If the Government doesn’t fund it, it won’t get done.
We hear this justification for government spending on a host of things. The biggest most recently is probably ethanol. Is it a good reason for the government to step in?
Well, we might notice first of all that lots of useful products got developed with little or no government assistance: cars, airplanes, computers, the I-Phone, for instance. When things are useful, people tend to be willing to pay for them. When they are absolutely critical, people should be willing to pay a lot for them. So it seems odd that the government needs to step in for some product its proponents claim is so critical.
Let’s look at how things work in the private sector. Someone decides the world needs a new product to solve some problem. Why? For the glory, for the money, or maybe they just wanted to build a better mousetrap. There are many motivations out there. They now need resources which means they have to convince a venture capitalistic or bank to fund them, or reach into their own pocket. What happens if the idea doesn’t work out? The funding gets cut off. Is that a bad thing? Not if the idea was a bad idea. If it was a good idea, chances are someone in this technologically rich world with venture money sloshing around will rediscover it (or something even better).
Now let’s look at how things work when the government fund development. Some product gets developed and if it works, then society gets some benefit though one may question whether that free money might not encourage producers to produce more than people want. If it doesn’t work, or after the good has outlived its usefulness (as is often the case), then you have special interests who say they now need more money to keep things going. And you also have a group of politicians closely tied to those special interests because they gave them money the first time. Both groups now spend resources protecting their perk (i.e. access to your tax money), so they can profit even though they are losing money for the economy in general.
It is this failure to respond to the market telling you that your product sucks, or is no longer useful, which makes government funding really wasteful. Farm subsidies may have served some limited purpose during the Depression (though I doubt it), but 68 years and billions upon billions of dollars later, they don’t today. Ethanol probably never served a useful purpose, yet we are saddled with it and probably will be for years to come (definitely under Obama and maybe even under McCain if the overriding of the farm bill veto is any indication). The private sector was saying for a long time that ethanol was an idea which wouldn’t fly. It would have been better had we listened.