Where Have All the Dollars Gone?

How the government robs Peter to pay him back.

On the ground, an overloaded airplane still looks like an airplane. It seems to have all the necessary parts-- the wings, the motors, the tail assembly. It looks so much like an airplane that passengers may be easily deceived and embark upon it expecting to travel to faraway places. But to the engineer who reckons such unseen factors as thrust and lift, this machine has no capacity for flight. It is, in its present state, nothing more than a truck, a vehicle that can only motor noisily around the airport grounds.

The modern helping state has become something like this overweight airplane. The politicians have used it to subsidize practically everything that human beings could want, from housing to hospitals, from science to string quartets. The prevailing assumption in welfare-state capitals around the world is that there is always room for one more subsidy.

But a close look into the theory of subsidies shows that this assumption is incorrect. Government cannot successfully subsidize a large number of beneficiaries. This is not a statement of opinion, nor even a declaration of fact. It is a mathematical point. Too many subsidies mean that government cannot help anyone. The passengers climb aboard and the engines make an impressive roar, but the plane goes nowhere.

Although Beltway insiders haven't got it yet, some onlookers are beginning to note the circularity of welfare-state economics. "I love the message coming from both parties," said Ross Perot at the National Press Club during the '92 campaign. "'Can we buy your votes with your money this year?'" Perot may be more sound bite than substance, but even he seems to recognize that there is something absurd about this system.

The Cornucopia Illusion

Our intellectual roots leave us poorly prepared to analyze the limits to subsidies. The modern Western tradition treats government as a cornucopia, an inexhaustible source of everything that people might need. Government has a bulging treasury of hundreds of billions that it showers in subsidies in every direction.

A closer look reveals, of course, that this appearance of wealth is deceptive. Government does not create wealth. It is simply an agency for coercively shifting it about. The helping state is not a complete economic system; it is merely the attractive face of an equal and opposite "hurting state," a government that day by day inflicts privation upon its citizens, taking their money away from them.

Economists have generally been willing to point this out, to reveal to their students that the standard government subsidy merely represents the robbing of Peter to pay Paul. Unfortunately, they fail to extend the inquiry. They do not ask the critically important question: What happens when we feel sorry for Peter and try to subsidize him, too? What are the economic implications of taxing Peter to pay Paul, and then taxing Paul to pay Peter?

One excuse they will give for not having studied this problem is that it would be illogical to tax and subsidize the same person. But the idea that governments are rational is, unfortunately, little more than an academic fiction. Subjects and sufferers of governments, from the days of Nero to the age of Rostenkowski, know that wise government is, if not an outright myth, at least an historical rarity.

It may indeed be silly for government to subsidize the same people it is taxing, but that is certainly what it is doing today--on a vast scale. It is practically impossible to find someone who is the object of a government helping program who does not also pay taxes: retirees, farmers, scientists, elderly people needing medical care, veterans, the unemployed, college students, the disabled, even the very poor. Some groups may escape the income tax, but they pay a hefty employment tax as well as a multitude of federal, state, and local excise taxes. We are now in the age of self-subsidy: To a considerable degree, each of us is paying for his own government benefits.

Perhaps we have overlooked this problem because it has crept up on us cloaked in a subtly shifting "public goods" theory of government spending. In its original meaning, a public good was a socially beneficial thing that individuals could not purchase for themselves: defense, police, and judicial services; protection of patents and copyrights; and public works of great scale where user charges are infeasible.

Over time, the meaning of "public good" quietly evolved to include any socially beneficial expenditure. This shift opened the floodgates to self-subsidy, since practically all personal expenditures have a socially beneficial aspect. If you house yourself, you are preventing homelessness; if you educate yourself you are improving productivity; if you go to the doctor you are improving health. Now it has become full-bore public policy to buy things people can buy for themselves.

The point applies to cultural, charitable, and scientific activities as well. These have benefits that extend to the wider society, but they are not public goods in the strict sense of not being purchasable by individuals. Art, music, literature, scientific research, and charitable projects of all kinds can be--and are-- supported privately, both on a profit-making basis and philanthropically. If to fund such activities the government taxes the people who already would support them, then it engages in self-subsidy. The opera- goer who gets a reduced-price ticket because of a subsidy is also a taxpayer who pays for that subsidy.

Consider painter Donald Baechler, who has had 27 solo exhibitions around the world and sells several hundred thousand dollars of art each year. The federal government has decided that he is a valuable contributor to modern culture and wants to make his life and work easier by putting more dollars in his pocket. He was awarded a $15,000 National Endowment for the Arts fellowship in 1989. But at the same time the government makes his life and work harder by taking thousands away from him in taxes. Baechler commented to The Wall Street Journal, "I paid about a quarter of my taxes with my NEA grant."

Farm subsidies illustrate the same pattern. Government spends billions to support farmers and bolster their standard of living. In 1982, for example, the federal budget showed outlays of $13.3 billion for "farm income stabilization" (commodity price supports, crop insurance, agricultural credit, etc.). I choose 1982 because that's when the Department of Agriculture happened to do a survey of disposable farm income. It revealed that farmers paid $4.5 billion in various business taxes, $1.3 billion in Social Security taxes, and $7.6 billion in personal tax payments (such as federal and state income taxes, federal self-employment tax, and property taxes). So by this accounting (which did not include all tax burdens on farmers), government was forcing farm income down by $13.4 billion--almost exactly what it was spending to keep farm income up. Everywhere we look, we find government using its powers of taxation to drain funds away from the same people and functions that government itself has declared worthy, subsidizable social needs.

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    Apart from state-by-state differences, total school spending in the United States is routinely underestimated because of other measurement problems. As Lieberman and other analysts have pointed out, official school spending statistics leave out an awful lot. A partial list of expenditures excluded from federal data includes business and foundation donations, donated time, pension contributions, the cost of negotiating contracts, the cost of training teachers, remedial education in colleges, judicial costs, out-of-pocket parental expenses, and federal educational programs in departments other than Education (such as Head Start). Since real per-pupil spending even as currently measured shot up 62 percent from 1973 to 1993 (according to the ALEC study), an accurate analysis of total spending would no doubt find an even bigger jump.

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