Roads, Education, & Big Macs

     Recently, a gentleman by the name of Mark Howard, the executive editor of  Florida Trend magazine, wrote an editorial calling for government investment in roads and education. A  cursory glance of the article seems to provide a plausible case for such an investment, since it is infrastructure that is the backbone of the economy. Mr. Howard is suggesting that government investment in this infrastructure will be necessary for prosperity a “21^st Century Economy.”   

     Speaking of the economy, the science of its study, called economics, just so happens to be happens to be a hobby of mine. The textbook definition of economics is “the efficient allocation of scarce resources.” Essentially, the more rare and/or in demand an item or service is, the higher its price will be. For example, a BigMac will always tend to be cheaper than a diamond; otherwise I would have more girlfriends than extra pounds.

     Now what does this have to do with roads and education? Everything. Just as demand and supply dictate the optimum production of everything from BigMacs to diamonds, they can do so with roads and education. In fact, we need not look any further than our own backyard as evidence for this. If you live in a house that is part of a neighborhood association, its quite likely that you have used a private road to get home. Going back to the 19^thcentury, it was the private transcontinental railroads that were built cheaper, faster and most direct to their destinations than those sanctioned by the government. Private and virtual schools are also more successful in both measures of success than government schools, balanced budgets and quality of education.

     Simply, the market is simply more efficient at allocating goods than the government. This was the proposition offered by Nobel Prize winning economist F.A. Hayek. The government cannot invest without first taking away, via taxation. Taxation has unintended consequences which can have adverse effects, known in economic lingo as excess burden. When the government taxes something, it generally tends to make people want less of it. The use of this tax money to “invest” in other things distorts demand and supply and therefore the market, causing what is known as a malinvestment. Going back to a previous example, if the government decided to tax BigMacs and “invest” in diamonds, sure I would lose weight, but do I really need more than one girlfriend? This type of government intervention is what many economists claim to be the root cause of the housing bubble and the impending financial meltdown.

     So, for the sake of the economy, the government actually should not become an investor and leave that to those who do it the best, the market.