Public Works Means Taxes and Taxes Divert Production

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Public Works Means Taxes and Taxes Divert Production

Hazlitt wrote in 1946 that “there is no more persistent and influential faith in the world today than the faith in government spending.” Not much has changed over the last 70 years.

Problems with education? Increase spending! There’s bad guys abroad? Give the Pentagon more money! People use drugs? Give the DEA a bigger budget, that will cure things!

This view, however, masks the reality that everything must be paid for someway, somehow. Government cannot spend a dime unless it first removed the equivalent amount of money from the private sector.

Too often, “public works” projects are not evaluated on their own merit to determine whether or not this project is worthwhile. Instead, defenders of public works projects argue the program’s necessity as a type of “jobs program.” For example, President Obama claimed to have “shovel-ready jobs” projects just waiting there; insinuating that all Congress had to do was approve the spending and unleash an economic boom.

But, as Hazlitt would say, if 500 jobs were created by an arbitrary public works program, “it is true that a particular group of bridge workers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most. Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work… But there are other things that we do not see, because, alas, they have never been permitted to come into existence.”

Meaning, at best, some jobs were diverted from any number of projects onto the bridge project. This takes a bit of imagination. After all, it is easy to see the bridge constructed where none previously existed. However, if you pull back the curtain just and look, you will see “the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, perhaps the ungrown and unsold foodstuffs.”  

This logic applies not just to bridges but to every possible form of public works. For example, without considering all the pros and cons of public housing, the point still remains that “taxation for public housing destroys as many jobs in other lines as it creates in housing. It also results in unbuilt private homes, in unmade washing machines and refrigerators.”

Do not allow yourself think short-sighted. You can see the men working on the public housing project, but it does not follow that there would have been no alternative spending or investment of the funds somewhere else. This is to be trapped in the world of the seen. Economics seeks to understand the full set of consequences; seen and unseen.

The last ditch effort by supporters to justify these projects is that private capital is insufficient to fund various public works projects. Hazlitt points out that “in fact [it has] been built by private capital — the capital that was expropriated in taxes (or, if the money was borrowed, that eventually must be expropriated in taxes).

And to top it all off, capital would actually be more effective when left in the hands of private individuals and entrepreneurs, who must provide what consumers want or be thrown out of business. Bureaucrats can spend arbitrarily and wastefully because they raise (seemingly) infinite money through taxation; while entrepreneurs must pass the test of profit and loss with customers or demonstrate to capitalists (who are risking their own funds) that a further loan or investment would pay off in the future.

Therefore, taxing $1 million to spend $1 million on public works is not a matter of “taking something out of the nation’s right-hand pocket to put into its left-hand pocket,” it is taking $1 million that is subjected to the efficiencies brought about by the critical test of profit vs. loss and moving $1 million into the realm of arbitrariness, wastefulness, corruption and cronyism.

Taxation hurts, period. It is wasteful. It discourages production and private investment. Why would an entrepreneur risk, say, $1 million if the government places high taxes on income or wealth? Nobody would invest $1 million when the options are make $200,000 due to high taxes or lose it all. Therefore, “when the total tax burden grows beyond a bearable size, the problem of devising taxes that will not discourage and disrupt production becomes insoluble.”