Government Spending and the Zero Sum Game

Why won’t people who love to make zero-sum arguments about the economy apply their own lessons to government spending?

Anyone who has expended energy arguing for free trade, market competition, and the open exchange of ideas has repeatedly encountered the same obstacle: zero-sum assumptions misapplied to dynamic, nonlinear phenomena. Almost anywhere you see statism advancing— in economic policy, national security, even the basic conditions for free speech—you can bet that underneath there’s a faulty zero-sum argument. All complicated matters of life, according to this way of thinking, can be reduced to a simple binary scale: Press your thumb down on the bad end, and the good one will go up.

So when President Barack Obama slaps a 35 percent tariff on Chinese tires, as he did on September 11, he does it in the name of ensuring that (as he put it in a campaign promise) “China is no longer given a free pass to undermine U.S. workers.” In this yin-yang formulation, there is a single pie of domestic American tire consumption, and China’s slice is growing bigger at the expense of domestic producers. Forget the overall U.S. economy, with its 99.9 percent non-tire-industry workers (and its government-owned, money-hemorrhaging auto companies), all of whom are happy to take advantage of cheaper tire prices. And forget a once-starving country that has catapulted more human beings out of poverty within a generation than any nation in the history of the world.

Most of all, forget the famous formulation by Adam Smith, dating back to the Declaration of Independence: “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.”

You might have thought that the New Democrats routed those zero-sum arguments years ago, perhaps when then–Vice President Al Gore eviscerated Ross Perot while debating the North American Free Trade Agreement on Larry King Live. But Old Democrat economics made a rousing and depressing comeback during the 2006 congressional elections, to the point where Hillary Clinton felt the need to actively campaign against the policies (including NAFTA) of her husband. Ideas long marginalized to the Ralph Nader slice of the left are back in vogue in the mainstream, and everywhere you look you see a pie.

“The truth is,” first lady Michelle Obama said in April 2009, “in order to get things like universal health care and a revamped education system, then someone is going to have to give up a piece of their pie so that someone else can have more.”

It’s an alluringly simple vision, this notion that public policy challenges can be solved merely by lifting some gold off one end of the scale and plopping it down on the other. You see it every day, for example, in California, where for decades the conventional wisdom has held that the proximate cause of the Golden State’s periodic fiscal meltdowns is Proposition 13, the 1978 ballot initiative that caps annual property tax increases. If only those greedy homeowners gave up a bit more of their pie, presto! No more budget problems.

There are three fatal flaws in this line of thinking. The first is that it fails to acknowledge, let alone explain, the fact that we keep placing more and more gold on the “government services” end of the scale without seeing anything like a commensurate increase in results. If the fiscally troubled 50 states had simply limited the growth in their budgets to the growth rates of population plus inflation in the good times of 2002–07, they’d be sitting on surpluses instead of lobbying Washington for a second round of federal bailouts.

President George W. Bush increased federal education spending by 58 percent in real terms, and Obama is on track to at least double that record. How much gold can the education establishment consume before the current crop of governing Democrats begins to entertain the notion that the root problem of public schooling isn’t a lack of funds?

The second flaw in zero-sum economic logic is that by consciously whittling down issues to a single, hermetically sealed scale, policy makers overlook the complexity of consequences, whether intended or not. Who could have predicted that, as Veronique de Rugy points out in “Who Wants to Tax a Millionaire?” (page 16), a 1969 tax aimed at just 155 of the country’s richest people would end up affecting 4 million Americans 40 years later? Certainly not those who proposed and passed the tax at the time, nor those who are acting on similar impulses today.

Nor do soak-the-rich types entertain the idea that their high-value targets might respond to new incentives in ways that could have negative side effects. The rich are so different from you and me, the thinking goes, that their behavior won’t change. In March 2009, when the president was pushing to jack up taxes on charitable contributions by the well-to-do, he pooh-poohed the possible negative impact on charities. “Now, if it’s really a charitable contribution, I’m assuming that that shouldn’t be the determining factor as to whether you’re giving that $100 to the homeless shelter down the street,” he said. “I think it is a realistic way for us to raise some revenue from people who’ve benefited enormously over the last several years. It’s not going to cripple them. They’ll still be well-to-do. And, you know, ultimately, if we’re going to tackle the serious problems that we’ve got, then, in some cases, those who are more fortunate are going to have to pay a little bit more.”

Back when New Democrats still held sway—and both the stock market and economy were humming along—auto-abusive ideas such as taxing every stock transaction were limited mostly to Ralph Nader’s presidential campaigns, where corn-pone wag Jim Hightower was fond of saying things like, “Yeah, Wall Street’s whizzing all right—it’s whizzing on you and me!” Nowadays such sentiments are being translated into new legislation from the majority party in Congress, such as the Let Wall Street Pay for the Restoration of Main Street Act of 2009. The idea that Wall Street is utterly unconnected to Main Street (whose adult residents typically own stock and occasionally work for companies who have taken advantage of initial public offerings) would almost be funny if so many people in power didn’t actually believe it.

The third and most infuriating aspect of zero-sum economics is that its practitioners suddenly forget to apply the same standard to one of the few entities that can accurately be described with a pie metaphor: government budgets—especially on the state and local level, where printing money is not an option and sometimes you aren’t even allowed to run a deficit.

This issue of reason is filled with infuriating stories, including cops legally stealing from people who haven’t been charged with crimes (Radley Balko’s “The Forfeiture Racket”), a college student getting punished for reading a book criticizing the KKK (Greg Lukianoff’s “P.C. Never Died”), and a chilling look at the drug war’s death toll (Brian Doherty’s “War in Juarez”). But one that should get your blood boiling every time you see a zero-sum argument is Steven Greenhut’s cover story on the “Class War” being waged by government workers against the rest of us.

As Greenhut details, public-sector unions are not just growing the pie of government on all levels; they are brazenly gobbling up two, three, and even 20 times the amount that they were taking just a few years ago—on guaranteed contributions to their pension plans alone. Wherever you see a politician or public servant warning about “draconian” cuts to public services, you almost certainly are witnessing an agency whose employees have negotiated a sweetheart pension deal within the last decade. It’s awfully hard to balance a budget, let alone improve public services, when you’re tripling a major line item. When will Michelle Obama talk about that pie?

Matt Welch (matt.welch@reason.com) is editor in chief of reason. This column first appeared at Reason.com.

Matt Welch is Editor in Chief, Reason





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