During the last three days,The Honolulu Advertiser devoted unprecedented space to the proposition that Hawaii taxpayers spend $1 billion over the next 10 years on expanding prison facilities within the State.
The various articles in question displayed both bad statistics and bad economics. The focus here is on the latter -- in particular, the notion that "keeping the money in Hawaii" will generate a positive "ripple" or "multiplier" effect.
There are two kinds of multipliers in Economics, neither of which applies to the current economy of Hawaii. The first is the Keynesian multiplier, which was invoked in the 1930s during the Depression and is relevant only when a substantial proportion of the labor force is unemployed and when there is substantial excess capacity in the economy's stock of buildings and equipment.
The second category is the regional multiplier, which measures the extent to which a regional economy expands in response to increased government spending.
It is not meant to measure the increase in economic welfare nor the increase in per capita income. When one state or region expands its economy through government spending, it is usually by means of attracting a capital and labor from neighboring economies, and is at the expense of those neighbors.
And when the economy expands by attracting new residents, existing problems of congestion and high living costs may be exacerbated.
Using either method to exaggerate the benefits of government spending is bad economics. Indeed, proper benefit-cost analysis must include the additional costs of government spending in
a low unemployment and overheated economy.
Such excess spending will increase inflation. In particular, spending $1 billion plus on construction will inflate construction costs and the cost of housing. One of the most serious economic problems in the State is that young people who wish to better themselves through education and hard work are discouraged from staying in Hawaii by the high cost of living. Excess government spending on construction will exacerbate the problem.
James Roumasset is a professor of economics at the University of Hawaii and serves on the board of scholars of the Grassroot Institute of Hawaii. He can be reached via email at: mailto:jimr@hawaii.edu
HawaiiReporter.com reports the real news, and prints all editorials submitted, even if they do not represent the viewpoint of the editors, as long as they are written clearly. Send editorials to: mailto:Malia@HawaiiReporter.com
