Public Works Mean Taxes   1 comment

The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.

This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.


Image result for image of norris damThere is no more persistent and influential faith in the world today than the faith in government spending. [It] is presented as a panaceas for all our economic ills. … All that is necessary is for government to spend enough to make up the “deficiency”.

This fallacy, Hazlitt said, is part of a intricate network of fallacies that support one another. There is a mother fallacy that has given birth to this network. We could call it “the no such thing as a free lunch” fallacy.

The year 1946 looked a lot like 2017 in that the government had spent a lot of money for a long time, mostly financed by debt. The economists of Hazlitt’s day were full of ideas on how to get something for nothing. Most of the New Deal and a great deal of the American portion of World War 2 had been financed by debt. The economists were assuring the public that there was nothing to worry about. Hazlitt reminded his readers that history records a trail of national insolvencies and runaway inflation for governments that pile up debt with no plan to retire it.

“Everything we get, outside of the free gifts of nature, must in someway be paid for.”

All government expenditures must eventually be paid out of the proceeds of taxation…. [E]very dollar of government spending must be raised through a dollar of taxation. Once we look at the matter in this way, the supposed miracles of government spending will appear in another light.

Yes, a certain amount of government spending is necessary to perform essential government functions. Roads, bridges, armories, police and fire — these are essential government services, according to Hazlitt. While I am beginning to entertain the notion that these things could be done just as well (or better) by the private sector, set those aside for the time being.

A bridge is built to meet a public demand that could not be met in another way. It might even have been more necessary to build that bridge than was whatever else the taxpayers might have spent their money had it not be taxed away from them. That bridge is unobjectionable, Hazlitt said.

A bridge is built for the primary reason of providing employment – like a lot of bridges were built during the Great Depression. Providing employment was the end goal. The actual need for the bridge is subordinate. Regardless of whether there is an actual demand for the bridge to … say, cross a river between a large residential zone and a primary commercial zone  … the government spenders present the building of the bridge as absolutely needed and brand anyone who doubts that as obstructionist reactionaries.

Image result for image of a us housing projectOf course, those obstructionists might simply have trained themselves to look beyond immediate to secondary consequences and beyond those who will directly benefit from the government project to others who will be indirectly affected in the long run.

Yes, 500 bridge workers will receive more employment than otherwise. The bridge must be paid for out of taxes. For every dollar spent on the bridge, a dollar is taken away from the taxpayers. If the bridge costs $1 million, the taxpayers lose $1 million.

In actual fact, every public job created by the bridge project represents a private job that will be destroyed somewhere else. We see the men employed on the bridge, but there are other things we do not see because they never happen. There is, at best, a diversion of jobs because of the project. More bridge builders means fewer automobile workers or farmers.

But, Hazlitt said, there is a second argument that will be made. The bridge exists and it has come about through the magic of government spending. This beautiful bridge (think Brooklyn or the Golden Gate) would not have been built if the obstructionists had had their way and the country, the government spenders will argue, would be the poorer for that loss.

[G]overnment spenders have the better argument with all those who cannot see beyond the immediate range of their physical eyes.

They see the bridge, but it takes thinking to see the unbuilt homes, the unmade cars and radios, the unmade clothes and the ungrown and unsold food.

To see these uncreated things requires a kind of imagination that not many people have. We can think of these nonexistent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day.

This same reason applies to every public work. Hazlitt used the example of public housing. The money to build public housing projects for low income families comes from families with higher incomes in the form of taxation to force them to subsidize these selected families with lower incomes and enable them to live in better housing for the same or lower rent than before.

In this case, the government spenders would say the housing project creates wealth in the form of better living standards, but taxation for public housing destroys as many jobs in other lines as it creates in housing. It also results in unbuilt private homes and other uncreated consumer goods and services, in part because it diverts rentals away from the private market.

Again, we see the houses being built and the people living in them, but it takes concentrated thought to think of the wealth not created because of the taxation.

Image result for image of the big digThe Tennessee Valley Authority was another of Hazlitt’s examples. Great project … bringing needed electricity to the people of rural America. There was a mighty dam built “greater than anything that private capital could have built” and it was (and remains) a beautiful subject of photographs. It was a miracle of public works that lifted a whole region to a better standard of living, attracting factories to the area. It must be seen as a net economic gain without offsets.

But there was a debit side to the ledge, Hazlitt said. Taxes were taken from people and companies all over the country and spent in one particular section of the country. It shouldn’t be surprising that that blessed section becomes comparably richer. What is harder to see is that the other sections of the country became comparably poor.

The thing so great that ‘private capital could not have built it” has in fact been built by private capital – the capital extorted from the private market through taxation.

Again, we must make an effort of the imagination to see the private power plants, the private homes, the typerwriters 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.

Hazlitt admitted to choosing the cream of the crop of public spending schemes because these are the ones government spenders laud so highly. He chose not to choose from among the boondoggles that acted as jobs programs, so that the usefulness of the project was completely subordinate to the project itself.

[T]he more wasteful the work, the more costly in manpower, the better it becomes for the purpose of providing more employment.

Think about the “Big Dig” and the millions of dollars that were wasted to provide jobs. The official planning phase started in 1982; the construction work was done between 1991 and 2006. The project was originally scheduled to be completed in 1998 at an estimated cost of $2.8 billion (in 1982 dollars, US $6.0 billion adjusted for inflation as of 2006). However, the project was completed only in December 2007, at a cost of over $14.6 billion ($8.08 billion in 1982 dollars, meaning a cost overrun of about 190%) as of 2006. The Boston Globe estimated that the project will ultimately cost $22 billion, including interest, and that it would not be paid off until 2038. As a result of a death, leaks, and other design flaws, the consortium that oversaw the project agreed to pay $407 million in restitution, and several smaller companies agreed to pay a combined sum of approximately $51 million. A 2008 Boston Globe report asserted that waiting time for the majority of trips actually increased as a result of demand induced by the increased road capacity. Because more drivers were opting to use the new roads, traffic bottlenecks were only pushed outward from the city, not reduced or eliminated. In other words, a 20-year jobs program that will take a half-century to pay off and it didn’t really improve overall traffic. Might not it have been better if the individuals whose wealth was stolen from them in the form of taxation had been free to spend their money as they chose rather than be forced to surrender part of their earnings to the state to build a big road project of questionable merit.

Posted January 14, 2017 by aurorawatcherak in economics, Uncategorized

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One response to “Public Works Mean Taxes

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  1. Pingback: Introduction to “Economics in One Lesson” | aurorawatcherak

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