A Classical Liberal State Spends for Public Goods, Not Free Lunches

In the coming weeks Washington faces another budget showdown between Democrats and Republicans in Congress and then between Congress and the President. Sadly, whoever wins or whatever compromise is struck, the federal budget will remain not only bloated but grotesquely misshapen.

The reason is that the debate concerns only cutting discretionary spending, not reforming entitlements. Yet entitlements are the primary drivers of ever increasing spending.  In contrast, discretionary spending can generate public goods that aid long-term prosperity.  An economist would define the essence of a public good as one from which individuals cannot be excluded and where the use of the good by one individual does not prevent use by another.

National defense is the paradigm case of a public good.  Scientific knowledge is another. Given that such goods provide benefits which for which the provider cannot receive remuneration, they will be undersupplied. And some kinds of infrastructure goods with lots of positive spillovers also are likely to be undersupplied, even if they do not quite meet the definition of a public good. The primary fiscal focus of the classical liberal state should be on the creation of such goods, because neither the family nor the market will do so in sufficient quantity.

Not all federal discretionary spending supports these kinds of goods, but a good deal does. For instance, spending for the NIH is declining, despite very substantial evidence that it pays off in longer and better life for citizens.

Entitlements and interest on the national debt have been crowding out such beneficial spending.  One of the most troubling trends is the ever smaller portion of the budget available for spending on such public goods. The Steuerle-Roeper index of fiscal democracy measures the percentage of revenues not allocated by previously elected officials to mandatory programs, like Social Security and Medicare and interest on national debt, and the share of public good spending has been decreasing over time, not only in the United States but in almost all other industrial democracies.

We may need constitutional reform to help change the budget’s shape. For instance, we could impose supermajority requirement on entitlement spending, but not on public goods spending.   Fiscal supermajority rules are a neglected element of the toolkit of classical liberal constitutionalism.

Some might think that the substitution of the welfare state for the public goods state is justified by the gains to equality from government transfers. Bu if this were ever the case, the argument is weaker than ever before. Most entitlements do not go to the poor but to the elderly who are well-off as a class. In contrast, public goods spending on science extends lives and life extension is egalitarian by nature since everyone has only one life. More generally, basic science is a spur to technological innovations. These innovations fall rapidly in price and redound to the benefit of the great majority, as have cell phones and internet access. The federal government should stop trying to provide a free lunch for some and help create free and less expensive stuff for everyone.