Crowding Out

There is a great animated movie, A Bug’s Life, a play on one of Aesop’s Fables, The Ant and the Grasshopper, which tells the story of a hard-working group of oppressed Ants and their oppressive “leaders”, the Grasshoppers.  From time eternal, the Ants work hard every year growing food but when it comes time for the harvest they must set aside a substantial offering for the Grasshoppers who, after spending the growing season vacationing, fly in to claim their “fair share”.  If ever there was a story about slaves and their masters, or of the tax payers and the tax consumers, this is it.  In any event, it is instructive in understanding the concept of “crowding out”.  In particular, the crowding out of private investments, and ultimately of wealth, in favor of public or State government “investments”.

In the movie, the Ants are farmers and they grow several varieties of food.  They are the private sector.  The Grasshoppers provide “protection” services.  It is clear, as clear as it is in real life, that the biggest threat to the Ants are the Grasshoppers, but none the less, the Grasshoppers are the public or State sector.  Any amount of food, no matter how small or large, confiscated by the Grasshoppers, will necessarily reduce the amount of food available to the Ants.  The Grasshopper’s consumption will crowd-out consumption available to the Ants.  Without the Grasshoppers in their lives, the Ants might, alternatively, decide to grow less food.  After all, they no longer must feed the Grasshoppers.  Instead, they might decide to spend that extra time and effort gathering sticks to build better houses.

The Ants work all year gathering sticks, 1,000 of them (their savings or wealth), to build new housing.  Unexpectedly, the Grasshoppers fly in and take every last stick to build a palace for El Presidente Grasshopper.  The palace is part of a “public infrastructure” plan to bring glory to the nation.  When all is said and done, El Presidente has a palace, and the Ants have no new houses. That’s called crowding out and it doesn’t matter, incidentally, if the sticks are stolen, “taxed”, or borrowed.  Even if the sticks will be repaid, good luck on that, at a minimum the Ants will not have access to their savings, or their new houses, for quite a while.  This is not part of the movie mind you, but there is a parallel concept between the crowding out of food consumption and the crowding out of savings and ultimately the investment of that savings.  Any time a government confiscates taxpayer savings or property for infrastructure, military spending, space programs, research, etc., they are “spending” resources not available for private use.  Contrary to popular belief this, in turn, reduces private wealth.

During the Reagan years, for example, spending human and natural resources on building missile systems, etc., instead of housing, crowded out private investment and decreased the amount of housing and other consumer goods available for the citizens to enjoy.  How about a current example?  I actually drive a lot and from what I can tell, the infrastructure is incredible.  President Trump, though, would like to blow spend “invest” $1 trillion on “better”, whatever that means, infrastructure and a gigantic wall on the US/Mexico border to prevent inexpensive high quality products from reaching U.S. consumers.  There is already a shortage of housing, and prices are through the roof, but he wants to pull construction workers from building houses and have them build “better” infrastructure and a moronic “magnificent” wall.  The labor market is already tight and a project of this proportion can only lead to higher prices and, ultimately, fewer homes. Whether it be in the 1980’s, or in 2017, State spending must “crowd out” available resources in the private sector.

Where most people get confused is focusing on the money that is being spent, not the resources or wealth, both natural and human.  Every increase in State government,  either a new hire or use of scarce natural resources, robs from what can be produced in the private sector of the economy.  A metric ton of minerals mined from the earth and used in building a State government spacecraft is a metric ton of minerals not used for consumer goods or capital equipment in the private sector.  A new hire in the Consumer Product Safety Commission is a hire not available to the housing industry or technology sector.  Necessarily, the cost of housing will be greater and new private innovations in technology will be limited¹.  As can be seen in these examples, and what would be true for the entirety of State government spending, is that when government marshals resources for its own ends, private goods become more scarce and more expensive.  It really comes down to scarcity and whether it is State government or not, where there are limited resources, the consumption of one will necessarily crowd out the consumption of another.

I, to be clear and to summarize my position, support a certain level of military and infrastructure spending.  Certainly we need roads, utilities and communication development.  Every investment in to infrastructure, however, must be self-liquidating, or must pay for itself.  In other words, the investment must increase productivity such that the increase in production returns more than what was invested in the first place.  If it does not, the resources to build the infrastructure, natural and human, were wasted, were consumed.  My concern with State-government-directed and taxpayer-funded infrastructure is that most often political, not economic, analysis is decisive in determining when and where resources will be utilized.  These resources represent the hard-earned savings of taxpayer producers and it is in private hands that these resources are most efficiently, effectively and, most importantly, productively spent.  Lastly, if there is to be a State government at all, it should be there to ensure a peaceful and tranquil environment in which producers can pursue life, liberty and happiness. Even a minimal amount of resources, however, spent on military endeavors, necessarily crowds out the building of private wealth. The only question is, what is reasonable and what sacrifices are worthwhile to balance wealth and security?

¹ It is often argued that State programs like The Space Shuttle program, the United States government’s manned launch vehicle program, administered by NASA from 1972 to 2011, can act as a kind of incubator for technology and innovation that can then be transferred in to the private sector and ultimately benefit individual consumers.  Thus, they will argue, those resources were not wasted, they were invested.  The total cost, in 2011 dollars, of The Space Shuttle Program was $196 billion.  To analyze the true return on “investment”, it is helpful to consider the multitude of alternatives that $196 billion of natural and human resources, could have supported in the private sector of the economy.  For example, $196 billion could have purchased nearly 2 million (1,960,000) $100,000 housing units.  So, instead of nearly 2 million additional homes for people, that would exist to this day and well in to the future, we have a mothballed Space Shuttle Program.  Further, while it is true that certain technologies are developed in State laboratories and make their way to individual consumers, there is no telling what additional technologies might have emerged in the process of building an additional 2 million homes.  Given the shortage of homes that is reported today, is there any doubt we would have been better off with the houses, than the junked shuttles?

First flightApril 12, 1981
Last flightJuly 8, 2011
Cost$196 billion (2011)

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