Under the gigantic welfare-warfare state under which we have all been born and raised, it is easy to fall for the mainstream press’s condemnations of any significant reductions in the number of federal employees and in the federal programs they administer. The statist critics point to the rising unemployment that is being generated by such layoffs and lament what they claim is serious economic harm to American society being generated by such layoffs and the reductions in federal spending.
The problem is that the statists focus on what is easily seen — that is, the short-term consequences of these layoffs and reductions in federal spending. In the process, they fail to focus on the unseen consequences, such as the doubly positive effect that such layoffs and reductions have on economic prosperity and the overall standard of living in society.
Imagine that for the first 100 years or so of our nation’s existence, America had no welfare state and no national-security state (i.e, Pentagon, CIA, NSA, vast permanent military-intelligence establishment, and empire of military bases). Imagine no income tax to fund all this and no IRS to collect it — that is, people free to keep everything they earn and decide for themselves what to do with their own money.
Imagine that 100 years ago, however, Americans decided to adopt a welfare-warfare state, which would, let us suppose, entail a 50 percent income tax to pay for it. Once the 50% tax was being collected, the federal government, let us suppose, used the money to hire three million people from the private sector to become federal employees, either in the welfare-state section or the military-intelligence sector.
Let’s assume that things stay that way for around 100 years. Then, one day libertarians recommend that all of the welfare-warfare-state functions be dismantled and all federal employees working in these two areas be laid off. They also recommend a repeal of the federal income tax and a termination of the IRS. Let’s assume that the American people agree with the libertarians and pressure Congress into enacting such proposals and pressure the president into signing them into law.
The reaction of the mainstream press would be predictable. They would focus on all the people being laid off and lament the increasing unemployment. They would also focus on the adverse impact on all the businesses that were indirectly dependent on the federal largess — for example, all the restaurants and bars near military bases, which would now be closing.
But what they would not focus on is on the unseen positive consequences of what was happening.
Prior to the enactment of the new law, there are 3 million people who are not producing wealth in the private sector. They are living off of the 50 percent of the wealth that the IRS is seizing from people who are still producing wealth in the private sector. Those three million people in the federal sector, along with their welfare-warfare state programs, are essentially comparable to leeches in that they suck 50 percent of the wealth of wealth-producing people in the private sector.
Once the layoffs and the reductions in spending take place, everyone in the private sector is now able to keep 100 percent of his earnings rather than just 50%. That extra money means that people have more money to spend or save. That additional consumption spending or investment spending generates the jobs that hire the people who were previously in the federal sector and who got laid off.
That means that there is now a doubly positive effect. The private sector is now free to keep all the wealth it is producing. Moreover, the people who were in the government sector are no longer leeching off the private sector but instead are themselves now in the private sector producing wealth. That double positive economic effect significantly raises the overall standard of living of the American people.
Or consider it another way. Suppose federal employees and their welfare-warfare state programs are sucking away 90 percent of the income of people in the private sector. If suddenly all those federal employees were laid off and if their welfare-warfare programs were suddenly terminated, it would be easy for the mainstream press to condemn this horrible libertarian policy. They would say: better to keep all those people on the federal dole even if they are sucking away 90 percent of the income of the private-sector people who are producing the wealth that the IRS is confiscating.
But the more people in the private sector who are producing wealth, the higher the overall standard of living will be. Thus, while laying off all those federal employees and their welfare-warfare programs would necessarily mean that those people would have to re-train to get the rapidly expanding new private-sector jobs, the fact is that over time society overall would be much better off in terms of higher standards of living.
Equally important, if not more important, economic liberty — that is, the right to accumulate unlimited amounts of wealth though voluntary economic enterprise and decide for one’s self what to do with it — will have been restored to the American people.
This article was originally published at the Future of Freedom Foundation and is republished here with permission from the author.
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