Causal Relationship Between Means and Ends Really Does Matter

Political rationality often is not economic rationality, because ends and means relationships are misunderstood or because of opportunity costs. 

Consider an infrastructure bill passed by the U.S. Congress authorizing $548 billion in public

infrastructure spending. In principle, one might argue that additional spending should create economic growth and benefits. It will not, say Penn Wharton School economists Jon Huntley and John Ricco.

“The additional public capital makes workers more productive, however, this is offset by the decline in private capital, which makes workers less productive,” they say. “Overall, workers’ productivity is unchanged, which is reflected in wages that do not change in 2040 and 2050.”

“Overall, similar hours worked and lower private capital lower GDP, an effect that is offset by the productivity benefits of the infrastructure investment,” they say. “Overall, GDP does not change in 2031, 2040, or 2050.”

The capital on public works “crowds out” (displaces) private investment that otherwise would have been made. 

Economic Effects of the Senate Infrastructure Package

Percent Change from Baseline

 

Year	GDP	Capital Stock	Hourly Wage	Hours Worked	Government Debt
2031	0.0	-0.2	0.0	0.0	1.3
2040	0.0	-0.2	0.0	0.0	0.9
2050	0.0	-0.1	0.0	0.0	0.6

source: Penn Wharton Budget Model

Improvements to roads, bridges or other infrastructure often are necessary. But so are other investments in private productive capacity that are competing uses of capital. Diverting funds to one area necessarily precludes investment in alternative investments.

In this case, what seems politically rational is economically less than fully rational, to a great extent.