A reply to Dr M on the cost of govt

January 12, 2014

The writer counters Dr Mahathir's take on the government's fiscal policies.

By Medecci Lineil

This is a point-by-point rebuttal to Dr Mahathir Mohamad’s blog on the cost of government.

1. Governments need money. It cannot function without money. It has to pay the people who work for it. It has to provide services and infrastructures. And now it has to provide more and more social amenities such as education, medical care etc. And of course it must defend the country and maintain law and order.

To answer Para 1, you must come to a sense of understanding that the government is running against the market. Austrian economics teaches that governments do not earn money or revenue. They expropriate resources by taxing people, enforcement, regulations, summons and seizing goods. They then use the money to acquire goods and services or pay civil servants or subsidies to favored groups like Perkasa.

On the second note, civil servants are not performing any market function for profit and loss. This is because they are not subject to market pricing. Government jobs are paid out from taxpayers’ money whereas private jobs are paid out from accumulated capitals of firms and individuals.

As I firmly argued in the last article, civil servants from judges, army generals, school teachers, policemen; whether their services are necessary and beneficial or not, are consumers’ labor. This is simply because the payment of their wages uses up government revenue rather than providing the government with means of earning revenue. To maintain their operation, the government must turn to taxes.

On the third note, with regard of your statement “And now it has to provide more and more social amenities such as education, medical care etc” it gives in to the reality that only taxes will provide education, bridges and roads.

It sounds like turning more social amenities over to the government which can operate without profits, and cost savings; magically appear with better care for everyone. This is the problem of the government. They have critical problems of incentives that politicians and bureaucrats face when spending taxpayers’ money and ultimately the problem of managing capital which always leads to a depleted and obsolete capital.

I strongly recommend you to read the works of Ludwig von Mises and the Austrians Circle to understand the problem of economic calculation of socialism.

Thus the notion of “Governments need money. It cannot function without money” obviously indicates that they cannot rule without taxation.

2. The funds are mostly raised through taxes on the activities of the people, on incomes, on profits, on the services provided by the government such as transportation, sewerage, water and power, ports and airports, approval processes and oversights etc.

To answer Para 2, the funds are raised through taxes on people by coercion and violence. Direct threat of confiscation or imprisonment if payment is not forthcoming. Saying ‘NO’ is not an option for ‘CONSUMER’ obtaining government services.

For services provided by the government, since these do not bring an income to it, in my view it is much easier for Ministers and politicians wanting to spend on those that provide fame, glory and votes; eventually empowering the government further to increase taxes on individuals by force and violence.

3. Although there are many countries where people avoid paying taxes and rates, Malaysians generally pay their taxes and other charges for services rendered by the government. But as the cost of the government increases over time, the taxes and rates will need to be increased. Naturally tax and rate-payers do not like to pay more; but they admit the need as salaries of government servants need to be raised too in view of the rising cost of living and more expensive procurements made by the government.

To answer Para 3, following the logic that government acquires its income by coercion and violence (you will be jailed if you do not pay up) many people defy paying taxes and rates. You have the right to what you earn and keep what you earn. I believe Malaysians and human by nature want no taxes. Real democracy means no force and coercion but voluntary actions.

There is no correlation between higher living cost of government servants and wages; thus the need of higher tax rates.

The economic reasoning of taxation is the wealth destruction that we are subjected to all year long and my question is in what way this reasoning is able to address the rising cost of living?

4. But the tax payers cannot suddenly come up with the money to pay the new taxes and charges. Lately Malaysian individuals and businesses have to come up with more money because of the many increases in cost due to government policies. Firstly the increase in minimum wage to RM900/-. This increase cannot be limited to those earning less than RM900/-. Those already earning RM900/- and above will also need to be paid higher wages. With this the costs of doing business and producing goods and services have increased and in turn the cost of living for everyone has increased.

To answer Para 4, the taxpayers cannot come up with the money to pay new taxes and charges because of no genuine savings due to inflation.

BR1M and cash handouts are not genuine savings, in fact these are designed to promote consumption.

The word ‘savings’ describes money that has been earned and not spent but rather set aside for emergency or investments.

Abolish government. Do not tax and do not focus on revenue. Allow people to accumulate more savings. In addition to that, I am more concerned with the role of media and mainstream economists; who frequently emphasize consumption as the driver of economic growth and discourage saving.

Meanwhile I totally reject minimum wage because this policy is not guided under priori economics which interprets the relationship between quantity of money, prices or the exchange between money and other goods and services.

Go back to my earlier argument; do not tax, and abolish the government thus more savings; thus no higher cost of doing business and cost of production.

5. Over and above this the government decided to reduce subsidies on petroleum products. The electricity charges are raised. People of Kuala Lumpur will pay higher rates on properties; with some may see an increase of 2000%.

To answer Para 5, yes, the effort to abolish subsidies on petroleum products is commendable. But more abolishment are needed. Free the prices and interest rates.

6. In 2015 the GST (Goods and Services Tax) will replace the sales tax. Obviously the government wants to collect more than the revenue from sales tax, and this must add to the cost of goods and services.

To answer Para 6, any form of taxation is a recipe for economic disaster. Government tax profits, income and now consumption as well?

I have argued in a GST article before, that this tax will decrease our living standards. Does this policy make sense to achieve the status of developed nation?

7. We must accept that the Government needs more money with passage of time. But should the increase be as big as the government says. Should the taxes and rates come all at the same time?

To answer Para 7, the government is indeed asking someone to review the method of stealing after being unsuccessful and insufficient in the previous method.

You also attempt to distract people from the real issue of existing problems and you know the political limits to openly extract money from every income, every activity, every piece of property and every citizen directly and indirectly, visibly and invisibly.

8. In business there is a thing called “cost down”. When a business is faced with competition or its cost of production reduces its profits, it can either increase prices or reduce cost. To a certain extent the price can be increased. This might cause a reduction in sale and also profits. It is far better to reduce cost and maintain or minimise the increase in price.

9. When a business exercises cost down, what it does is to examine everything that it does which contributes to the cost of doing business. It examines the efficiency of the process, the material cost, the reduction of wastage, the speed and volume of production. Invariably some cost can be reduced.

10. The same can be done by the government. All its cost can be examined to determine which are truly necessary, which cost can be reduced, which service can be curtailed or modified etc. etc.

To answer Para 8, 9 and 10, make no mistake, government is not the same entity as business for variety of reasons.

Unlike a business, the government does not have incentives when it spends. In fact, it is subject to political motivations that provide fame, glory and votes.

Government is a monopoly institution, established by force and coercion, effectively outbids potential competitors by their spending program. Because of its monopoly status, the government is not constrained by taxpayers’ money; they can borrow and create more money in order to finance its purchases.

For individuals and businesses, the role of prices in helping them make their decision is very important in daily exchange; while to the government, prices are completely irrelevant.

Therefore the concept of profit and loss is not applicable to government operations. This is why I never hesitate to say abolish the government once and for all.

In business, you can cost down by accumulating more capital. Capital is accumulated on the foundation of savings. As Austrian economist – philosopher Friedrich von Hayek explains ‘more production’ comes at the expense of ‘less consumption’.

Malaysians lack savings or have incredibly low levels of savings. Efforts to save have been hampered and frustrated due to the government’s deficit, spending, inflation, taxation, artificial interest rates and so on.

As Hayek again told us in his article The Paradox of Saving, by analyzing the effect of savings on the structure of capital in the economy, new investments would enable firms to reduce their production costs by more than the amount that prices would fall, enabling firms to make profits at the lower prices.

And real wages would rise!

As a result of capital accumulation, you do not need more workers to produce more goods; in fact the same workers can produce more goods provided the amount of capital increases.

Now my question is, does the government increase our wealth?

11. Government often waste money because it is not too concerned about the returns on its expenditure in whatever form. For example, has a contract been given to the best offered price – though not necessarily the lowest. Every year the Auditor General reports on wastage through improper procedures and carelessness. Usually not much is changed so as to benefit from the Auditor General’s criticism. There is no doubt that much money can be saved if the AG’s criticisms are taken seriously. Even changing procedures can reduce costs.

To answer Para 11, you are absolutely right about government often wasting money because it is stolen from the rightful owners; furthermore as there is no profit and loss sensitivity like business, this is the result you have to suffer.

12. If the government is interested in reducing the cost of governance, it can do so and perhaps quite substantially. For example it can reduce the cost of electricity by switching to LED for street lights. The savings would be more than 50%. The subsequent reduction in the amount of electricity to be generated will reduce subsidy on fuel for power. But this has not been done by the government. The initial cost may be high but the savings will mitigate this.

To answer Para 12, the effort to reduce the cost of governance like electricity by switching to LED for street lights makes no economic sense. Government spending for street lights is just a consumption expenditure ; as there are no or little returns. It is simply consumed.

On the second note, I do not see the reasoning as where the saving comes from as you claimed. Because saving is built on money that has been earned not spent but rather set aside for emergency or investment use.

In order to earn, governments need to engage in market production i.e free competition, voluntary exchange and no taxation. Saving is impossible for government.

Current government spendings should be cut and used for prospective spending.

Medecci Lineil is an Austrian Libertarian who lives in Kampung Tematu, Kuching, Sarawak. He also a Board Member at Institute for Leadership and Development Studies (Lead) and former senior executive at Institute for Democracy and Economic Affairs (Ideas).