Government Spending has Major Cost | Eastern North Carolina Now

    Publisher's note: This article appeared on John Hood's daily column in the Carolina Journal, which, because of Author / Publisher Hood, is linked to the John Locke Foundation.

    It's hard not to play along when children come up with cute untruths.

    Back when one of my now-grown sons was just an Opie Taylor-like tyke, for example, he used to tell me matter-of-factly that if he didn't go to bed, the moon wouldn't rise. It was a reasonable conclusion based on his experience at the time. Later, as his bedtime changed and he noticed the moon visible even during the daytime, he concluded otherwise.

    Unfortunately, many politicians have yet to grow out of the toddler phase when it comes to spotting and discarding spurious correlations. They insist matter-of-factly that without their favorite spending program or regulation, some huge chunk of the economy would cease to be or some favorable social trend would reverse itself.

    The most naïve and destructive behavior is to misuse the concept of the "multiplier effect." A politician will say that for every dollar spent on such-and-such, the public will receive multiple dollars back in economic activity and thousands or even millions of jobs. In most cases, the statement isn't just invalid. It's idiotic.

    These politicians are citing economic-impact studies that take the amount spent and run it through a model that estimates the local expenditure on labor and materials and the resulting employment implications. While such data can be useful - particularly if you are thinking about going into the business of supplying labor or materials to a particular project, firm, or industry - they don't speak at all to the net economic benefits.

    Getting to the net requires that you estimate the benefit of using those dollars on some alternative expenditure. Economists call this the opportunity cost. If you spend $9 eating lunch at Jersey Mike's (highly recommended, by the way) you can't spend the same $9 on some other meal, or on buying socks after having skipped lunch altogether. More broadly, the resources you consumed getting to and from the sub shop, including the minutes, can't be devoted to something else. These represent the opportunity costs of your Jersey Mike's excursion.

    In public finance, the opportunity cost comes at two stages. Certainly the tax dollars spent on, say, highway construction can't be spent on public schools or law enforcement. That's the second stage of opportunity cost. But there is also an opportunity cost to converting private dollars, earned through voluntary means, into tax revenue in the first place.

    When people keep more of what they earn, that money doesn't disappear just because it no longer shows up in the government's balance sheet. It is devoted either to current private consumption or to private investment, both of which have economic impacts of their own. When politicians claim huge economic bonanzas from subsidizing sports stadiums, convention centers, or economic-development projects, they typically ignore this foregone private expenditure altogether.

    The only real justification for a government program is that private individuals, spending a given amount of money through voluntary exchange, wouldn't get as high a return on that money as the government would by taxing the money away from them and devoting it to some public purpose.

    The case isn't that hard to make when it comes to basic governmental services such as law enforcement and the courts. Beyond that, you have to argue that government policymakers are likely to know better than citizens how best to spend the citizens' own money. There are such cases - public goods for which, for technical reasons, private individuals are not presented with the information (prices) they need to make the best decisions. But such cases are not the norm.

    Those who assert the magic of multiplier effects to justify their pet programs may be dissembling. But it is my experience that most of the time, they don't know enough about the matter to be lying. They are just repeating what they've heard, or imagining spurious connections on the basis of limited experience.

    It's their business if they choose, Peter Pan-like, not to grow up. But they should keep their hands out of the wallets of the grownups.
Go Back


Leave a Guest Comment

Your Name or Alias
Your Email Address ( your email address will not be published)
Enter Your Comment ( no code or urls allowed, text only please )




House Budget Offers Chance for Prudent Final Spending Plan Focused on Growth Carolina Journal, Editorials, Op-Ed & Politics Bill Allowing More Sales At Craft Distilleries Passes Senate Committee


HbAD0

Latest Op-Ed & Politics

Be careful what you wish for, you may get it
America needs to wake up and get its priorities right
Former President Donald Trump suggested this week that if he becomes president again, he might allow Prince Harry to be deported.
It's a New Year, which means it's time to make resolutions — even for prominent evangelical leaders. The Babylon Bee asked the following well-known figures in the faith what they hope to accomplish in 2024:
Vice President Kamala Harris will visit a Minnesota Planned Parenthood clinic, reportedly the first time a president or vice president has visited an abortion facility.
An eight-mile stretch of the Blue Ridge Parkway near Asheville has been temporarily closed due to a string of “human and bear interactions,” the National Parks Service announced.

HbAD1

University of Wisconsin tried to punish conservatives for the fact that liberals regularly commit crimes to silence opposition
most voters think EU officials not doing a good job on illegal immigration
Come from behind by GOP candidate is a blueprint to 2024
Biden spending and energy policies to blame
Tuberculosis carried by illegal invaders has already infected Texas cattle

HbAD2

Sen. Ted Cruz (R-TX) said this week that the only campaign promise President Joe Biden has delivered on as president is the complete dismantling of the U.S. southern border.

HbAD3

 
Back to Top