Freeman

ARTICLE

Half-Truths or Consequences

Free market advocates must be ready to force advocates of government policies to justify them on their actual merits.

NOVEMBER 01, 1992 by GARY M. GALLES

Gary M. Galles is an Associate Professor of Economics at Pepperdine University.

The legitimate role of the American government is small, at best. This follows from the plain wording of the Constitution with its grant of tax power only to promote the general welfare, its brief list of enumerated powers, its prohibition against the taking of private property without just compensation, and its system of checks and balances. It also follows from simple logic. All creating a government does is to give one group the power to force involuntary trades on others (although I “volunteer” to pay my taxes as a way to stay out of jail). It does not impart any additional intelligence or wisdom to “governors” in the process, but it does distort their incentives and diminish accountability for their actions. On what basis should we expect improved results?

Given that much of what our government does is indefensible by reference to either logic (e.g., how do farm subsidies advance the general welfare?) or principle (e.g.,”Thou shalt not steal,” a rule that clearly advances the general welfare), how are government’s actions made to appear worthwhile? They are justified with plausible sounding but invalid arguments, many as old as government itself. It is worth reviewing some of the more frequent political fallacies as a sort of self-defense course.

 

Half-Truth Number One

During election years we hear that government spending programs create jobs, thus also reducing welfare spending. This is a half-truth. Government spending does create jobs where it is spent, but those same resources, spent elsewhere, would have created other jobs. If the government builds a prison rather than a highway, it has not created jobs—it has only moved them. More importantly, this argument does not support government programs at all, because they require taxes (or deficits, which are deferred taxes) to finance them, and those taxes destroy jobs elsewhere. Further, government spending moves jobs from where voluntary and mutually beneficial market choices place them to where politicians dictate. Given what we know about the failures of governments to plan rationally, government spending provides no assurance of mutual advantage. The truth is that government spending does not increase wealth and prosperity.

 

Half-Truth Number Two

We have also heard the half-truth that government spending generates multiplier effects, ultimately producing several dollars in secondary benefits for each dollar spent on direct benefits. Added incomes resulting from government spending do generate additional spending and jobs and still more income. However, any government spending would create similar multiplier effects. Further, so would eliminating the taxes that are necessary to finance the spending. In fact, private individuals, allowed to use their money as they see fit, will use it more efficiently than government, creating greater real income than government spending. The truth is that government spending delivers gains in one area only by imposing greater losses elsewhere.

 

Half-Truth Number Three

We have heard innovative ways of counting the same benefit in different disguises, as if it were several different benefits. Jobs and income are both counted as benefits, even though the jobs are actually the work that must be done to earn the incomes. Similarly, crime or pollution reduction and the resulting increased property values are both counted, even though the higher values are simply capitalizing those benefits, resulting in double counting. (Of course, when government actions increase uncertainty, crime rates, and pollution, and therefore lower property values without compensation, we hear about neither the problem nor the lower property values.) The truth is that advocates of government spending sometimes misuse both logic and statistics to make government spending appear beneficial.

 

Half-Truth Number Four

We have heard claims that government spending creates external benefits for society, justifying the “need” for more spending. Public education is routinely justified on this basis. However, the external benefits argument for government provision of education, as in many other areas (e.g., health care), cannot withstand either logical or empirical scrutiny. Wood shop comes to mind, as do the “skate” classes that can be found at every school. So do law, medical, and dental schools, given that the benefits of such professional training are captured by their graduates as higher incomes. Further, any such external benefits would require that schools successfully teach the truth and students retain what they are taught past graduation, a condition clearly open to challenge on both counts.

We have heard many other misleading justifications for government programs as well. These include plausible sounding claims of benefits (1) whose magnitudes are empirically insignificant (e.g., local or state pollution initiatives will reduce global warming or food stamps will help the nutrition of the poor); or (2) which are not benefits at all, but have effects opposite those claimed (e.g., higher minimum wages or mandated benefits help the poor, public housing results in better shelter for the poor, or foreign aid helps other countries’ citizens, even when it goes to regimes that use it to repress their citizens more efficiently); or (3) which rest on false premises (e.g., a dollar spent in a government program must be worth a dollar to citizens).

At least as important to justifying indefensible government programs as overstating benefits is substantially understating the costs of government spending by treating each dollar spent as costing society only a dollar, when in fact it costs far more. A substantial part of both expenditures (sometimes over 10 percent) and the taxes that finance them is consumed by administrative costs. Large compliance costs are also imposed on both taxpayers and program beneficiaries (e.g., the average American taxpayer spends about three full workdays on income tax forms). Further, these ever-changing programs introduce substantial added risks of future alterations in the laws, which can turn good decisions into bad at the whim of a legislator, judge, or bureaucrat. The substantial costs of the distorting effect of the tax wedge (often involving multiple taxes compounded on the same income or transaction) between buyer and seller, which thwarts many mutually beneficial transactions, must also be included. If the cumulative marginal tax rate is 60 percent, a common result, the last dollar not spent in the marketplace because of taxes would have provided $1.60 in benefits to the purchaser, and those forgone benefits are the real costs of the government spending involved.

Since the true social cost of even a hypothetical “well spent” government dollar thus substantially exceeds a dollar, not even counting the less obvious costs of reduced liberty, government “solutions” can be economically justified only if they can be demonstrated to be less costly than the “market failure” they allegedly address. This does not generate a long list of legitimate government programs.

 

A Proper Defense

In defense against these half-truths, free market advocates must be ready to force advocates of government policies (including regulations, which are disguised tax and expenditure packages) to justify them on their actual merits, rather than on the basis of a misleading “shopping list” of alleged benefits. If every proposal could be made to bear the burden of proving (not just asserting) that it actually advances the general welfare, we would have come a long way toward restraining government. Perhaps we should adopt a variant of the ancient Greek practice and require legislators who propose new programs to do so with a noose around their necks, ready to be hanged if those programs do not advance the general welfare.

ASSOCIATED ISSUE

November 1992

ABOUT

GARY M. GALLES

Gary M. Galles is a professor of economics at Pepperdine University. His recent books include Faulty Premises, Faulty Policies (2014) and Apostle of Peace (2013).

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