Pursuit of Truthiness

my gut tells me I know economics

When More Taxes Mean Less Government

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I am writing this while sitting in the DMV. The Department of Motor Vehicles is often used as an example of how government provides services poorly relative to the private sector. This example is used for a good reason- I would never put up with these sort of wait times if I weren’t legally required to “buy” their products, and in the private sector competition means that multi-hour waits are an extreme exception rather than the norm.

But I have yet to see people recognize that the DMV is a great example of how a single-minded obsession with cutting taxes is not the best way to shrink government. Suppose that we cut the DMV budget in half, and cut taxes accordingly. Most people would say we had just successfully shrunk the government. It would be true that the government was taking fewer literal dollars from people, and spending less on its own employees. But government didn’t really shrink- it merely changed the way it is extracting resources from the population. Instead of paying more dollars in taxes, people will spend more time in lines at the DMV- a terrible fate. The value of people’s lost time could easily exceed the tax savings.

The same idea applies to many regulations. When we went from a draft to an all-volunteer army, government spending went up, but the true size and coercive power of the government went down. We could probably avoid the distortions of the minimum wage if conservatives would embrace wage subsidies, but wage subsidies are clear examples of government spending, while the minimum wage is a hidden tax on employers. Dollars taxed and dollars spent is not a perfect measure of the size and scope of government- in fact, sometimes more taxes and spending can shrink the true size of government.

Of course, there can be other ways to shrink government too. Even better than throwing more money at the DMV so they can hire more employees would be to change the incentives of current employees. Imagine that the manager of a DMV ran a real risk of getting fired when the lines got long, and had the chance to get a bonus when wait times decreased. Private sector-style incentives could lead to private sector-style efficiency. Ideally we can do smarter government, rather than increasing spending. But maybe sometimes, smarter government means more spending, and more spending means a smaller government footprint overall.

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Written by James Bailey

May 8, 2014 at 2:19 pm

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