Government Is Not a Wise Steward

“Every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him.” ~ Adam Smith 

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A group of billionaires — 16 who have identified themselves, and 1 who has chosen to remain anonymous — has gotten some attention recently for circulating an open letter in which they have called for higher taxes on high incomes and huge fortunes like theirs (Anthony Gill and David Henderson have discussed it).

Maybe it’s a noble sentiment, but what makes us think paying higher taxes is especially virtuous in a world with so many alternatives?

Given its track record, it’s not at all clear to me that the U.S. government — or my state, county, or local government — would be a wise steward of any money I feel like I don’t need. You know those bumper stickers that say something like “It will be a great day when schools have all the money they need and the army has to hold a bake sale to buy a tank,” or something like that? I’m not sure I want more of my money going to an entity that spends so much on tanks and bombs.

You can probably see the dilemma. Governments at all levels take our money and do some good things (roads, basic science) and some bad things (wars, ethanol subsidies). I’m not sure they’re going to be good stewards of the money they might take from others — and perhaps eventually from us, if the history of the income tax and its downward drift is instructive.

Should they give it to charity? Maybe. Even then, the decision isn’t quite as clear-cut. There are a lot of nonprofits that seem to exist strictly to raise funds, not to actually solve any problems, as Tyler Cowen points out in his book Big Business: A Love Letter to an American Anti-Hero (which I discuss here). Even if we address the possibility that we end up joining a scam like the Bluth Foundation’s battle against TBA, Yoram Barzel famously argued that it is very difficult to give away money in a way that benefits the people we are trying to help. Even for the devoted humanitarian with resources like GiveWell at her disposal, “Give your money to charity” wouldn’t obviously deliver maximal bang for one’s benevolent buck.

This raises yet another option, which would be some variation on “Just leave it in the bank.” Park it in the stock market where it will earn returns, and reinvest the earnings in ever-more-productive assets with which we can raise our standards of living.

So what should people do? It’s a terribly hard problem without an easy solution. Indeed, I would suggest it’s a problem that doesn’t have a “solution” at all. For just about any proposition, there’s a passage in Adam Smith that’s insightful and illuminating, and this case is no different. Here’s Smith:

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

Part of being human is having a nearly endless number of ways we can think of for others to spend their time, their talent, and their treasure. However, we don’t have knowledge of another’s “local situation” sufficient to do much more than offer advice. If some of the super-duper-rich think the very best use of their money is to give it to the government, that’s their prerogative. They owe it to others, however, to respect their liberty to choose otherwise.