I am usually dubious about the government trying to encourage certain behaviors. Examples:
- Buy a house
- Go to college
- Manufacture goods
- Any number of special interest earmarks
- “Saving” through IRAs and other tax-deferred vehicles
I like to think that most people know well enough to look out for themselves. They know well enough whether they can afford and need a house. They know whether they are college material or not.
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But in both of those cases, the government provided incentives to invest in houses and college educations, and managed to push up home ownership for a time, and college students as well.
The problem is that not everyone wants to or it capable of taking on the fixed commitment of buying a home. Not everyone is bright enough or motivated enough to go to college, and the effect of college on wisdom and job prospects is is dubious if you are not a top quartile high school student.
Better to be a welder than a Anthropology BA. Better to be a plumber than a Sociology BA. Better to be an electrician than a Humanities BA. Better to rent than own a home that you can’t afford.
Governments imagine that they can shape outcomes, and in the short-run, they can. In the long-run, the real productivity of the economy matters, and only those that can make it without government help will make it. Whatever government policy may try to achieve, eventually the economy reverts to what would happen naturally without incentives. There is a natural carrying capacity for most activities, and efforts to change that usually fail.
Politicians err greatly, both Democrats and Republicans, by promising that they can create a better economy. Please, leave the economy alone, and it will do better. Regulate the banks tightly, because their borrowing short and lending long causes most financial crises, but in general, the government errs when it encourages us via the tax code to do anything. Eliminate preferences, simplify the tax code, reduce the ability to defer income.
We will do better with humble politicians and bureaucrats who realize that there is not much that they can do, and so the size of government reduces.
Simple government and taxes causes companies to focus on operations, not tax savings. Same for individuals; let them focus on productivity, not tax angles.
Pushing an economy beyond its natural limits (carrying capacity) by government intervention does not work. Limited government works, and people have to live with the fact that the government can’t solve every problem. Woe to those where the government thinks it can do so.
By David Merkel CFA of alephblog