Tuesday, August 17, 2010

From Henry Hazlitt's "Economics In One Lesson", on the economic benefits of government spending

From Henry Hazlitt's classic "Economics In One Lesson", Chapter 4:

There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills. Is private industry partially stagnant? We can fix it all by government spending. Is there unemployment? That is obviously due to "insufficient private purchasing power." The remedy is just as obvious. All that is necessary is for the government to spend enough to make up the "deficiency."

....Everything we get, outside of the free gifts of nature, must in some way be paid for. The world is full of so- called economists who in turn are full of schemes for getting something for nothing.

They tell us that the government can spend and spend without taxing at all; that it can continue to pile up debt without ever paying it off, because "we owe it to ourselves." We shall return to such extraordinary doctrines at a later point. Here I am afraid that we shall have to be dogmatic, and point out that such pleasant dreams in the past have always been shattered by national insolvency or a runaway inflation. Here we shall have to say simply that all government expenditures must eventually he paid out of the proceeds of taxation; that to put off the evil day merely increases the problem, and that inflation itself is merely a form, and a particularly vicious form, of taxation.

A certain amount of public spending is necessary to perform essential government functions. A certain amount of public works-of streets and roads and bridges and tunnels, of armories and navy yards, of buildings to house legislatures, police and fire departments-is necessary to supply essential public services. With such public works, necessary for their own sake, and defended on that ground alone, I am not here concerned. I am here concerned with public works considered as a means of "providing employment" or of adding wealth to the community that it would not otherwise have had.

A bridge is built, If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary than the things for which the tax payers would have spent their money if it had not been taxed away from them, there can be no objection. But a bridge built primarily "to provide employment" is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. "Projects" have to he invented. Instead of thinking only where bridges must be built, the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.

Two arguments are put forward for the bridge, one of which is mainly heard before it is built, the other of which is mainly heard after it has been completed. The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence.

This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridge workers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000, 000. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, radio technicians, clothing workers, farmers.

But then we come to the second argument. The bridge exists. It is, let us suppose, a beautiful and not an ugly bridge. It has come into being through the magic of government spending. Where would it have been if the obstructionists and the reactionaries had had their way? There would have been no bridge. The country would have been just that much poorer.

Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and radios, the unmade dresses and coats, perhaps the unsold and ungrown foodstuffs. To see these uncreated things requires a kind of imagination that not many people have. We can think of these non-existent objects once, perhaps, hut we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others.

We must apply the same reasoning, once more, to get projects like the Tennessee Valley Authority. Here, because of sheer size, the danger of optical illusion greater than ever. Here is a mighty dam, a of steel and concrete, "greater than anything capital could have built," the fetish of photographers, heaven of socialists, the most often used miracles of public construction, ownership Here are mighty generators and power ho whole region lifted to a higher economic level, attracting factories and industries that could not otherwise have existed. And it is all presented, in the panegyrics of its partisans, as a net economic gain without offsets.

We need not go here into the merits of the TVA or public projects like it. But this time we need a special effort of the imagination, which few people seem able to make, to look at the debit side of the ledger. If taxes are taken from people and corporations, and spent in one particular section of the country, why should it cause surprise, why should it be regarded as a miracle, if that section becomes comparatively richer? Other sections of the country, we should remember, are then comparatively poorer. The thing so great that "private capital could not have built it" has in fact been built by private capital -the capital that was expropriated in taxes (or, if the money was borrowed, that eventually must be expropriated in taxes). Again we must make an effort of the imagination to see the private power plants, the private homes, the typewriters and radios that were never allowed to come into existence because of the money that was taken from people all over the country to build the photogenic Norris Dam.

I have deliberately chosen the most favorable examples of public spending schemes-that is, those that are most frequently and fervently urged by the government spenders and most highly regarded by the public. I have not spoken of the hundreds of boondoggling projects that are invariably embarked upon the moment the main object is to "give jobs" and "to put people to work."

For then the usefulness of the project itself, as we have seen, inevitably becomes a subordinate consideration. Moreover, the more wasteful the work, the more costly in manpower, the better it becomes for the purpose of providing more employment.

Under such circumstances it is highly improbable that the projects thought up by the bureaucrats will provide the same net addition to wealth and welfare, per dollar expended, as would have been provided by the taxpayers themselves, if they had been individually permitted to buy or have made what they themselves wanted, instead of being forced to surrender part of their earnings to the state.

The pics for this post came from here and here and here and here and here and here and here and here. 


Nick Rowe said...

Brilliant post. Loved the pictures you added too. It's a nice follow-up to your Broken Window Fallacy post.

I think those t-shirts should say, "Rob Paul to Pay Peter" and put Krugman's face on it. I don't think he's paying his "fair share" given all the additional stimulus he desires.

You may have seen my post about the ARRA projects to install wheelchair ramps on street corners all over San Francisco - where there were already wheelchair ramps. Meanwhile, potholes in the road are unrepaired because the state is broke and they're not getting federal funds for roads.

Drivers can't cross town without getting their front end out of alignment, but a vegetable can go from Bay to Breakers if they're so inclined. I even saw a sign on the public bus encouraging people in wheelchairs to call in to report where wheelchair ramps are needed.

It's not that I think we shouldn't (eventually) have wheelchair ramps, but I don't see why we have to tear up perfectly good wheelchair ramps to build new ones.

One project in my former neighborhood cost $6 million, and produced 9 jobs according to Recovery.gov.

I'm still waiting for the most transparent administration in history to have Joe Biden conduct a thorough audit of every ARRA project to identify any fraud, waste, and abuse.

The Whited Sepulchre said...

I think I'm going to illustrate Hazlitt's entire book, should time permit.
Doing this was kinda fun, and it's been emailed, Twittered, Facebooked, and Discussion Boarded more than the usual rant.

elexerdelex said...

Nice post! I always love demotivational pictures!

Anonymous said...

Government money spent is money spent. If that money was not collected in taxes and instead left in the private market it could possibly well have ended up in the hands of one of the richest 20% of your country (you know...the ones that own 85% of the wealth of the USA). If those people already have bucketloads of money, and they do, then it is highly unlikely that they will spend that much more of the extra money. You can only consume so much and when you are pulling in millions each year...well why would you spend more.

But but but - they would invest that money you say. Your country has extremely low levels of consumer spending, reflecting the fact that you have a large number of unemployed and hidden unemployed people. If people are unwilling to buy anything then why would they invest that money? There is no way that the investment would provide value for money so they won't invest it. Ergo that money won't go into the economy, people won't be employed, and they will have a generally crappy life.

It's commonly accepted and understood that when private spending is reduced government spending should increase to increase aggregate demand in the economy. You might want to review the first year economics textbooks before you start waxing lyrical about non-existant bridges and toasters.

Nick Rowe - that $6 million that generated 6 jobs? Guess what, all of the money that was spent went into the economy and generated spending. The money went to pay for concrete and other building supplies, which means that the suppliers of those goods had their business grow and could afford to hire more workers (assuming that they didn't use Chinese workers like so many of the Republicans have made easy by deregulating your industries).

The Whited Sepulchre said...

The bottom 50% don't pay any net taxes here. The top 10% pays something like 40% of the total already.
And it might surprise you to learn that people don't put their money at risk to create jobs, jump-start the economy, or to help fund the government. They put their money at risk so they can get more of it.
Everything else is debunked Keynesian bullshit. Fail to understand why people don't take risks in a confiscatory environment, and you'll fail to understand why the economy is now crap.