Tue, 10 May 2005

Economic Activity

This morning I heard on NCPR (the local NPR affiliate) a story about military base closings. The story ended with the note "[These bases] generate more than $2 billion of economic activity."

This short note is economically wrong in three ways. First, taxation does not generate anything. In fact taxation replaces private spending with public spending. Thus, a more accurate note would be "[These bases] spend more than $2B in New York State."

Second, taxation only transfers money from being spent on one thing to being spent on another[1]. Thus, when the public taxes money away from private entities, it also destroys the thing that the public would have spent the money on. Taxation also costs money: directly in the expenses of the operation of coercing taxes, and indirectly in the actions taken by citizens to reduce their taxes. Thus, an even more accurate note would be "[These bases] spend more than $2B in New York State, and destroy even more spending all over America."

Third, the whole point of trade in a free-market economy is to create value, not just activity. Economic activity includes digging a hole, and filling it in again. Unless some value was created by that activity, it was a complete and utter waste of money. Economic ignoramuses may say "ahhhh, but the workers got paid!" I say "ahhhh, but they would have been paid to do something else, productively." For one particular set of workers, that's not necessarily true. If you make the economy inefficient enough because you concentrate on activity and not value, it becomes so highly probable that it becomes truth.

So, the most accurate note would be "If the military doesn't need the bases, they wasted more than $2B spent in New York State, and destroyed a greater amount of spending all over America."

[1] Even if the money is just put in the bank, the bank will loan the money to someone, who will then spend it. Even if the money is put in a mattress, the economy will notice that that money isn't circulating anymore and will adjust the value of the remaining money higher.

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