Interventionism and the Darwin Economy

Ludwig von Mises presents an argument in Human Action against Socialism and all forms of interventionism.  I believe that his argument against Socialism holds, but we cannot have the same confidence in his argument against all forms of interventionism since it is possible that there are other forms that he failed to anticipate that would serve their intended purposes.  For example, I cannot be certain that the forms of interventionism proposed by Robert H. Frank in The Darwin Economy are susceptible to this criticism.

Mises mentions specific kinds of interventionism and argues that they are all counterproductive, but this can't tell us about all forms of interventionism.  Note that if we are to follow his approach we cannot comment on the fundamental morality of any form of intervention.  He held the view that people could argue just about anything from so called "natural" moral and ethical principles.  The only valid argument against a given policy would be that it failed to accomplish its intended results.

In particular there is his argument against redistribution.  He didn't argue that it was wrong to redistribute income, but that it was counterproductive, that in the long term it would make the poor worse off.  This is a surprising claim, but I think he makes a good case.

The upshot is that redistributing income will have an impact on the stock of capital goods that society will have at its disposal.  Note that he makes the same assumption as many Keynesians who advocate redistribution on this basis: the poor will spend a greater proportion of their income on consumption goods.  The impact will be that production will shift from capital goods to consumption goods in Ludwig von Mises' view.  Those who support redistribution tend to argue that this will have a stimulating effect on the economy.  To me this argument seems like a proposal to get something from nothing, as if they were advocating the construction of a perpetual motion device.  We encourage people to spend and tell them that they are doing something to promote prosperity.

But then the argument depends on two things, that the budget be balanced and that taxes are levied on income. What he was referring to was a graduated income tax.  What if instead of this someone were to propose a graduated tax on consumption.  For practical purposes we could see this as an income tax that allows the citizen to report net savings and exclude this from taxable income.  You would report your savings and borrowing.  Subtract the borrowing from savings to get net savings.  This would then be subtracted from income in order to get a figure for consumption.

To be fair to Mises, the simplification of a balanced budget isn't necessary for his argument.  Government borrowing would likely be taken from money that would otherwise be invested so as to build up the society's capital stock.  Further, those who advocate progressive taxation would probably not be content with a tax on consumption no matter how progressive it was.  This tax would enable the rich to keep as much of their money as they wanted.  Suppose a rich man consumed next to nothing.  He would spend no more than a poor man, but would invest all of his money so as to become a billionaire.  Even though he made millions of dollars every year, he would pay nothing in taxes.  Do you think that people in favor of redistribution would want to tolerate that?

However, this does point out a form of government intervention that might be productive, or achieve its intended result.  If the government were to require people to save, or to tax consumption for the purpose of building up society's capital stock and hence increasing wages, then this just might work as intended.

Robert H. Frank mentions a progressive tax on consumption of the type described above, as well as mentioning a few points about taxes on pollution and CO2 emission.  The latter wouldn't necessarily qualify as forms of intervention since pollution and CO2 emissions are likely to be harmful to others.  Hence governments have a legitimate role in preventing this.

What I thought about Robert Frank's book was that he made too many attacks against libertarians and libertarianism.  I believe that he grossly overestimates libertarian's influence.  He mischaracterised the tax cuts enacted under George W. Bush as being targeted at the rich, when taxes on the poor were reduced by a greater proportion.  Granted most of the tax reduction went to the rich, because the rich earn more money and hence were paying more taxes to begin with.  He failed to note that we have progressive income tax and that it became even more progressive under Mr. Bush.  Social spending was increased as well.

However he is right that the taxes that we are collecting are insufficient to cover the spending that we seem to want.  He frames the issue by pointing out that we are unwilling to reduce entitlement spending and so we must increase taxes.  You could just as easily say that we are unwilling to raise taxes and hence we will have to reduce entitlement spending.  In both cases we have taken the recent action of our government as an indication for what the government must do in the future.  Clearly the government must change one or the other.

Historically what the U.S. government has done since WWII is to collect a remarkably consistent proportion of GDP in taxes.  Tax rates have gone down, but a growing increase in GDP has pushed incomes up so as to make the difference since we have a progressive system of taxation.  The government has increased social spending and decreased military spending.  However, this process has a limit.  Eventually we will reach the point where we cannot increase social spending without increasing the proportion of the economy that is collected in taxes.  In order to do this we will have to increase taxes to a record proportion of GDP, but since GDP is at a record we will be able to do this without imposing record tax rates on anyone.

Nevertheless, we cannot indefinitely raise social spending as a proportion of GDP we will eventually reach a limit.  Also we will want to have a discussion about how much government spending we want.  Taking cuts in social spending off the table on the basis that this is unprecedented is not legitimate.  No matter what we decide it will in a sense be unprecedented.

A good place to start the discussion is with what happens in the absence of agreement.  The Bush tax cuts expire as does all discretionary spending.  All mandatory spending continues.  Various people in congress will find this unacceptable.  That's not a good way to look at it.  This is simply the alternative to a negotiated agreement.  If you want the government to spend more or tax less, you will need to give the other side some of what they want.  If you find that negotiations aren't going the way you think they should, then it is possible that you might want some change in the process.  However, in order to implement that change, you will have to get an even more widespread agreement than you would need to form a policy.