Author: Stephen J Richmond

We worry about government spending, is it money well spent? Is it hurting the economy? What we rarely do is take a step back and remind ourselves of the logic behind those questions. Why do we worry about government spending and how should Liberals think about it in a way that maximises human Liberty? We normally agree some government spending is good, how do we tell the difference between "good" and "bad" spending?

For two centuries Liberals have liked competitive markets as a way of allocating resources, hoping they can allow individuals to signal what they truly want. Society has often forgotten that this is only true of competitive markets, not all deregulated markets, but once we add in that caveat Liberals tend to be on board. So the easier part of the question is handled there: some markets aren't naturally competitive and so a government might spend money to either provide that service or else regulate the market to make it more competitive. Think police, fire services, medicine or the army. Equally food and other product safety standards and regulation are a great example. Socialists have this job even easier as they can simply argue individuals don't make good choices and society makes better ones.

So what does bad government spending look like and how does all this fit in with redistribution?

A government might take up resources that could be used for something more worthwhile (and would in a competitive market!) and instead uses them on something that isn't as useful. Say a government decided to build a 200 meter high concrete statue of a fish and paint it. It would need to buy up enough concrete and paint for the project plus buy up the time and effort of planners, fish experts for accuracy, artists and engineers to construct the statue, paint it red and so complete their giant red herring.

How the government ends up paying for that, borrowing, taxes or printing money won't change the underlying problem: the physical resources and the human effort and time are simply wasted.

Redistribution is different. When the money is given to recipients it does not take up physical resources or time. The only real cost is in the administration of the redistribution scheme. The spending is different to other kinds of government spending because the government does not choose what it is spent on, the recipients do. Here the cost isn't about misused resources, these consumers are buying goods and services in the marketplace with money just like they would from wages. The spending decisions are not any less efficient than any other private spending. The cost here only comes from the macroeconomic effects of redistribution. What do those look like?

This can be affected by types of taxes, if the taxes are all on rentier income (like income from land or any risk free returns from investment and savings) and the income is then given to everyone then all this does is spread out rentier income. This really doesn't have any negative impacts. There are still the resources used in administration but the fact you are eliminating rentier incomes is actually a positive for the economy and so this is a net macroeconomic gain rather than a cost! Much like providing food safety regulations makes the food market work better, and brings the real world closer to the perfectly competitive ideal, taxing rentier incomes and redistributing them also acts as a gain for society rather than a cost.

If taxes are leveled on non-rentier incomes this is different. Here there should be some incentive effects where by taxing the incentive we get less of the stuff we want. If you taxed all income so everyone earns zero and then gave everyone an equal amount of money it's clear to see why markets would break down… but here comes the twist. Are we sure all income is non-rentier? If the most any CEO could hope to earn in any job was, say, £500,000/year are we absolutely certain they wouldn't do the job because currently they are paid in the tens of millions a year? Are we absolutely sure that markets are so perfectly competitive that no corporation is making any rentier income from a unique position it has? Doesn't that seem just a touch unlikely?

This opens up the last and most interesting part about redistribution. There is some point where taxes will get high enough that they are affecting incentives. At that point people will demand more money for the same services. Consumers can afford to pay because we are redistributing, literally giving them money to spend, so what will happen? Excess inflation. That inflation will eat away at our redistribution until the gap between people once again provides enough of an incentive for the work we want done to be done. That's very helpful for us as policymakers and Liberals.

This can be used many different ways and ultimately could be used in the era of ultra low inflation and interest rates to push the economy into full swing without overheating. However, in the short term I believe Liberals should use it as a defence for a mix of UBI and taxes corporations and the wealthy find hard to avoid. The Scandinavian countries, for example, have a high tax to GDP ratio and make extensive use of Goods and Services taxes, which are hard to avoid but should be regressive. So why do they have vibrant economies and low inequality? Simply for the reasons laid out in this essay: they heavily redistribute. We should do the same.

So redistribution is different to other government spending. Rather than minimising it we can increase it and know that we are always getting closer to efficient markets up until inflation gets too high, then we can pull back. Unlike other government spending where we want to keep costs down in redistribution we want to push it up as high as we can. Why? Because then each individual person has the maximum power to buy the goods and services they want from an economy that is producing as much of what people want as possible.

That's why redistribution is so different to other government spending.

Stephen John Richmond is a member of the SLF Council and has stood as a parliamentary candidate for the Liberal Democrats in Coventry South

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