In the coming weeks Washington faces another budget showdown between Democrats and Republicans in Congress and then between Congress and the President. Sadly, whoever wins or whatever compromise is struck, the federal budget will remain not only bloated but grotesquely misshapen.
The reason is that the debate concerns only cutting discretionary spending, not reforming entitlements. Yet entitlements are the primary drivers of ever increasing spending. In contrast, discretionary spending can generate public goods that aid long-term prosperity. An economist would define the essence of a public good as one from which individuals cannot be excluded and where the use of the good by one individual does not prevent use by another.
National defense is the paradigm case of a public good. Scientific knowledge is another. Given that such goods provide benefits which for which the provider cannot receive remuneration, they will be undersupplied. And some kinds of infrastructure goods with lots of positive spillovers also are likely to be undersupplied, even if they do not quite meet the definition of a public good. The primary fiscal focus of the classical liberal state should be on the creation of such goods, because neither the family nor the market will do so in sufficient quantity.
Not all federal discretionary spending supports these kinds of goods, but a good deal does. For instance, spending for the NIH is declining, despite very substantial evidence that it pays off in longer and better life for citizens.
