Some expenditures don't aid economy

By DAVID MOON, Moon Capital Management
April 27, 2003

As I merged onto I-40 Tuesday evening to go home from work, traffic came to a complete halt before merging from James White Parkway. After taking thirty minutes to drive approximately two miles, I finally saw the accident. It was a horrible mess. There were several cars involved. The destruction was so confusing it was difficult to tell whether the accident occurred in the east or west bound lanes of the interstate. The concrete barrier separating the traffic was destroyed, as were several vehicles. It was hard to imagine that no one was killed in the accident, although I saw no news reports about it. No doubt, people were injured. And obviously, automobiles were crushed. There is going to be a lot of money spent on medical bills, cars and concrete to restore everyone and everything back to their pre-accident condition.

If all of the people involved in the accident, along with the Tennessee Department of Transportation, are going to spend hundreds of thousands of dollars for various personal and property repairs, is our local economy better off as a result of the accident? Of course not. The victims of that accident (including the taxpayers who own the interstate) will spend significant money without improving anyone's quality of life. There are some doctors, automobile dealers and road builders who will profit from the accident. But that money would have otherwise been spent at the grocery store, a boat dealership or on a new bridge. The accident forces the victims to divert money from expenditures they would have otherwise made to improve their quality of life to trying to restore their pre-accident lifestyle (or road conditions.)

Insurance companies will pay for the automobiles and much of the medical bills. But the expenditures of the insurance companies will be factored into their rates, ultimately causing all insurance customers to pay for the cost of the accident. You are paying to replace those automobiles. I am helping pay for someone's medical bills. We're all paying to fix the road. And that is money you and I do not have to spend on something we would prefer.

Last week, a reader took issue with my contention that wealth is not fixed. In a free society and capitalistic economy, an individual can combine two or more assets (including his own ingenuity and sweat) to create an asset more valuable than the sum of the individual assets. This is how a tree becomes a cord of firewood or silicon becomes a valuable computer processor. People in our society are free to pursue their own self-interests, acting on the incentive our economy provides successful entrepreneurism.

The next time someone argues that the government should 'create' more jobs, remember that jobs are a function of consumer demand. Like a car accident, the government can cause money to move from one area (or job) to another. But, wealth can only be created when someone increases the value or utility provided to society. If creating wealth was simply as easy as 'creating work,' then the accident on I-40 created wealth. But it did not. It merely shifted it from one place to another.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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