Tuesday, May 29, 2012

Boats, government spending and the unseen

The boats have to do with Reagan’s notion that lowering taxes increases income that then blesses the economy through spending and investment.  (Paradoxically, JFK first used the term, “A rising tide lifts all boats,” to justify a dam project in 1963.)

Government spending is not investment; it is merely spending.

The “unseen” part comes from the essay by French statesman Frederic Bastiat titled “That Which is Seen.”

The overarching principle here is that money in the hands of government is not the same as money in the hands of the public.  The “redistribution of wealth” is a false notion.  “Destruction of wealth,” is more like it.

Let’s take retirement savings for example.  When you put money in the bank for your retirement, that money is put to work by being loaned to someone else.  People buy cars, go to school, take vacations, remodel the bathroom, start a business, build a new home…with your retirement money.

When government takes your FICA deduction, it goes directly into the hands of a retiree or maybe someone the government has declared “disabled.”  Now, the feds could have acted like a bank and made investments, but instead they used that pot of money to fund day-to-day government costs.  Instead of continuing the creation of wealth, they killed it.  No rising boats.

So when Washington taxes the rich it isn’t much help.  The money takes a detour from the economy and subsidizes dependency and inefficiency. 

The message of those who want to increase taxes is that government can do better with your money than you can.

Frederic Bastiat was a French politician who was an advocate of small government and low taxes.  I suppose we would call him a Libertarian today.  His essay, “That Which is Seen,” invites us to look at the flow of money in various scenarios.  (This encourages us to look beyond the political hype that taxation helps the poor and government workers are nice people.)

Bastiat takes as his first example a broken window in the cobbler’s shop.  The shoemaker pays the glazier to replace it.  And that’s good for the glazier.  He’s got work. 

But that doesn’t mean the broken window is a good thing.  The shoemaker could have used that money for other things.  One must look at tax money the same way.  Is the government better at circulating that money than you?  I don’t think so.

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