Political fantasies can be costly

Posted 4/6/21

RALEIGH — It’s hard not to play along when children come up with cute untruths.

For example, for a time one of my boys used to tell me matter-of-factly that if he didn’t go to …

Sign up to keep reading — It's FREE!

In an effort to improve our website and enhance our local coverage, MyDailyRecord.com has switched to a membership model. Fill out the form below to create a free account. Once you're logged in, you can continue using the site as normal. You should remain logged in on your computer or device as long as you don’t clear your browser history/cookies.

Political fantasies can be costly

Posted

RALEIGH — It’s hard not to play along when children come up with cute untruths.

For example, for a time one of my boys used to tell me matter-of-factly that if he didn’t go to bed, the moon would not rise. It was a reasonable conclusion based on his personal experience at the time (he was around 3 years old). Later, of course, his bedtime changed, he began to notice the moon in the sky even during the daytime, and concluded differently.

Unfortunately, many politicians have yet to grow out of the toddler phase when it comes to spotting and discarding spurious correlations. The most naïve and destructive examples stem from misusing the concept of the multiplier effect.

A politician will say that for every dollar spent on such-and-such a project, the public will receive multiple dollars back in economic activity. They cite economic-impact studies that take the amount spent and run it through a model that estimates the local expenditure on labor and materials.

While such data can be useful, they don’t speak to the net economic benefits of spending those tax dollars. Getting to the net requires that you estimate the benefit of using those dollars on some alternative expenditure. Economists call this the opportunity cost.

In public finance, the opportunity cost comes at two stages. Certainly the tax dollars you spend on, say, highway construction can’t be spent on public schools or law enforcement. But there is also an opportunity cost to converting private dollars into tax dollars 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 private consumption or investment, which have broader economic impacts of their own. When politicians claim huge bonanzas from subsidizing sports stadiums or convention centers, they typically ignore this lost private expenditure.

The only justification for a government program is that private individuals, spending a given amount of money through voluntary exchange, won’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 where, for technical reasons, private individuals are not presented with the accurate information (prices) they need to make the best decisions. But they are not the norm.

Politicians 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 spotting 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.

John Hood is a Carolina Journal columnist and author of the forthcoming novel “Mountain Folk,” a historical fantasy set during the American Revolution (MountainFolkBook.com).

Comments

No comments on this story | Please log in to comment by clicking here
Please log in or register to add your comment