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Some time ago I began a series directed at my Wintercow kinfolk so to speak. Here is the next in the series. While I am as alarmed at government spending and government budget deficits as the most aggressive budget hawks out there, I believe that a dangerous narrative is floating beneath some of the disucssion. It’s pretty clear to me that government should spend less than it does now, and it should focus its efforts on the things it does well, but that is not the same thing as saying that all government spending is bad.

The way the current debate is being framed is as a morality play (which at times I support) between those who believe the government is just and moral and can and should be spending on everything it is spending it on today, against those who favor restraint. But this kind of morality play, especially when engaged in by my kinfolk, rules out some movements in policy that would nominally go against what they are supporting, but certainly be in the spirit of more responsible, just and fair government. The best example I can think of right now is on minimum wages and policies directed at alleviating poverty. It is well known that price controls like the minimum wage are counterproductive if not outright destructive. I also find them morally objectionable. One advantage politically that the minimum wage has going for it as a poverty fighting strategy is that it is off-budget. Government spends no money (at least not directly, ignoring any possible unemployment spending generated from it) to have this “socially just” policy on the books.

But let me ask my fellow travelers, would you not take the following deal? Eliminate the minimum wage at the federal and state levels, and in exchange, expand the earned income tax credit program? I am ruling out for now the option of eliminating the minimum wage with no corresponding compensation. The EITC targets a far larger share of the poor population than the minimum wage does. The EITC is far less distortionary than the minimum wage is. The EITC is far more equitable than the minimum wage is (all taxpayers fund it as opposed to small businesses that are forced to pay the minimum wage). And the EITC has a proven track record of improving the outcomes for the poor that the minimum wage does not.

But what is the drawback of the EITC? Since it is an earned income subsidy, it must be funded through tax revenues and of course these subsidies count as government expenditures. Here is a thought experiment, suppose there are currently 3 million people earning the minimum wage and are being paid $1 more than their productivity per hour, and that these workers work 1,500 hours per year. This amounts to an off-budget cost to small businesses (and others) of roughly $4.5 billion per year. Would it not be better to eliminate this law, and instead expand the EITC by $4.5 billion? In addition to the benefits listed above, I believe that this spending would partially pay for itself considering the massive inefficiencies that would be eliminated by ending the minimum wage.

My point is not to ask why the EITC is not more popular, I think the reason is obvious. My point is that simply being a knee-jerk “no government spending ever” reactionary, without thinking through what you mean by such a comment or position, or what logical conclusions that leads us to, is harmful and shuts off potentially valuable policy solutions that both folks on the left and right would agree upon.  As a final and very related point, it should by now be apparent that the level of government expenditures, within reason, can be very high and we can still have a very well functioning, fair and efficient economy. Had I another career, I’d spend my time documenting and studying the crushing impact of the various off-budget government rules, restrictions and regulations as compared to what we do on budget.

2 Responses to “Adding to the 95 Theses”

  1. Harry says:

    I believe, Wintercow, that Milton Friedman was an advocate of a reverse income tax, of which the EITC was a close cousin. One of the advantages would be to reward productive effort, and at the same time get the government’s hands above the table with every new deal, so everybody knew that a spade was about to be played. Doctor Friedman never made that exact metaphor.

  2. Harry says:

    Had Wintercow pursued another career, he may have been a USGA official, adjudicating things about movable obstructions and other epistemological questions. That would be on the side. The day job would be a forest ranger, leading to a job in forest ranger management with access to a helicopter and all BLM lodges.

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