On Costs and Public Works Projects

The outright anger and angst shown by Paul Krugman and others regarding Gov. Chris Christie's cancellation of The Tunnel has been pretty predictable, but it also ignores the fact that governments today are spending huge amounts of money for things that were not in the budget back in the days of the Hoover Dam.

While I am not a regular reader of David Brooks' NYT column (given that I am not much into "National Greatness" Neoconservatism), I do believe that he has some important insights into the latest controversy in his column today. Perhaps the most important point he makes is that at the present time, state and local governments have most of their budgets carried away by government employees. He writes:

...nobody seems to be asking is: Why are important projects now unaffordable? Decades ago, when the federal and state governments were much smaller, they had the means to undertake gigantic new projects, like the Interstate Highway System and the space program. But now, when governments are bigger, they don’t.

The answer is what Jonathan Rauch of the National Journal once called demosclerosis. Over the past few decades, governments have become entwined in a series of arrangements that drain money from productive uses and direct it toward unproductive ones.

New Jersey can’t afford to build its tunnel, but benefits packages for the state’s employees are 41 percent more expensive than those offered by the average Fortune 500 company. These benefits costs are rising by 16 percent a year.

New York City has to strain to finance its schools but must support 10,000 former cops who have retired before age 50.

California can’t afford new water projects, but state cops often receive 90 percent of their salaries when they retire at 50. The average corrections officer there makes $70,000 a year in base salary and $100,000 with overtime (California spends more on its prison system than on its schools).

States across the nation will be paralyzed for the rest of our lives because they face unfunded pension obligations that, if counted accurately, amount to $2 trillion — or $87,000 per plan participant.

Unfortunately, the Keynesian version of this seems to be that the more governments pay out to employees in pay and benefits, the more "aggregate demand" is created. As one of the people who regularly comments on this blog wrote: "What Austrians do not understand is wages are not just a cost – they are always income as well."

This is most instructive, for what he is saying is that the higher the rates of pay, the more wealth is created. No, Austrians are not unaware that one's paycheck is one's income, but we hold that the Keynesians have it backward. One's paycheck should reflect the value of the marginal revenue product one has created, and if pay is raised above such a level -- as is often the case with unionized government employees -- then the real wages of others, after the transfers via taxation are completed are diminished to rates below their MRP (or Discounted MVP, to quote Murray Rothbard).

The Keynesians seem to believe that government spending itself creates wealth, so the more that government spends -- no matter how it does so, taxation, borrowing, or printing dollars -- the wealthier we become. Obviously, Keynesians and Austrians are at an impasse at this point, and there really is no bridging of the intellectual gulf.

Brooks is arguing that there really is a "crowding out" effect of government in which the public employee unions make it increasingly costly for state and local governments to afford to carry out many public works projects. Murray Rothbard noted that over time, true monopolies are captured by their employees, and by definition, governments are monopolies. I believe that this version of a "Capture Theory" is correctly applied here.