Simple economic errors

When you read some of the editorial pages in Nevada's newspapers, or one of Jim Rogers' letters, you'd be wise to read with a bit of skepticism. We hear claims about the government creating jobs, education driving economic development, and budget cuts destroying the economy.

Despite attempts by organizations like NPRI, the Cato Institute, the Heritage Foundation and more to educate people on the facts, many people still believe the New Deal mitigated the effects of the Great Depression. Many now think the free market caused our recent housing market collapse.

But in these cases and many others, the conventional wisdom is false – and the editorial boards, pundits and politicians are incredibly wrong. Their mistake usually derives from some category of economic ignorance - such as the failure to grasp the seriously destructive effects of government adulteration of the money supply.  Another important, but very simple, error is a failure to understand opportunity costs. An opportunity cost is the value of whatever one did not produce, purchase or even spend time doing.

For example, if the state government increases higher-ed spending by $400 million, that is $400 million that taxpayers cannot spend or invest as they see fit. The opportunity cost is the loss of $400 million in consumption and investment opportunity for taxpayers.

While new jobs will exist at UNLV or UNR, jobs that would have resulted from taxpayer consumption or investment in the private market will not. Thus the opportunity costs here are jobs lost in areas where consumers and investors would have spent their money. The best case in such instances is that there will be no real gain for the country.  More frequently, the mal-investment by government means a net reduction in economic growth.

Just remember, the only thing our state government does under this scenario is shuffle wealth and jobs around – politicians, rather than consumers, get to decide who the winners in Nevada are.

Don't worry if it takes you awhile to wrap your head around the concept of opportunity costs. Given all the economic fallacies pushed by today's politicians, pundits, policy wonks and journalists, it's a wonder anyone understands.  To learn more, check out the book Economics in One Lesson by Henry Hazlitt.

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