E minus 15: One way or another, everyone pays

As Milton Friedman was fond of saying, “there is no such thing as a free lunch.” Don’t imagine this rule can be evaded by taxing businesses either, because businesses can’t pay taxes; only people, e.g., customers, employees, or stockholders, do that. Similarly, printing and issuing money may sound like a win-win proposition, but it will invariably lead to inflation (just a type of tax). The free lunch myth, youtube video (7:08), http://tinyurl.com/k8prd4p




There may be a loophole of sorts, in that some people hope to receive benefits from the public treasury while leaving others to pay for them. As Frederic Bastiat (a 19th century French economist, who is cited by Friedman in the video) put it: “Government is the great fiction through which everybody endeavors to live at the expense of everybody else.”

Those who fancy a “beggar thy neighbor” strategy should beware, however, because government largesse generally comes with strings. At the end of the day, they may find themselves paying dearly for what they receive – and not necessarily just in money. Some examples follow to make the point.

A. Government grants – One way in which the federal government has expanded its power over the years is by offering money to state governments and other beneficiaries provided they comply with federal edicts that might otherwise be regarded as infringing on the rights and powers reserved to the states and the people under the Constitution.

The lure of “free money” is potent, and aggregate federal grants amount to some 15% of the overall budget. That’s a high price to pay for influence (but not total control) in areas arguably better left to the states. Downsizing the Federal Government, Chris Edwards, Cato Institute, 2005. http://tinyurl.com/n4vv3m8

Some $426 billion in grants were paid in 2005, ranging from $186 billion for the federal share of Medicaid and the $71 billion cost of the Dept. of Education (mostly grants) to “hundreds of more obscure programs that most taxpayers have never heard of.”

The grants are not really free, of course, as federal taxpayers residing in the several states pay for them; this tends to reduce the ability and/or willingness of the individuals concerned to pay state and local taxes.

Grants encourage overspending for the stated grant purposes, reduce flexibility and innovation at the state level, and necessitate federal, state and local bureaucracies to document compliance with federal mandates. SAFE letter (Boughton), 12/5/06. http://tinyurl.com/k8mqtzv

Some of the money being transferred back and forth evaporates, so the states might do better to decide how much they wanted to spend and raise the money themselves. SAFE letter (Dorsch), 12/11/06. http://tinyurl.com/o7wt5ur

Accountability at the state and local level is undermined by federal grants. SAFE letter (McClain), 1/11/07. http://tinyurl.com/p2gk7aa

Given the huge fiscal problem, which affects everyone in the country, it’s imperative to find ways to cut spending; eliminating federal grants could be a good place to start. SAFE letter (Fasig), 1/24/07. http://tinyurl.com/m47ob2k

Grants or no grants, some states are beginning to balk at controversial federal programs like GovCare and Common Core educational standards. The time may be right to salvage states rights, Sean Lengell, Washington Examiner, 9/15/14. http://tinyurl.com/p9n9q5p

Resistance to Washington is patchy. Many states embrace federal initiatives, from Obamacare to construction projects. Illinois and California, and cities such as Detroit and Chicago, are so deep in the red that they are prepared to fall into the arms of the feds almost whatever the price.

“It is a gross mistake to talk about the states as if they’re an ‘it,’” said [Michael] Greve [of the American Enterprise Institute]. “They have different interests and are increasingly divergent. There are some states that are aggressively demanding federal intervention, for all sorts of reasons. And there are some states — red states, mostly — that push back and think that there’s nothing in it for them anymore.”

B. Welfare, etc. – A host of social support programs are available in this country, and many recipients have apparently concluded they can do better by not working and going on the dole than by trying to support themselves and their dependents. This entails giving up not only the money they could have earned, but also the prospects for advancement to which they might otherwise have aspired. Tax work, subsidize idleness, and batten down the hatches, 2/17/14.

Most people are not inherently lazy, but if they expect to earn more from welfare than from working they will opt for welfare. Accordingly, the “war on poverty” announced by LBJ in 1964 hooked a lot of people on welfare rather than helping them to better themselves. The American welfare state, Michael Tanner, Townhall.com, 8/5/13. http://bit.ly/1dtzFlX

Here’s some additional evidence of the dynamics involved, namely a declining unemployment rate since extended unemployment benefits were belatedly allowed to expire. Why so many are unemployed for so long, Richard Rahn, Washington Times, 10/13/14. http://tinyurl.com/q37c2tb

In a new staff paper published by the New York Federal Reserve Bank titled “Unemployment Benefits and Unemployment in the Great Recession,” the researchers found “that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extension of unemployment-benefit eligibility.” ***As the researchers noted, those receiving unemployment benefits could afford to be more “picky” about what jobs they eventually chose to take, which added to wage pressure. The higher wage pressure caused employers to reduce the number of jobs they offered, thus causing fewer to be employed.

Various ways have been suggested to alleviate poverty or misfortune without discouraging recipients from taking jobs, e.g., hiking the minimum wage “modestly” (up to 20% or so), and/or liberalizing the earned income tax credit (EITC). Use wage hikes, EITC to help Delawareans, Saul Hoffman (UD economist), News Journal, 1/14/14.

If the minimum wage is raised, however, look for adverse results that advocates often neglect to mention. (A) Some low-income workers will lose their jobs or be involuntarily reduced from full-time to part-time work as business owners seek to control wage costs. (B) If aggregate wage costs nevertheless rise, business owners will attempt to recoup the added cost by raising prices – to the detriment of low-income workers and everyone else.

Republicans invented the EITC (Milton Friedman is said to have played a hand in this), and two prominent GOP Congressmen (Senator Marco Rubio and Representative Paul Ryan) have floated proposals that would effectively extend it to additional taxpayers.

However, such “conservative” endorsements, should not exempt the EITC from criticism. For starters, it does not eliminate the cost of raising wages for low-income workers, but simply shifts the cost from the parties concerned (low income workers and consumers) to taxpayers. And the aggregate cost (which is reported as a reduction in tax revenue) is already quite substantial. Republicans’ love-hate relationship with a tax credit, Brian Faler, Politico, 1/17/14. http://tinyurl.com/l5ke9lz

The more [workers] earn, up to certain limits, the more they receive in the form of a [refundable] tax refund. Those without children can receive up to $487 while those with three or more children can get $6,044. It’s the government’s largest anti-poverty cash program, with more than 27 million people receiving $62 billion in aid in 2011.

As structured, the EITC is often available for a single-parent household whereas a married couple would earn too much income to qualify. This gives people an incentive not to get married, despite lots of evidence that they could improve their chances in life by doing so. Getting married pays, Dwight Lee & Richard McKenzie, Wall Street Journal, 2/12/99. http://tinyurl.com/n6w3p8p

And because the EITC phases out at higher income levels, affected taxpayers are subjected to a steep marginal tax rate on additional income. The message seems to be that it doesn’t pay to work too hard, as the government will claw back the lion’s share.

To sum up, welfare benefits (including variations on the theme such as a minimum wage and EITC) can and do benefit targeted segments of the population, but the recipients wind up forfeiting income they could have earned, opportunities to get ahead, and a sense of personal engagement and contribution. They may also face restrictions on their personal freedom, as discussed in the next section. Even for benefit recipients (as distinguished from society as a whole), therefore, the “no free lunch” principle holds true.

C. Nanny state – As discussed in section A, federal grant programs have been used to influence the policies and activities of states, local governments, and other groups – arguably not for the better. A similar approach seems to be envisioned in the case of benefit programs for individuals (section B), which could help to expand the already substantial area in which Americans are called on to accept the government’s guidance instead of leading their lives as they see fit. Thus liberty dies, a bit at a time!

It has traditionally been thought that “a man’s home is his castle,” for example, but the Centers for Disease Control and Prevention recently claimed that big savings could be achieved by prohibiting occupants of subsidized housing from smoking. Can anyone doubt that legislation (or perhaps an executive order) will soon be proposed to capitalize on this perceived opportunity? CDC: Making subsidized housing smoke-free could save $500M yearly, Melanie Hunter, cnsnews.com, 10/7/14. http://tinyurl.com/oqs8s8w

And with the government massively subsidizing the healthcare sector, it’s not hard to envision the outlays involved being seen as an excuse for mandating healthier life styles for all. Thus, smoking could be banned in workplaces, in all privately owned housing and motor vehicles, etc. Government warning: freedom may be dangerous to your health, Michael Schaus, Townhall.com, 10/9/14. http://tinyurl.com/pnb4ypy

Cigarettes are certainly an unhealthy, unwise, and ultimately devastating habit to pick up… but, then again, so is voting for big government (and that doesn’t even have a 1-800 quit-line).

Dietary guidelines for federally subsidized school lunches are old hat, but now there may be a move afoot to reduce meat consumption in the name of curbing global warming. Sustainable could become a food group, Andrew Martin, businessweeek.com, 10/2/14. http://tinyurl.com/m2c9e7o

Governments spend money trying to keep Americans safe from drugs and terrorism, so they are arguably justified in seizing assets that are fueling such activities. Under the Justice Department’s Equitable Sharing program, state and local police forces around the country can keep up to 80% (feds get the rest) of the assets they seize from private citizens through highway interdiction, etc. – without having to prove that a crime has been committed.

Citizens seeking to recover their property must prove it was acquired legally, which turns the burden of proof for criminal cases on its head, and the aggregate amounts involved are substantial. Asset seizures fuel police spending, Robert O’Harrow & Steven Rich, Washington Post, 10/11/14. http://tinyurl.com/qhxdrlz

Brad Cates, a former director of asset forfeiture programs at the Justice Department, said the spending identified by The Post suggests police are using Equitable Sharing as “a free floating slush fund.” Cates, who oversaw the program while at Justice from 1985 to 1989, said it has enabled police to sidestep the traditional budget process, in which elected leaders create law enforcement spending priorities.

D. Same boat – The idea that everyone should be able to get ahead if they work hard and follow the rules ought to sound familiar, as it has been invoked repeatedly in recent years. State of the Union Address, 1/28/14. http://tinyurl.com/k6jjrls

And what I believe unites the people of this nation, regardless of race or region or party, young or old, rich or poor, is the simple, profound belief in opportunity for all, the notion that if you work hard and take responsibility, you can get ahead in America.

One could go on to argue, as the president is prone to do, that we’re all in the same boat (or words to that effect) and will do better if everyone is thriving and not just the top tier of the economic pyramid. Weekly address, 10/4/14. http://tinyurl.com/l6ghtzf

Let’s do this [raise the minimum wage] – because it would make our economy stronger, and make sure that growth is shared. Rather than just reading about our recovery in a headline, more people will feel it in their own lives. And that’s when America does best. We do better when the middle class does better, and when more Americans have their way to climb into the middle class.

But one could equally well apply the “we’re all in the same boat” analogy in reverse, for members of the middle class and those aspiring to join it surely won’t prosper if the overall economy is foundering. Secular stagnation is a cover-up; failed Keynesian policies have blocked growth, Larry Kudlow & Stephen Moore, Washington Times, 8/15/14.http://tinyurl.com/nfxpcal

We have paid people not to work by raising eligibility and time limits for various benefit plans, substantially raised marginal tax penalties when people move from welfare to work, disincentivized employers from hiring more workers (Obamacare, minimum wage), raised taxes on investment, passed new regulations to strangle our energy industry, unionized even when workers don’t want it, continued corporate-welfare cronyism, and refused to fix a corporate tax system that sends jobs abroad. And then we wonder why the economy won’t shift into a higher gear.

No doubt there are people who would like to live at the expense of others, as Bastiat suggested, but that does not mean they are likely to succeed. So our advice to Americans would be to search for political leaders who support sounder economic policies.

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