Opportunity Cost

This is one of the best and most concise articles I have ever read on the idea of opportunity cost.

The point Mr. Horowitz makes in this article is lost to 99% of people, and I really think it's one of the most important learning points of economics:

Over the weekend, the White House released a report indicating that the stimulus program had directly funded about 600,000 jobs and indirectly "created or saved" a total of 1.5 to 2 million jobs. Later investigation will likely reveal that a good number of these created jobs are non-existent or otherwise shouldn't have been counted. Politicians, both national and local, have every reason to exaggerate numbers like this, and expecting accounting accuracy from the people who pay hundreds of dollars for a hammer has long been an exercise in faith over reason.

Moreover, one can raise all kinds of questions about whether "creating jobs" should be the goal of economic policy. There's a story about Milton Friedman in China that may be apocryphal but illustrates this point. In observing hundreds of Chinese workers clearing land for a new building using shovels, Friedman asked his hosts "Why are they using shovels? Why not use heavy equipment like an earth-mover?" The Chinese official said "If we did that, we'd lose all of those jobs!" Supposedly Friedman said "Oh, you're trying to create jobs! I thought you were trying to build a building. If you want to create jobs, why not take away their shovels and give them spoons?" I'm sure the Chinese host didn't find that funny, but it perfectly illustrates the point that "creating jobs" is easy (another example: we could destroy all farm machinery); the tougher thing is creating value by saving labor in one place to use it where it is more urgently needed elsewhere. The benefits associated with the disappearance of jobs in making candles or horse-drawn carriages should make us skeptical of the rhetoric of "saving jobs."

Even with those flaws, the Administration's accounting is still one-sided. What it doesn't consider are the jobs lost due to the very policies that are "saving" jobs. Government can only spend what it takes from the private sector one way or another, either through taxation, borrowing, or the redistribution effects of inflation. For every dollar that government spends, there is one less dollar being spent somewhere else in the economy. The jobs that weren't created because the private sector lacked access to capital due to increases in government borrowing should be offset against whatever jobs the stimulus supposedly is creating.

The problem, of course, is that what was never created cannot be seen and therefore cannot be counted. The French economist Frederick Bastiat once defined economics as the art of seeing the unseen. It may be true that we can "see" it by recognizing the unseen effects of policies, but if you can't count what you can't see, you'll always lose out in the numbers game. The result is that estimates of the net employment effects of government programs will always be biased in favor of the program's effectiveness. The inability to count what we can't see should give us long and serious pause when reading about the jobs "created or saved" by the stimulus package.