Government and Investing

"They are going to take you."
--Bryan Mills (Taken)

The Obama administration often refers to the spending that the federal government is doing as 'investing.' Can this rhetoric be taken seriously, or is it just political euphemism?

Commonly defined, investing is committing money to an endeavor in anticipation of earning an economic return. An economic return means that, over time, more money is gained than is put into the project (a.k.a. return on investment or ROI).

Implied by this definition is that investing is a voluntary activity. Investors decide whether to commit their capital or not. They are not forced to do so.

We can therefore observe one thing wrong with referring to government spending as investing. Government does not commit its own capital to a project. Instead, it uses funds collected from others. And unlike private sector money managers who act as investment agents for willing principals, government obtains its funds by force.

Committing proceeds forcefully obtained from others toward an economic endeavor is not what a money managers does. It is what a thief does.

Suppose, however, that we temporarily embrace the socialist's argument that, despite the use of force, government is nevertheless investing because it is committing capital for the 'public good.' The capital that it is allocating is collectively owned by 'society,' and government serves as money manager for the collective.

In order to be an effective investor for the collective, government must overcome a classic agency problem. Government officials who allocate funds serve as agents for public principals. Because they are allocating other people's money, the government agents face a different risk:return profile than their principals.

If they make poor investment decisions, government monetary agents face different consequences than their collective principals. Yes, government agents could be fired by their principals but that might mean merely a return to private sector employment. But behavior of government agents can be difficult for the public principals to monitor, making it difficult for the collective to assign blame for poor investment decisions.

Meanwhile, the collective gets hit with real economic loss. Less comes out of government programs than goes in. To make up for the lost economic resources and maintain their standard of living, citizens have to a) work harder and/or b) borrow resources from others.

Of course, these are precisely the kind of results we see being posted on the economic scoreboard. People are working harder. Federal debt has been exploding higher. Standard of living has been slipping for many Americans.

The question to be asking is this: If the federal government is an effective investor, then why are we observing such results?