The ledger cost of the Ray Nagin corruption scandal is picayune: some thousands of dollars in bribes and, in an old-fashioned touch, truckloads of free granite; some more substantial costs relating to the misallocation of city resources; and the expenses of putting the former New Orleans mayor on trial and then housing him for what one hopes is a good long time in a very small room. But if we take to heart the wisdom of Frédéric Bastiat, we should be looking not only for the seen but for the unseen as well, and that is a different story. The damages of Ray Nagin’s crimes may not amount to very much, but the damages inflicted by Naginism are staggering.
Economists have many different models explaining how economic growth happens. And though the relative merits of those models are hotly contested among economists, as are the relative weights that should be assigned to many variables, a few factors keep turning up: productivity, capital accumulation, population growth, and technological progress. (Those are the basis of the Solow-Swan model of growth.) While government policy certainly has an effect on those factors, they generally operate at some remove from it: You cannot simply pass a law mandating greater productivity or technological innovation. You can encourage your population growth by (for example) liberalizing your immigration rules, which will probably work if you are New Zealand or the United States but not for Rwanda or Haiti, or a sparsely populated rural community in the United States. Policy can encourage capital accumulation, but it cannot ensure it. We have invigorating political fights about the tax code and stimulus spending, and those are important fights to have, but many of the most important factors driving economic growth are beyond direct political control.
But there is a critical variable that is at least partly within the direct control of government: the quality of government. The quality of government — its honesty, competence, reliability, and predictability — has an effect on most of the important economic variables. And not just government itself, but other institutions with the power to shape public life, such as unions and large firms. Quality is something outside of and different from policy specifics, which is why similar policies often produce wildly different outcomes in different polities: Single-payer health care in Bahrain turns out to be very different from single-payer health care in Canada. A high level of government-enforced union involvement has been catastrophic for the U.S. automotive industry but not for the German automotive industry, which is a lot less of a mystery than it seems when you account for the fact that the UAW is not IG Metall, GM is not Audi, and the U.S. government is not the German government.
The situation is in some cases much worse at the state and local levels. Imagine that you are a taxpayer or a city councilman being asked to vote for a bond issue to update Philadelphia’s airport. Or imagine that you are a private firm or neighboring jurisdiction considering a partnership with the airport. How would you proceed, knowing that not too long ago a mayor’s brother, by occupation a hotdog vendor, had been awarded a seven-figure contract for providing services at the airport — a contract that also absolved him from any financial responsibility in his dealings? If you are a taxpayer in Atlanta being asked to consider spending more money on the city’s schools, surely the corruption of their managers must weigh on your decision.
The problem extends beyond outright corruption: Perhaps you are an American taxpayer who believed the president when he said that his stimulus package would “put people back to work rebuilding our crumbling roads and bridges,” only to learn that almost none of that money was spent on roads or bridges, or indeed on any other infrastructure project, but was instead channeled to the president’s political allies?
A reasonable person might grow wary.
Our defective public institutions make it possible for us to find ourselves in such seeming paradoxes as spending far too much money on education while spending too little money on educational programs that produce good results. For example, I have argued before that increased spending on basic science and technology research may be a good long-term policy — see “technological innovation” above — but such spending would largely go through our universities, and it is difficult to trust that the money will end up where it is intended rather than going into, say, questionable climate-change advocacy projects or simply being used as offsetting revenue to offer more transgender-consciousness-raising-basketweaving classes. We could have Finnish levels of education spending and Finnish models of schooling, but that does not necessarily mean that we will get Finnish results. The Affordable Care Act creates a sort of crippled model of the Swiss health-care system, and, as we are finding out with every rollout disaster, delay, and sweetheart exemption, that does not ensure Swiss efficiency, Swiss transparency, or Swiss results. Should we spend more money on our schools? Maybe some of them; maybe not others.
Capital accumulation, a critical factor in long-term economic health, is dependent on savings, and our personal-savings rate remains low by historical standards; worse, it has been offset in recent years, and more than offset, by federal deficits. And why should households save when there are so many disincentives to do so? Why should firms invest in physical capital? Here, too, we are missing out because of defective institutions. Building a factory is an expensive, long-term commitment, and many investors will hesitate to do so if, for example, they are unsure of what their future labor environment will look like, whether the corporate-tax code will be used to subsidize their politically connected competitors, or what environmental rules they will be operating under. The Obama administration’s penchant for executive fiat makes the policy environment much less predictable — and does so largely for reasons of political self-interest. Things like the Keystone-pipeline delays and the EPA’s overreach on carbon dioxide emissions are pure politics, and nothing more. But they impose real costs.
The Obama administration is willing to undermine the U.S. economy when its political self-interest is served by doing so: That is the lesson of Keystone and much more. But the problem goes all the way down: A Michigan teachers’ union has been fighting tooth-and-nail to ensure severance pay for a teacher convicted of sexually molesting a student — the union’s financial clout is the only thing in which it places real value. That will occur to a few taxpayers the next time the union comes demanding a little something “for the children.” Education is crucial to long-term productivity and to technological innovation. What Ray Nagin did was a crime, but there are worse things than crimes. It is possible to undermine critical institutions without ever violating a law.
Combined federal, state, and local spending in the United States is about the same as it is in Canada, so it is not as if we were starving our public sector to death. The problem is that our institutions are not full of Canadian budgeters, Finnish school administrators, and Swiss train conductors. They are full of Ray Nagins.
— Kevin D. Williamson is roving reporter for National Review.