Making Hamsters Run Faster

There’s an interesting exchange posted over at The Conspiracy to Keep You Poor and Stupid. It’s an investigation of the economic fallacies in the “Porkulus” proposal now snorting its way through the Senate.

If government raises its absorption of resources by spending more, then it must tax people more, just as Cochrane says. What he does not mention is that people therefore feel less wealthy and typically respond by working more, which raises national output/income. Thus the spending really does stimulate output. HOWEVER, in so doing it reduces welfare.

In other words, when we are told that a dollar of Federal spending has a “multiplier effect” which results in more than a dollar’s worth of production, there’s no evidence that we’re actually better off. We are likely worse off, because we’re working harder to pay that first dollar as a tax before it gets “multiplied”. Instead of enjoying an hour with the family, we spend an extra hour in the office.

When the government comes along and taxes people more, the resulting loss in income does induce those people to give up some leisure and produce more, but that is a change in behavior they would have not have chosen in the absence of coercion. Forcing people to work more by first impoverishing them lowers their welfare. It is just the same as if disease had wiped out some of their crops or a fire had burned down their house.

Which is parallel to Bastiat’s Broken Windows fallacy. Fixing broken windows—or paying taxes—is not what we would choose to do. The true measure is not how much we are working. Work is merely a means to something else. What matters is how much value we add through our work, and whether we are allowed to keep our earned wealth in order to enjoy the non-working aspects of life.