The economics of government spending on architecture

We’ve been in all-out government-slashing mode since last year’s elections. The dialogue goes something like this:

Democrat: Let’s cut spending to reasonable levels and figure out ways to pay for what we really need.

Republican: Let’s brutally slash spending on programs that help people and then cut taxes for rich people!

Can someone remind me again why Americans elect Republicans? Even the most intelligent conservative economists understand that what Republicans in Congress are currently proposing would damage the economy and help only the wealthiest. Even the Wall Street Journal editorial page, that lonely voice of intellectual conservatism, has taken a step back from its usual cheerleading of antitax-ism.

Some basic economics — and how they tell us that government should spend money on public goods like civic architecture — after the break.

So I think now is a good time to step back and calmly point out what so many people seem to have suddenly forgotten: the nature of an appropriate role for government in our economy. The argument I’m about to make is nothing radical or even liberal. It’s basic textbook economics. (For those who already understand this, bear with me.)

In a free market economy, the market almost always allocates resources efficiently. This is the case because everyone involved pursues his or her own self interest. And that, in turn, helps everyone (the economist Adam Smith dubbed this effect the “invisible hand”).

But sometimes, there are these special cases where the markets fail. Yes, that is possible. No, I’m not a socialist for saying it. Here’s the thing: in many market interactions, one or both parties has an unfair advantage — when one knows something the other doesn’t (adverse selection or moral hazard problems in economics-speak), or, more importantly, when one isn’t actually paying for what it purchases.

So let’s turn to SUVs. If I buy a massive SUV at the free market price, I’m actually not paying for what I’ve purchased. Because society incurs the cost of my polluting the atmosphere and destroying roads with my massive car. I don’t have to pay for any of that, so really, I’m paying too little for my SUV. The market isn’t working properly; resources aren’t being properly allocated to serve the best interest of everyone (they’re being over-allocated).

And therein lies a key role for government — correcting for what are called externalities. My SUV that pollutes is an example of a negative externality — everyone else has to pay for what I’ve done. But there are also such things as positive externalities, so when I buy something, everyone else benefits. Since they don’t have to pay for that thing, they won’t and they don’t. So again the market hasn’t allocated resources properly — this time it has under-allocated them.

So with those market failures established, our healthy, active government can step into the market and help it and fix its problems. To deal with negative externalities, it can impose taxes so that SUV owners do end up actually paying for the damage they do. (So no, carbon taxes are not just liberal ploys to bring in piles of cash. They’re actually around to help the free market function properly.) And to correct for positive externalities, the government can subsidize goods affected by them. Like good architecture. Society benefits from having well-designed buildings in a number of different ways, but since the cost of the buildings are underwritten by an individual or group of individuals, the market doesn’t provide incentive for everyone else to invest in good architecture.

And that’s why the government should subsidize good design by providing tax breaks for developers who hire real architects, by investing in an active Department of Housing and Urban Development, etc.

So perhaps our national discussion on government spending should expand its scope. We need not just to be talking about cutting; we need to be talking about investing in the future. And this isn’t just about architecture. It’s about a huge range of goods that deserve government investment — like solar energy companies (enough about Solyndra already; that was just one company out of literally hundreds not to succeed).

On a more fundamental level, we need to realize that government is not an evil — not even a necessary evil. It’s a powerful entity with huge potential for changing our lives for the better.