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Thought Experiment

It is a cherished belief among state religionists that government spending is vital for economic growth and to keep up consumer “confidence” (I know that when the town of Pittsford builds a new school building, I am confident my tax bill will be increasing).

So I ask this question: what do you think would happen to confidence if the government announced, today, that within 10 years, it would eliminate all taxes and spending? The related question: would such spending and tax reductions be de-stimulating (since additional spending is thought to be stimulating)?

In order for the latter to be true, we would have to demonstrate that all government workers would be out of work permanently (or at least for a long time), that their current work is productive (or more productive than what they would be doing otherwise) and that by entering the private (i.e. non-violent) labor force they would simply substitute for all of the private sector workers in the positions they hope to secure (e.g. a government statistician at BLS would kick me out of my job, an oil scientist at USGS would displace a Shell researcher, a Postal Worker would replace a FedEx driver, a Congressman would replace the marketing director for Apple, and so on …). Remember that the time in US history where the most massive influx of workers into the private labor force happened turned out to be the time when the US economy appears to have grown faster than at any other time in its history, even today. And this is a fact celebrated by the likes of Paul Krugman and JK Galbreath. It was the influx of soldiers back to the US at the end of WWII. And we are not talking a few thousand soldiers. We are talking tens of thousands of people entering the labor force almost instantaneously.

Note, too, that the above discussion ignores the effect that lower (or no) taxes would have on economic activity. Note, too, that I am not asking about the socio-political consequences of this, just the direct impact on our ability to produce goods and services that we desire.

3 Responses to “Thought Experiment”

  1. Harry says:

    Interesting question.

    If all taxes were abolished tomorrow, we’d find everything suddenly cheaper, although retired people would feel it less than employed people who are presently burdened with FWT, FICA, FUTA, state taxes, state unemployment taxes, and local income taxes, all of which are burdensome. We would all have to wait on school property taxes, since we just paid those.

    I doubt we would adapt to this situation smoothly. Every time the government changes the rules of the game we get anything from delayed chaos to instant chaos. Note the parallel between congress being in session and volatility in our markets. OK, to be fair, let’s include all influential progressives, including Jim Baker in 1977 and Hank Paulsen in 2008, and George Bush/Nancy Pelosi in 2008, and Nixon abolishing Bretton Woods and imposing the 55 MPH speed limit.

    Even when somebody influential suggests a change in taxes, particularly tax increases, it forces everyone with a stake to go back and recalculate what it might mean to them, and the exercise is the same as handicapping a horse. One of the reasons why Philadelphia is not a thriving business mecca is that one has to factor in the effect of John Street getting up on the wrong side of the bed on a given morning. Has he taken his meds?

    Abolishing all taxes would be a shock, but it would lead to true “zero-based budgeting” where every stupid governmental department, like the Montgomery County (PA) Health Department, might meet a stillborn birth.

    Meanwhile, Wintercow, I would not be worried about some nerd at the BLS getting your job on merit. You would lose your job, of course, but it would be for heresy. Paul Krugman will carry the torch that will light the pyre.

  2. Harry says:

    I meant Jim Baker in 1987, when he suggested that the mark should be stronger against the dollar. Or did he say that real chili doesn’t have beans? Back then the herd was watching the current account deficit.

  3. azmyth says:

    Ultimately, how you answer this says whether you are a Keynesian or not. I don’t think you’re going to convince anyone by this thought experiment, because I think Keynesians would just say “output would collapse”, “the multiplier would get smaller”, and all the other stuff they’ve been saying for 70 years. I wouldn’t want government spending to go to 0, but a 90% reduction would probably do the economy some good. Phasing out the government slowly would be better as well to allow time for the private sector to absorb the excess workers.

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