Mr. Anderson is Executive Secretary of The Foundation for Economic Education.
The newspaper headline read, Dam Destroyed,—Damages In Millions. The copy relates the horrifying details: “A group of terrorists announced responsibility for the destruction of the hydro-electric dam . . . A bomb exploding deep in the dam fractured the superstructure . . . The collapsing dam released a huge wall of water into the valley below . . . Within hours the lake was drained completely . . . Power generation was cut off instantly.”
The stunned reader can clearly recognize the devastation inflicted on life and property from such an evil event. Bombs in the hand of saboteurs can wreak havoc. The damage, both seen and unseen, is apparent to all.
The physical destruction of the dam, the leveling of properties from the onslaught of water below the dam, the loss of both electrical power and the lake itself are immediately discernible. Also recognized are the losses of future recreational activities from the lake, irrigation water for agriculture, and a low-cost source of electrical energy. The impact of the saboteur’s bomb in terms of capital destruction and a lower material well being for many people angers all who read or hear of such a violent act.
A public debate on the merits of blowing up the dam would be a discussion reserved for madmen. The harm from such sabotage is directly related to the exploding bomb. A universal condemnation of terrorism inevitably results because the devastation is so clearly recognized.
There is, however, another kind of sabotage. Unlike the exploding bomb at the dam, the damage from this sabotage is not as readily perceived. This second kind of sabotage is the “time bomb” of government interference in the marketplace. And unlike madmen debating the merits of blowing up dams, practically everyone participates in this forum of economic sabotage by political manipulation.
The problem arises not from an abandonment of common sense in such debates, but instead from a failure to grasp the destructive consequences that this government “time bomb” can impose on life and property. If the economic consequences of government intervention could be as clear and direct as the damage from an exploding bomb, no problem would exist. The great tragedy, however, is that the effects of this latter bomb are rarely that clear.
Windfall Profits Tax a Time Bomb
An excellent demonstration of this government “time bomb” sabotaging the productivity of the market has been witnessed in the public debates over the “windfall profits tax.” Political rhetoric seriously argued that the “solution” to the energy crisis was yet another tax. It was argued that such a tax would “solve” the problem of economic waste, while at the same time lead us to greater social justice.
But what is argued and what is true are rarely the same in politics today. The “windfall profits tax” is a classic example of sabotage with a government “time bomb.” And whether this sabotage is an act of evil or ignorance is irrelevant, for it in no way alters the outcome. The result of sabotage, intentional or misguided, is always the same—devastation of life and property.
The “windfall profits tax” is a wedge driven between consumers and suppliers of a scarce and valuable resource. It deprives the suppliers of a part of the price consumers will pay for additional oil or other forms of energy. So it is a cost of production that will have to be covered by higher prices if the additional production is to be undertaken. Gasoline prices and cigarette prices have consistently demonstrated this principle in the past whenever new taxes were imposed upon them.
It is, of course, this very result of increasing product price that has led to the advocating of a “windfall profits tax” as a means of curtailing energy consumption. At least there seems to be an understanding that less of a good will be consumed at higher prices than at lower prices. But it’s the other things that are not seen, and their harm to life and property, that is the force of sabotage to the marketplace.
It must never be forgotten that the advancement of human welfare is accomplished by increasing the abundance of goods and services in society. A curtailment of consumption by taxation can only discourage production and therefore lead to a worsening of economic conditions. Such taxation, therefore, is a direct undermining of our economic well-being as it increases energy costs and makes energy ever more scarce.
The Function of Price
A distinction between rising prices generated by increased taxes and rising prices resulting from market forces must be made. Rising prices generated by the market forces of supply and demand perform a valuable economic function. The higher market price makes consumption more costly and thereby consumers will demand less. Correspondingly, producers receiving these higher prices are motivated to supply more of the good. These higher prices, when market determined, encourage more efficient use by consumers and greater productive output by producers. This increased efficiency in the use of the higher priced good by the consumer and the increased incentive to produce more of the good by producers brings about an ultimate improvement in total welfare.
When higher prices are generated by taxation, however, the market process is sabotaged. The signal gets short-circuited. The demand by consumers falls in response to the higher price, but the “tax wedge” prevents the signal from reaching the producers. The result is a transfer of wealth, equal to the tax, from the consumers to the tax collector.
The public expenditure of the wealth collected by the tax invariably leads to the destruction of that wealth. Either through its consumption in wasteful activities (synfuel plants) or its employment in government regulation of future production (an energy department) the wealth collected by the tax is lost. The final result is a lower standard of living as the cost of living increases and productive activity declines.
The devastation to life and property from the destruction of the dam was visible to all. The evil of such sabotage could be clearly seen. But the sabotage by government taxation is never so visible. The unseen destruction of future prosperity by the political consumption of this wealth is every bit as devastating to our lives and property as the terrorist’s bomb. But to see it requires an understanding of the economic forces in the marketplace that direct our lives.
An understanding of all of the economic consequences, both seen and unseen, is vital if we are to guard ourselves from this second kind of sabotage.