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The Henry Hazlitt Series: Public Works Means Taxes

The Hazlitt Series

This latest stewardship post is a continuation of our monthly exploration and modern application of the economic writer  Henry Hazlitt, and his seminal work, Economics in One Lesson. This work draws heavily upon the insights of the great French economist Frederic Bastiat.  His key insight was to look at that which is not seen.  So, for example, do not simply look at the benefits of a trade restriction of say wool, but also look at the costs to the rest of the economy.  Hazlitt updates this insight with a more modern take to look not just at the short-run effects on a small group, but also the long-term effects for the economy as a whole.  Hazlitt then applies this lesson to a variety of topics.  Each installment will pay homage to this most clear of economic thinkers and writers by applying each of his applications to our world today.

Public Works Mean Taxes

The fallacy in this week’s post is that government spending can occur without really raising taxes.  One way this fallacy presents itself is that the government can borrow the money, and that this debt does not matter because “we owe it to ourselves”.  Once again our uber consistent Keynesian Paul Krugman makes this claim.   Along with this claim is the idea that public works will provide employment that is not otherwise available, and that this will add wealth to the community.

Further, this argument goes beyond normal governmental operational spending.  This line of thinking involves big, bold projects, that will last a long time.  That is part of the argument for these projects adding to the wealth of the country.  They are talking about roads, bridges, dams, and all manner of very durable build outs.  Many even argue that it is necessary to “invent” projects to keep the country moving.  President Obama talked about “shovel ready” ideas and President Trump, it seemed, designated every other week as “infrastructure week”.  All of this will not only create projects that will last, but also create employment, which will become self-sustaining.

These are all claims that the government made when pitching President Biden’s infrastructure package.  Building and repairing highways, adding broadband capacity, refurbishing ports, and on and on, were all touted as adding to the wealth of the nation.  There was scarcely any mention of the added debt that would be incurred in all these public works projects.  I do not mean to be partisan by mentioning President Biden’s recent programs.  This was just the latest in a long line of public works legislation that has been touted by both parties over many years.

Thinking It Through

Upon consideration we can see that this is just another fallacy built upon muddled thinking.  Let’s look at bridge builders who are contracted to build, and/or repair bridges around the country.  They will certainly gain work and may even need to add workers in order to fulfill the contracts.  Let us say a contract is let for $1billion to build a new bridge that is deemed as economically necessary.  That $1billion must come from somewhere and it comes from the taxpayers.  This is true even if the extraction from the taxpayers occurs over time via debt service on a bond the government sold.  This means that those taxpayers who have the $1billion removed from their accounts cannot spend that sum on items they, as consumers, valued more.  It is $1billion that taxpayers no longer have.  Also, you need to think through the reality that some people benefit from the repayment of debt (bondholders), and some people are making the payments (taxpayers).  Calling both two discrete groups “ourselves” is just a meaningless rhetorical construct. 

Every public job that is created means a private sector job is destroyed or never created in another sector or line of production.  This is simple logic.  Yes, the bridge is built, but other goods and services are not created.  Also, the raw material, steel, concrete, etc. that are used in the building of the bridge cannot be used in other areas, areas that consumers valued more.

Now proponents will claim that these are needed and valued.  Yet, if they truly were, there would be no need to pass legislation forcing the bridge to be built rather than the human and natural resources being put to some other use.  This argument runs headlong into the socialist calculation debate.  This debate, won by honest economists, showed that government cannot calculate the way the market can by way of freely formed prices.  The economist Friedrich Hayek framed it as an information issue. Dispersed information, as exists in the market, will convey to market participants what it is that consumers desire, and provide them with the incentive to allocate scarce resources to these more highly valued projects.  The actual record of these kinds of projects is not great.  An entire Wikipedia page exists just on bridges to nowhere.

Spreading Nonsense or Logic

We can take the logic of this insight provided by Henry Hazlitt, and apply it to other cases, or we can apply the nonsense of poor economics to those other areas. The same argument is used by proponents of such spending to make the case for public housing (now called social housing).  This argument was made most famous during the New Deal of the 1930s in favor of the TVA.  Yet, all these examples suffer from the same fallacy.  The government is diverting resources from where market participants wanted those resources directed and in the process of moving those resources, taxed the previous owners of those resources to build public works.  These public works are all quite visible.  The offsets (taxation) are not clearly visible, but just as real.

So, whatever your view of public works is you will have to make a case for them that is not based on “owing money to ourselves”, and that considers that the creation of public works necessarily entails taxation.  As always good stewardship need not involve economic illiteracy.

Praise Be to God

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