Monday, February 28, 2011

Jobs v Wages v Taxes v Growth: Part 2 - Attack of the Government Drones

2. Taxes need to rise so that the government can spend more money and grow the economy.

Please keep in mind, that I'm not trying to teach the complexities of the economy, but a broad brush of the basics and how they can be applied to analyze a situation. 

This statement, as heard in the previously mentioned on-air debate seems to stem from a perverted views of the work of John Maynard Keynes.  Keynesian economics suggests that when the government spends money it has a multiplier effect, generating almost 1.5 times the total GDP impact.  Respectfully to Mr. Keynes and the aforementioned debater, I disagree.

Taxes take money out of the economy to redirect spending.  So, before you can analyze the impact of government spending on the overall economy you have to first look at the impact of taking money out of the economy by the government.  Again, this is an oversimplification, but still remains true despite the omission of numerous factors.

When people and corporations pay taxes, this money leaves the private economy.  The government then uses those monies to pay for a variety of things.  Not least of these is paying interest on the already large amount of public debt that we owe.  Much of this debt is to people, corporations and governments outside of our country.  This money is essentially gone from the national economy.  The rest of the money is then paid out to individuals, companies, and governments chosen by the legislative and executive branches of our Federal government.  Often this money is put to productive use.  Roads are built, wages are paid, healthcare is provided, etc.  Sometimes, however, this money becomes sunk against the overall economy.  The government literally pays people to NOT work, NOT produce.  It can also be used to subsidize inefficient use of time and material resources.  As an example, the government pays to offset the inefficient production of electricity, the inefficient delivery of health services, and for outdated military systems that the Pentagon has asked to scrap. 

At the times Mr. Keynes was formulating his theory on the power of government spending on our economy, many of these expenditures did not exist or were extremely limited.  How much have these programs impacted effectiveness of the Keynesian multiplier?  Without more resources than what are at my disposal, I can't give you an exact figure, but it should not be hard for the GAO and or the CBO to give us a better estimate.

Putting all of the above arguments aside, the number one reason this statement is wrong is that it says the Government should choose how the money you've earned is spent, and not you.  The greatest incentive to encourage most people to do more, earn more and produce more is to let them keep more of what it is they do, earn and produce.

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