Is all spending created equal?

So asks Mario Rizzo over at the ThinkMarkets blog. The issue here is whether or not government spending is as good as anybody else's when it comes to economic stimulus and fighting unemployment. Brad DeLong seems to think so. Mario Rizzo thinks not. He writes

So when DeLong, among others, says that government spending is as good as private in restoring employment, he is speaking against the whole thrust of the principle of efficient resource allocation. The essence of our recessionary problem is not the fall in aggregate demand and the lack of business confidence that accompanies it. First, it is the misallocation of resources produced by excessive risk-taking and by excessive expansion of interest-sensitive sectors. (These were generated by excessively low interest rates over the past several years.) Second, it is the uncertainty that is natural to the discovery of more appropriate combinations of resources. Third, it is the endogenous uncertainty created by the fits and starts of stimulus, bailout and unclear monetary policies.

When government adds to investment as a result of fiscal stimulus or directed monetary expansion (like buying mortgage-backed securities, student loans, etc) it does not act as a super-entrepreneur who is trying to determine the efficient and sustainable direction of resources, including the allocation of capital goods. It spends according to economically irrelevant criteria of job creation, propping up over-expanded sectors, and preventing politically painful adjustments.

Such spending is counterproductive in the medium to long term. It is also unsustainable (once the stimulus stops) since it is not consistent with the preferences of consumers-savers-investors.

Now I think here is little in the way of doubt that government spending can create jobs, as can monetary policy. Both these policy instruments can affect output and thus the level of employment/unemployment. But the government bureaucrats carrying out the fiscal or monetary policy, have no way of knowing what the efficient, productive investments are likely to be. They are not entrepreneurs. It is the market that can, over time, work this out, via the interactions of millions of investors. The public choice part of me would, therefore, ask if the bureaucrats really care what the investments they make are, as long as employment is increased. This is short-termism at its worst. Doing something, anything, now is better than waiting for the market to work things out, that takes too long. Or so bureaucrats and politicians think.

I would also suggest reading the comments section on the Rizzo posting. De Long replies and Rizzo responds. All good stuff.