choice and claim the deduction.

  26. Absalon, do you think that if people could directly allocate their taxes that they would try and claim deductions?

  27. mattski, my issue isn't the's the spending.

    From my perspective your issue is profound ignorance. The entire basis for your position is that government is unnecessary. But you're too daft even to recognize that.

    I apologize to Noah for my weak-willed inability to look away from your train wreck.

  28. mattski, can you explain how you go from "taxpayers directly allocating their taxes" to "government being unnecessary"? That only makes sense from an anarcho-capitalist perspective.

    The complete opposite would be true from the socialist perspective. Allowing taxpayers to directly allocate their taxes would reveal that the private sector was completely unnecessary.

    The entire basis for my position is that there's no way that I...or you...or Noah...could possibly know the proper scope of government. How could any single individual truly grasp something that complex? All we can know is how the scope of government benefits or harms us as individuals.

    Therefore, my position is one of humility. It requires humility for me to advocate that you be allowed to allocate your taxes according to your perspective. If I was conceited enough to think that my perspective on the scope of government was correct...then why would I argue that you should be allowed to allocate your taxes according to your perspective on the scope of government?

  29. Xerographica:

    For someone who accuses someone else of not understanding basic economics, you sure do make arguments with very basic and obvious flaws.

    Your premise that allowing people to "allocate their own taxes" would lead to the optimal level of government is clearly wrong. Why? A couple of reason.

    (1) The overall level of government is nearly completely unrelated to the amount any particular individual spends.

    This gives rise to:

    (2) A free rider problem. An individual may want the roads to be repaired so that potholes do not ruin their tires or public schools to be decent so that their kids can get a decent education. They also may want someone else to pay for it. Since that individual's single contribution is going to have very little effect on the level of services that are provided, they have every incentive to minimize their contributions.

    In your world, our roads would go unrepaired and we probably wouldn't even have public schools, even though this would go against the wishes of the vast majority.

    I appreciate that, if your proposal is actually serious, that you may be thinking of creative ways to make the world more "perfect" and you are searching for the "perfect" way to allocate the "perfect" amount of money to government. Because heaven forbid that 1 dollar too little or 1 dollar too much is spent on government.

    This obsession with perfection of yours is leading you to proposals that simply do not make sense.

  30. Mr. Welker

    I think Xerographica is bot. Someone is trying to see if they can pass the Turing test.

    Fail. There is no self aware intelligent life there.

  31. David Welker, if you did know more about economics then you would already know that Bastiat's essay on the Seen vs the Unseen perfectly addresses your critique. Well...then you would also understand how the Seen vs the Unseen is basically the same thing as opportunity costs.

    If taxpayers could directly allocate their taxes...then their money would have to go somewhere. So if their money didn't go to fixing the roads...then it would have to go to fixing the environment or providing greater access to public healthcare or more space on and so on and so on...

    The question many potholes would you be willing to forgo for a cure for cancer? That's not a question that I can answer for you...that's only a question that I can answer for myself. What happens when we all answer these hard question for ourselves? We end up with an efficient allocation of public funds.

    Now...I can't think of a single argument against the efficient allocation of public funds. That would be the equivalent of saying that in some cases it's a good idea to give your kidney to somebody with two perfectly healthy kidneys. Nobody would willingly do that...yet here you are arguing against people being able to directly allocate their taxes.

    Like I might have already mentioned, congress allocating taxes only makes sense from a historical has absolutely no logical economic explanation.

    If you haven't already done so then read my post on Unglamorous but Important Things...because you'll probably have to wait a while before Noah decides to write an entry on opportunity costs.

  32. David Welker, looking over your comment again..."Because heaven forbid that 1 dollar too little or 1 dollar too much is spent on government."...I think you're not understanding my use of the word "taxes". "Taxes" refer to the portion of your money that can only be spent on government organizations.

    Allowing taxpayers to directly allocate their taxes doesn't mean that they can decide to pay less just means that they can decide which government organizations receive their taxes. So the free-rider problem is in no way applicable to this scenario.

    So it would be more accurate to say..."Because heaven forbid that 1 dollar too little or 1 dollar too much is spent on" a government organization that I do not value.

  33. Xerographica,

    You say that Bastiat deals with the free rider problem, but you yourself appear to be totally incapable of providing a reasonable and concise explanation of how free rider problems would be overcome in your utopia.

    Please feel free to come back when you have an actual argument, instead of an argument from libertarian authority.

    In terms of reading your extremely long post, recognizing the opportunity cost of doing so, I choose not to. I am not impressed with any of your arguments here so far (i.e. it can be reasonable inferred that Noah Smith, who is quite a ways along in his graduate studies of economics, must not understand the Econ 101 concept of opportunity costs) that would think that such an adventure would be enlightening.

    Your persistence has convinced me that you are sincere. However, your arguments have been completely unconvincing. You still have made no progress convincing me that you are nothing more than a utopian dreamer.

  34. David Welker, let's compare.

    A. You have better things to do with your time than read my long blog entry...aka opportunity costs.

    B. My argument is that taxpayers should be allowed to decide if there are better government organizations that they can spend their taxes on...aka opportunity costs.

    Why is the opportunity cost concept applicable when it comes to your time...but it's not applicable when it comes to your taxes?