Instead of What? H. Hazlitt

INSTEAD OF WHAT HENRY HAZLITT Government can't give us anything without depriving us of something else. Take a recent news item almost at random: WASHINGTON - The De partment of Housing and Urban Development ... said today it would release $264 million over the next two years to help moderate-in come families buy housing. The program is designed to provide 250,000 new and re habilitated dwellings for families that earn $9,000 to $11,000 a year. Never mind the details. In our era such projects have become a routine activity of federal, state, and city governments. Politicians Henry Hazlitt, noted economist, author, editor, reviewer and columnist, is well known to readers of the New York Times, Wall Street Journal, The Freeman, National Review, Human Events and many others. Best known of his books are - The Conquest of Poverty, Economics in One Lesson, The Failure of the "New Economics,"

Man vs. the Welfare State, and What You Should Know About Inflation. promise these and a hundred other kinds of "benefits"· to the voters. The Congressmen who voted the appropriations for this housing, when they come to run for re election, will remind their con stituents who occupy the new housing: I got you this. I not only provided you with these dwellings at a rental or buying cost far below what you would have had to pay in the market, but in addition my vote gave employ ment to thousands of construction workers. The funds appropriated gave $264 million in increased pur chasing power to so-and-so many people. And so on. In fact, the politi cians' claims probably will be even more sweeping than this. The Sec retary of HUD who announced the foregoing project said her econ omists predicted it would stimu131 132 THE FREEMAN March late about $6.5 billion in construc tion ,activity and create 500,000 new jobs.

Too many voters have come to accept such claims. Yet they could deflate them all if they asked their supposed political benefactors a single question: Instead of wha,t? You say you got us such-and-such benefits. Maybe. But instead of what? What was the cost? What did we have to give up for these benefits? Inorder to give Paul's family $1,000 worth of "free" housing, you must have taken $1,000 more away from Peter's family in taxes. In fact, you must have taxed the Peters a good deal more than you turned over to the Pauls, because a lot of the money never got into con struction. It went (even disregard ing possible graft) into salaries for extra bureaucrats to administer the program. We may add the probability that a good deal of the money was taken from the Pauls themselves, and that they indirectly paid for at least part of their new housing. So, we have to ask, what would have happened if this $264 million had not been taxed away to pay for this ,government program?

The original earners would have kept it. They would have had it to spend on something they them selves wanted, instead of having the politicians force this expendi ture on them. Let us say (assuming the aver age division reported by government figures) that the taxpayers would have spent 92 per cent of this taxed-away income, and saved 8 per cent of it. This "saved" money would, of course, also have been spent, but on different things. It would have gone, for example, into savings banks; which in turn would' have lent it as mortgages to help build private housing, or invested it in bonds of industrial companies. The mO,ney would have been spent, in other words, to in crease the machinery and plant that would have further reduced costs and increased the nation's productive capacity. And the 92 per cent of the re tained personal income that was spent directly on consumption goods and services would have bought more . . . What? Food?

Overcoats? Refrigerators? Stereo sets? Housing? And in what pro portions? We just don't know. And we will never know. Because these things were not allowed to come into ex istence. This is the tremendous advan tage that politicians and their spending schemes - their housing programs, for example - enjoy in the minds of so many voters. The houses exist. They can be seen, they can be admired, they can be lived in. But the goods and ser vices (which would have included housing) that the taxpayers had 1976 INSTEAD OF WHAT? 133 to give up, so that this govern ment housing could be brought into existence, cannot be seen or felt because they have not come into existence. They have become merely hypothetical, merely so many might-have-beens, and there fore forgotten. If something like this is pointed out to the spending politicians, the more sophisticated among them (or their professional advisers) may come up with one or more answers.

They may say, for example, that the housing did not cost the tax payers anything because the money for it was not raised by taxes but borrowed in the market by selling bonds. This answer overlooks that the supply of rea] capital available for investment is strictly limited, and that the money borrowed for the govern ment housing project absorbed funds that might otherwise have gone, say, into a new private oil refinery or chemical plant. Again, they may argue, the money for the public housing proj ect came neither from taxation nor from borrowing, but was sim ply printed by the government. Of course, this argument is almost never made openly in such plain blunt terms; but it is an assump tion in the back of the spenders' minds. What is bought by inflation, it is thought, costs nobody anything. But when more money is printed, creating new demand, it lowers the value and purchasing power of every dollar already in existence, by raising prices.

Inflation, A Vicious Tax Inflation is, in fact, a form of taxation. It is a vicious form, be cause it does not fall on people in proportion to their income or wealth or in any other way that any reasonable person would con sider equitable. Its incidence de pends on the particular line in which each person happens to earn his living and on the particular form in which he happens to hold his assets. The inflation tax falls with particular weight on the non unionized (i.e., most of us) and on the aged. But in recent years the spenders have come forward with a new an swer, supplied to them by Lord Keynes, the late British economist, and his disciples. This is that new housing or any other government spending project really causes no body to have to give up anything, because it produces a net increase of goods and services that other wise would not have been produced at all. If the additional spending comes when there is heavy unem p10yment, they say, this means that there are unused resources of men, machines, and materials. The additional public spending puts 134 THE FREEMAN March them all to work, and is justified and necessary until it has brought "full employment."

It is true that it is possible to imagine circumstances under which this "Keynesian remedy" could temporarily work. If the previous unemployment has been caused by wage-rates or other costs that have been forced too high in relation to market selling prices, so that margins of profit have been wiped out, and if the government spending. is financed by inflation - that is, by the gov ernment issuing additional quan tities of money - then the spend ing may force up prices to the point where profit margins are re stored, and full employment and production can again take place. But this will prove at best a temporary solution. For the same inflation that raises prices will soon begin to raise wages and other costs just as much or more - especially as long as our laws continue to make unions so power ful that they can force these in creased wages on employers. And then there will once more be the same discoordination of wages and prices that caused the original un employment that the government spending was supposed to cure.

The basic error in the whole Keynesian theory is that it over looks the unworkable relations be tween particular prices and costs, between relative prices and wages, that have brought on the unem ployment that the Keynesians are seeking to cure. The Keynesians persist in the false assumption that the unemployment has been caused by something they call a "lack of effective demand" or a "shortage of purchasing power." And so their cure is always more government spending, bigger defi cits, more paper money - in brief, still more inflation. What Causes Unemployment? What the Keynesians have never done is to tackle or even notice the real cause of the unemployment they affect to deplore. This cause is practically always unworkable relations, maladjustment, and dis coordination in the wage-price sys tem. This discoordination is brought about by the very govern ment interventions in the market that most of the Keynesians are chronically recommending. Not a higher price "level," but only the free market, only the daily and delicate market adjustment of rel ative prices and wages, only prices and costs in workable equilibrium, can bring full employment. And it is precisely this equilibrium that government intervention persist ently prevents.

Our attention has up to now been focused on government con struction of or subsidies to hous1976 INSTEAD OF WHAT? 135 ing. But our basic question - In stead of whal?-applies to govern ment subsidies and handouts of every kind. These have become not only in this but in other coun tries much further along the road to socialism than ourselves - too numerous even to list. They in clude food stamps, school lunches, job training, rent supplem ... ;nts, "model cities," community action proj ects, legal services for the poor, and hundreds of other pro grams variously classified under such heads as social insurance, public aid, health and medical pro grams, veterans' programs, edu cation, and so on. Recently, Senator Edmund Mus kie of Maine, a long time "liberal," began to express his doubts : "We have a system of grants-in-aid," he said, "that has over 1,000 dif ferent programs, each with its own requirements, approach and mon ey. In the health field alone, there are 228 different federal programs.

There are 1,240 federal advisory boards, committees, commissions and councils." "Do we really ex pect a majority of Americans," he went on to ask, "to support na tional health insurance when esti mated costs range up to $100 bil lion a year?" Of each of these thousand pro grams we have to ask ourselves our basic question: Instead of what? For the money that is exacted from the taxpayers for each of these high-sounding programs means that each individual tax payer has that much less of his own earnings to spend on the par ticular goods or services that he himself would have chosen. No Net Gain Nothing is added by any of these government programs to the total of goods or employment. At best what happens is that the community gets employment or production in one direction instead of in another. In a free market people tend to get the particular mix of goods and services that each individually prefers. In a wel fare state they get the mix that the politicians and bureaucrats de cide is good for them.

Why are these political spend ing programs so popular? Partly because real costs are seldom con sidered. The assumption is almost invariably made by the spending politicians that the taxpayers do not really need the money that is taxed away from them to pay for some grandiose public project. If the taxpayers were allowed to keep this money to spend on the things they themselves preferred, it seems to be assumed, they would merely spend it on luxuries or trivialities. But even if the political spend ers do not make such an uncon136 THE FREEMAN March scious assumption, their imagina tion simply cannot encompass these costs. If they have spent the money for a great new housing project, the project when finished is big, visible, solid, perhaps im posing. But not only are the things that had to be given up by each family to pay for this public proj ect not there for anyone to see; by comparison they are individu ally so small that they hardly seem to weigh in the scale. The political imagination simply cannot add up to any perceivable total the mil lions of big and little sacrifices that millions of taxpaying fam ilies have had to make. When the kings of Egypt commanded the pyramids to be built to the greater glory of themselves or their fa thers, the toil, sweat and exhaus tion of the slaves or other sub jects who built them must have seemed utterly negligible in com parison with the spectacular re suIt.

All this is not to deny that there are some public works - such as streets and sidewalks and sewers that ·can be justified by their ne cessity. But the total of such proj ects can very easily be overdone. ".Dhe excuse that they are needed to provide "full employment" is never valid. Too many public proj ects today are social luxuries, if not sheer social waste. We must try to make sure in every case that the gain of producing them ex ceeds their real cost. We must al ways ask, in other words: I nstea.d of what? In pointing out earlier that nothing is added by most of these public projects and social pro grams to the total of goods,serv ice, or employment in the com munity, we have in fact under stated the case. These programs clearly reduce total production. Wasteful Use of Resources and Lost Opportunities First, they lead to overproduc tion and wasteful consumption of the commodity or service that is either given away or sold below its actual cost. When· people have Medicare, for example, and are of fered hospitalization, doctors' serv ices or medicines for a trivial cost or for nothing, they demand them far more often and for far longer periods than if they had had to pay the full market rate. This in creased demand drives up the mar ketprice of such medical services far beyond what it would other wise reach for all those who do not get part of this price paid for them by the medical subsidy. The end result is greatly to overpro duce the subsidized commodity or service - housing, medical care, or whatever - at the cost of under producing something else. Such programs, in other .words, lead 1976 INSTEAD OF WHAT? 137 both to wasteful consumntion and.

to lopsided production. In addition, these programs must lead in the long run to a substantial cut in overall produc tion. By taxing the productive to support the unproductive they diminish incentives at both ends of the economic scale. They lead people to become less efficient or to put forth less effort or to work fewer hours - either because they do not need to do more or because it no longer seems worth the trouble. The heavier taxes on corpora tions, especially, reduce new in vestment in plant and equipment and new employment below what they would otherwise have been. In sum, practically all these sub sidy measures, all these schemes to redistribute income or to force Peter to support Paul, are one eyed as well as shortsighted. They get their immediate appeal by fo cusing attention on the alleged needs of some particular group of intended beneficiaries. But the in evitable victims - those who are going to be asked to pay for the new handout in increased taxes (which directly or indirectly means almost everybody else) -are left out of account.

Only one-half of the problem has been seen. The cost of the pro posed solution has been overlooked. The vast majority of would-be social reformers think of the "cost" of something as simply its money cost; and they persistently under rate or dismiss even this because they think of money as something that can be turned out at will by a government printing press. But when economists talk of cost in the broader sense they mean what ever alternate opportunity must be forgone in order to produce the thing that is made. Everything we make, and everything we do, must be at such a cost. For every alleged benefit that the politicians confer upon us, they must neces sarily deprive us of something else. I have not raised here the polit ical and moral issue involved when governments extend and pervert their powers to expropriate part of the earnings of Peter to turn them over as a handout to Paul, or force both to "buy" something with their earnings quite different from what either would have bought of his own free will. But even if we put aside this basic issue, the next time the politicians offer us some alleged economic gift, let us at least ask them the question: Instead of what? ~ Reprints available in attractive pamphlet: 4 copies $1.00; 25 copies or more, 15 cents each.