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In Paul Krugman’s most recent op-ed, he argues that the iPhone 5 will create a stimulus, and this displays why the US Federal government should spend more money stimulating the economy, as well.  No, I’m totally not kidding about this.

The iPhone Stimulus

The logical leaps in this Krugman article are about as wide as the Grand Canyon if it were to be bombarded by 12 meteorites.   It should go without saying, but Apple is a private company.  It is not an arm of the US Federal government. The US Federal government did not contribute to Apple’s innovation or know-how. And when the US Federal government taxes, it actually takes money away from private individuals, who fund businesses like Apple.

Krugman also talks about demand. He argues since the iPhone creates more demand, so will government spending. Except, what if the government spends money on things that don’t create “demand”? The iPhone creates “demand” because people actually want to buy it.  Does hiring more bureaucrats to regulate banks and insurers create more “demand”?  How about re-paving highways that were in reasonably good shape already?   How about funding companies like Solyndra?

I’m not arguing that government spending can’t create demand under any circumstances.   The Tennessee Valley Authority and the Interstate Highway System are two examples of what I might consider useful Federal spending.  But these sorts of projects tend to be the exception, rather than the rule.  When I look at the Federal budget right now, I’d say that we could go without 75% of the stuff in there; or alternatively, the private sector could achieve the same results more cost-effectively.  (And for the record, highway spending is only 1.1% of our budget.)

Is the Private Sector More Efficient At Creating Growth?

The other big point Krugman neglects, but almost tacitly implies by using the iPhone as his example:  what if the private sector is more effective at creating economic growth?  What if the private sector is a better steward of the nation’s economic capital than the public sector?

It’s simple to see why this might be the case.  When you or I choose to invest in a business, we likely only do so on the basis that we believe their business model will be viable, and we can make a profit at some point.  Of course, we’re wrong from time to time, but we suffer the consequences when we are wrong, giving us more incentive to learn from our mistakes.   Moreover, if we’re wrong a lot, we go broke, and then we don’t have money to throw away on more unsuccessful projects.

When the government invests, the accountability that we find in the private sector disappears.  If I’m a politician, it doesn’t matter if the investments I make are viable.  It does not matter if they are useful or beneficial.  It’s not my money, so if I lose 100% of it, it harms me not one bit.  In fact, I still collect a handsome $200K+ salary regardless.  But there are ways for me to profit:  I could reward campaign donors (who help me maintain power), family members (who indirectly enrich me), and other “allies” with the flow of funds I control.

Yes, there are people who put the public interest first, but we seem to get more Solyndras and “Bridges to Nowhere” than we do TVAs or Interstate Highway Systems, and this is precisely because of the misaligned incentives in the Federal government.  So Federal government investment tends to be, by its very nature, less efficient than private sector investment.

Of course, let’s not forget inflation, which is what we typically get if the US Federal government engages in excess spending for long periods of time.  Inflation is a stealth tax in a sense, since the government crowds out private investment by forcing interest rates upwards.  With less capital in the private sector, there is less funding for companies like Apple.  More importantly, there is less funding for innovative start-ups that hope to be like Apple one day.

Overall, it’s really difficult to take Krugman’s argument here seriously.  He’s not arguing that government investment is necessary, economical, or useful.  Rather, he’s arguing that an innovative, private company somehow makes the case for more Federal government spending.  Yet he completely seems to sidestep the issue that this Federal government investment typically comes at the expense of said innovative, private companies.  Ultimately, that’s why Krugman’s argument is a bit absurd.