The hand that bites

Of the many reasons people support the government, “to help the less fortunate” is a frequent and admirable reason. While the implementations of government programs are often horribly mismanaged with questionable results, and opinions vary on the types of programs that should be run, the question of running them or not is rarely asked. But what if you knew that, rather than being beneficial, government programs caused the opposite effect and hurt the very people they were supposed to help? As Austrian economist Henry Hazlitt said, “the art of economics consists [of] looking not merely at the immediate but at the longer effects of any act or policy.” In other words, government, rather than helping the people it intends to, causes unintended and counterproductive effects.

Why are governments vulnerable to unintended effects? When people trade, it happens only because both people involved in the trade believe that they will be better off after the trade. When governments are involved, exchanges become involuntary: some participant in the trade is worse off than they were before, otherwise the trade would have been made without the government. The tools that the government uses, which boil down to police or military violence (though it may not be easy to see and deserves a future column), indicate that this is so. Since the government forces an involuntary exchange, usually of money, it should be expected that at least some people are hurt. However, it goes much deeper than this.

If the only people made worse off were the ones that funded government programs for “the less fortunate,” then the argument would be moral rather than practical. A quick look at most government programs indicates that this is not the case. Consider a few examples: rent ceilings intended to provide housing at a certain expenditure level cause housing shortages. Housing subsidies that set costs at a percentage of income encourage dependence on the program and avoidance of better paying work. Welfare programs and foreign aid suffer from a similar dependence problem. Insurance and medical regulations in the US drive costs of medical care and medical insurance upwards. The list is extensive.

The reason why government programs fail to achieve their intended effect is captured by Bastiat’s Broken Window fallacy. The fallacy goes as follows: a person has their window broken by a hooligan and must then spend money on replacing the window. A repairman who is paid to replace the window then gains the money spent by the person whose window was broken. Since the window repairer is kept in business by the broken window it must be a good thing to break windows, but this is not the case. As Bastiat explains, the fallacy lies in ignoring that which is not seen, i.e., the results of other options that are not immediately apparent. Simply because the window repair trade is kept in business by breaking windows it does not follow that we should break windows.

This applies to governments because the focus (what is seen) is on the money that is spent and the people who are employed or benefit as a result. It applies even more generally to situations where nothing is spent but a law is put in place, such as the minimum wage law. The reason it applies is because government action does not take into account what is unseen, such as how the money spent by the government would have been used by those it was taken from, or in the case of the minimum wage law, how people would have behaved had they been free to do so. A public works project that builds roads and employs many people would be touted as a great achievement, but it ignores how the money would have been used and the people occupied otherwise.

The total value of government taxing and spending cannot be measured, because there is no objective way to say that the benefits outweigh the costs. While some people may benefit from government programs or laws, there are always those who will be harmed by them, and it cannot be said objectively that those harmed matter less than those who benefitted. In some cases the effects are direct, but in many cases it is difficult to determine who is harmed. Since the government operates on violent coercion and creates exchanges that would not have happened voluntarily, it leads to many unseen effects. It cannot be as efficient at alleviating the needs of the less fortunate as non-coerced exchanges.

As Bastiat said, “Compare the nation to a parched tract of land, and the tax to a fertilizing rain. But... you ought to ask yourself whether it is possible that the soil can receive as much of this precious water by rain as it loses by evaporation?”