This article was originally published by Garet Garrett at The Mises Institute.
[This essay, which exposes the big-government policies of the Hoover administration, was first published in the Saturday Evening Post, on June 25, 1932.]
In the minutes of the Chicago City Council, May 12th last is the perfect example of how commonly we regard public credit. From bad taxation, reckless borrowing and reckless spending, the city of Chicago had so far prejudiced its own credit that for months it had been unable to meet its municipal payrolls either out of revenues or by discounting its notes at the bank.
Therefore, it knew what could happen to the public credit of a city. But with the public credit of a nation, it was different. On that day the City Council adopted two resolutions: One called upon Congress to reduce the federal government’s expenditures by one-fifth; the other called upon Congress to vote a Government bond issue for as many billions as might be necessary and spend the money “to make possible the American citizen’s inalienable right to earn an honest living for himself and his family.”
As if the taxpayer were willing, for the sake of some immediate relief, to increase the load of those who come next. And of course, he is. Hence the passion for public borrowing.
Not only are all these ideas of refuge and solution in public credit to some degree plausible; very often they are of good and wistful intention. This is notably so in the present. There is a crisis in the economics of human welfare. The intention is to overcome it. If truly it could be overcome by the use of public credit, no objection on the ground of precedent or political theory would long prevail. Public credit belongs to the people as a whole and they may do anything with it they like. Therefore, as to these ideas—any and all of them—there are only two questions:
First, will they work? Nobody can answer that. Nobody knows what lies in the future. Sometime the tide, of itself, will rise again. We take that for granted. Therefore these unprecedented uses of the public credit now being made, and proposed to be made, are to meet a crisis that must soon pass. President Hoover says:
I have no taste for any such emergency powers in the Government. But we are fighting the economic consequences of overliquidation and unjustified fear as to the future of the United States. The battle to set our economic machine in motion in this emergency takes new forms and requires new tactics from time to time. We used such emergency powers to win the war; we can use them to fight the depression.
But the risk is real. If the natural level of economic recovery were long delayed, then all these measures would very soon fail in the total ruin of public credit.
Yet suppose differently. Suppose they did work, the tide rising to save and redeem them, and that we should be able to perform the terrific gymnastic feat of getting back our equilibrium. What then?
Well, in that case we should have established certain things in the way anything is established—by the fact of its having once been done before, such as these:
That when the industrial rhythm breaks and there is an crisis in employment, it becomes a function of government to provide people with work; thus responsibility for unemployment comes at rest not upon industry, where we had thought it belonged, but upon government—the state—and must be charged to the public credit.
That when from bad banking, wild speculation, senseless credit inflation, or no matter from what cause, the private banking structure seems about to fall, it becomes a function of government to support it with public credit, not particularly to save the banks, but to save depositors. Thus responsibility for the solvency of banking as a whole passes to the government.
That when railroads, in a crisis, are unable to meet their interest charges, it becomes a function of government to save them with loans of public credit, as through the Reconstruction Finance Corporation, not for the sake of any railroad as such, but because if the railroads go bankrupt the savings banks, the insurance companies and many thousands of investors who hold railroad bonds will be hurt.
That when liquidation of commodities and securities has gone too far it becomes the business of government to stop it, using public credit by such means as it may think fit.
That when prices are too low—prices taken all together—it becomes a function of government to manipulate them back to where they belong. This it will do by inflating money and credit.
And it follows by necessity that certain functions of government are assumed, as, for example, the wisdom to know when a crisis is such a crisis, to know when liquidation has gone far enough, when prices are too low, when they are high enough again, how many bank failures constitute a crisis in banking, how many railroad failures constitute a crisis in railroad credit, and so on.
Whether this would be all for the best, or otherwise, is not yet the point. There cannot even be a discussion of it until we see clearly where we are going. It may be that industry cannot accept responsibility for unemployment; if so, perhaps the government must. It may be that in a crisis finance cannot any longer be responsible for its own solvency, nor business for its own continuity. It may be that we are done with the anarchy of prices which we have so long justified by supposing a law of supply and demand.
But if these things are true, and if now in any crisis such responsibilities must pass to the government, we have gone far unawares toward an experimental state we know nothing of by experience, almost nothing of by theory. That is to say, we have not consciously intended it. We have not considered what kind of state that would be, much less to decide if we want it. It is clear, however, that in passing these responsibilities to government we should be exchanging freedom for something else as yet unnamed.
Hilaire Belloc, in his book The Servile State, defined that something else as economic status. Security according to the economic status of persons, classes and groups, in place of freedom.
And we shall have done another thing. If only such ideas as these now current do prevail, and if they work, we shall have enormously increased the power of self-extension which is already inherent in government.
There are many aspects of government. The one least considered is what may be called the biological aspect, in which government is like an organism with such an instinct for growth and self-expression that if let alone it is bound to destroy human freedom—not that it might wish to do so but that it could not in nature do less. No government ever wants less government—that is, less of itself. No government ever surrenders power, even its emergency powers—not really. It may mean to surrender them, but on the first new occasion it will take them all back. One of the American Government’s wartime powers was the War Finance Corporation. The present Reconstruction Finance Corporation is a revival of that power in time of peace. And so it goes.
Observe that in time of prosperity government is bound to extend itself because revenues are plenty and there is always a purblind demand for special benefits to be conferred by public credit.
If now it is established that in time of depression government must extend itself even faster, prodigiously, in order to meet the responsibilities which we are so willing to pass to it by default, then the growth of government will be uninterruptible, without time or season, and the last problem of all is how people shall defend themselves against it.
Already the cost of government is absorbing, roughly, one-quarter of the total national income. One day’s work in every four belongs to government. We speak here of all government—national, state, city and local—from Washington above down to the counties, townships, boroughs and districts, all exercising the tax power.
As the total national income falls, the proportion of it absorbed by government will rise. It must rise because government is the one thing that cannot be liquidated or deflated in time of economic depression. To the contrary, as we have seen, it must extend itself to meet new responsibilities. Therefore, taxes must be increased, first in order to provide as much public revenue as before, and then further increased to provide more revenue than before. Thus, in bad times like these, the proportion of the total national income absorbed by government will rise in a special manner. Nevertheless, the rise, irrespective of the state of the times, is continuous. The cost of government rises faster than the national income when the national income is rising. It rises even faster when the national income is falling.
The increase in the past few years has been such that if it should continue at the same rate, the cost of government fifty years hence would absorb the whole national income. Then we should all be working for government, either directly as state employees or indirectly to support the employees of the state.
Already of those above ten years of age gainfully employed in the whole country, male and female, about one in ten is directly employed in government service.
The per capita cost of all government has increased as follows:
|In 1880 it was||$13.56|
|In 1903 it was||$19.39|
|In 1913 it was||$30.24|
|In 1923 it was||$88.94|
|In 1929 it was||$107.37|
In 1932 it will be, approximately $124.00
The first thought will be that the war did it—the war itself and the after costs of the war in such things as veterans’ relief, pensions and national defense. But these are Federal expenditures, and they have much less to do with the rise in the cost of all government than you would suppose. By the figures of the National Industrial Conference Board, the per-capita costs of government separately stated, are:
Half the total cost of all government is the cost of city and local government, and that per-capita cost in 1929 was three times what it was in 1913.
Taxes have risen to a point at which they begin to devour people’s possessions, and the taxpayer is wild for relief. What relief does the taxpayer imagine? This—that the cost of government shall be reduced.
How shall the cost of government be reduced? By economy, by the elimination of graft and needless waste, by a consolidation of government’s competitive parts, by a reform of its structure to limit the number of local and civic units because duplication is costly. In brief, government shall find ways to do what it does for less money. Not less government, you see; the same amount of government for less money.
And all this intelligent uproar is in a sense superficial and probably delusive. It is superficial wherein it aims only to abate a very acute pain in the taxpayer’s pocket, and if anyone supposes that reducing the cost of government by economy and greater efficiency will limit government itself, it is elusive at the crucial point. More than that, reducing the cost of government by measure tends to serve the most potent forces now acting to extend government.
Why? The explanation is simple. The more efficient government is, the less it costs per measure, all the faster it may be extended without producing that very acute pain in the taxpayer’s pocket. This pain is the terror of government because it arrests its growth.
And now you will see a selective struggle taking place within government itself. The impulse is to select the more extensible forms.
The structure of government is by strata, beginning with innumerable small local units, such as boroughs, townships, school districts, improvement districts, and so on, each one exercising the tax power; rising thence to counties, cities and states. At the top is the federal government. In the whole country there are approximately 500,000 separate units of government. This is the estimate of the tax commissioner of the state of New York, writing an essay in Community Service magazine on the preposterous duplication of parts, offices and powers in government.
“Take the case of New York,” he says.
That state has sixty-two counties and sixty cities … In addition there are 932 towns, 507 villages, and, at the last count, 9,600 school districts … Just try to render efficient service … amid the diffused identities and inevitable jealousies of, roughly, 11,000 independent administrative officers or boards!
This extreme of home rule is not good for government. The tax power, in so many hands, is much less effective than it might be. So now there is a movement—a movement within government, independent of the taxpayer—to rationalize the structure from the bottom up, each next higher stratum with an impulse to absorb the powers of the one below, or, where they cannot be absorbed, to divide them reasonably. And at the top the federal government, with no authority over the sovereign states, would very much like to come to an understanding about taxation, because more and more Federal and state taxes collide at the same source, as with the income tax, which now some states are using in competition with the federal government. Such competition is embarrassing and unscientific from the common point of view of government seeking revenue. It is well known that a cow milked by a few expert hands in a regular manner will give more milk than the same cow milked in a haphazard manner by the neighborhood.
Certainly if the structure of government were rationalized, we could easily have as much government as before for less money. But there is the specious point again. Not less government; only as much government as before for less money. The cost of government by measure is one thing; the quantity of government, at any cost, is another.
Tax rates have been rising by necessity because the national income has been shrinking. It takes a higher rate of taxation to produce a given amount of revenue. At the same time, new taxes have been invented. There is yet everywhere a deficit in the public revenue because the shrinkage in everything taxable was so sudden and violent.
Now suppose that under stress of abnormal public revenue the structure of government is somewhat rationalized and that by such means as economy and efficiency the cost of government by measure is much reduced. Suppose it. Then what will happen when the national income rises to normal again?
There will be an enormous increase of public revenue, as there was after the war from the carry-over of the wartime taxes. All the public treasuries will be rich. And there is bound to be, again as it was after the war, a terrific extension of government.
The rise in the cost of government is not from increase of graft and corruption, for these evils in a relative sense are diminishing; nor is it from an increase of waste, for of this the ratio has probably been fairly constant. What it means is extension of government—not bad government only but good and bad together.
Let it be asked: What are the political and social forces now acting to absorb the national income for purposes of government—acting, that is, to increase taxation? First by habit one thinks of those for which we have traditional images: The machine, the boss, the pork barrel, the spoils system, the politician everywhere in his popular character, acquiring merit and power by spending public money; doing things for his people with the money of other people, taking care at the same time to do enough for himself with everybody’s money. The spender of public money will never want followers.
“Of course,” said the Secretary of the Treasury2 recently, in a speech before the New York City Bar Association,
the people are in a large measure themselves to blame. They have not only tolerated but given encouragement to an ever-expanding cost of government. The spenders were the ones elected to office and bond issues voted with cheerful alacrity.
One who remembers a Southern senator shouting out loud that he would steal for his people a hog every time a Yankee got a ham may be indignant, but the feeling is not personal. The senator was only human. These predatory, parasitic, more or less shameless forces are inseparable from government. They do increase the cost of popular government. Nevertheless, they are limited. That is to say, corrupt government tends to limit and defeat itself. Moreover, these forces are thoughtless. They have no theory among them. They do not want to redistribute wealth; they want only to prey upon it.
Now, much more potent are the forces acting upon a definite political doctrine. Such are the extreme liberals, the Socialists, the radicals, themselves perfectly honest, all haters of graft and corruption in government, yet who are for increasing popular taxes on any pretense of public benefit because that is one way of redistributing wealth downward, according to their doctrine.
What are popular taxes? The Secretary of the Treasury, in the speech just referred to, tells what they are: “the income and inheritance taxes, because they are so levied as to reach comparatively few people.” The income tax is popular because fewer than 2 percent of the people pay income taxes. Why should not everyone pay an income tax? The principal reason, from the point of view of government, is that a universal income tax would be a powerful restraint upon the expansion of government.
And now observe how it is that on one side, the government—even a conservative government—and on the other side, all the forces moving to effect a redistribution of wealth downward by political theory, are bound for different reasons to favor popular taxes. The government favors them naturally—”the most feathers for the least squawk.” And those radical forces, who may have nothing else in common with this government, favor them on the ground of doctrine.
Observe another strange bedfellowship. When the railroads throw themselves on the hands of the government and demand public credit to save them from bankruptcy, these radical forces do not protest, or, if they do, it is in an academic sense only; and the reason for this is that they believe in the public ownership of railroads, and see, perhaps more clearly than the others, that such use of public credit tends to bring the experiment of state ownership to pass. For the same reason they protest lightly or not at all against the use of public credit to save the private banking structure, for that will tend to bring about state control of credit. They are for anything that tends directly or indirectly to get the government into business, for that leads to state ownership of the means of production. If taxation meanwhile has to be heavily increased, so much the better, so long as the increase is, as it certainly will be, in the field of popular taxes, for thereby wealth is redistributed downward and capitalist society, in which they disbelieve, is on its way to trouble.
A third formation of forces moving in a parallel manner to absorb the national income by extension of government is made up of practical reformers, idealists, good-government people, with or without any political theory. What they have in common is a certain reaction to the sight of human misery, squalor, discomfort, disadvantage or what they believe to be curable wretchedness.
They preach a gospel of the responsibility of the state to administer happiness, not because the state should, not because they themselves would prefer the kind of state that does, but simply that the state can. Thus, government responsibility for old-age security, child life, tonsils, widows, backward mentalities, employment insurance, better maternity, public nursing, recreation, adult play, plumbing, housing, right nurture, infant feeding, vocational guidance, the use of leisure, everything of the good life for everybody, as a responsibility of the state, to procure it, provide it, superintend it. Everyone knows that impulse. How many times, on looking at slum dwellings or some other distasteful human spectacle, have you yourself said, “There ought to be a law,” and so forth? Well, but “a law” means in every case to interfere by power of government, backed by the public credit.
Demands upon the public credit for social service are most difficult to resist. There is the emotional appeal, and to this is added the practical suggestion that, after all, it will pay, or that it will be cheaper in the end.
Two children in every nine are so far handicapped physically or mentally as to need special treatment and training. Who so mean that he will not himself be taxed, who so mindful of wealth that he will not favor increasing the popular taxes, in aid of these defective children?
Moreover, as the report of the White House Conference on Child Health and Protection said,
It is unquestionably better policy to spend more money today in helping the handicapped child to help himself than it is to spend many times as much tomorrow in supporting him at public expense.
At the recent national conference of the American Association for Old Age Security, Representative Connery,4 who is moving an old-age pension bill in Congress, said,
Evidence was introduced before the House Committee to show that the cost of old-age pensions would be much less to the states and municipalities than is the present cost of the workhouse institutions. It is my hope that the Congress, which has seen fit to provide $2 billion to protect the banking interests of the United States, will see the necessity of passing this legislation to protect the old people.
Fourteen states now have old-age pension laws, and 100 other old-age security measures are pending in forty state legislatures. The Assistant Commissioner of the Department of Social Welfare reported on the first year of old-age pensions in the state of New York, saying the protest against them came mainly from people in the rural districts where the pensioners were visible to those who were struggling to pay the taxes out of which old-age pensions are provided; and the delegate representing the corresponding work in California complained that the operation of the old-age pension law in that state was hampered by the two conditions that to be eligible one must be a citizen and of good character.
Whether old-age pensions would be cheaper than poorhouses is a question which, even if it is permissible, cannot be determined as a matter of fact. The same spirit that moves old-age pensions has been improving the poorhouses. Trenton, for example, has made the word taboo. Its poorhouse is a municipal colony, governed by the idea, says the magazine of the New Jersey League of Municipalities, that as a refuge for the unfortunate it differs from people’s homes “only in its larger facilities and the greater number of its inhabitants. Every resource to soften its institutional features has been used, including motion-picture shows, concerts, an extensive library, pool tables, newspapers, magazines.” It is really a better place to live than many of the private homes taxed to support it.
The cost of social service, exclusive of education, now is representing one-fifth or more of the total expense of cities. In enlightened states it runs even higher. For Massachusetts the cost of it is nearly two-fifths of all state outlay.
The effects and works of social service are very flattering to our sense of benignity; we are doing well by the less fortunate. Yet this unction is by most of us undeserved; it comes after the fact, with some sourness in it. Very little social service is really spontaneous, straight from the taxpayer’s heart. The promotion of it for many is an avocation, for increasing numbers it is a profession, and for a very great number of more or less trained men and women it is employment and livelihood.
“But where do many of these governmental elaborations come from?” asks the secretary of the Des Moines Bureau of Municipal Research.
Many originate with educational, recreational and sociological enthusiasts … These enthusiasts usually start by stating that such and such neighboring city has a certain public service or improvement; therefore, we ought to have it. And so these ideas spread like wildfire from community to community. But when one expresses a timid doubt regarding the necessity for such and such a project because of the expense, these boosters argue, “The public demands it,” when, as a matter of fact, they themselves originated the scheme… Further tax-boosting influences emanate from the “per capita” or “model” standards. Certain national groups, particularly in the field of education, recreation, health or sociology, have set up per-capita targets toward which they assert every city in a certain population range should aim. Then these enthusiasts return home from their national gatherings, and if they find that their city spends less for such service, they make it their business to see that it soon attains such a standard.
There is another reason why the taxpayer himself is not entitled to that unctuous feeling in the presence of social service. Now the oldest object of his animosity—namely, the political boss—has annexed the idea. Formerly the benefactions of the boss were intimate and personal, but to these he now adds the more diffuse benefactions of social service, and his base is wider. Such a boss as this now commands the support, first, of all the beneficiaries of social service; secondly, of all who promote and live by social service; thirdly, of those whose doctrine is to take and give; and he has still his machine as it was before. He is fairly secure.
“Cities have assumed new obligations,” writes Lent Upson, director of the Detroit Bureau of Governmental Research. “Increased wealth, with its higher standard of living, creates a demand for public services not known a generation ago.”
In twenty years, 135 new activities were added to the responsibilities of government in Detroit, such as high-school evening classes, children’s clinic, child-welfare nurses, transportation of the crippled, classes for mental defectives, training library personnel, testing gas, testing materials, health-education nurses, camps for tubercular children, public-health education, medical college, college evening classes, college summer classes, employment bureau, symphony concerts, cancer clinic, cancer nurses, human antiserum nurses, cooperative high school and the use of radio in schools.
Results, typical: Taxes in the same twenty years have increased from $14 to $53 per capita; public debt has increased from $15 to $175 per capita. A great deal of that admirable work was not paid for; the people could not afford to pay for it. They borrowed the money, and now the problem of Detroit is what to do about its debt. Bankers are loath to lend it any more money because investors are reluctant to buy any more of its bonds. Creditors are hard, yes; only, suppose there had been no creditors to borrow from. Out of the city’s own resources, unaided by creditors, the people of Detroit could not have enjoyed these benefits of social service.
What should or should not be is a question that belongs to argument. Here is the intent only to show how unlike and differently motivated forces, economic, social and political, are tending together not only to swallow up the national income in government but also to produce a result which some intend and some do not.
The loss of public credit, the complete ruin of it, would be the least of the consequences.
In a recent report on the “new poor,” made by the Welfare Council of New York City, there is a reference to “the mental infection of dependency.” This was upon the investigation of unemployment relief. But taking refuge in public credit will cause that same infection to attack business, banking, industry, agriculture, the entire body of private enterprise. Increasingly, as it may seem, irresistibly, we are using public credit to create an indigent caste, indigence becoming more and more comfortable until for many it may seem a goal; then a very great dependent caste referred to as people in the “lower income ranges,” who, without being indigent at all, are yet dependent upon public credit for security, for modern housing, for care in illness, protection in health, economic insurance, amusement and guidance; then a social-service caste to mind the indigent and oversee the dependent. In all of these ways we are exchanging freedom for something else—for security, for status, for refuge from the terrors of individual responsibility. The last may go very deep.
Émile Faguet, a Frenchman, in a book entitled The Dread of Responsibility, wrote,
We like to surrender ourselves to the state while allowing it to impose even heavy tasks upon us. The basis of this paradoxical inclination is the lack of personal will, and this lack of personal will itself comes from the horror of responsibility … We imagine today that everything is done by the aggregate without the will to act of any of the individuals composing the aggregate.
He was writing about French people, and he supposed this weakness in them was from having lived so long under a crown that did everything for them. But what of American individualism? Was it a myth? That you will be hearing. Has the modern circumstance overwhelmed it? The city, of course, is an important factor. The modern city is a new form of life, really, and one that we have no science for; in that form individual helplessness is a rising social liability.
Whatever else may go by conjecture, this will be evident in itself—namely, that a rise in the cost of government, suddenly in one generation, from a traditional basis to a point at which it begins to absorb one-quarter of the total national income, is a political and social omen of great significance. It will be evident in the same way that taxation has reached a point where it represents an active redistribution of wealth by hand and power of government. No particular kind of state is sacred, nor is any particular doctrine of wealth, but it is all the more dangerous to be going this road with no theory of either the kind of state it leads to or what shall be the status of private wealth within it.
Until about 1910, excepting only the period of the Civil War, the cost of the federal government was met almost entirely by customs duties and the tobacco and liquor taxes; and until about 1910 the cost of state and local government was met by the property tax, supplemented somewhat by corporation taxes, license fees and death duties.
Since 1910,” says the Secretary of the Treasury, “the picture has materially changed … The Federal Government adopted a full-fledged income tax in 1913, and estate tax in 1916 … Beginning with Wisconsin, in 1911, state after state adopted an income tax, though at very moderate rates, until today there are twenty-two with this form of taxation. The states have also invaded the field of consumption taxes formerly used almost exclusively by the Federal Government. Today every state imposes a gasoline tax, and thirteen make use of taxes on tobacco or cigarettes…
And he cites, for example, one state where the state income tax, which has just been doubled, plus the new and higher Federal income tax, will amount to more than one-fifth of a personal income above $12,000 a year, rising to more than three-fifths of a personal income above $100,000 a year. In the same state the levy upon corporation income, state and federal taxes together, will be one-fifth or more. This is the income tax alone! And thus the national income is absorbed.
Obviously, we cannot continue in this direction without consequences either disastrous in fact or revolutionary in principle. A total ruin of the public credit would be a disaster in fact. We might then wipe the slate and begin all over. Any alternative would be revolutionary in principle, such as, for example, as for the state to appropriate all wealth and administer it directly.
With a national income of not more than $60 billion this year, we are obliged to buy more government than we bought with a national income of nearly $90 billion in 1929; moreover, in this depression, we are obliged to buy a good deal of it on the deferred-payment plan. That is what it means to sell bonds. All of it has sometime to be paid out of taxes; and even those who may not pay these future taxes directly will pay them indirectly in the cost of the houses they rent, the food they eat, the clothes they wear, the gas they burn in their motor cars—in every item of the cost of getting born, growing up, growing old, even dying. It is imperative to reduce the cost of government by measure—that is, to make the tax dollar buy more than before. But that will be only like pruning the tree, for lustier growth hereafter, unless we settle what public credit is for in principle and limit in a drastic manner the ferocious growth of government.