Contra Senator Sanders
Senator Bernie Sanders is at it again with yet another harebrained scheme. He has rolled out a plan to guarantee to every American a publically funded job, paying $15 per hour, with an additional $3 for health benefits. The price tag on this proposed plan is around $450 billion dollars, or 2.3% of America’s GDP. Unsurprisingly, Mr. Sanders’ plan faces a multitude of political and economic hurdles. In order to fund this program Sanders calls for large tax increases to be levied on America’s top earners and the ever expanding bracket of who this includes.
The plan’s stated objective is to decrease the number of unemployed workers. Currently, unemployment sits at about 3.8%, but by increasing tax rates on all incomes, the exact opposite effect would occur. By placing a cap on the amount of returns an individual can enjoy before they are subjected to hefty taxation, Mr. Sanders’ plan disincentivises investment needed to draw down unemployment.
A hefty tax would shrink Americans’ disposable income, meaning there would be a decrease in both private spending and saving. This is called the crowding out effect—when government increases taxes, it decreases the amount of money entrepreneurs and investors have to work with, leading to a decrease in private spending and investment.
The plan also draws resources away from the private sector. The government’s entrance into the labor market increases the demand for labor, leading to an increase in wages, which undoubtedly leads to an increase in inflation.
Companies can only absorb so many cost increases before they have to pass it along to consumers. This phenomenon, often referred to as cost-push inflation, shows that a gradual increase in the cost of labor leads to an increase in the prices of goods that consumers face. A good example of this is the rapid inflation the United States faced as a result of the 1973 energy crisis, which was not properly corrected until the early 1980's.
As I noted earlier, an increase in taxes would almost certainly lead to a decrease in saving, thereby hindering the rate of capital formation. By decreasing the actual amount of new capital that is being created, Sanders’ plan limits the rate at which the economy can grow and the amount of new wealth that can be created. Slowing the creation of capital would almost certainly lead to an increase in the rate of interest, again further hindering private investment. Overall, Mr. Sanders’ plan would crowd out private investment, lead to a misallocation of labor and capital, and decrease the overall creation of new wealth of American society.
However, I cannot help but feel that these issues are known by Mr. Sanders and his supporters, they just simply don’t care. Perhaps the most obvious effect of this program would be to create a class of workers who have a vested interest in seeing the programs continue. It is perhaps not too much to assume that this class of workers would quickly be formed into a loyal political base from which Mr. Sanders and his colleagues on the radical left could use to further push their agendas.
In addition to dulling the political awareness of those employed in such a program, it would make those workers tethered to the government for the livelihood of themselves and their families. Such reliance would undoubtedly lead to a number of limitations being placed upon their political rights and would severely limit the sphere in which those individuals would be free to act.
Such a program may be permissible during times of severe economic depression, where they are merely a short term measure to be repealed once the crisis is over, but allowing that sort of government control to be permanently imbued into America’s private sector is a large and dangerous step down the road to serfdom.