In discussions of the financial crisis, I have often heard it argued that the financial industry did some of its harm by luring intelligent and capable people away from industries that actually do more good. Rather than applying their knowledge to improving technologies, teaching the young, or providing valuable services, they spent their time earning millions for the partners at big investment banks.
It occurs to me that something a bit similar may happen with government. In many ways, government jobs are the best ones left in society. While there are strong reasons to doubt whether the pension plans will actually exist in thirty years, they do provide a good deal to people who will be retiring soon. They also provide good benefits, flexibility, high rates of pay, generous family provisions, and job security. As an unintended consequence of all that, they might be acting like the banks did – drawing in some of Canada’s most promising people, keeping them in place with generous pay and benefits, but ultimately not putting them to very good use in a lot of cases.
Economists talk about how high interest rates on government bonds can ‘crowd out’ private investment. It is easy to see how this could be the case. When a private organization needs to repay a loan, they need to earn money to do so by selling goods or services. The government, by contrast, can simply raise taxes or print money. The government also enjoys the highest level of public confidence, in that people fully expect it to repay its debts. As a result, people may find it safer and more profitable to lend their money to governments than to firms. At the same time, it is not always the case that governments will use that money well. They might, for instance, use it to fund wasteful undertakings like building hockey arenas or hosting big international sporting competitions. They might squander it on costly and unnecessary weapon systems, or on trying to buy votes in marginal constituencies, or doing favours for their friends in the private sector or their political allies.
Often, it is within the power of government to offer people the best deal available, when they are choosing how to invest their money or time. What governments should remain aware of – however – is the risk that in doing so they will be drawing people away from better uses of their energies and skills. Canada would probably be better off if some of the underused people within government were off doing productive work in some other sector instead.