Friday, December 5, 2014

The vicious cycle of spending and taxing

Okay, so we have people in this country, and just about every other country too, who think the role of government is to solve problems. So they see a problem -- poverty, for example -- and they create government programs -- welfare, food stamps, unemployment -- to solve those problems.

As noted by the great economist Henry Hazlitt in his 1946 book "Economics in One Lesson:
"There is NO more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills. Is private industry partially stagnant? We can fix it all by government spending. Is there unemploiyhment? That is obviously due to 'insufficient private purchasing power.' The remedy is just as obvious. All that is necesary is for the government to spend enough to make up the 'deviciancy.'
Now, this all sounds all fine and dandy. It makes the politicians who create these programs feel good because they are creating a charity, and it makes the people feel good about the politician because they are helping those in need. Yet what goes unnoticed here is that for every dollar the government spends to implement and manage these programs a dollar has to be taken via taxes from the people.

"Everything we get, outside of the free gifts of nature, must in some way be paid for," said Hazlitt.

He explains that there are certain necessary functions that must be performed by government, and in order to pay for them a certain amount of taxes must be collected. Such necessary functions include

  1. Building and maintaining roads and bridges and tunnels
  2. Armories and navy yards to protect us
  3. Buildings to house legislatures
  4. Police departments
  5. Fire departments
  6. Coast guards

Hazlitt uses the example of a $10 million bridge being built by the government to create jobs. People can see the bridge, and they can see that it is beging used to allow cars to cross over water. They can see the 500 people working on it, peple they think would not be working if not for the building of the bridge. This is all good, they think.

However, what is not seen is that this means that $10 million in taxes has to be collected. He said:
"They would have that much taken away from them which they would otherwise have spent on the things they needed most... Therefore, for every public job has been destoryed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. Mor bridge builders; fewer automobile workers, television technicians, clothing workers, farmers."
Of course another argument is that, while people can see the bridge, they do not see all the projects that are not done because money was diverted from the people to the government. He said:
"Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But ifthey have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, perhaps the ungrown and unsold foodstuffs. To see these uncreated things requires a kind of imagination that not many peple have. We can think of these nonexistent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others."
The same can be said of all other government programs. We see that we are helping the unemployed, but we don't see that the same tax dollars that are taken to feed the unemployed are taken from the businessman, who in turn has to lay off a worker, or not hire a worker, because he has less money due to the taxes.

So, in other words, taxation to help the unemployed or impoverished destroys as many jobs as it creates. It also results in unbuilt houses, unbought wedding rings, unmade refrigerators, unbought refrigerators.

Making this worse is that a viscious cycle develops, where once you create these programs no polician wants to be the one to tell the people these programs are going to be cut. Even if the programs are no longer self sufficient, they are never ended. In order to keep them afloat even more taxes have to be collected.

Making this even worse, is that hundreds if not thousands of people are employed to manage these programs, and they will fight tooth and nail not to lose their jobs. Likewise, those who are receiving the money don't want to lose their checks, or their government provided food or home, and so they vote for whomever champions for continuing the program. It's a viscious cycle.

Spending equals taxes. Taxes basically you are taking from those who create wealth and giving it to those who don't. So those who own businesses, instead of giving raises or creating new jobs, they must not give raises and not create new jobs, and sometimes lay off workers and add to the unemployment problem. They have to do this all because of taxes.

And so as fewer people are working, government officials create new programs, and to pay for these new programs they have to raise taxes. And once taxes get too high -- say 50, 60 or 70 percent -- then people quit spending their money, and so even fewer products are consumed, and fewer jobs are created, and the unemployment number goes up even higher.