Highway Robbery

This article was published on Techcentralstation.com, July 27, 2004.

What can a 19th century French journalist teach the U.S. Congress about the 2004 federal highway bill? A lot, actually. Those who hold the public purse strings on Capitol Hill would be wise to heed the common-sense counsel of Frederic Bastiat, who had plenty of prudent things to say about taxes and government spending -- basic rules that are still relevant today, especially for the highway bill.

Lately, Senate Majority Leader Bill Frist and House Majority Leader Tom DeLay have been touting the substantial job growth they claim will occur if Congress would just spend an extra $280 billion or more in federal taxpayer money on proposed transportation projects. In a February press release, Frist states the 2004 transportation bill would "create 47,500 new jobs" for each $1 billion spent. In a March press release, DeLay was even more ambitious: Citing the same figure, he couched the issue in terms of the federal government's attempt at "kicking the economy into high-gear... This is a jobs bill, pure and simple." In fact, that's been the mantra of Hill supporters of the highway bill on both sides of the aisle for months.

The problem with all of this is that it is wrong. Government spending won't actually create any "new" private-sector jobs. To understand why, take a look at Bastiat's famous essay, "What Is Seen and What Is Not Seen." There he explained what has become known as the "broken window fallacy." The story goes like this: When a shopkeeper's window is broken, a window repairman receives a job and compensation for his handiwork. To someone simply looking at this transaction in isolation it seems that the broken window, while the result of an accident, is actually a benefit to the economy -- the window repair industry did receive business, didn't it? That, as Bastiat wrote, is what is "seen."

What is "not seen," however, is what the shopkeeper might have spent that money on if the window were never broken. Perhaps he would have bought any number of other goods or services, or hired another employee to work in his shop, but now he cannot. The breaking of a window does not increase net employment in the economy as a whole, even though it increases the employment of the window repairman.

Bastiat extends this logic to taxation and government spending. To spend money on anything, the government has to first tax that money out of the economy or borrow it from the capital markets. While supporters of a government project will argue that it creates employment for some, they fail to mention that the taxes or debt -- a form of future taxes -- will inhibit employment of others. As Bastiat wrote, "public spending is always a substitute for private spending," which "adds nothing to the lot of the working class taken as a whole." When politicians say that highway spending will create new jobs, taxpayers need to remember that the fuel taxes used to finance that spending have already taken a chunk of productive capital out of the economy.

Although Bastiat's essay was published in 1849, politicians and bureaucratic busybodies seeking to promote all sorts of government subsidies, from corporate welfare programs to baseball stadium boondoggles, have perpetrated the hoax for over 150 years. Bastiat might as well have been referring to members of the U.S. Congress when he wrote this: "When a railroad or a bridge has real utility, it suffices to rely on this fact in arguing in its favor. But if one cannot do this, what does one do? One has recourse to this mumbo jumbo: 'We must create jobs for the workers.'"

Luckily, not everyone in the federal government has fallen for the hoax. Various studies have put forward a modern version of Bastiat's argument. A 1993 study from the Congressional Research Service notes that employment gains from increased transportation spending would likely be offset by losses in other parts of the economy due to the increased taxes or debt to finance the spending. The authors of a 1992 Congressional Budget Office study even go so far as to ask an important question: "If [these proposals really create jobs], why not just keep adding new programs until full employment is achieved?"

To put it another way, if these types of government-financed transportation projects were indeed sources of real job growth, West Virginia would be an economic dynamo and pork-master Senator Robert Byrd would have won the Nobel Prize in economics by now. The truth is that increased government spending on highways usually only guarantees new jobs for bureaucrats. That's not the type of jobs program that the U.S. economy needs.