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House of Sand


Borrowing government money to invest in non-productive assets means short-term gain and long-term loss.

The following is an exerpt from the local paper in Cincinnati:

"Federal stimulus dollars will pay for most of a $35 million segment of the Banks riverfront development project, allowing work on a parking garage and other transportaion upgrades to being years ahead of schedule.

"The catch: the city and Hamilton County will each have to pay between $3 and $4 million upfront to make it happen.

"All 3 county commissioners reacted positively Monday, speculating that accelerating the garage and street project will more than offset the unexpected intiial costs. Without the stimulus, the garage and nearby improvements wouldn't be built for at least five years.

'The biggest cost of construction is delay,' commissioner David Pepper said [whose unique qualification for commissioner is that he is the son of a former CEO of PG (PG)]. "The idea that you moved up a project 5 years, that's a huge saving.'

"County Auditor Dusty Rhodes, a critic of the project, said it's 'nuts' to be talking about spending new money while both the city and the county struggle to pay for existing services. City officials are grappling with a looming budget deficit; the county has laid off hundreds of workers.

" 'How many more policemen are we supposed to fire so we can indulge these people in these utopian dreams?' he said.

"Meanwhile Cincinnati City Manager Milton Dohoney told council that if the downward trend of city tax collections continues, the city will have a $20 million deficit this year, a scenario that is going to mean substantial budget cutting."

As background, the Banks Project plans to build shops and restaurants and associated parking in downtown Cincinnati near the river and the football stadium. It's a project fostered by local government that's never gotten off the ground for lack of private support. In other words, intelligent businessmen look across the river at Newport, Kentucky and see shops, restaurants, and movie theaters that are over capacity, and thus refuse to put their own private capital into a project that makes little economic sense. Only the government of Cincinnati won't let it die.

Now they have their wish: They have federal money to spend. With federal stimulus money, things are going to get built all over the country that will add to current overcapacity. We're going to invest in assets that have nothing to do with production and everything to do with waste.

When you borrow money to invest in non-productive assets, you get short-term gain at the expense of long-term loss. The crowding-out effect will make sure that we don't have capital to invest when we really need it to invest in real production.

Some government officials -- like Dusty Rhodes -- can understand this concept. Most cannot.

Risk is high.
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