Thursday, December 9, 2010

Rational Expectations

Yes, it’s Christmas time once again.  It’s the time when we turn our attention to . . . this year, government spending and tax rates.  (Bah, Humbug!)

Apart from all the political deal-making over all this, there are some are a few things everyone involved, and even those just thinking about it, should think about.  These are simple, unavoidable facts of the human condition.

First, if you want more of something, offer people money to do it or to keep doing it.  For example, if you want people to become or remain unemployed, pay them to do so.  If you do this, you can be sure to increase unemployment.  No matter how nice you think it is for the government to help people in this way, only the irrational (and I know there are plenty of those) will deny this.

For another example, if people agree to give the government more money, you must expect to get more government.  Perhaps you think that is a good thing, perhaps you think it is a bad thing, but don’t be so silly to expect otherwise.  As an aside, since government works by coercion, expect more coercion when you agree to give more money for government.

Here is another general principle in this regard:  if you want less of something, tax it.  (That is, penalize it fiscally.)  If you want less business, tax it more.  If you want more business, tax it less.  Whichever way you go, remember that business (in its most general sense) is the main place you get jobs.  So if you decide to tax business more, expect fewer employment opportunities for people.

Another example of this:  if you want people to have more income, tax income less.  If you want people to have less income, tax income more.  Obviously, if you take taxes out of income, it will be less by that amount.  But that is not what I am talking about here.  Far beyond that, if you tax income more, people will generally put out less effort to create income for themselves.  If you tax income less, people will be more fiscally motivated to create (in all sorts of ways) more income for themselves.

Now, this might seem obvious to most people, and it should be.  But keep this in mind when you hear politicians and pundits talking about government taxing and spending.  Don’t allow political talking heads to get away with (at least in your mind) statements like this:  “I am concerned about the rising unemployment rate, so I favor extending unemployment benefits.”  That is irrational.  If you truly favored less unemployment, you would not favor paying people to be unemployed.

Here is another “don’t let them get away with it” example:  “I am very concerned about our declining economy.  The government needs more money to deal with all the problems of a declining economy, so we need to tax businesses more to get that money.”  That, too, is irrational.  If you tax business activity more, expect less of it.

May all your expectations be rational!

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