Up and Coming Weekly is a weekly publication in Fayetteville, NC and Fort Bragg, NC area offering local news, views, arts, entertainment and community event and business information.
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JUNE 7-13, 2017 UCW 21 WWW.UPANDCOMINGWEEKLY.COM It's hard not to play along when children come up with cute untruths. 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 with- out their favorite spend- ing 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 pol- itician 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 expend- iture 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 — it doesn'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 opportuni- ty cost. But there is also an opportunity cost to con- verting 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 econom- ic impacts of their own. When politicians claim huge economic bonanzas from subsidizing sports stadiums, convention centers, or economic-devel- opment projects, they typically ignore this foregone private expenditure altogether. The only real justification for a government pro- gram 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 enforce- ment 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 — pub- lic 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 imag- ining 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. Government Spending Has Major Cost by JOHN HOOD JOHN HOOD, Chairman of the John Locke Founda- tion. Contributing Writer. COMMENTS? Editor@ upandcomingweekly.com. 910.484.6200 "When people keep more of what they earn, that money doesn't dis- appear just because it no longer shows up in the government's bal- ance sheet." POLITICS