May 1, 2016 at 9:21 pm #18724
that category seems to be suffering from a tragedy of the commons. Hopefully you Professor Herbener will reply.
Public employee wages in Calif seem to be in the 6 figure range. How does that impact the private sector? Does the largess paid to them, come out of discretionary income of everyone else in Calif, because of higher taxes?
On a national level regarding the same thing, does the disposable income drop because of higher taxes?
Since the federal government is paid for by borrowed money, i.e. inflation, does it affect the discretionary income of the taxpayers?
Pat GilbertMay 2, 2016 at 1:55 pm #18725
Standards of living are lowered when resources are moved out of the hands of entrepreneurs whose production decisions must pass the test of profit and loss and move into the hands of bureaucrats whose production decisions are not subject to the test of profit and loss. This reduced efficiency is the primary effect of government control over resources and occurs regardless of the method of financing government expenditures.
Compensation paid to government employees are financed either by taxes, debt, or monetary inflation. In the case of taxes, the income of taxpayers is coercively extracted and transferred to government employees. Taxpayers have both lower after-tax incomes and lower standards of living. In the case of debt, the income of taxpayers is coercively extracted and transferred to the holders of government bonds. Once again, taxpayers have both lower after-tax income and lower standards of living. In the case of monetary inflation, the income of the late recipients of the new money is transferred to government employees and the early recipients of the new money. While the nominal after-tax income of taxpayers may stay the same (or even rise), their standards of living decline.
Even though most states have a balanced budget amendment, they also have outstanding debt. So the distinction between a state, say California, and the federal government is one of degree, not kind.May 4, 2016 at 11:59 pm #18726
Thank you for the answer professor Herbener
In the case of the federal government. What if we assume the debt is never going to be paid back. Since the dollar is the reserve currency of the world, wouldn’t the effects of fed printing being mitigated through out the whole world, so there would not be any appreciable inflation in the United States?
So in this case does the effect of overpaid workers not have an effect on the taxpayers standard of living?May 5, 2016 at 7:41 pm #18727
The wealth transfer from monetary inflation occurs regardless of whether or not the purchasing power of money overall changes, i.e., regardless of whether or not price inflation occurs. This is because, the first recipients of the new money bid prices of goods they buy higher than they would have been without their increased demand and thereby, deprive the least-eager buyers of the goods who have not received any new money of the goods they would have been able to buy otherwise.
The wider the demand for a given money, the less reduction in its purchasing power from a given increase in the stock of it. For example, suppose an additional $100 million in new money were created and spent by the Federal government in Washington, D.C., every month for the next ten years. Then the extra demand for goods by the residents of D.C. would lower the purchasing power of the dollar in D.C. As that happened, they would begin to spend the new money in other places where the purchasing power if the dollar hadn’t changed. The additional demands for other goods by other people who obtain the new money would bid prices up all throughout the country. Then Americans would begin to demand foreign goods to take advantage of their lower prices. If foreigners are willing to sell to Americans in dollars, then the prices of their goods would likewise be bid up to bring the purchasing power of the dollar in foreign countries into conformity with its purchasing power in America.
This process of wealth transfers via monetary inflation determines who in the private sector will be less well off when government officials are enriched, but the fact and extent of lower standards of living is determined by how many resources are drawn out of the private sector and into the government sector.
If the government levies a 10 percent tax on income so that, let’s say, 6 percent of society’s resources are controlled by government bureaucrats instead of entrepreneurs or if the government inflates the money stock so that 6 percent of society’s resources are controlled by government bureaucrats instead of entrepreneurs, then the reduction in standards of living in society will be the same. Whose standards of living fall and by what extent will be different in the two cases, but the overall effect will be the same.May 6, 2016 at 12:28 am #18728
In the first and second paragraph you are referring to the Cantillon Effect?May 7, 2016 at 11:42 am #18729
Yes. Cantillon effects are usually invoked to demonstrate why money is non-neutral. In response to any increase in the money stock, the prices of some goods move up to a greater extent and some to a lesser extent and the pries of some goods move up sooner and some move up latter. These changes in prices then have effects on profits and losses and therefore, production. As a consequence, the pattern of incomes in the economy change.
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