Consumption and Investment

by Reihan Salam

Matt Yglesias writes:


Medicare is obviously a heavy subsidy for old people’s consumption of health care services. But that, in turn, constitutes a heavy subsidy for medical-related R&D spending. America has the world’s most bloated health care sector but we’re also world leaders in pharmaceuticals, biotech, medical equipment, etc., and I doubt this is a coincidence. Any kind of in-kind social welfare provision is in part a form of industrial policy. In the classic Milton Friedman critique of the welfare state, this is a problem. But in the Continetti/Brooks/Salam reformulation of the critique, it ought to look more like a feature. I wouldn’t swing 100% to the “just send money” side of the argument, but on the whole I think Friedman has the better of the argument.

Matt Continetti pointed to education, R&D, infrastructure, and defense expenditures as better understood as investment rather consumption. One could use a finer-grained analysis, e.g., R&D investments in delaying the onset of various age-related diseases could be seen as an investment in human capital, whereas the Medicare expenditures devoted to end-of-life care represent an expensive form of signaling best understood as consumption. When Matt Yglesias suggests that Medicare is a heavy subsidy for medical R&D spending, I’d suggest that it’s a uniquely ineffective way to spur innovation as Medicare stymies business-model innovation. I take Yglesias’s basic point: the investment vs. consumption question is necessarily subjective. But his examples actually suggest that it is more useful than he allows.

And of course Continetti wasn’t suggesting that the federal government shouldn’t devote resources to “consumption,” but rather that there might be a better balance between “investment” and “consumption.” 

I embrace Milton Friedman’s view that direct cash transfers are preferable to in-kind transfers as a general rule, and, as a fan of Amar Bhidé, I’m very skeptical about “techno-nationalist” arguments made on behalf of public R&D expenditures. As Matt Yglesias writes in his post, “the closer a public expenditure comes to resembling a private capital investment the more vulnerable it becomes to public choice critique.” 

Yet my sense is that Matt Continetti was thinking about time horizons. That is, which expenditures will create value in the future. It’s fairly easy to see how spending on effective early childhood education programs will yield benefits. It is harder to see how spending vast sums on medical care for the elderly in the hope that some of said funds will spur “innovation” in this space, including innovation in regulatory arbitrage strategies designed to extract more cash from taxpayer-funded programs, will do the same.  

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.