Letters from an Ohio Farmer

Taxation and Unlimited Government

To My Fellow Citizens:

Throughout history, most political regimes have been what professional categorizers of such things call "extractive." We have no objection to the term. It is accurate enough and even vivid. Extractive regimes—that is, most regimes in most places in most times—protect the political and economic power of the ruling class by taking wealth from others. In the realm of international affairs, states and empires conquered others and extracted wealth from the defeated populations. Domestically, rulers imposed taxes on their subjects in order to fund the rulers' enterprises, especially foreign wars.

On the surface, the extraction of wealth from the subjects by taxing them would seem to be limited only by the will of the ruler. But in practice, the imposition of high taxes on the population destroyed the incentives of those being taxed to produce, ultimately drying up the rulers' source of revenue, often leading to the fall of the overreaching extractive political regime.

The American Founders, building on the liberal political theories of the 17th and 18th centuries, envisioned a different polity, a limited government the purpose of which was to protect the natural rights of its citizens. Such a government would of course require revenues, but taxes would be limited because the ends of government were limited.

The Constitution's "spending clause" (Art. I, Sec. 8, Clause 1) permits the levying of taxes for only two purposes: to pay the debts of the United States and to provide for the common defense and general welfare of the United States. Some Founders, especially Alexander Hamilton, supported an expansive spending and taxing power for the national government, but even this most ardent advocate of a strong national government understood the limited purposes of government. For Hamilton, the taxing and spending power of the national government was best focused on stimulating economic growth.

Hamilton and the other Founders understood, as Adam Smith taught, that freedom and economic growth could occur only if the government's power to interfere with the natural rights of individuals, especially the right to property, was constrained. They understood that sacrificing the natural rights of individual citizens to a government of unlimited powers would lead to slavery, not freedom. As James Madison argued in Federalist 10, the protection of the diverse faculties of men, from which the rights of property originate, "is the first object of government."

As we have argued repeatedly in these letters, the Founders' understanding of the Constitution as a charter for limited government has over the course of a century largely been overturned by a progressivism the central idea of which is that the job of government is to provide for the material well-being of all. The government envisioned by the progressives is necessarily unlimited in scope. And if the ends of government are unlimited, the revenues necessary to achieve those ends are likewise unlimited. Progressive government is a return to an extractive political regime.

In practice, taxation under the progressives' extractive regime amounts to adjudicating the distribution of resources among competing claimants. For today's progressives, the United States is not a community of individuals, but an array of groups whose demands must be met. But since government produces nothing on its own, certain favored groups prosper at the expense of others. Wealth must be transferred from more productive citizens to less productive ones. Modern progressives may invoke the language of rights, but what they really mean by the term, as we have seen, are privileges or claims to resources that are granted by government. All of this is done in the name of "equity" and "fairness."

The problem with the progressive version of the extractive polity is the same one that the old-fashioned extractive polity faced: raising taxes to pay for an unlimited government destroys the incentives of productive citizens to create the wealth that underpins economic growth. Without economic growth, taxes and wealth transfers create a zero-sum or negative-sum outcome. This situation is what economists call "rent-seeking": the distribution of a fixed stock of goods. Politics in such a regime is reduced to the maneuvering of politicians seeking advantage by redistributing wealth to favored groups in the expectation that those favored groups will re-elect them.

As the old saying goes, all that is certain in life is death and taxes. The problem today is that progressivism has distorted the end of government, eliminating the constraints the Founders recognized as necessary in a republic dedicated to the protection of natural rights. But unlimited government requires unlimited revenues. The result is a system of taxation that kills economic growth by interfering with the release of productive capital into the economy. Those who want a preview of the future of a progressive America need only look to Europe, where governments seeking to redistribute wealth have run out of other people's money.

Ohio Farmer

The Spirit of Checks and Balances

To the Members of the 112th Congress:

Senator Harry Reid of Nevada recently stated that the National Labor Relations Board, the regulatory agency established by the 1935 National Labor Relations Act, was “created in the same spirit of checks and balances” as the U.S. Constitution itself. NLRB “acts as a check on employers and employees alike,” said Reid. “It safeguards employees’ rights to unionize or not to unionize, if they so choose, it mediates allegations of unfair labor practices, and it does all this independent of any outside influence.”

Reid was defending NLRB’s decision to issue a complaint against Boeing, the aircraft manufacturer, for opening a new production facility in South Carolina to produce its latest commercial aircraft, the 787 “Dreamliner.” The NLRB filed its complaint, which is similar to an indictment in criminal court, because its acting general counsel contends that the company decided to open the South Carolina plant in order to threaten the International Association of Machinists, the union representing workers at Boeing’s 787 plant in Seattle, Washington.

The reasoning is that Boeing was attempting to punish IAM for going out on strike in the past, and intimidate it from going out on strike in the future, by opening a new facility to produce the 787 in a state where only 2.8% of private-sector employees are union members. Such an action, the complaint alleges, unlawfully discriminates against those Seattle workers represented by the union. Demonstrating a nice gift for irony, NLRB insists that it does not seek to prohibit Boeing from running its South Carolina factory, only to prevent the company from illegally intimidating IAM. The NLRB remedy, however, is to require Boeing to open and operate a second, unionized 787 factory in Seattle – one that would, of course, turn the non-unionized plant in South Carolina into a hugely expensive redundancy.

Reid’s argument could be considered a faint, though distorted, echo of the assertion in Federalist 51 that the Constitution’s “policy of supplying, by opposite and rival interests, the defect of better motives, might be traced through the whole system of human affairs, private as well as public.” In classical economic thought, of course, the defect of better motives in private affairs is supplied when individuals seeking their own benefit wind up inadvertently improving the lives of others by offering goods and services that are of higher quality or sold at lower prices than those provided by their competitors. As Adam Smith wrote in The Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.”

When he suggests that it is a logical extension of the American founding to have a government agency tell a company where it may and must locate its factories and offices, Reid is reflecting the New Deal idea that market competition was no longer a sufficient restraint on powerful industrial enterprises. The economist John Kenneth Galbraith argued for the same view in American Capitalism: regulatory agencies and labor unions imparted to our economic system the benefits of “countervailing power.” Such entities would offset the dominance of giant corporations in markets that were, Galbraith argued, theoretically but not effectively free.

Galbraith and Reid notwithstanding, for a federal agency to lay the groundwork to order a private company to build its products here and not there is contrary to, not consistent with, the logic of the American founding. For one thing, the Constitution protects both the ability of the individual states to govern their internal affairs, and the free flow of commerce between the states. States are prohibited, for example, from levying duties on goods “imported” from other states of the Union. The Constitution was, in this sense, the original North American Free Trade Agreement.

When Congress amended the National Labor Relations Act in 1947, it explicitly authorized state governments to enact “right-to-work” laws, which stipulate that private employers may not fire employees who refuse to join a union or pay union dues. Since a labor union is a kind of cartel, where sellers of labor agree not to compete against one another, right-to-work laws have generally had the intended effect of preventing unions from forming and growing. Since 1947, twenty-two states, including South Carolina but not Washington, have enacted such laws.

Since right-to-work provisions are legal, and the free flow of commerce between states is constitutional, it’s hard to see how the NLRB’s proposed course of action can be wise. If the agency winds up forcing Boeing to build production facilities in Washington, when the company would rather build them in South Carolina, it will nullify Boeing’s right to choose how to run its business, and South Carolina’s right to choose how to run its state.

There are other problems with Reid’s position. Although the Constitution states, “All legislative powers herein granted shall be vested in a Congress of the United States,” Reid means to restrain Congress when he describes NLRB, an entity created by Congress, as an agency that does its work “independent of any outside influence.” The outside influence he resents is Congress itself, or at least its Republican members. For Republicans in Congress to object to NLRB’s course of action concerning Boeing is “inappropriate … disgraceful and dangerous.”

Reid does not, apparently, have a gift for irony. He is outraged that elected members of Congress are objecting to an NLRB inspector bringing a complaint about the violation of NLRB rules before an NLRB administrative law judge – because of the threat such political “interference” poses to the “spirit of checks and balances.” The genius of the Constitution was to separate legislative, executive, and judicial powers. The genius of the New Deal was to combine them in agencies whose employees and friends want to keep them independent from – politics. Independent, that is, of democratic self-government. Independent, in other words, from the people.

“Which Side Are You On?” asks the anthem of the American labor movement. We know which side Harry Reid is on, and it isn’t James Madison’s.

Ohio Farmer