President Mixed up on Investments

August 02, 2013 J

By: Matthew Roy

President Barack Obama seems absolutely fixated on investment.  There’s hardly a speech or policy proposal that doesn’t promise more of it, including the one he gave this past Tuesday. How can we rev up a slow economy? Investments.  How can we combat high unemployment?  Investments.  How can we prepare for a changing climate?  Investments.  And most recently, how can we improve the middle class?  Yep, you guessed it.  Investments.

The president is right to give investment so much focus, but his approach to advance it has been all wrong.  His policies only concentrate on increasing funds for public investment, which is inherently inefficient and unproductive, instead of encouraging private investment.

Politically-tinged words like “investments” can mean different things to different people, so it’s important to work from the same definition.  Economists use this word to refer to capital goods — the buildings, machinery, equipment, and other infrastructure that makes production of other goods possible — and they overwhelmingly agree that capital goods are vital for growth.

However, government investment is not the same as private investment.  There are a number of important differences between the two.  One difference has to do with risk.  Private investors are only willing to risk their limited resources on projects that will turn a profit.  Businesses will not invest in new capital unless it will help to create value for customers and ultimately improve their bottom line.

Another difference has to do with accountability. Government doesn’t go out of business for making poor investment choices, whereas a private business may have to shut its doors. This means that government officials are not directly accountable for investment failure like private investors are, so they are less careful to make a good decision.

A third difference is the funding mechanism. The government can only fund its investments by siphoning money out of the pockets of productive businesses and hardworking Americans.   Rather than keeping money in the hands of people with local knowledge of how to improve their local economies, Washington politicians that peddle government investment send tax dollars to whatever pet projects or special interests hold political favor in the moment.

Public investors also face overwhelming knowledge problems.  Government cannot allocate resources very well because bureaucrats and politicians lack perfect information.  Government has neither the knowledge nor the incentives to accurately and appropriately pick and choose what is right for the wider populous.  It’s simply impossible to account for all the various subjective preferences of a country.

Look what happened with Solyndra.  The government dumped $300 million of taxpayer dollars into this company, and it failed.  Why?  The American people did not have enough demand for solar panels — if they did, Solyndra wouldn’t have required government support in the first place.  If private investors were the only ones risking their own money, then the cost of Solyndra’s failure would have been limited to them.  Instead, the government put that risk on everyone and wasted millions of dollars that taxpayers could have put to good use in their own lives.

To make matters worse, in many ways, the current federal tax code discourages private investment. One example is the unequal tax treatment of debt and equity. Businesses that buy capital goods are not allowed to deduct the full cost of those expenditures in a single year, but they are able to deduct the cost of servicing their debt.  This means investing businesses will overstate their incomes and face higher tax liabilities.  Evidence shows that these capitalization rules in tax law hold back private enterprise and sacrifices as much as 2.7% of GDP and 2.3% of wage growth.

President Obama may want you to think that his economic plan is a like a road map to get the economy on the path to growth.  At best it’s a detour, sending our money down winding roads to places we do not want to go.  America does not need one man or one administration’s master plan; she needs freedom for each individual to find their own way forward.  The president should stop talking about all the spending he will do for us and instead let Americans choose themselves.

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