My first post of this name was a survey of many areas where programs intended to help, either a specific group or the public in general, instead produced harmful results, often results exactly opposite of those intended. This time I want to look at one very specific version of this phenomenon. To be specific, the way in which laws intended to help make life better for the poor end up harming the poor*.

Let us start with the basics, things we can agree upon regardless of political perspective. First, to provide for the poor, be it training or outright cash subsidy, food stamps or medial assistance, housing or subsidized employment, day care or job readiness classes, the government must spend money. Second, to obtain that money the government has three options. It can tax people, it can borrow on the market by selling bonds publicly, or it can inflate the money supply through Federal Reserve**.

Now, let us stop and look at the results of any of those three choices. I have written extensively about inflation, so we can just say that it does immeasurable harm to the economy, and is probably the worst choice, though the most popular among politicians. The choice to borrow is damaging as well, as it puts a tremendous drag on the economy, but is better than inflation. And finally, taxation, though politically unpopular, is probably the best, as it forces consumers to reduce consumption to the same degree government increases consumption, leading to less economic distortion, not to mention that consumers now know precisely how much government is taking. It is still damaging, as it pulls lots of money out of individual pockets, but it does the least overall harm to the economy.

The problem is this. No matter which choice is enacted, the group most heavily hit is always the group with the most. The reason this is true of inflation should be obvious, by eroding investments and savings, clearly those with more wealth suffer more under inflation. However, borrowing is almost as bad, especially for those with new ideas who want to start up a company, as the government's competition dries up investment funds and generally freezes the economy. Though even existing firms are not much better off, as they cannot borrow to expand nor can they refinance loans coming due, or issue new bonds. So, in the long run, borrowing too hits those with the most.

Taxes on the other hand, are not obviously going to hurt the richest the most, but political necessity makes it so. No politician is ever going to suggest a head tax, saying every citizen must pay so much. First, because with the massive numbers involved in government spending, many could simply not afford it. But also because we are so used to progressive taxes, we simply wouldn't accept a tax which was not somehow tied to wages. But even a flat rate tax is out of the question, as the rate would still likely leave many without enough to survive. So, out of political realities, taxes will always be weighted toward taxing the rich more heavily, perhaps hitting them alone, as has been suggested by our current administration.

The problem with this reality is, whether through inflation or borrowing or taxes, when the rich lose money they, like everyone else, begin to economize. They not only spend less on personal consumption, but they reduce what the would otherwise invest. And a a result, new jobs are not created and old jobs are often lost. What many forget in this formula is that the jobs lost are usually the most marginal, that is those who earn the very least. So, by spending to help the poor, the government manages to eliminate some of the jobs which would have prevented them from being poor.

Now, some will counter with the argument that the government spending creates jobs, and they more than offset the losses from the private sector, but that is fantasy. As I explained in "Bureaucratic Management", government's incentives differ from for profit ventures, and as a result spending is always less efficient. That means, quite simply, what the government spends has less impact than the same money left in the hands of those who have a personal stake in turning a profit. Less efficiently allocated resources means less work.

I am sure this sort of argument will require more than this one post to convince those who believe in the government's benevolent influence, so I will wrap this up now with a promise to return again with another post, probably incorporating those many other topics I mentioned in footnotes alone. Until then let me simply make one point. Regardless of whether you think it is worthwhile,can we agree that taxing the rich clearly does harm to people other than the rich? Paris Hilton might miss her manicure, but her manicurist misses that check even more.Yet somehow, when "soak the rich" schemes are discussed no one ever thinks about those who make a living thanks to the rich and their investments and consumption***. And that blindness is precisely why I argue that in trying to help the poor, many times the state ends up creating more poverty than they eliminate.

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* I intend to limit this post specifically to the economic aspects of taxation and funding. That does not mean that is the only way in which these laws bring about harmful results. The first "When Help Hurts" mentioned disability benefits and welfare, while unemployment insurance was covered in "The Endless Cycle of Intervention" and "Perverse Incentives",  and "Consequences" and "How Democrats Keep the Poor Poor" both showed how the incentives of these programs encouraged people to fail to provide for their own needs and become more reliant on the state, essentially making it harder for them to get out of poverty than had there been no help at all. And, in more general terms "Subsidizing Irresponsibility and Poor Planning", "Social Security is Not Insurance", "Welfare for Malibu Residents" and "Why Borrower Forgiveness is Both Wrong and Dangerous" explain how trying to indemnify people against the negative outcomes of their choices ends up encouraging either more bad choices, or, at the very least, encourages less prudence and fewer precautions against the unexpected. So, while I limit myself to the tax question, there are countless other ways in which laws designed to help the poor end up doing just the opposite.

** The exact mechanism is complex and really irrelevant here. It keeps up the pretense that the government is selling bonds, but the end result is that the government is effectively telling the Fed to print money and use it to pay these debts. The only downside to the more complex system is, since bonds can serve to back new credit at a less than 100% reserve ratio (I believe it is 30%, but I may be out of date), the money supply actually increases by several times what was borrowed, making this scheme MORE inflationary than had the state simply printed the cash it needed.

*** The best example of this shortsighted idiocy is the idea of "luxury taxes". The truly rich will always get around those fees, usually by purchasing overseas. The one who suffer will be the boat builders, jewelers, auto mechanics and others who made a living creating and servicing those "luxuries", usually not the wealthiest of people. The other group harmed will be the middle class who will be priced out of the market entirely, where previously they may have been able to purchase the occasional luxury. Oddly enough, these taxes make luxuries less obtainable for those not rich, while putting the poor and middle class out of business, yet do little to the richest.

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POSTSCRIPT

As I said, this topic is going to be revisited in the very near future. When my hands allow me to type at greater length I plan to incorporate all of the topics cited in the footnotes along with a bit more comprehensive discussion of the economic impact of funding the "war on poverty". But at the moment I am not up to that task, in fact I had to cut this a bit short, so it will have to wait. Please check back soon, as there is more to come.