Politicians claim to be smart spenders

Some important lessons about political economy seem to have to be relearned from time to time. One of them is that markets are superior to politicians, intellectuals and bureaucrats in productively allocating capital.

Distrust of markets is a defining, and animating, characteristic of the left.

Bill Clinton’s New Democrats, and Tony Blair of Great Britain’s Third Way, made peace with markets as the mechanism to generate economic growth and expand prosperity. There was a role for government in regulating market conduct and providing a safety net for those adversely affected by their turbulence.

But markets needed to be relatively free in allocating capital and deciding which products and services get produced, where, and in what quantities.

The Democratic presidential primary is, in large measure, a collective retreat from this peace treaty. Markets are rigged is a common refrain. There are extensive proposals, particularly from Elizabeth Warren, to exercise greater political control over the allocation of capital and fundamentally change the way large corporations are governed and managed.

The right has historically trusted and defended markets. But, of late, distrust of markets is being increasingly expressed there as well.

Florida senator, and former presidential candidate, Marco Rubio recently gave a speech to the Catholic University of America that got a lot of notice.

Rubio thinks that markets aren’t resulting in the right investments or creating the right kind of jobs. The implication is that government should do something about that. He calls it “common-good capitalism.”

According to Rubio, there is too much investment in financial and intangible assets, and not enough in tangible assets such as manufacturing plants and equipment.

He takes particular aim at stock buybacks, as do many on the left. But stock buybacks are an efficient and productive way of redeploying capital.

They are rarely the first choice of corporate managers, who tend to be empire builders. If a widget maker thinks there is unmet demand for widgets, it will invest in making more widgets.

But if it doesn’t, then returning capital to shareholders is preferable to hording it or making questionable investments in expansion or acquisitions. Those selling stock in a buyback think they can invest the money more productively elsewhere. The money isn’t taken out of the investment stream. It is simply redeployed.

A previous report Rubio issued noted disapprovingly that Ford was making more money lending to people buying cars than in producing and selling the cars, from finance rather than manufacturing.

But these activities aren’t in tension. The lending increases car sales and enables Ford to capture the return on customers buying its product on term.

What gives Rubio the standing, or the expertise, to override the decision by Ford regarding the relative allocation of capital between lending and manufacturing cars?

Rubio also joins the left in deploring short-termism, or the management of companies to produce quarterly results the stock market likes rather than making decisions for the long term.

I think that the extent and effect of short-termism are exaggerated. But let’s assume that it exists, that shareholders want companies to produce smooth, steady and distributed earnings.

Why should Rubio’s preferences be substituted for that of the shareholders? They own the company, not him. It’s their money, not his.

There is an enterprise, the federal government, that members of Congress manage directly. It spends in the vicinity of $200 billion to $250 billion a year on long-term physical assets, such as buildings or fighter jets.

Yet it is borrowing more than $1 trillion a year. So, it is imprudently borrowing roughly $750 billion a year to cover operating expenses.

It recently enacted what passes for a budget in Congress for the fiscal year that actually began more than two months ago. The Medicare hospitalization trust fund is projected to start running a deficit in 2026 and the Social Security trust fund in 2035. Yet there is not even any discussion in Congress regarding doing something about it.

And these are the people who want to direct private sector investment decisions? And deliver lectures about shorttermism?

Friedrich Hayek famously called the claim that politicians, intellectuals and bureaucrats could better allocate capital than markets “the fatal conceit.”

I don’t know that it’s fatal in all of its manifestations. But it is certainly a conceit.