Tax and spend destroys living standards(Read article summary)
Why do governments keep believing that government spending can buy our way out of economic crises?
Photo illustration / Rafael Ben-Ari / Chameleons Eye / Newscom / File
Most market sympathisers know that lower are overall taxes, the smaller is government and the higher are living standards, but for support they concentrate on statistical evidence such as the adverse relationship between economic growth and the level of overall taxes. This evidence is very strong, but an underlying theory showing WHY this is the case would make it far stronger.
Naturally such a theory exists, but it is little known nowadays outside Adam Smith aficionados and the Austrian School of Economics to which both Ludwig von Mises and F. A. Hayek belonged. Even then, I have yet to see a simple and arresting explanation. In The Constitution of Liberty, Hayek refers to the effects of taxation, including â€śthe frequent restriction or reduction of the division of labourâ€ť. The Institute of Directorsâ€™ Graeme Leach refers to the â€śdeadweight lossâ€ť as the loss of output that would have occurred in the absence of the tax â€“ a loss of economic welfare above and beyond the tax revenues collected.
These observations are absolutely correct, but it is probably fair to say that they do not describe in laymanâ€™s terms the simple mechanism at work. We must remember what we are up against in the shape of government and the public sector in general (including many schoolteachers and lecturers); the last thing they want is to have their cover blown.
It is nothing short of a scandal that generally respected commentators can still promote government spending as a major plank in getting out of the current recession when (in addition to the fact that such spending was a major plank in creating the recession) it will inevitably reduce output even further. Such a level of ignorance could not possibly exist were it not for the stateâ€™s iron grip on the education system via a nationalised school system including a national curriculum. And you certainly wonâ€™t find a mention of the topic on the website of the â€śNational School of Governmentâ€ť, the Civil Service training college.
The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.