Public Works Means Taxes

0:00This is Jeffrey Tucker at the Mises Institute. I'm sitting here with Jeffrey Hervener of Grove City College. He's agreed to talk to us about a couple of chapters from this book, Economics in One Lesson, our new edition. And the book is now about 62 years old and Yeah, it's great. It's a fabulous book. Everyone's first introduction to sound economics, still, after 60 years. Do you use it at Grow City? We use it at Grow City. We have a course in public policy, and so it provides a first introduction to sound thinking on public policy.

0:46You mean that all students take a public policy course in addition to an economics class? Do they take an economics class? The econ, no, it would be mainly econ majors or majors in political science and history, those that are interested in policy questions. Do they take an economics 101 class before they take another policy? Yes, they do. So, but why wouldn't you use it in 101? Why wouldn't we use it in 101? In 101 we want to, well we would use it, I mean we'd have to the professor's discretion to use it on questions of, relevant questions of policy that come up. I see. It's not a sort of praxeological theoretical development in the book, it's the lesson and then the application, so it's a succinct, it's a very nice succinct statement of a lesson that's excellent for applications once you get to that point in the principal's class.

1:42So, but you're thinking about students as learning a sort of more conventional technical economics, more of a... Right, say in a one-on-one class, we would just begin and develop economic theory from praxeological, yes, microeconomics. And then once in a micro class you get to the questions of policy, the middle part of the class or toward the end, then Hazlitt's book would be very useful. Most people think about economics and its relevance today, they're thinking about that second step. That's right. Yeah, because that's the economics we encounter day to day, we pick up the newspaper, we're not reading about the theory of marginal utility. Exactly right. Right. And this is exactly the sort of thing that the non-economist student confronts when they think about public policy, right?

2:34They have to confront this big lesson, and if they don't get the lesson, they're just awash in all sorts of nonsense. And yet you learn a lot of economic theory. Absolutely. And so the topic we're discussing now concerns public works and taxes. Right. And taxes. Okay, so let's talk about the first chapter, public work. Right. In this chapter, what Hazlitt does is develop a sort of extended argument about public works. He says, look, many people say the justification for public works isn't the grandeur of the thing that's produced, it's that it provides employment. So we can justify the building of a bridge or the building of streets or buildings and so on on the grounds that this provides employment to people.

3:28And, of course, the point he's making is that this is always diversion, right? We're simply diverting employment from one area to another precisely because the expenditures to build the public works require taxation. And so we're just funneling, shifting the resource use. And again, this basic notion of scarcity and the reallocation of things is totally lost on non-economists or those who aren't introduced to economic reasoning. So it's a wonderful point. So this is 1946, and very fresh in his mind is the experience of the New Deal and World War II, and it's a very common argument. It is very common. He gives the example of the TVA, one of the public works projects that he uses to illustrate his point.

4:22He talks about the grandeur of the wonderful, the dams and all the wonderful things generated from this electricity. And this is what you see. This is what you see, but you do not see the diversion, what it's been diverted from. And of course, he doesn't really, to make his point, this is the beauty of Hazlitt's writing, he doesn't really have to go deeply into the theoretical background, what's behind and the weighing of the different values of things that are produced in one area of the economy relative to another in order to drive this point home. So you don't find extended discussions about entrepreneurial calculation and how a profit has to be the test of whether or not the thing is justified and so on and so forth to see that he's right about that.

5:15And yet it does strike you as somewhat absurd that bureaucrats could decide, well, we need an enormous dam over there that way, we need a highway here, how do we know these things? How do we know? But he raises this question, his rhetoric is sort of, you know, we always dwell just only upon the thing that we see, and we ignore the thing that we do not see. What happens to our analysis if we include the thing we do not see, and he just leaves it at that point for us to think more deeply. Now, it's not so much an argument you hear these days, is it, that public works are necessary to employ people? No.

6:00You don't hear it that much. You do sometimes. It's more sector-specific, like, well, here's a population that's sort of distressed in some way. Right. But it's not a macro... No, you're right about that. Yeah, like you said before, it's in the context of the depression that it's thinking about. It's because unemployment is so low. And yet, you know, the magazines and newspapers are filling up now with the news of the impending movement towards national service. Right? Very true. And so the idea is that you just enslave people between the age of 18 and 23, or 21 or 22. But you have to, and I guess this argument in some way impacts on this, doesn't it? Leaving aside human rights considerations?

6:45Yes, there is the mundane economic aspect. So apply it to that. So that would be the diversion again, right? So we see what the public service would be done by this conscripted labor, but we don't see the value of the alternative and of course and when we think more deeply about it we realize that again here's a question of entrepreneurship of the individual's entrepreneurial choice to say I in my own mind can weigh these alternatives should I you know work in a soup kitchen for the summer should I volunteer for the Peace Corps should I go into business and Can you imagine what it would mean for national productivity, if you care about that kind of thing, to rob the economy of two or three years of young people's lives, get them, you know, away from webmastering and skills, you know, and get them out of the way?

7:55The next chapter deals with taxes and it's a topic on which you The title is Taxes Discourge Production, which, once you hear those three words, sounds unobjectionable, and yet it requires some fleshing out, doesn't it? Right, and what it says in this chapter is, again, the repetition or application of the basic lesson.

8:45So, yes, we have this case where the subsidy is provided to someone and everybody says, He says hurrah and look at the wonderful thing that's been done by the state and how it's benefited the recipient, person A, let's say. But they totally ignore, I mean, they realize that taxes have been raised to pay for this, but they ignore the effect on the behavior of B, the state of condition that B is in, right? They dwell upon the condition of A, the allegedly improved condition of A. And so he simply says, well, look, let's consider this. What happens when you tax the productivity of the productive output of someone? Well, they're not going to just sit still for this, right? This changes their behavior. Just like the subsidy changes the behavior of A, presumably for the better, but not obviously necessarily.

9:35Now, why can't you just say, well, actually, when you tax people, it's true that it takes away some of their money, But that fact alone encourages people to work even more, to become even more productive, to make up for their friends. Well, yeah, people do kind of try to claim this, but of course this is sort of a confusion of the notion of productivity, right? What exactly do we mean by productivity? We're producing value. Okay, so what is the value that we're producing? Who decides on what is a valuable thing to be produced? and of course this is the producer, this is Hazel's point, right? What's being produced is what the producer himself deems to be valuable and so if he runs a business and he's not being taxed or he's being taxed lightly and so he's producing goods in his business and selling them, so he's choosing this as the valuable alternative and he's having it ratified by the purchase of the consumers and so on, so if he's taxed and he does something else, so now he lessens his productivity in this area

10:38The Theory of Money and Credit

11:08Well, why isn't it a good argument then to say, let's not tax productivity, let's tax consumption? Right. Well, this is Rothbard's great contribution in tax incidence theory, where he pointed out that all taxes are, in fact, income taxes. So, if you tax consumption, that tax gets imputed back to production. In other words, a businessman who... All taxes are taxes on production. On production, what did I say? Yeah, income. Same thing. Yeah, well, in the context of our discussion, we can treat that as the same thing. The other tax is on wealth or things produced, right?

11:56Okay. Okay, so yeah, so the idea would be if you tax consumption, you have a sales tax, you have a general sales tax or an excise tax or something like this, that once again it's the entrepreneur who decides how to adjust to this he isn't a passive recipient of the taxation or payer of it he adjusts his production what he does of course is of necessity is since his costs are raised by the taxes he has to lower his costs in other areas this means lessening his demand for labor shrinking back his capital expenditures and so on so this falls upon someone's income some producers productivity is impacted by So there's no way to tax consumption? No, consumption cannot be taxed. It can't be taxed? No, it can't be. Only things produced, only wealth, only income.

12:45Well, it's often said that, well, if we put a sales tax on beer or cigarettes or whatever the thing happens to be, then the producer's not paying, and it's only the consumer, and then that becomes voluntary, because then you can choose not to purchase it, and this is a very... Yeah, I once had this conversation, actually, at an academic conference where I presented something on taxation, and I was making this previous point that we made about taxes being

13:44and then his behavior changes. So without the hand of the state here, his production decisions are different and prices are mitigated and supplies are increased and incomes are higher and so on. Now, whenever I've, well let me ask you this. When you present to your students various arguments about the impact of taxes on economic growth, does anybody ever raise their hand and say, well Professor Herbiner, how do you propose taxes be structured in a way that will not be damaging? Right. In fact, I teach the course in public finance at Grove City College, and so I kind of avoid this line of questioning by beginning at the very starting point of analysis to take students through step by step, you know, the production on the market and so on and so forth, and the theories of market failure and what have you, so that by the time we When we get to the point where we're discussing taxation and the transfer of resources, they've been disabused of the notion that, look, the government has to have a certain tax base

15:05in order to provide this or that particular good or set of goods because these are public goods or, you know, the market has failed here and there's an externality and something has to be done by the state. Right. But at least when you're going to, if you're going to impose a tax, at least be aware of the cost. Right? Right. And it is true that there are perhaps taxes, one could say that the extent to which a tax is neutral is not the same for every tax, right? So Rothbard himself points out that this is one of the strikes against income taxes. Income taxes tend to, in practice, actually be less neutral because there's more revenue taken by the state than, say, an excise tax or a tariff or something like this, right? and you know it's it's fascinating how our public policy ethos seems to recognize the truth what has it a saying whenever you have proposals from the left and right for so-called tax holidays yeah suddenly suddenly our eyes

16:11In reading through the chapter, is it your sense that the theoretical apparatus of economics that he's addressing here, the fallacies that he's addressing, do they seem like they've changed that much over the 60 years? No, I don't think so. I think they haven't changed. Basically it's the same fallacy over and over again. I get that impression from the whole book. He seems to have picked out a whole series of issues that seem to be...

16:56Timeless, unfortunately. Unfortunately, timeless. Universal fallacies held by all people at all times and all places. Thank you for helping us unravel some of these today. Thank you, Jeff. The Theory of Money and Credit