Monday, August 16, 2010

Allocation of Scarce Resources

David Merkel summarizes our economic problems perfectly on alephblog.com:

Governments are bad allocators of capital.  They borrow money and allocate it to where the political return is the highest.  Those projects may bump up GDP in that year but do little for future GDP.  This is the lie of C+I+G=Y.  Yes, in the short run that works, but in the long run, money spent by consumers and investors yields far more for growth in the economy than government spending.  Our government is only interested in the short run, given their short-run fixation on the election cycle.

Consumers choose what helps them in the short-run, and Investors the long-run.  The government has non-economic motives — their actions merely harm the situation.  Better they should reduce taxes broadly than try to target certain areas that have clever lobbyists.

To put it bluntly; politicians have no incentive to create long term prosperity, stability, or safety and therefore believe that spending other peoples money  regardless of how inefficiently that money is spent — will create short term illusions needed for reelection.

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