I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I —
I took the one less traveled by,
And that has made all the difference.
From “The Road Not Taken”
by Robert Frost (1874 – 1963)
Published 1920 in
I wish to use this final stanza from the famous Robert Frost poem to make a point about economics. But first, a true (though simplified) story….
I was recently at a retirement dinner for a long-time coworker. After the toasts and roasts concluded and most had left, a few lingered. Talk turned to politics and the 2012 campaign, well underway. One guy voiced what I have found to be the common fiscal opinion of most mild liberals, as follows:
“Yes we have some fiscal budget problems, but those radical Republicans scare me with all their talk of spending cuts. I’m truly scared of what they want to do. I just can’t possibly vote for those scary guys.”
I undertook to make the case for a Constitutional amendment for a balanced budget. I described the difference between a realistic balanced budget and a wishful balanced budget. Here’s what I meant by that distinction: I pinned the current problem to the levels of Federal spending and tax revenues, as compared to the country’s Gross Domestic Product (GDP) . I pointed out that 2012 Federal spending was projected to be about 24% of GDP, while 2012 Federal tax revenues would only be about 16% of GDP due to the sluggish economy. The 8% difference is a $1.2 trillion deficit for 2012.
He said, “Yes, so obviously we must raise taxes. The government must keep stimulating the economy, or it’ll never recover.” It reminded me of when Joe Biden told an AARP town hall meeting, “We gotta go spend money to keep from going bankrupt.”
Undaunted, I gestured in the air with my hands:
He was unconvinced by my air guitar playing. Like many people, he didn’t accept the concept that the U.S. economy has a level of sustainable tax capacity that simply cannot be exceeded no matter how high the tax rates are raised.
I explained that excessive taxes sap the power from the economy. I compared taxes to a serpentine belt on the engine of a car. That belt turns a bunch of things like alternators, water pumps, air conditioning, radiator fans, and power steering pumps. These devices – some necessary, some conveniences, some luxuries – rob power from the drive shaft. On a hot day this bogs the car down so it can’t climb steep hills very well. And the slower the car goes, the slower the serpentine belt turns. The car is trapped in a lethargic slow-down. Similarly, high taxes rob strength and resiliency from our economy, so people can’t afford to spend, businesses can’t afford to hire, and our economy can’t recover from a recession very well.
I thought it was one of my better analogies, but he wasn’t impressed.
Running out of ideas, I decided to use his brain instead of mine for awhile. “Where does the government get the money it spends?”
He said, “Obviously from taxes.”
I said, “Two thirds is from taxes, the rest is borrowed. Why do you think spending borrowed money will help hasten prosperity in the long run?”
He said, “You admitted that tax revenues are down because the economy is stagnant. Expert economists say that stimulating the government sector is the only way to get the economy going, so tax revenues will increase.” He meant Paul Krugman, no doubt.
I asked, “Why do you insist that the government’s action of taxing money from citizens and spending it on government projects is more ‘stimulating’ than leaving more money un-taxed, to be put to use in the private sector?”
Finally he blinked. I had asked something he’d never thought of before.
To drive the point home, I paraphrased from Henry Hazlitt’s book Economics In One Lesson . “When Government spends beyond what is reasonably necessary, it’s not beneficial overall. When it becomes stimulus for the sake of expanding publically-funded employment that isn’t strictly necessary, it does more harm than good.”
I continued, “With every public project that comes into existence from compulsory government taxation and spending on public works, we see those jobs and those projects trumpeted by politicians and the liberal media. But what we don’t see is all the private jobs and private enterprises that didn’t come into existence because they were not permitted to occur. They are imaginary, but their non-existence hurts us. For every $B spent on government projects, there’s a $B worth of jobs that don’t exist for the private sector because that’s where the money was taken from.”
He said, “But government spending has a multiplier effect, because that same money gets spent again and again throughout the economy.”
I answered, “Don’t you realize that same effect occurs when the money is left to circulate in the private sector too? The multiplier effect is not unique to government spending. Hey, doesn’t everyone — public and private sector alike — spend their paycheck at the grocery and department stores, gas stations, and movie theaters?”
Awkward pause…crickets even….
Finally he said, “Well, um…I’ll have to think about that.” Soon after, he looked at his watch and said it was late and he must get home.
What had happened?
Robert Frost told us. Economically speaking, I had pointed out The Road Not Taken…the road less travelled. If more money were allowed to travel that road, it would make all the difference.
2 Free downloadable 205-page PDF of Economics in One Lesson by Henry Hazlitt, published in 1946. Chapter 4 (pp 17- 22) is called “Public Works Mean Taxes.” Read it now.