Math is Remorseless, Redux

To expand a little more on the notion of identified beneficiaries and hidden losers:

The model of government action is, perhaps, building a bridge: while the benefits of a bridge might be obvious to the people on both sides of the river, the cost and organization needed to get it built may be beyond any private party’s capabilities. So, money is appropriated by a government from a wide range of taxpayers, an entity is set up to build the bridge. Once completed, the bridge makes travel – and commerce – easier, and the amount spent to build it is eventually recovered by the private sector through the increased economic activity the bridge makes happen. Everybody wins.

Well, not everybody. It is almost certain that some people or businesses got taxed beyond any benefit they personally received from the bridge – they live far away, they’re retired and don’t care, or their activities were otherwise not aided by the bridge. But hey, nothing is perfect in this world, and it’s easy to conclude that the benefits far outweigh the costs, and that the bridge remains a success and a good idea.

But consider cash transfers. A large percentage of government activity is moving money from one set of people – taxpayers – to another set of people. The premise is that the payers have more than they need, and the payees need the money. We are encouraged to think fat cat bankers as the payers, and orphans and widows as the recipients (and to ignore the bureaucratic mechanisms required to effect the transfer, which consumes much, sometimes even most, of the money the payers have paid).

In practice, what happens is often almost exactly the opposite: money collected from middle-class tax payers is transferred to the fat cats, sometimes rather baldly, as in the case where Goldman Sachs paid bonuses out of the money it got as a result of the government bailouts it engineered for its creditors. More often, the tax money gets to the fat cats through a more circuitous route, such as how the makers of name-brand contraceptives, which cost much more than the generics, will now get government funding as part of the contraceptive mandate – a little pork to grease the wheels.

But let’s stick to the cases that are more appealing to Christian sensibilities and less criminally outrageous. We tend to think that the benefits of transfer payments to the needy are clearly greater than the cost. The taxes paid by the middle class is often an average of a few dollars per tax payer for any particular program, an amount we’d hardly miss, yet the program really makes a difference to real people in need.

Now I go to a place that is easily vilified. Please keep in mind that nothing I say here is meant n any way to relieve our Christian duty to care for the poor, nor does it make camels any smaller or needles eye’s any bigger. It’s just math.

Any money you take away from people does not get spent by those people as they might otherwise spend it. Say a worthy program, one that feeds moms and their babies, costs the typical taxpayer $5 a year, and there are 1 million people paying taxes in this theoretical example. OK, so that’s $5 million dollars, of which – we’re being very generous here – the government manages to get $4M to the moms. While a mom is going to spent my $4 ($5 minus the $1 for government administration) on groceries,  as a tax payer, I might have spent that $5 I no longer have on a latte at a local espresso bar – a comparatively frivolous purchase, to be sure.

Now for the repercussions: a local grocery store gets $4 more dollars than it might otherwise have gotten. Ultimately, it and other grocery stores in the area get the whole $4M, since, let us assume, groceries are the only items the moms can buy with the money. The margins on groceries (what the store gets paid for carrots and hamburger minus what it costs the store to put the carrots and hamburgers on sale) is very slim – along the lines of 2-3%. So, with the $120K (3% of $4M) gross margin, maybe the local grocery stores hire the equivalent of an extra checker and a bagger or 3 – at least, this program has made it economically possible for them to do so.

The other $1M goes to pay for the bureaucracy someplace – some office space, a few salaries, paperclips, and so on. If is just so happens to happen locally – that the government agents are located where the dollars would have gotten spent anyway – then the money is not lost, just redirected. Instead of me getting a latte, some government office next door is stocked with paperclips.

That’s if the money is redistributed: the moms and kids get fed a little better, and the grocery stores and the sellers of paperclip make a little more money. And a handful of jobs – something like a few nice government jobs, and a descent checker job and a couple of entry-level bagger jobs – get created.

(At this point, if you’re still awake, you know painfully well why economics is called the Dismal Science.)

If that was all that happened – and remember, we’re using a fairly rosy case here – and if there were only a few such carefully targeted and efficiently run programs, then I don’t think any sane person would object.

But this isn’t all that happens.

Now, let’s look at our frivolous purchase of a latte. Make mine a large Peet’s, 2%. The margin on lattes is pretty darn good – not sure about Peet’s in particular, but I’d bet over 50% gross, and maybe 15% net. (Starbucks had a 13% net profit on all its operations – I’m guessing lattes are among the better margin products.) So, using these numbers, and assuming everybody spends the $5 on lattes that they didn’t pay in taxes to feed mothers and babies, the espresso joint in the area take in an additional $5M, which, at 15% margins, gives them a profit – there’s that dirty word – of  $750,000. If they wanted to, they could hire about 3o employees at $10/hr. Some of those employees might even be single moms with babies, who knows? All we do know is that those potential 30 jobs are not economically feasible if we tax that $5 away. Jobs don’t just happen – somebody’s got to pay for them. Businesses generally want to see the money coming in before they hire people.

Not saying those jobs would actually happen – most likely, some lesser number of jobs would get created, or maybe none at all, if the latte-making capacity of the current shops is underused (meaning, that they have workers ready to make lattes at a higher rate than they have customers to buy them, most of the time).  And the grocery stores might not hire anyone, either. The only near sure bet, job wise, are the government workers.

This is just an example. It’s possible to pick ones that go the other way – where the money being redistributed tends to make jobs more jobs at the task toward which it is being redirected than it would if left in taxpayers hands. The whole point here is that there’s a trade-off, every time: whatever good deed we think we’re doing is always offset by things that didn’t happen – things that might have even helped more.

And that’s all I’m trying to illustrate here: shuffling money around through taxes and programs is never without its costs. Sometimes, those costs might even be more than any benefits. One does not have to be a cold-hearted meanie to wonder about these costs, and wonder if there might not be a better way.

And none of this fulfills our Christian duty toward our fellow man. And that works both ways: No one fulfill any Christian duty* of mercy by paying taxes, or voting for programs, or voting for people who promise programs. Nope. You have to do it yourself, nobody, including the government, can do it for you. And  if don’t pay the tax or vote for the program, you still need to do your duty.  You may vote for or against anything, based on your prudential judgement (hey, another dirty word!), but that in no way removes or mitigates the duty of  each one of us to love our neighbor.

*One does fulfill ones Christian duty to honor and obey the legitimate government when one pays taxes – but that’s a different duty altogether than our duty to love our neighbors.

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Author: Joseph Moore

Enough with the smarty-pants Dante quote. Just some opinionated blogger dude.

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