“Convention Center Not Living Up To Lofty Goals!” appeared as a headline in today’s Washington Post and should serve to remind everyone that the predictions of the virtues of government investment are rarely achieved. And from that comes a lesson. Capitalism is concerned about the efficient use of capital — the seed corn that provides for our future. A market encourages efficient use of captial because the individual seeking funds must put forward a realistic plan and work diligently to ensure that the plan becomes reality. When your money is at stake, when the potential profits will be captured by you — you work hard. Milton Friedman noted many times that nothing encourages efficiency more than when an individual spends her money on her goals!
Government diffuses those incentives. In the government investment model, good investments benefits “society,” but not necessarily the program managers in any direct way. If the project is a failure, the costs are born by the taxpayer — no government employee’s salary is cut. (Although in extreme cases, some people might be fired, holding government employees accountable for only the worst order of disasters). Likewise, if the project is a brilliant success, the individuals responsible don’t capture these gains. This lack of what economists call a residual claimant explains much of what happens in government-funded convention centers, sports stadiums, and so forth. But, we never seem to learn that lesson.