The seen and unseen effects of Iowa flood relief

KCRG news coverage of flood relief
Commerce Secretary, Gary Locke (Iowa City, IA)

KCRG reported the allocation of Federal funding to Iowa City for various flood relief spending projects.  Commerce Secretary, Gary Locke, spoke to reporters about the Federal government's $30 million check to Iowa City and surrounding areas for infrastructure.  Locke was present with politicians, Gov. Culver and  Iowa's U.S. 2nd District Congressman Dave Loebsack.

While this Federal spending was spun as welcome news to citizens of the 2nd Congressional District and Iowans affected by the flood devastation, the layman must analyze the "seen" and "unseen" effect this action will have from an honest economic standpoint.

First, let's look at the "seen" effects of the flood relief.  The Federal spending will bring jobs and economic activity to certain the infrastructure sectors of Iowa City, Columbus Junction, and Shenandoah communities.  This will provide a temporary "boom" for those industries set to benefit from the government spending (or "investment" as it was reported).  All of these industries will cheer the government for boosting the demand for their labor, services, and capital goods.  Congressman Loebsack and Governor Culver will be able to take credit for creating economic growth in those sectors of the economy and surely use this as a talking point on the campaign trail.

While all of the aforementioned observations will be the "seen" effects of government spending, identifying the "unseen" effects requires a more analytical approach.  The KCRG reporting fails to mention how will this funding be financed.  Are taxes being raised to pay for said "investments"?  Is the U.S. Treasury borrowing money from China to pay for the infrastructure?  Is the Federal Reserve financing the flood relief through the expansion of its balance sheet (printing money)?  Is a Federal spending program being cut to offset the new outlay?

The means and method of financing this Federal spending program is critical to examining the unseen effects and opportunity cost of whatever infrastructure activity is pursued.  While $30 million may be lunch money for those in Washington D.C., people in the real world do not have monopoly money to throw around.  Our nation issued $1.5 trillion worth of debt to finance the Federal government, yet no one asks these reasonable, yet tough questions to those entrusted to represent its citizens.

Whether the government taxes, borrows, or prints money to finance its operations, the bill has to be paid someway.  The issue at hand is not whether infrastructure needs to be replaced.  Capital infrastructure is necessary for a healthy economy and thriving community.  But, the means by which this end are achieved is elementary to understand the economic effects of such an activity.  What is the opportunity cost of this government spending $30 million on these activities?

Politicians and government central planners have little, if any, incentive of studying the most effective way of allocating scarce capital to create and maintain economically viable projects.  Politician are motivated and driven by political return on investment from their political capital they employ, who will vote for them, and what they can sell back to the public for political gain.  Time and time again, results from this type of "investing" by government is based more on political calculation versus economic calculation or sound economic reasoning.

For more info: Frederic Bastiat's, That Which is Seen and That Which Is Unseen, provides a more in depth exploration of government spending and unintended consequences of applying economic analysis to life and the political economy.