Wednesday, June 20, 2007

Lost in the Black

Last night I happened to have caught Lewis Black's stand up on Comedy Central. He argued that creating economic growth is easy: just get the government to build a big thing in a state that needs economic growth (he suggested Mississippi). Then people will say "I have to go see the big thing!" and then travel to Mississippi. Presto! we have growth.

It's hard to tell if Black was kidding or not (I suspect he wasn't) but it's worth pointing out why this is a bad strategy. Similar plans often pop up in government circles, candidate speeches, and various interest groups.

To illustrate where Black went wrong, let me propose a similar plan: to save money, instead of making a new big incredible thing people want to see, move an existing one. Let's pick up the Statue of Liberty and move it to Mississippi. That would create a lot of growth right? After all, we know people will travel far and wide to see it. It's a proven project and cheaper than starting from scratch.

But wait: what about all those New York businesses that depend on the tourism that the Statue brings? They would go under or move to Mississippi, which is why Black's plan won't work. Similarly, there are those who would go see the new amazing thing and thus forgo doing other things, like going to New York to see the Statue and patron local business. Black's just shuffling wealth. Net gain is zero (actually it's negative because we had to pay to get nothing).


jeremy h. said...

I don't quite understand what you're saying. Is it simply a condition of the government building something that has negative consequences for growth? Or is Disneyland also bad for the economy?

David said...

If the government built something two things could happen:

1) The thing is really cool and adds to growth (Disneyland) in which case you don't need the government to make it.

2) The thing sucks and takes away from growth thanks to opportunity costs.

Given what we know about government concerning incentives and knowledge, I'm leaning to (2). But in general the lesson is activity is no the same thing as growth, especially very localized activity (such as lots of construction in one area).

jeremy h. said...

I agree that actors in the state sector and more isolated from incentive mechanisms, but they are not totally isolated. Sometimes private firms make errors. Sometimes governments create wealth. Don't make this a tautology.