by John K Rutledge
Wheaton IL
Basic Facts
Government has no money except what they take from us.
- They can tax us.
- They can borrow from us.
- They can print it, diluting the value of what we have (inflation).
No one (including government) spends your money as carefully as you do.
As a society, we only have what we make, whether it is cars, porkchops, appendectomies, or haircuts. We can make more of what we make than what we need and trade some of it for something someone else makes cheaper or better.
The more we waste, the less we have, individually and as a society. Government spends your money more wastefully than you do, and thereby makes us poorer. The more government spends, the poorer everyone becomes.
If government gets it from us, we cannot spend that same money ourselves.
A dollar you spend gets you something you want. A dollar of your money spent by government will not be spent completely prudently and productively. The rest is waste, which is inevitable since bureaucrats are not spending their own money but yours.
We don’t miss what we never had. Let’s imagine that a new factory did not get built because taxes made it uneconomic. We don’t miss that factory, because it never existed. Then we wonder why the people who could have worked there are unemployed.
Compassion
“We need to take care of the less fortunate.” Who can disagree with that? I, for one.
- Maybe the “less fortunate” do not want our help.
- Maybe your definition of “help” is different from mine. Neither of us has a monopoly on the right answer.
- Maybe a large charity like the Salvation Army does the best job.
- Maybe the local food pantry is more effective.
- Maybe the government welfare bureaucracy is best.
- You and I can choose which, if any, deserves our generosity, but if the government takes our money and wastefully spends it on a bureaucrat’s idea of “help,” then we do not have it ourselves to give more carefully. Neither you nor me is wiser than the other in identifying and responding to need, and the government is not wiser, but is more wasteful, than either of us.
- Since government is not spending its own money but someone else’s (ours), their version of compassion is less effective than mine and yours.
I may choose to be selfish and give nothing away. This may in some respects be best of all. Simplify it to this choice: a donation to a charity or a nice vacation for myself. What is the result of the vacation?
- Travel: Jobs for flight crews, maintenance crews, taxi drivers, including those who engineered and built the airplanes, cars, trains, etc.
- Lodging – Jobs for hotel employees, including construction workers who built it.
- Dining: Cooks, wait staff, maintenance staff, including the construction of the restaurant.
- Souvenirs: T-shirt vendors and manufacturers, post card printers and vendors, etc.
- The list goes on. A dollar spent is a dollar earned by someone else.
Or I could donate to charity.
- Someone gets a gift, a handout. Even if it is something “worthwhile” like job training, it is still a handout.
Which is better, a job or a handout?
If I don’t spend it on a vacation or donate it to a charity, where does it go?
- Bank account: Provides financing for someone’s car loan, home mortgage, or business needs.
- Bonds: Like a bank account, this money is used to finance the immediate needs of borrowers. More money put in banks or bonds (“supply” of money) means lower interest rates.
- Stocks: No need to get to technical here, but as stock investors look for the best investments, their money will find its way into start-ups, helping the economy grow.
All these uses serve society, even the poorest among us. And by definition, rich people have more to save and invest (helping more people) than poor people do.
If you think it is important to support a particular charitable or social cause, by all means do it. Feel free to give all of your money to it if you want. I will do the same with my choice of recipients. But let’s keep the freedom to choose how and where to give, and keep our hands out of each other’s pocket. See “Plunder” below.
Minimum Wage
If the minimum wage is important, and it should be higher, let’s not be stingy. Let’s make it $100 per hour. Oh, let’s go on to $500. Why not? It should not be $500 per hour for the same reason that it should not exist at all.
If the price of hotdogs at the ballpark were half a dollar, I would eat several. But at $50 a dog, I will take a pass. There is a point at which the price of that hotdog exceeds its value to me, and I will not buy it.
Likewise, employees are not hired for fun or charity, but to be productive. If an employee can produce $50 of products or services per hour, perhaps $25 is reasonable compensation, to allow for all the other costs besides labor. If the production is worth $20, perhaps $10 is reasonable pay. But if the value of production is $5 and the minimum wage is $7, that person will not find a job. Is no job better than $5 an hour?
Pay is determined in the market as employers compete to hire people who can, through their contribution to the company’s efforts, help make a profit.
The minimum wage is especially cruel to people newly entering the workforce. Students and those just leaving high school (or prison) are not able to do rocket science. They need to learn good work habits and skills so they can advance. The minimum wage has a similar effect on those with limitations in their abilities.
Simply stated, the minimum wage prices potential workers out of the job market and perpetuates unemployment, especially among the poorer of us.
Business
Companies do not pay taxes. Companies only collect taxes from real people.
What is a company?
- Employees who need a job.
- Customers who need what the company produces.
- Suppliers of goods and services needed by the company.
- Investors who want to earn a return on their savings by financing the company.
- Managers who need a job and who must organize the company in a way to minimize costs and maximize revenue to earn a profit and assure the survival of the business.
Any tax must be absorbed either in higher prices for the customers, lower pay for employees, lower prices paid to suppliers, or lower returns to investors. All of these are real people, or companies themselves composed of real people. The business takes the money from these real people and passes it on to the government in the form of taxes.
If the tax affects all companies in competition for the same customers, all will have to raise their prices to their customers to stay in business.
If there are other companies not burdened with the tax, they can offer their product or service at a lower price and the taxed companies will either reduce pay (risking loss of employees) or reduce the return to investors, driving them away and starving the company for financing.
If managers fail to do a good job, competition will drive the enterprise out of business.
Are managers paid too much? If so, what is the right amount they should be paid? If you answered those questions, what makes you think you are right? Other people have differing opinions. The competitive market balances the supply and demand of management talent as well. Same could be said for star athletes, movie idols, etc.
Super Wealthy People
Should Bill Gates have so much money? Is that immoral?
How did he get it? He got it by developing technology that the whole world wants. I don’t have to buy Microsoft products. I don’t even have to buy a computer. But I have, repeatedly, because it improves my personal and work life. If Mr Gates only helped me, he would not be wealthy. But he found a way to help many people enormously.
If you disagree, I assume you do not have a computer, and that is fine with me. (OK, so you prefer Apple or Linux over Microsoft, but you get the point.)
In fact, unless the rich person’s wealth was accumulated through crime, wealth is a measure of a person’s contribution to others. No one made me buy a computer with Microsoft software, but I choose to because of what it can do for me thanks to his innovation and risk-taking. Because of the benefits of his products, I willingly hand over my money to his company. I got a good deal, and Mr Gates got rich. More power to him.
And what does he do with all his money? Go back and read the section on “Compassion” above. And remember, a dollar taxed from Mr Gates or one of the poorest will be partially wasted and will be unavailable for spending, giving, or investing by the one who earned it.
Government Stimulus
Keynesian followers think government spending can stimulate the economy. They are sufficiently convincing that they can get away with taking our money and spending it in a way that serves their purposes. But since they got the money from us, we no longer have the money to spend ourselves. Because government spending is wasteful, and we cannot spend what government took from us, “stimulus” spending makes us poorer for every dollar of our money they spend.
“Exporting Jobs”
That phrase makes a good sound bite, but it doesn’t stand the light of analysis.
An auto worker in Japan goes to work not to make a car for himself but to earn money for his living expenses. When he goes to the grocery store, he must pay in yen. If I buy a Honda he helped build, I must buy it with dollars because I have no yen.
There is no secret factory where dollars are recycled and reprinted into yen. Instead, Honda trades my dollars to someone who wants them in exchange for yen to pay their factory workers.
Who wants those dollars? A Japanese company that wants to import a bulldozer from Peoria, Illinois, or a boatload of soybeans from Champaign County, or software from Microsoft, all of which American workers produced in expectation of being paid in dollars, not yen. Or maybe those dollars I paid for the Honda go into the hands of tourists who need them to visit Chicago, stay in our hotels, ride in our cabs, and eat in our restaurants. All these mean jobs for Americans.
Another alternative for those dollars is investment in America. (Think Chinese buying our bonds or Japanese companies opening car factories here.) Those investments pay interest or dividends – in dollars. Again, the Chinese holder of US bonds wants yuan, not dollars. So those dollars get traded to someone who wants to spend or invest them back here. And eventually the investment will be sold – for dollars to be spent here and only here.
Because those dollars are only good here, they do not linger overseas but come back here instantly, and in fact never really leave here but simply remain in a US bank until they are spent or traded away to someone who wants to use them here.
A further note on foreigners buying our bonds: The more money being invested in bonds (demand for bonds), the higher the price of bonds. Demand pushes prices up. Higher bond prices mean lower interest rates.
Investment types know this, but for everyone else, think of it this way. You are going to buy a bond for $100. It pays $5 per year in interest. But then I decide I want that bond and enter a bidding war with you. We bid the price up to $200 for this bond that pays $5. Now, instead of getting $5 of interest on a $100 bond (5%), we are getting $5 on a $200 bond (2 ½%). Higher bond prices mean lower interest rates, and foreign demand for bonds drives prices up and interest rates down.
Plunder
Frederic Bastiat, a French philosopher (1801 – 1850) wrote in The Law that it is plunder for government to take our money to do with it what we could do for ourselves. If we look at governments at all levels, they are deep into the plunder game.
I could give money to ACORN if I choose to do so. If the government takes my money and makes a grant to ACORN, that is plunder. I could give money to you for a new car if I so choose. But if the government takes my money and gives it to you (Cash For Clunkers), that is plunder. Remember that government has no money that it has not taken from us, and it spends our money less carefully (more wastefully) than we do.
I cannot field my own army. It makes sense for us to pool our resources locally for police and fire protection, although some would say that we could hire private security firms. There are those things that we cannot do individually, and it makes sense to do collectively. But if I can give money to an art museum or opera company, it is plunder for the government to take my money and, through the National Endowment for the Arts, give it to either the Lyric Opera or a pornographic dance company.
If government does not take our money, we can devote it to our choice of charities. If government pre-empts us, they have deprived us of the opportunity to be charitable and compassionate, and to invest those dollars in ways that will benefit others.
Corruption
Each government program involves spending and regulation. To get at that money and to minimize the negative impact of regulations, lobbyists swarm Washington on behalf of their clients. If logic doesn’t carry the day, maybe money will. Thus does corruption flourish.
Economic Policies Matter
Higher government spending (whether from tax dollars, borrowed dollars, or printed dollars) means more waste. More waste means a poorer society. If I want to buy a car or give money to my neighbor to buy a car, I write a check. If the government takes money and adds to its fleet or gives it to my neighbor for a car, it must hire an army of bureaucrats to administer the program, a total waste since it does not add value. Those bureaucrats might as well be digging and filling holes. With the government spending of each dollar, we become poorer through waste.
Government does not have to spend money to waste it. They can cause waste by requiring us to do things that we would not do on our own. I support handicapped accessibility. I patronize restaurants that are accessible. Government has mandated that the private sector spend on making accommodations accessible.
Without that mandate, some restaurants would make improvements and others would not. The market would reward those that did and punish those that did not. Accessibility improvements would be designed to be practical, not to conform to regulations written a thousand miles from the work to be done. But the mandate requires money to be spent in specific ways, and not always to the best use.
President Reagan came into office in 1981 when the maximum personal income tax rate was 70%. “Stagflation” described the economy. A lot of money was wasted on tax shelters that created no wealth but reduced the tax burden. And a logical analysis might go like this. If I work an extra hour and I get to keep thirty cents of each dollar I make, it is not worth it. I will not do the extra work.
President Reagan almost immediately, with the cooperation of Speaker O’Neill, got the top rate down to 50%, and in 1986 it came down to 28%. Despite these tax “cuts,” tax revenue increased each year of his presidency, primarily because it paid to be productive. Twenty million jobs were created, and the stock market soared. The deficit soared too, due to spending, not tax rate cuts.
Socialist policies pursued since 2007 (when the Democrats retook Congress and began to ramp up spending with the cooperation of President Bush) by contrast have been accompanied by stubbornly high unemployment and a weak stock market (a barometer of future expectations of economic performance).
Nowhere in the world has socialism produced more wealth for more people than what our system has done for us for over two centuries. Yet the attitude of the government seems to be that, if a little socialism isn’t working, we will try more. That is like saying that it is hurting to bang myself on the head with a hammer, so I will try it with a bigger hammer.
Because of its inherently wasteful nature, government always makes things worse by its efforts to solve problems that could be solved by free individuals.
Several easy-to-read pieces have helped shape these comments. I particularly suggest:
Bastiat, Frederic; The Law
Genetski, Robert; Taking the Voodoo Out of Economics and other writings
Read, Leonard E; I, Pencil
11/4/10
