Thursday, June 28, 2007

Social spending does not yield greater prosperity

Hat tip to The Economist:

"Mark Thoma showcases this image with this commentary:

These are countries whose per-capita incomes are greater than the OECD average. The point here is that there's no trade-off between high levels of national income and high levels of social spending.

Why, no, there isn't. You could also choose to have enormous deposits of oil and natural gas!

Seriously, I don't understand how anyone is making that argument from that graph. Throwing out Norway, where high GDP is due to fossil fuel reserves that cannot be achieved through any policy decision, there seems to be a downward sloping, although noisy, curve running from America and Ireland through Canada and the higher-spending European countries. Even if you throw out America--even if you throw out Ireland--the relationship is pretty clear.

Am I missing something?"

No, The Economist is not. This graph shows a clear trend of greater GDP per capita inversely proportional to the level of social spending.

Why is this? Conventional wisdom says that citizens with "safety nets" and other social programs to help them out would have greater prosperity than those who do not. Isn't it, after all, the liberal maxim that social programs lead to greater prosperity?

Clearly, we are forgetting the unintended consequences of how these social programs are funded. When you punish prosperity and productivity by enacting crippling taxes on individuals and businesses, the net result is exactly what you'd expect: less productivity, less prosperity. By punishing the productive individuals in society we destroy incentives for them to create more wealth. Furthermore, the drain of deadweight loss, bureaucratic overhead, and inefficient allocation of monies all but guarantees that the tax revenue collected will be significantly under-maximized. The combination of disincentives to productive members of society and wasteful misallocation of taxes creates a significant drain on an economy.

This explains the chart above in that the consequences of a massive tax burden are a less prosperous society. And what of the outlier, Norway? Because the majority of their social programs are not funded through tax, but rather natural resources (read: oil), they do not suffer the same unintended consequences that the tax-supported countries have. Despite this, one wonders that if the oil revenue were held solely in private hands, where it would be used more efficiently, how much additional GDP per capita Norwegians would have.

The conclusion is clear: tax hikes reduce prosperity. Despite this, we have Democrats in the Michigan and US legislature trying to raise them up further. You cannot tax your way into prosperity. While countries around the world (especially, surprisingly, in Europe) are slashing tax rates, all we hear from our government is that they need to be raised.

It is time for the Democrats to wake up.

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