A key element in understanding reality is an accurate representation of reality. And this headline in the November 10 Washington Post — “N. Va. Boom Sparks Economic Recovery” — demonstrates how poorly is the average newspaper editor equipped to accurately describe economic affairs, which may help explain why the average reader understands so little about economics.
The story spoke of “dramatic growth in federal defense and anti-terrorism spending in Northern Virginia” as having “fueled a rapid economic recovery” (and more to the liking of government officials, “boosted tax collections” — but that is another story.) Stephen S. Fuller, a professor at George Mason University, is reported to have found that “federal spending in the region has more than tripled, from $10 billion to about $35 billion” per year since 1990, leading to “record job growth in Northern Virginia” — mostly from “increased spending on defense and homeland security projects, salaries for consultants and other professional services.”
“But,” the writer continues, “the rosy outlook is tempered by two realities”: the rest of the state is not likewise experiencing this growth in prosperity and “expenses are gobbling up the money as fast as it comes in.” (See parenthetical remark above.)
More important is the reality that wasn’t mentioned: government spending does not constitute an economic boom.
In the interest of clear communication, a definition is in order: an “economic boom” is the result of an expansion of the amount of wealth in existence and available for either savings or consumption.
A common misconception is that government has money to spend. This is untrue. Government money is nothing more than the wealth it extracts from private businesses and then spends as it sees fit. Government has no wealth, can create no wealth — and therefore is in no position to expand economic activity.
The only true way to create an economic boom is through savings and free trade.
Take as an example two farmers who wish to better their respective positions. One grows apples, the other oranges. Each desires to have what is offered by the other, so they negotiate an exchange, say, one orange for two apples or two oranges for one apple, or three apples for three oranges. The exact terms of the trade are unimportant.
Now, what happens next is interesting: the orange grower takes his apples to the mango farmer and trades them for mangos, which he loves. He now has mangos — his heart’s true desire — and oranges, which he can use to get more apples from the apple grower. Everyone is happy. This is called free trade.
Next, the orange grower gets an idea. He wants more mangos. So he decides to grow more oranges (or consume fewer oranges himself), which will allow him to trade for more apples, which will bring him, in the end, more mangos. This is an expansion of the number of oranges in existence. In time, both the apple farmer and the mango farmer figure out that they can do the same thing, and with equally beneficial results. There are now more oranges, apples, and mangos than anyone is currently consuming. This is called savings.
But then along comes a government official who claims to know better how each of the farmers ought to be spending his produce. He decides to take a large chunk of the surplus of apples, oranges, and mangos and give it to the coconut farmer — whom nobody chose voluntarily to do business with and, for that matter, nobody really likes — in exchange for more coconuts.
Naturally, the coconut farmer is now wealthier than he’s ever been. He’s got apples, oranges, and mangos, when he used to have only coconuts. He then uses this produce to hire more coconut workers. Next come all the coconut-related projects, and increased salaries and “other professional services” related to the coconut industry.
The coconut workers now have more apples, oranges, and mangos to use in procuring other goods and services that were previously unavailable to them. Those living around the coconut plantation experience an increase in business activity. They are of course delighted. They start to speak of the “economic boom” that has come to their region. The government official points to the region with pride.
Unfortunately, what no one sees is that the orange, apple, and mango farmers now have less produce with which to barter for the goods and services they need to better their own lives, creating jobs and raising living standards in their own “regions.”
In his classic book, Economics in One Lesson, Henry Hazlitt wrote that “for every public job created … a private job has been destroyed somewhere else,” which is why he defined the “art of economics” as consisting 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.”
The federal government, in its zeal to spend more money, takes more of what others have produced and spends it in one favored region — Northern Virginia, for example — and so creates the semblance of an “economic boom.”
What happens in reality is that resources must be drained from other regions — “from $10 billion to $35 billion” per year — which no one really sees, and that money is then poured into Northern Virginia, funding projects, raising salaries, increasing the number of jobs, and benefiting ancillary businesses. No “boom” has taken place. There is no net increase in wealth, prosperity, or living standards. It should be called instead a simple transfer of wealth.
A true “economic boom” is not a zero-sum game: it doesn’t require that anyone lose in order for others to gain. Northern Virginia’s “economic recovery” comes, quite simply, at the expense of everyone in the country.
As the great 19th-century economist Frédéric Bastiat observed, in viewing the “benefits” of such government benevolence, “You will doubtless tell me that these little sous, which pass in this way … from my pocket to yours, provide a livelihood for the people around your castle and enable you to live in grand style. May I point out to you in reply that if you left the money in my hands, it would have provided a livelihood for the people around me.”
