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 confidently and 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 and job creation. 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 — 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 of spending those tax dollars.

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. 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 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 either to current private consumption or to net 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 lost private expenditure altogether.

The only real 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, I would submit — public goods where, for technical reasons, private individuals are not presented with the accurate information (prices) they need to make the best decisions.

But these cases are rare.

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.

Recommended for you

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).

(1) comment

Branch

“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 net private investment, both of which have economic impacts of their own.”

First of all, the tax raises for private citizens being proposed by the Biden administration do not affect households that earn under $400,000 annually. In 2019, the median household income was only $68,703; as I have pointed out in the past, household incomes are increasingly drifting away from the median towards the polar ends. That said, Hood gives us a false binary of where money for high earners (and tellingly, he seems to be thinking more about businesses than real people here) may go: consumption or private investment. Data tells us this is not true. For lower earners, money does go directly back into the economy at a high percentage and velocity (consumption). Half of Americans do not invest in the stock market at all (that includes 401K’s BTW), and it is unclear what else Hood may mean by “personal investment” here. The idea of monetarily “investing” in education and other self-edifying pursuits — a uniquely modern Libertarian ideal — is really just another form of consumption. For high earners and corporations, however, investment is a fantasy. Wealthy individuals do not spend money that they do not need; they do not invest it in real-world capital or the businesses they own. It goes into stocks and tax havens where it contributes nothing to the real economy. Businesses now siphon off profits directly to shareholders and largely skip self-investment. In one extreme example of personal wealth, Jeff Bezos has admitted that he cannot possibly spend all of his money, so he metaphorically burns it by spending some odd billions annually on a vanity project concerning space travel (literally). This doesn’t affect his bottom line in any way, and his billions of unspent dollars sit around doing nothing but accumulating even more wealth through speculation and interest. At the same time, Amazon pays nothing in federal corporate income taxes.

Welcome to the discussion.

Keep it Clean. Please avoid obscene, vulgar, lewd, racist or sexually-oriented language.
PLEASE TURN OFF YOUR CAPS LOCK.
Don't Threaten. Threats of harming another person will not be tolerated.
Be Truthful. Don't knowingly lie about anyone or anything.
Be Nice. No racism, sexism or any sort of -ism that is degrading to another person.
Be Proactive. Use the 'Report' link on each comment to let us know of abusive posts.
Share with Us. We'd love to hear eyewitness accounts, the history behind an article.