Stimulus: Public and Private Goods

The Oregonian is reporting on a competing stimulus plan by Oregon's republican contingent in the state legislature that would give tax credits for remodels, bigger if they involve green things like solar panels.

Is this a sensible idea? Sure, these tax breaks only come if you spend the money, so it can be expected to stimulate consumption to a greater degree than income tax cuts, only a fraction of which will translate into new consumption. Promoting green home improvements is also beneficial to society. So this can be expected to lead to an increase in consumption spending and to have a stimulus effect which will help reduce unemployment.

But is it better than the democrats plan to spend on construction projects? Direct spending on construction will also have the same positive effect on consumption. So is it a wash? Well, the key difference is in the fact that the democrats plan focuses on public goods while the republican plan is on private goods.

Public goods are those for which there are at least partially non-excludable and non-rival: anyone can use them and using them does not leave less for others to consume. Roads are a prime example. The key to public goods is that they confer benefits on many people beyond the person responsible for their existence. This means the public benefits are much higher than the private benefits and when left to individual economic agents, the private cost-benefit calculation will often lead to the under-provision of public goods. This is why government provides these goods.

Construction on roads and schools are improvements in public goods, a large swath of society benefits from these investments while private remodeling only benefits the owners of the property (save for the small socially beneficial effect of more efficient homes). In other words, the initial stimulus can be expected to be similar for a similar outlay (assuming, of course, people take advantage of these tax incentives), but the long term benefits of providing more and better public goods will provide much greater benefit to society than better kitchens in private houses.