This article was originally published by Pat slattery of The Free Market Project on January 27, 2011.
Investment and Spending are Different (a primer for the econmically illiterate)
Dear President Obama, Democrats, and Washington Elites,
I am writing because I feel the need to explain something to you. You seem confused about what the term “investment” means, and completely befuddled about how the act of investing creates jobs.
This is how investment works, and how it creates jobs: Joe has an idea for a product or service that he thinks will be of use to people, and, therefore, he can make a profit selling this product or service. Joe puts his plan together, possibly creates prototypes, and he goes to other people and tries to convince them he has a good idea. The people he talks to are FREE to show him the door, and FREE to give Joe money in exchange for ownership in his new company. These people are taking a risk, based on a belief that ownership in Joe’s company will eventually be rewarded by a higher stock price (so they can sell at a profit), or dividends. The money FREELY INVESTED is used by Joe to bring his product or service to market, which includes HIRING PEOPLE to work for him. If Joe fails, his investors lose their money and Joe’s workers lose their jobs, and Joe loses both his job and his money. However, if Joe is successful, his investors make money (which they can turn around and invest in other businesses or spend), Joe has to hire even MORE EMPLOYEES, and Joe might even get rich.
That is investment and how jobs are created.
What you are calling “investment” is spending. There are several distinctions I want to emphasize because you seem to lose them. First, Joe’s investors were FREE to invest or not. When government “invests” in things, the taxpayer is not free to decline participation. You are spending someone else’s money (often borrowed).
Secondly, Joe’s investors, being free to invest or not invest, made a calculation about whether or not the MARKET would support Joe’s business. You see, if the market does not want what Joe is selling, it’s a terrible investment, even if Joe’s idea is brilliant. When you pour taxpayer dollars into things like high speed rail or “green” technology, you only have to do this because the market (meaning the people) have looked at these possible investments and have decided they don’t want to invest in them. Do you understand? If these businesses were good ideas, if they were things the market was crying out for, they wouldn’t need money from the government. By definition, if it takes “investment” by government to move these industries forward, they are bad “investments.”
Third, because you must take the money you spend (I’ll no longer call it investment) from the people and you put it where you think it’s a good idea–usually for political reasons–even though the market (the people) are not willing to support an industry with their own money, you have now taken investment money from people who would put it where it is needed and wanted and will be most productive and you have put it where it will be less productive. You have harmed, rather than helped, investment that results in prosperity and jobs.
What we (those of us in the private sector who are laboring to create prosperity for ourselves, our families, our employees, our communities, and our nation as a whole) want is for you to get out of the way of OUR investment, or our ability to attract investment freely. We need you to stop spending our money on YOUR projects and allow us to spend it on OURS. We need you to stop putting the cost burden of compliance with your regulations on us and to begin to understand that, in a free market (especially in an age of light-speed communications) we have to be conscious of making good products, not polluting our atmosphere, not harming our customers, and treating good employees well so we can keep them. The market regulates us. There are places where your input may be necessary, but those places are small, and the burden you put on us should be light.
There you go. Do you understand what investment is? Can you see that getting out of the way with your burdensome regulation and confiscation of money that could be used as investment capital is the best way to build prosperity? Free Joe and his investors to create wealth by generating new products and services that people want and that will require hiring if they are successful. Don’t think for a minute that we believe that your spending is the same as investment.
UPDATE: Read this by Charles Krauthammer:
This is nothing but a retread of what used to be called industrial policy, government picking winners and losers. Except that in a field that is not nearly technologically ready to match fossil fuels, we pick one loser after another — from ethanol, a $6 billion boondoggle that even Al Gore admits was a mistake, to the $41,000 Chevy Volt that only the rich can afford (with their extended Bush tax cuts, of course).
The green jobs hustle is an example of politicians attempting to override the laws of basic economics. A job is not a product to be manufactured, or a gift that can be bestowed by a benevolent State. Jobs are the sustained demand for labor, created in response to opportunity. If the economy wanted green jobs, it would create them without massive government subsidies – which must be sustained over long periods of time, since jobs that vanish after a few months don’t do much for the unemployment rate.
Since the economy does not want green jobs, the State must force them into existence… and yes, this is an exercise of compulsive force, since it takes funds away from taxpayers, and uses them to force labor into channels undesired by the private sector. These green projects are far less efficient and productive than rational uses of energy and industrial technology, so large amounts of spending are necessary to make the economy accept them.
Found one more… this by David Limbaugh:
When the Soviet Union lurched ahead of us in the space race, America’s leaders launched a national effort to surpass the Soviets. For Obama, by analogy, the federal government has to be the prime mover in leading and catalyzing America’s comeback in education and in economic growth. We cannot understand Obama without recognizing that he believes the private sector can’t create or innovate without paternalistic direction and googobs of money from the wiser beings in Washington.
“We know what it takes to compete for the jobs and industries of our time,” he said. “The first step … is encouraging American innovation.” Note that he didn’t mean “encourage” in the sense of getting government off businesses’ and people’s backs. He means the federal government should proactively prod, direct and lead us into the promised land of economic growth.
He credited government for providing money for “basic research” and “cutting-edge scientists and inventors” throughout history, without which the hand of the free market would have been not only invisible but also impotent.