I heard an exasperated congressman say that people on unemployment spend 100% of the money they get in the economy, and therefore this is the best place money could be spent to stimulate growth, certainly better than extending tax cuts for those making more than $250,000. (For the record, I think it is better than building interstate off ramps to nowhere as individuals can make decisions about how to spend the unemployment benefit.) On the surface, this wealth redistribution argument sounds great, put money in the hands of people eager to spend it, instead of letting the wealthy hoard it, right? The devil is in the details. What they are suggesting is that setting money aside while paying someone to collect the tax and review the tax return, pay someone to account for it, pay someone to distribute it to the relevant agency, pay someone to distribute it to the state employment agencies, pay them to account for it, pay them to distribute it to relevant case account, and pay to distribute it to people who are not working, puts more people to work than the high income earner spending it themselves, or investing it or anything else they might do with it. The argument is that paying people to manage a government program produces more wealth than turning raw materials into finished products.

What’s my problem with this? I have a problem with the assumptions insinuated within the premise that the government pulling leaky buckets buckets of water from one end of the economy pool and dumping them in the other somehow lowers the level on one end and raises the level on the other. (Consider they are sucking water from the water-multiplying end of the pool.) The first assumption is that high income earners are less efficient at spending money in the economy than low income earners. Second, the assumption that paying for unemployment generates less unemployment. Third, the assumption that giving capital to consumers generates more capital than investing in production generates, so much so that it can cover the interest paid to borrow it. Finally, I take exception with the assumption that individual’s situations can be improved by applying a single solution to the group as a whole.

First, why do high income earners make the big bucks? Pick a reason. Half of you will say something like tenure, or favoritism, or just plain luck. Although the luck argument probably exists, it cannot be sustained, Chelsea Clinton asside; indeed none of them can, without one truth. Sustained employment exists when an employee produces more than they cost the employer for a sustained length of time. A private endeavor goes out of business if they pay more than they earn. The simple truth is that high income earners produce higher returns on their employer’s pay investment in them than does someone doing a minimum wage job could make for them. Otherwise, there would be no sustained high income earners. When faced with the decision of whether to hire a $300,000 employee or 2 employees making $150,000, the decision comes down to which situation makes it more likely that the company will survive. In short, that option which produces the most money in return. Raise the cost of having a $300,000 employee, via tax increases on those making more than $250,000, and you skew the decision slightly and get fewer $300,000 employees. In some cases, that means hiring more $150,000 employees which is good for out of work $150,000 employees. In some cases, the $150,000 option is not profitable. (The $300,000 employee may have been more profitable than the lower paid option by an amount which straddles the break even point.) Those businesses will stop conducting business, or move this business to another country to survive, firing all other American employees in both cases. This produces a net decrease in all jobs at all income levels, clustered near the tax break level of $250,000.

My next problem is with the idea that paying people to sit at home, or unsuccessfully look for work, keeps their money going in the economy even though they are not producing anything. Remember the bucketing of the pool water idea? Taking money out of the economy, or promising to do so by borrowing it, and then putting it back via the hands of entitlement recipients, does not create anything. Simply, there is no return on the investment. Just like friction in an engine, there are parasitic losses in doing this, and there is a time lag between when the taxes are known, and the payments put them back in circulation. Also, when you increase the cost of some activity, you get less of it, when you lower the cost of some activity, you get more of it. We tax tobacco and subsidize GM’s Volt with this conviction. Raising the cost of employing people, via taxes or future taxes via borrowing, reduces hiring, and eliminates the marginal businesses from the American economy. The marginal companies go under, or move away to survive, taking the remaining jobs with them. Concurrently, when you make it less costly to be unemployed, you get less effort to change that condition by the only person who can affect it, the unemployed. Of course some take any job as soon as they can, and some feel like they hit the lottery and would not take a high paying job until all the “free” money stops. Those people who did not need to work, or who were barely breaking even after paying the costs of getting to work and dressing for work, will stay home and take the unemployment payment. They are not immoral, in my opinion, they can simply add. Why get up each morning, come up with gas money ahead of the paycheck, and give up your day to spend time on the road, hire daycare, and loose an 8 hour day, when you can stay home for anything in the ball park of the same net income? Shame you say? Perhaps, but some of those working out of a feeling of obligation, not need, such as those whose spouses are able to pay the essential family expenses, will not work with the “unemployed” badge of honor shielding them from feeling shame. Encourage businesses to not hire people with promises of increased unemployment taxes while encouraging people to put off searching for a job with promises of benefit extensions, increases unemployment. Do a little research and see just how close to the end of unemployment payments people get, ON AVERAGE, when they miraculously find an acceptable lower paying job. People turn down lower paying jobs than they lost in hopes of finding a higher paying job than exists in their market, for as long as they are being paid to do so. When you make future job creation cost more, and current joblessness cost less, you get higher current unemployment and higher future unemployment in a downward spiral.

The next is one of my favorite pro-government-program arguments to dispute: the idea that low income people spend their money in such a way which creates more jobs than more affluent spenders do. In other words, 5 people who only make $20,000 a year do more to create jobs than a single person making $100,000 does. Ask yourself this, is a “poor” person more likely to buy things that are mass produced by machines, (pop tarts), or custom things that are handmade, (omelets)? Is a “rich” person more likely to buy cheaply produced food from a factory, (tater tots for home), or hire local kitchen staff to prepare more labor intensive, expensive food, (baked potato in a restaurant)? Come on, be honest. “Poor” people buy flour and make bread; “rich” people buy bread, and pay the baker. The affluent also invest in bakeries and bakery company stock. Another obvious question, which is more likely to have cash stashed in a shoebox under the bed, and which is more likely to have it in a bank account or invested in stocks? In other words, in preparation for the proverbial rainy day, who is more likely to have their available money in the economy and which is more likely to have it hoarded? Know anyone who thinks they will start saving and investing once they make a little more money? That is me. I can’t wait to make enough to hoard, all the while flexing my spending up and down to match my income. I doubt that this is a “poor only” phenomenon. I suspect that promising future tax increases by borrowing against future taxes, actually encourages the higher earners to hoard their money instead of spending it or investing and paying capital gains. Those who barely think now’s the time to invest, will switch over to the buy-gold-and-hoard side, removing their money from the economy. This money stays out of the economy until the capital gains tax rate is low enough. It has to be low enough to pay the double tax of cashing in gold and paying the tax, and investing in stocks and paying the tax again each year. Even if gold goes down, but by a lower percentage than the tax, it may not be sold. Which do you think makes gold rise, government spending or government frugality? See the catch 22 of raising taxes on the rich to “create or save” jobs?

The last assumption is at the core of the government spending v.s. private spending debate. The idea is that everyone on unemployment gets extended payments because someone will have a worse time if they don’t. My belief is that the national government should steer the national efforts, those which will benefit the most people, not those that will benefit any single person. Those who want to raise unemployment benefits agree with me, otherwise they would not suggest we extend every unemployed person’s benefit time. If they wanted to help individual situations, they would encourage and empower the people familiar with the individual. At a minimum they would leave the money in the states to pay out and eliminate several middle men. They would suggest local control of unemployment programs instead of single-location control from Washington DC. I question whether votes for extension is about helping a person or about looking like they want to help. Helping people can get you re-elected, so can looking like you are, and the two can only be contrasted in light of fact and principle and rejection of feelings and emotion. We will limit job growth for everyone via the promise of high taxes to cover debt service which produces nothing. We are willing to allow millions of new workers to suffer without a job, in order to believe that one previously employed person will not suffer having lost one. Why is a new employment ready person not important but one who held an over paid position, no longer needed, worthy of borrowing money from the Chinese?

More philosophically, consider this story. A man has $20 and stops at an intersection with 5 men sitting next to, “Will-work-4-food” signs. He rolls down his window and gives each $4. A dozen people driving by notice this act and applaud it. The 5 men buy burgers and eat. Next day, another man, also with $20, stops and asks if any are truly willing to go home with him and help him rake his leaves. 3 stand up and get in the car. He goes home with $20 worth of groceries and rakes leaves. A dozen neighbors notice and applaud the second man. The second man and the workers eat their share of the groceries, the three men remaining at the intersection get nothing.

The next day, both men collide with each other and die and can no longer offer up $20. Now that there is no longer either man to offer help, which dozen applauders is more likely to respond to signs of Will-work-4-food? Which of the men are more credible in the argument that they would work for food for what work there exists? In other words, which situation actually gave them opportunity to improve their lives and which situation actually encouraged others to employ the men? Most of us would agree that it is better to make a man a fisherman than to simply feed him fish.

So how can we claim to produce more fish when the fisherman supplies a government fish collector to give non-fishermen free fish?

Would you expect one or more of the 5 to show up the next day with a stuffed animal, because they did not like doing without? Do you think that some of the kids would offer their extra stuffed animal to classmates with none? I would. I would expect one or two of the 5 who simply forgot, or didn’t take the request seriously or whatever would remember the next day. That leaves 3 who did not bring a stuffed animal because they could not, for whatever reason. I would expect some with stuffed animals to share with those who do not have a stuffed animal. I have a son who routinely shares his most prized treats with others around him. Some of those with one stuffed animal would bring in another the next day, and some would do so specifically to share with their classmates.

Imagine however if the teacher felt sorry for the 5 students without a stuffed animal and assumed they did not bring one in because they did not have the opportunity at home. Imagine that she wants to keep from embarrassing those without stuffed animals by allowing them to play without a stuffed animal or to be at the mercy of the charity of those students with multiple stuffed animals. Imagine that with good intention, she collects the “extra” stuffed animals and distributes them to the students without one. Everyone has a stuffed animal. Perfect, right?

What happens the next day? What happens if this is continued indefinitely into the future?

Will the 2 forgetful students bring in a stuffed animal the next day, or the next? Perhaps, but is there more or less incentive for them to do so than if they had been left alone?

Are the students who had 2 or 3 stuffed animals, and had the “extra” collected more or less likely to bring their 2 or 3 again the next day, to have them collected and redistributed to someone else?

When there are fewer than 30 stuffed animals brought in, is it fair for those who brought one or more in to be the one without any, so that someone who did not bring one in can have one?

Does the student’s reason for no longer bringing in a stuffed animal matter to you when answering this question? For example, does it matter that one student who brought in multiple stuffed animals just days before, only brings in one, and another student does not bring one because she cannot? Would you take the one stuffed animal from the “stingy” student and give it to the one without any choice in the matter?

Would you expect a child to bring their best or favorite stuffed animal in if they saw another student play carelessly with stuffed animals that did not belong to them? Would they attempt to protect their favored stuffed animal from confiscation and damage by leaving it at home in favor of a less appreciated toy?

If the teacher attempted to make the stingy students (who stopped bringing in stuffed animals) feel bad, would they bring in lesser appreciated stuffed animals in larger quantities to keep the count up without risking the better stuffed animals?

Would those who lack the ability (as apposed to those who were forgetful or lazy) be better off in the original situation where everyone felt free to bring their best stuffed animals and share as they felt comfortable?

How does this thinly veiled commentary on free choice relate to current events?

The Associated Press did some homework recently: http://apnews.myway.com/article/20091029/D9BKMVMG0.html

http://www.cleveland.com/newsflash/index.ssf?/base/national-13/126320409066680.xml&storylist=washington et. al.

First, the jobs created were overstated. Imagine that, people competing for government grants painting a rosy picture about how well they had used the money. No surprise, I would expect any program with self reporting to have tremendous reported success.

Second, unemployment did not fair better in areas where a lot of stimulus money was spent relative to where none was spent. Transportation Secretary, Ray LaHood disagreed and said there were tens of thousands of jobs created in construction with road and bridge money. After all, how could we spend $400,000 per stimulus job and not hire anyone? They can’t all be raises for current employees reported as jobs saved. Is someone lying or stretching the truth? Perhaps, but both could also be right. Consider this:

Start with the fact that government cannot create wealth; it cannot give anyone something without first confiscating it from someone else. So, where did the jobs come from? In terms of stimulus money, where did the $400,000 dollars come from? More importantly, how many people would your employer have to lay off, to pay up $400,000? After all, that is where the money comes from, the economy. So, we borrow (from the future economy) $400,000 per job, with interest, which will have to be paid back (likely in terms of jobs lost or not created) by that part of the economy left when the new notes come due. We recently borrowed $290 billion to pay the interest on the next few months of loans we already have. This was the raise in the borrowing limit to keep the notes from coming due, presumably until the health care bill can pass.

In addition, the economy has to pay the government to operate, pay people to print/collect/borrow the money, as the government does not create anything and cannot pay for itself. And, the economy must pay for those programs and non-operational expenses of the government, like national health care, should it pass.

So, imagine that you are a potential employer, especially one over seas. Are you more likely to hire people in America, or somewhere else? Keep in mine, an employer has to have the money to pay the employee before hiring and for a long enough time for them to pay for themselves. Are you more likely to bring your best-most-favoritest bear you built at Build-a-Bear to the American kindergarten to be confiscated, redistributed, and played with by careless Americans? Or are you more likely to take your bear to China/India/Ireland/Dubai or any of hundreds of more bear friendly countries?

The problem with socialism, shared prosperity, social justice, economic justice, or whatever statist-collectivist name you want to put on it, is that it demands that human nature be ignored. This type of system is only sustainable (let alone prosperous) if the teacher can go into each student’s house and force them to bring in their bears. In other words, if there is no private bear ownership, if there are no alternatives, if there are no liberties. Such systems are only sustainable at the point of the proverbial gun. Such systems are only enforced, not upheld by informed free people.

Consider how this fits in with the current discussion of the day, where you will be forced to buy a particular government specified health insurance from companies who are forced to provide it to you without considering pre-existing conditions, at a government determined “affordable” rate, payable to Doctors who have been forced to accept this amount. Plans better than the particular “minimum” plan determined by the government (ironically called Cadillac plans, a GM brand owned by the Fed) will be taxed for re-distribution, and Doctors who do not accept the minimum payment or charge cash or provide enough care to be in the top 10% by volume, will be penalized likewise.

Will the currently uninsured be better off with the eventual outcome, or at the mercy of the current system? Will those from other countries continue to bring their medical dollars here, or will they follow the foreign Doctors to the more bear friendly counties?

Taking resources out of the productive areas of the economy, via healthcare, energy, income, or any other taxes and mandates, to re-distribute to non-producing areas, wastes resources in the re-distribution effort, and scares producers from other countries from producing here. Job stimulation spending costs us jobs and re-distributive health care reform hinders the availability of health care. The “stingy” will always have theirs, here or in China. Those who cannot produce always suffer the worse equality-of-outcome from socialism than the outcome from equality-of-opportunity of the free market.