Naked Economics: Undressing the Dismal Science pdfdrive com

Some government activity shrinks the size of the pie but still may be socially
desirable. Transferring money from the rich to the poor is technically
“inefficient” in the sense that sending a check for $1 to a poor family may cost
the economy $1.25 when the deadweight costs of taxation are taken into account.
The relatively high taxation necessary to support a strong social safety net falls
most heavily on those with productive assets, including human capital, making
countries like France a good place to be a child born into a poor family and a bad
place to be an Internet entrepreneur (which in turn makes it a bad place to be a
high-tech worker). Overall, policies that guarantee some pie for everybody will
slow the growth of the pie itself. Per capita income in the United States is higher

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than per capita income in France; the United States also has a higher proportion
of children living in poverty.
Having said all that, reasonable people can disagree over the appropriate
level of social spending. First, they may have different preferences about how
much wealth they are willing to trade off for more equality. The United States is
a richer but more unequal place than most of Europe. Second, the notion of a
simple tradeoff between wealth and equality oversimplifies the dilemma of
helping the most disadvantaged. Economists who care deeply about the poorest
Americans may disagree over whether the poor would be helped more by
expensive government programs, such as universal health care, or by lower taxes
that would encourage economic growth and put more low-income Americans to
work at higher wages.
Last, some government involvement in the economy is purely destructive.
Heavy-handed government can be like a millstone around the neck of a market
economy. Good intentions can lead to government programs and regulations
whose benefits are grossly outweighed by their costs. Bad intentions can lead to
all kinds of laws that serve special interests or corrupt politicians. This is
especially true in the developing world, where much good could be done just by
getting government out of areas of the economy where it does not belong. As
Jerry Jordan, former president and CEO of the Federal Reserve Bank of
Cleveland, has noted, “What separates the economic ‘haves’ from the ‘have-
nots’ is whether the role of an economy’s institutions—particularly its public
institutions—is to facilitate production or to confiscate it.”
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In short, government is like a surgeon’s scalpel: It is an intrusive tool that
can be used for good or for ill. Wielded carefully and judiciously, it will
facilitate the body’s remarkable ability to heal itself. In the wrong hands, or
wielded overzealously with even the best of intentions, it can cause great harm.
*
There is a subtle but important analytical point here. Those who argue that tax cuts increase government
revenues often point out, correctly, that government revenues are higher after a major tax cut than before.
But this is not the appropriate comparison to make. The question we should ask is whether government
revenues after the tax cut are higher than they would have been if there had not been a tax cut. The reason
this distinction matters is that inflation and economic growth push government revenues higher year after
year even when the tax rate is unchanged. So it’s entirely plausible that revenues would have climbed 5
percent without the tax cut; if they climb 2 percent with the tax cut, government revenues are indeed higher
than the year before—but lower than they would have been without the tax cut. If spending growth is not
curtailed to match this new revenue reality, then budget deficits will result, which is usually what happens.

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CHAPTER 5
Economics of Information: