GRASS IN REVIEW

GRASSROOT INSTITUTE OF HAWAII

Nurturing the rights and responsibilities of the individual in a civil society.

 WEEKLY GRASS IN REVIEW   -    April 30, 2008

Time To Put Childish Things Away
by John Hood

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

For example, for a time the Little General 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 about two or three). Later, of course, his bedtime changed, he began to notice the moon in the sky even during some days, and concluded differently.

Unfortunately, many politicians have yet to grow out of the toddler phase when it comes to spotting and discarding spurious correlations. They insist, confidently and matter-of-factly, that without their favorite spending program or regulation, some huge chunk of the economy would cease to be or that ever-improving health and safety trends would suddenly reverse themselves.

The most naïve and destructive examples of such thinking stem from misusing the concept of the multiplier effect. You’ve seen or read this many times, I’m sure. 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 thousands or even millions of jobs. In virtually every case, the statement isn’t just invalid. It’s idiotic. And yet it just gets restated by the next earnest-sounding pol.

Most of the time, they are citing an economic-impact study that takes the amount spent and runs it through a model that estimates the local expenditure 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 – they don’t speak at all 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. Basically, all costs are opportunity costs, whether they are denominated by dollars, time, or some other means. If you spend $8.50 eating lunch at Jersey Mike’s (highly recommended, by the way) you can’t spend the same $8.50 on some other meal, or on 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. What you didn’t consume – the alternative meal, the socks, the extra time spent at the office – constitute 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, earned through voluntary means, into tax dollars in the first place. When people keep more of what they earn, the money doesn’t disappear just because it no longer shows up in the government’s balance sheet. It is devoted either to current consumption or to net private investment, both of which have economic impacts of their own.

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.

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 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.

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LIBERTY NETWORK

1. GRIH Board Member Dale Evans' open letter to Governor Linda Lingle was published in Hawaii Reporter on April 26, 2008: "Governor Lingle Failing to Deal with What is Happening With Small Businesses and Our Fragile Hawaiian Economy."
   

2. The www.LUV-Hawaii.org website was the subject of the main message of the January 16 Grass in Review. Since then, over 225 people have signed the petition and 160 have posted comments. A few of the comments were published in Hawaii Reporter on 2/8/08, 2/23/08, 3/1/08, 3/11/08, and 3/29/08.  Please read them and sign the petition if you have not already done so. The comments are anonymous and cannot be viewed on the LUV-Hawaii website at this time.
   
   If you have not already signed the petition or gone to the website to learn more about it, please do so today.

3. An important new website has made its debut! The founders of HawaiiConCon.org say it is a grassroots community effort to engage the public in a discussion about the Hawaii Constitutional Convention. (This election, the public will decide whether or not to hold a constitutional convention before 2010 – no concon has been held for the last 30 years.) Visit the site for more information. Also see the editorial by former Hawaii Congressman Ed Case that appeared in Hawaii Reporter on April 20, 2008: “This Hawaii Election, To ConCon or Not To ConCon.”

UPCOMING EVENTS

All of the Institute’s events, research publication dates and speaking engagements are available on our website.

1. The Small Business Hawaii Awards Banquet will be held on Friday, May 9th at the Waialae Country Club.  The awardees include:

• SBH Business Person of the Year -- John Garibaldi, Hawaii Superferry, Inc.
• Civic Leader --Victor Lim, McDonald's of Hawaii
• Young Entrepreneur – Bernadette Baraquio, Just a Girl Productions

The banquet will also celebrate the new SBH Educational Foundation, a 501(c)(3) non-profit corporation.  There will be a silent auction, prizes, entertainment and a special speaker.  Tickets are $100 per person and are tax-deductible in part.  Call Darlyn Evangelista at (808)396-1724.

2. The Small Business Hawaii Economic Summit will be held on Tuesday, May 13th, from 11:00 AM - 1:30 PM at The Kahala Hotel. Speakers include Dr. John Rutledge, Senator Sam Slom, Dr. Paul Brewbaker and Lowell Kalapa. The $50 cost includes a buffet lunch, and parking is an additional $5. Call (808)396-1724 to register or for more information.

3. The 2008 Preserving the American Dream conference: "Preserving Freedom and Mobility"
May 16-18, 2008 in Houston, TX

GRIH will be co-sponsoring the sixth annual Preserving the American Dream Conference in Houston (Omni Hotel near Galleria District) on May 16-18, 2008. Registration is $249 regular or $175 student and low-income. There is an optional lunch and tour of Houston on Friday the 16th (8:30 am – 4:30 pm) for $25. Last year’s attendees really enjoyed the tour of San Jose.

For more information or to register, please visit the American Dream Coalition website.

4. Luncheon with Mark Skousen
Wednesday, May 28th, 11:15 AM – 1:30 PM

Mark Skousen -- professional economist, investment expert, university professor and author of over 25 books -- will be our guest on May 28. Held in the Pacific Club Card Room, the deli luncheon buffet requires advance registration and payment ($25). Please send checks made out to GRIH to the office address or call (808)591-9193 to charge the fee. Click here for more information about Mark Skousen.