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Saturday, September 20, 2008
A Window Into Bad Economic Reasoning
By Kenneth M. Brown
Economic Consultant
A New Mexico legislator came to me with this problem. Often, he said, constituents would seek his support for some ill-advised expenditure of state funds for “programs” that would supposedly “'create jobs.” The legislator knew instinctively that most of these programs were worthless, but how to argue that point was his problem.
There's a parable in economics called the “broken window fallacy.” Suppose that you break your window, and it costs you $30 to have it repaired. The $30 creates a small job for the person who repairs it and a few dollars for the glassmaker.
So would a program to break, then replace windows create jobs? No; it would merely move workers from one task to another. The window-repair person could have been producing something else, in which case society would have both that something else plus an unbroken window. Moreover, you'd still have that $30 to spend, so any multiplier effect would be canceled out.
A close relative of job creation is “economic impact,” defined as the increase in total income of the state. Now you can increase income by subsidizing out-of-state workers to move here, but this is of little or no benefit to people already living in the state. What's the point? Are you anxious to pay higher taxes in order to have New Mexico's population growing a little faster?
Take, for example, New Mexico's generous subsidies to the movie-making industry. They consist of loans and a subsidy of 25 percent of expenditures within New Mexico. Clearly the result of such largess has been more employment, but at what cost? And how many of the new workers were New Mexicans rather than newcomers from out of state?
New spending proposals breed supportive data. There is little question that any “study” of the Downtown arena will turn out to be favorable, with exaggerated estimates of attendance, low-ball cost projections and dubious spillover benefits. It will ignore the negative economic impact of higher taxes.
The spaceport in southern New Mexico will cost $100 million or more. Off hand, it seems doubtful that many people would pay large sums to be flown really high for a few minutes. Nonetheless, the spaceport's supporters came up with wildly inflated economic projections and the Legislature fell into line.
Can the government ever create jobs? Public works projects during a depression might qualify if no other jobs are available and macroeconomic policy doesn't work. But Keynesian economics applies only in rare situations if at all.
Job creation isn't cheap. The real cost of hiring a government worker can be a lot more than just the one-year salary. A hire may expose taxpayers to many years on the job plus more years of retirement pay plus generous fringe benefits.
Often the benefits go to just a few people. Alaska's infamous “bridge to nowhere” would have employed workers, but used someone else's taxes to pay them, namely taxpayers in the lower forty-eight who would never even see it. A similar inequity exists in New Mexico's “train to nowhere,” aka Rail Runner, which cost an enormous sum from taxpayers statewide yet serves just a few.
Suppose the program is not a boondoggle but a much needed bridge. Then it should be evaluated according to benefits and costs, with labor as part of the costs.
Let's face it. Assertions that a program will create jobs are often camouflage for what's called “rent seeking” behavior. This occurs when a person, organization or firm seeks to make money by manipulating the legal environment rather than by trade or production of wealth. Look beyond the optimistic figures on economic impact and you will nearly always find someone who stands to profit without doing anything except winning favors from the government.
The best example of true job creation I've seen is the Sandia Science and Technology Park here in Albuquerque. The idea was to make commercially useful research available to high-tech companies that would locate near Sandia National Laboratories. It cost the city and the state a few million dollars for infrastructure, but the proliferation of high-tech firms with upscale salaries is quite impressive. Around 2,200 people now work there, at an average salary of $70,000.
So here's my advice to the state representative:
n Look for parallels to the broken-window fallacy.
n Have an independent expert review supporting data and analysis.
n Consider the possible self interest of the proposal's backers.
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