The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.
This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.
I will admit, this fallacy is one I’ve always kind of believed, so let’s work through it together and let Hazlitt straighten out our thinking.
After every great war, it is proposed to demobilize the armed forces and there is always great fear that there will not be enough jobs for these forces, resulting in widespread unemployment. And this does occur in the short term, because it takes a while for private industry to reabsorb these folks. Hazlitt had just lived through the coming home of the World War 2 vets.
Hazlitt points out that when the military is released from service, it should result in the public budget being reduced, which will allow taxpayers to retain the funds that were previously taken from them in order to support the troops. Taxpayers will spend their reclaimed income to buy additional goods, which will provide employment to the workforce.
The problem with this is when soldiers were supported by an unbalanced budget funded by government borrowing or other deficit financing, but Hazlitt deferred that discussion to a later chapter.
The soldiers previously supported by civilians will not become merely civilians supported by other civilians. They will become self-supporting civilians.
If we assume that the men who would otherwise have been retained in the armed forces are no longer needed for defense, then their retention would have been sheer waste. They would have been unproductive. The taxpayers, in return for supporting them, would have got nothing. But now the taxpayers turn over this part of their funds to them as fellow civilians in return for equivalent goods or services. Total national production, the wealth
of everybody, is higher.
The same reasoning applies to civilian government officials whenever they are retained in excessive numbers. Every time there is an attempt to reduce the number of unnecessary officeholders, there is a cry that this action will be deflationary. You will remove the purchasing power from these officials. You’ll cause an economic depression.
[T]he fallacy comes from looking at the effects of this action only on the dismissed officeholders themselves and on the particular tradesmen who depend on them. … [I]t is forgotten that … the taxpayers will be permitted to keep the money that was formerly taken from them for the support of the bureaucrats.
With more of their income to utilize, taxpayers will spend more and that provides jobs for the dismissed bureaucrats. Washington DC might be less prosperous, but the rest of the country can afford more stores.
The bureaucrats seek private jobs or create private businesses, becoming truly productive men and women. Hazlitt explained that he was not talking about laying off bureaucrats who provide ESSENTIAL services that make it possible for private industry to function in an atmosphere of law, order, freedom and peace. Bureaucrats value as employees should consist in the utility of their services, not in the “purchasing power” they posses by virtue of being on the public payroll.
This “purchasing power” argument could just as easily apply to a thief who robs you. After he takes your money, he has more purchasing power that he uses to support bars, restaurants, tailors, automobile workers, etc. But for every job his spending provides, your own spending must provide one less, because you have that much less money to spend.
When your money is taken by a thief, you get nothing in return. When your money is taken through taxes to support needless bureaucrats, precisely the same situation exists.