I don’t know if this piece is flat out supporting wasteful spending, but it’s really close. The United States threw money down the toilet for about 35 years – until computers paid off. Ryan Avent says:
“To give just one example: during the formative years of the computing era, government was an enormous source of demand for all the intermediates to production of computing power and computing power itself. America’s military machine brought brilliant people together, demanded they do work requiring extraordinary computational power, and plied them with the funds to develop and build early computers. That work created expertise, component supply, and even private demand that fueled subsequent private investments. And government remained a significant source of final demand for the output of those later private investments. It is quite probable that computers would have been developed somewhere without all of that effort, and it’s almost impossible to know whether the money spent on these efforts might have been used better elsewhere. But I don’t think it’s absurd to look back and feel that the government’s role in supporting the development of computing (or the web, for that matter) was a Very Good Thing.”
Basically, nobody would have done computing at all unless the U.S. federal government was wasting a huge fortune on computers for at least 30 years. We would not have computers, because the basic research was far, far more expensive than any single entity could have ever afforded.
We needed to waste a money in order to get to modern computing. Check out the Univac and IBM. The company which started the world of modern computers, Fairchild Semiconductor, had large military contracts.
I had touched upon this idea a few years back when I was touting the link between second greatest event in human history and government debt. I really think with extra money sloshing around, good lucky accidents have a much better chance of happening. I do remember my dad saying computers would never amount to anything useful, and he was dead wrong. In fact, you could argue that pushing the era of computers forward 10 years was worth the expenditure.
He goes on:
“The 20th century’s wars (hot and cold) helped deliver enormous communication advances, industrial chemistry, nuclear technology, computing, and much of the technology that goes into the iPhone in your pocket and the Google driverless car soon to be ferrying you to work. Obviously, the specific innovations in those devices and the brains needed to turn technology into things people actually want are mobilised by the market. We should never forget that. But it often takes patient, determined, or plain foolish capital, and a lot of it, to turn high-concept ideas into functional prototypes and a body of knowledge capable of driving private innovation and production.”
Government spending isn’t always as directed as private spending, and that “can” be a good thing. Sitting around and dreaming about what you could do is valuable, and taking action on some of those dreams sometimes leads to wild, out of the box levels of success.
It’s pretty safe to say right now the invention and development of computers is the third greatest event in human history. 100 years from today, that’s what people will say – computers come after establishing civilization and the industrial revolution.
Wasteful government support was a huge part of making this history changing event happen.
Update 3-19: Beowulf says in the comments… “Obama said in a speech recently, “Every dollar we invested to map the human genome returned $140 to our economy”. That is a sick rate of return. You can afford an awful lot of dry holes if you can come up with a 140-bagger once in while.”.
How much did the government spend on computers from 1940-1970? Probably $200 billion in todays money. If we assume the add to the U.S economy is ~ 1.5% due to computers – which seems absurdly low, we get roughly $200bn added to the economy every year due to computers. We get that back every year from 2005 (absurdly late), going forward, for the next century or so – APPL has already built up a cash balance of $130bn plus, after paying wages and buying a ton of stuff! NPV of $200bn at a 5% discount rate a 20 bagger for the U.S. economy. For the world economy, it’s probably closer to a 50 bagger. It could easily be a much higher multiple if you step into the real of the real world and use reasonable assumptions.
The enormous deficits we ran up during World War II funded an absurd amount of wasteful spending but damn if the economic payoff wasn’t enormous. The deficits we ran (20% to 30% of GDP, like $3.2T to $4.8T annual deficits today) funded a tremendous amount of scientific R&D, infrastructure improvement, and training & education funding. We benefited from public wealth creating by wartime capital spending for decades but the politicians in our day really, really suck, have become incredibly slack at investing in our national capital stock. After all, they’d rather our grandchildren be debt-free and living in squalor than have them face the burden of own Treasury bonds and those twice a year interest payments they’ll get… (oh right, apparently its someone else’s grandchildren who will inherit the T-bonds, nevermind).
Every year, the President’s Budget tallies up capital spending (divided between military & civilian, which is sort of irrelevant seeing as a Corps of Engineer dams is military and Dept of Energy nuclear research is civilian).
Table 9.1—TOTAL INVESTMENT OUTLAYS FOR MAJOR PUBLIC PHYSICAL CAPITAL, RESEARCH AND DEVELOPMENT, AND EDUCATION AND TRAINING: 1962–2013
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist09z1.xls
In 1968, capital spending was 6.6% of GDP, this year it was projected to be 3.4% (and that was before sequestration). Let’s see that 3.2% shortfall is over $500 billion a year– and this underfunding has been going on year after year. If you want to put a price tag on how much we suck, there you go.
I am not even a huge fan of public spending, but I feel like the people making the case for public spending are so freakin’ bad at it I need to give them some help. Avent is excellent at many things, but if he’s the high water mark on this topic, it just shows how awful the left is about talking about spending.
Remember, success in solar changes the trajectory of the entire human race. We don’t need 30 successes. We just need one huge success in solar.
Success in food changes the trajectory of the entire human race. We don’t need 30 successes. We need one success in food.
One success in AI changes the trajectory of the entire human race. We get a real AI, the entire human race changes.
Hell, we could cut defense spending by 30% and have the worlds greatest innovation spending over the next 30 years and not change the budget at all.
I didn’t even respond to your comment. Some people want to break out the capital and ongoing spending budgets for the U.S. government so we can better see how the government spends the money. This should be SOP for talking about the budget.
And break out capital spending w/ benefit to cost analyses. Obama said in a speech recently, “Every dollar we invested to map the human genome returned $140 to our economy”. That is a sick rate of return. You can afford an awful lot of dry holes if you can come up with a 140-bagger once in while. The craziest part of it is whenever we’re not at full employment (pretty much all the time), the government wouldn’t crowd out anything just printing the money to fund it.
Dennis Kucinich and fellow Ohioan Steven Latourette (a Republican congressman who retired last year) once proposed a bill ordering the Fed to fund infrastructure spending at 0.25% . If we supersized that so all capital spending was funded that way– even spending 6.6% GDP ($1T ever year) would only add an additional $2.5 billion in debt service per year.
http://votesmart.org/public-statement/287368/kucinich-and-latourette-take-action-for-federal-financing-of-infrastructure-repair
Some ground breaking science has been done by unfunded hobbyists. I guess they were doing what they did in the same manner and for the same motivations as you guys do this web site. Einstein did much of his most significant work in his spare time when his day job was being a patent clerk. Darwin was an amateur scientist. I’m not convinced that having government herding people around and keeping them busy for the hell of it is always the most conducive route to innovation. Perhaps government ensuring widespread financial freedom might be better. Advances in technology ought in principle be able to free up everyone’s time such that everyone is in a position to potentially do what Darwin and Einstein did.
I’m also not so sure about your other point that UK government debt helped fund the industrial revolution. What exactly was going on at that time? After the Napoleonic Wars, lots of interest was paid out on the government bonds issued to finance the wars. But that interest was funded by tariffs on the Atlantic slave trade and colonial exploitation of Asia etc. Imagine a merchant owned a lot of gilts paying out interest but also was levied with a tariff on his slave trading business to get that interest- doesn’t it net out? I don’t think the industrial revolution occurred in an attempt to meet government’s demands. Perhaps some case though could be made that it was partly driven by the need to meet the demands that came from the riches from the slave trade and the conquest of India. If the Napoleonic wars had not happened and so the UK had not had all of that government debt, then I still think the industrial revolution would have happened. I’m not so sure that the industrial revolution would have occurred in quite the same way and perhaps not in the UK, if it had not been for the slave trade etc, I’m happy to be corrected on this though.
The UK was one of the richest countries in the world at the time, and the government wasn’t able to run a balanced budget. There was tons of money floating around for the upper classes – these people were insanely wealthy – and they had time to experiment and funding to back wild inventions. Most of them ended up being worthless, but a few of them paid off, like the textile mills.
Spending money on crazy inventions does not make sense during times when money is scarce relative to deliverable resources. It’s entirely possible I am wrong, but here we have history. First, we have the industrial revolution happen in a place where government debt goes above 150% of GDP, and then we have the third most important event in human history happen when the U.S. government decides to throw bushels of money at things which really didn’t work very well and were madly expensive.
This is really about thinking like a trend following trader. A trend following trader loses money about 60% of the time. They make money 40% of the time. However, nearly all of the profits from trend trading come from about 2% of the trades. The other 38% of winning trades just pays back the losses from the 60%. Then those top 2% of trades make crazy money, because they are like 40 baggers.
I’d say most people who are against wasteful government spending have never considered this kind of payoff pattern before in their lives. But this is how the real world works with nearly everything you do. Date around for a while, then find someone who ends up being a 100 bagger for your personal life. Try a few jobs, then find one which ends up paying all of your expenses for your life.
Michael Sankowski, don’t get me wrong, I totally agree with all you are saying about the need for everyone to be taking a punt at making some ground breaking innovation. You can’t have anything more wasteful than never having had a go in the first place. I’m just saying that the UK had money because of the slave trade and looting India not because of expansionist government fiscal policy. I think I am right that the government at the time didn’t actually spend money on much other than wars and debt interest. They funded each war by issuing perpetual bonds and only ever taxed enough to pay the interest. Does that count as expansionist fiscal policy and big government?
Did you see my little comment after what jt26 wrote?
Some industries are just so wildly profitable. I was driving around New orleans with my wife, and we were just shocked at the wealth from Slavery. Then Baltimore – the nice places are due to Slavery money running through Baltimore.
The UK has some awesome examples too. Check out this for slave trade oppulence:
http://en.wikipedia.org/wiki/Harewood_House
“I’d say most people who are against wasteful government spending have never considered this kind of payoff pattern before in their lives. But this is how the real world works with nearly everything you do. Date around for a while, then find someone who ends up being a 100 bagger for your personal life. Try a few jobs, then find one which ends up paying all of your expenses for your life.”
Well said Mike, and I agree.
Too many of us, once we find the formula that hit, spend our time “misremembering” how we got there. We make up these just-so stories to try and tell everyone else how to do it. Maybe we even write a book on it. Point is we are terrible predictors but wonderful story tellers. And then, to top it off, when some smart ass comes along and tries to tell everyone that our story aint quite like we want it to be told, we call them a ” history revisionist” or something.
We spend way too much time patting the blind hogs on the back and putting crowns on their head and far too less time encouraging others to root around like a blind hog and see what else is out there.
Sounds like saying government money acts as the energy to escape a local maximum or is that a fancy way of saying taking a punt.
“The 20th century’s wars (hot and cold) helped deliver enormous communication advances, ”
I hate it when people say wars and war spending was great for technology and the economy …
What was lacking before the war was imagination, risk taking and desire … you can catalyze those without a war. The one thing a real war does create is enormous alignment of interests which does help to remove bureaucracy, corruption, special interests and other self-serving activity.
I am with you on this. This post slides over the points you and stone raise, which is pretty sad but necessary in a few hundred words.
No worries. My comment wasn’t directed at your post, just Ryan’s phrasing.
As a side note: One chart I’ve never seen is of national (private + gov) R&D spending over the last 100 years. I remember a long time ago reading about the history of the Manhattan project and the cost was crazy … luckily Wikipedia has all that now … http://en.wikipedia.org/wiki/Manhattan_Project .. $2B in … or 1% of 1946 GDP … crazy. Compare that to total national current R&D of about ~4%.
Not to nitpick here, but are you really going to trust Obama’s figures on this? I wouldn’t be surprised if they’re off by a factor of 140!
ScienceInsider traces the origin of that figure back to a 2011 report from the Battelle Technology Partnership Practice. The report calculated the direct, indirect, and induced impacts of human genome sequencing on employment, personal income, output, and tax revenue. It found that, all together, human genome sequencing has had an economic impact that exceeds $796 billion. Since the federal government invested $3.8 billion — $5.6 billion in 2010 dollars — that comes out to be a return on investment of 141 to 1, the report says. ScienceInsider adds that the estimate has been “criticized as being a bit rosy”…
ScienceInsider adds that “there is some political irony” to Obama using the figure as Life Tech CEO Greg Lucier has donated to Republican candidates…
http://www.genomeweb.com/blog/good-return