Taking money from John to give to Jim and dismantling the capital structure in the process

 

There is really no end to the constant political influence of our representatives when the economy (locally or on the state level) is concerned. The next headline comes from www.zagrebancija.hr.

In the article which is making headlines all across Zagreb, a massive government spending program is being initiated. The following picture that was taken shows the construction team in place already demolishing the previous meadow. This meadow is adjacent to the National Library Building. The meadow is really huge and one of its purposes used to be walking dogs, recreational walks and the such.

 

Our great major, Mr. Bandic has decided to implement a 20 million HRK project to build a fountain. Yes, that’s not a typo – he is spending 20 million HRK ( = $3,6 million) to build a fountain.

Now, a typical Keynesian economist will say that the G in GDP = C + I + G + (X – N) is government spending, and an increase in this variable will lift the national income statistic and give a boost to GDP. Arithmetically, this is true; economically, this makes no sense. The government in its infinite wisdom has decided how to spend my money and transfer this purchasing power to the construction company which I am sure got a deal with a large premium over the market. The building materials and labor hours will be wasted in the process and the lost factors of production and resources will be diverted from either home building, sewage construction or just used as idle capital stock as an insurance in case of future economic need for real purposes.

An economy doesn’t grow by spending money. Especially in this way when to generate this growth, you have to take the resources from the economy and implement such a project. In essence, this pork barrel project is nothing but a large shell game. A wasted resource is undermining the capital structure of the industries that need these resources, creating a permanent loss for the local government budget.

The main point is, spending money doesn’t do anything. Its resource utilization that matters. Why not build 1000 fountains? Because it makes no sense. This so called meritorious good benefits only the individuals that have a direct contact with this good or service. In this case, only the construction workers that will get a boost to the detriment of the rest of fellow Zagrebites and the politicians are ensured a sure vote.

Present goods in form of money are wasted in such projects and society therefore gets poorer.