THE LIMITS OF GOVERNMENTAL SPENDING

So far we have considered the means by which the State takes our money from us for public purposes--

(1) By borrowing it, and then taxing us to pay the lenders;

(2) By diminishing the buying power of our money by increasing its volume, with or without the help of bankers;

(3) By taxes.

There is yet another way by which some very clever people who have studied the question with great care and diligence think that the State might earn a great revenue, and that is by gathering money from us that we now pay to private undertakers of enterprise, and they believe that the State would do us a great benefit at the same time by giving us better service than these private undertakers. And many very earnest and high-minded people, who hate the waste and ugliness involved by the competitive system, have long believed that, if the work of growing, making, and distributing the goods that we need were in the hands of the State, all the miserable squalor that blots our economic system might be washed away, man’s labor would be made much more effective, and we should all of us, instead of wasting most of our lives in a chaotic struggle to earn our livings which ends in ill-spent affluence at the top with degraded destitution at the bottom, be free to live as civilized human beings; with time and energy to bring out all that is best in ourselves and others, and to enjoy the endless store of joy and beauty that Nature ever spreads before us, often to be buried under the mass of moral and physical ugliness that is heaped over it by our misguided efforts to better our lot.

[Sidenote: WAR’S LESSONS]

If these views are right, they have now a better chance than ever before of winning their way to action. War has shown us, first, how astonishingly great is our power to make and do things if we really want and mean to. Man has put all the prophets wrong who said that a great war could not last more than a few months, by proving that he could concentrate his energies on destruction with results that have appalled and astounded us, while at the same time producing all that was required for his material welfare; so much so that during the first two years of the war the general level of well-being in England was actually improved, owing to the more even distribution of the output, which was an economic incident of the war; so great was her margin of unused productive power and so great was the proportion of her productive power that was put into turning out things that were not necessary to the nation’s welfare. Secondly, the war has shown how short-sighted it is for any great and rich nation to allow a large part of its population to be stunted in mind and body. The voice of the social reformer is now raised in harmony with that of the recruiting sergeant, who wants sturdy men for the Army, of the employer, who wants strong and intelligent workers and of the statesman, who wants a nation behind him every member of which can understand the tremendous issues for which we are fighting and see and act on the need for the measures taken to secure victory. Never has there been a time when it has been seen more clearly that a nation, to be strong, must be strong from top to bottom. In other words, the war has shown us how much we can do and how much needs to be done. But the question still remains, whether what needs to be done can be best done by the development of the individual’s sense of national duty in work and spending, or by handing over to the State a continually growing share of the task of producing and distributing.

At a time when a brighter era is undoubtedly dawning for mankind, though it is only too possible that much turmoil and struggle may yet lie between us and its achievement, there seems to be something squalid in dwelling on the purely material side of the matter. After all, the human soul is the only thing that really counts. If everybody were pleasant to live with, all other things would be added unto us; if we were all honest and kindly and courteous and fair-minded and intelligent and unselfish, there would be no need to fash ourselves about output and distribution, because we should all be doing our best to make things better, and all these sordid problems would solve themselves. But as things are, material considerations are of the greatest possible importance, because it is so much easier for the necessary qualities to be acquired by people who are not expected to spend most of their lives in trying to get a better share of the world’s goods than their neighbors. If we can produce plenty for all and can prevent people from believing that getting more than plenty for themselves is the chief object of life, then there would be some chance for the rudimentary and atrophied human soul, which is now often treated very like the vermiform appendix--ignored if possible, and if not, cut out.

If, therefore, it is the fact that, by handing over great industries to be worked by the State for profit, we can make the State a great revenue earner, and at the same time do away with some of the competition that is a source of much waste and mendacity, without thereby producing a system of organized and hidebound efficiency that would kill all freedom and initiative, it is clear that we shall be relieving the taxpayer’s burden and perhaps clearing a way towards a social system that will stand daylight better than our present one.

[Sidenote: A FABIAN SCHEME]

A great scheme of nationalization has been put before the British public by Mr. Sidney Webb and his Fabian lieutenants, in a book, already referred to, called _How to Pay for the War_, published in 1916. They propose to increase very greatly the scope of the activities of the Post Office, making it do much of the work that is now done by bankers, and to nationalize the railways, the coal industry, and life insurance; and they urge, with a wealth of detail that is evidently the result of laborious investigation, that, if these things are done, the public will get a better and cheaper service, the workers employed will get better treatment, and the State will earn a revenue that will supply a mouth-filling number of millions for paying off the war debt. This attractive argument, of course, is only a development of the Socialist contention and an application of it to the needs of the moment; and for this reason will be refused a hearing by many to whom the mere name of Socialism is a terror. But a little later, as if to show how widely and in what unexpected quarters the idea of collectivist enterprise is being stimulated by war problems, there arises a new portent in the British economic sky in the shape of a body called the Empire Resources Development Committee, which also wants to help to pay off the war debt by means of State enterprise in industry and production, chiefly applied to overseas enterprise, though one of its manifestos also includes the coal and light and power industries at home among the means by which the after-war debt charge can be met without anybody having to pay it; because the State will be able to do business so cleverly that it will find the money out of net profits. The really interesting thing about this Committee is that it bristles with names that have been hitherto renowned for Imperialist rather than for Socialist zeal, such as Mr. Rudyard Kipling, Sir Starr Jameson, Lord Grey (not the late Secretary for Foreign Affairs), Lord Selborne, Lord Desborough, and Mr. H. Wilson Fox, M.P., a distinguished officer of the Chartered Company of British South Africa; and with them is Mr. Vassar-Smith, the highly respected chairman of Lloyds Bank. That names such as these should be found on a manifesto advocating what one used to think was pure Socialism shows at least how people’s minds have been shaken up by the war. The gist of their contention is that the immense latent resources of the British Empire can be worked for State purposes and under State auspices in such a way that we shall be able to “lift from the peoples of the Empire the burdens caused by the war.” And they, like Mr. Webb and his colleagues, think that the State can not only perform this financial feat, but at the same time cheapen the cost to consumers of articles that it provides and distributes.

[Sidenote: A LARGE ASSUMPTION]

It is a most alluring prospect and, if there is any chance of its being realized, the most bigoted Individualist will hardly let his dislike of State enterprise stand in its way. But is it not an enormous assumption to suppose that the State can manage an enterprise with so much more success than a private undertaker that it can afford to buy him out, then provide a better service or a better article, pay everybody better, and finally make a thumping net revenue? In the case of new Imperial enterprises, there might be no one to be bought out, though vested interests sometimes are discovered in the most unlikely corners when a chance of compensation arises. The Imperial Development Committee expressly states that the proposed enterprises should not be managed by Civil Service Departments; but it does not explain how the managers can help becoming civil servants and so being involved with the attributes of those who work the State machine, so admirably within certain limits, but not so admirably when it is a matter of conducting business enterprise at a profit and with satisfaction to customers and employees. They make a profit out of the Post Office? Yes; but in discussing the tangled question whether what Englishmen pay for postal service should be considered as taxation or payment for services rendered, at least one distinguished economist has decided that postal revenue is taxation only in so far as they pay more for this service than we should if it were managed privately. Every one agrees that it is impossible to gauge this amount, but no one seems to doubt that it exists, and that postal facilities would be cheaper if they were provided by private enterprise. Mr. Harold Cox, that stern, unbending foe of State enterprise, dealt faithfully with the proposals of the Imperial Development Committee in an editorial in the _Edinburgh Review_ for April 1917, and incidentally gave two examples of cases in which the State had taken over profitable enterprises and had totally failed to work them at a profit:

[Sidenote: A DOUBTFUL POLICY]

“In 1870 the State acquired possession of the electric telegraph system of the country, which had been built up by various private companies. The purchase was recommended to the House of Commons as a splendid bargain for the State. The permanent officials who prepared the scheme assured the House that the whole of the capital cost would be repaid in fifteen years out of profits and that after that period there would be an ever-increasing revenue to relieve the burdens of the taxpayer. That was the promise. What actually happened was that the whole of the profit disappeared after the second year of working by the State; that year by year the financial position has grown worse, till in the last years of peace the telegraphs were costing the taxpayer a sum which cannot be put at less than £1,400,000 per annum.

“Meanwhile, the telephone had been invented. During many years the State, in order to protect its telegraph monopoly, did its utmost to stifle the development of the new invention. Finally, the State bought up the telephones, completing the purchase in the year 1911. Again there were the prophecies--though in a somewhat minor key--of a lucrative bargain. These prophecies have gone the way of the old ones. The whole of the handsome tribute of over £350,000 a year, which the National Telephone Company was gratuitously paying to the State, vanished at once, and within three years the income collected by the State barely covered outgoings.”

With these actual examples before them Englishmen may well hesitate before embarking on a large policy of State enterprise, especially if it is to be directed to the provision of necessaries of life such as food and coal. Posts and telegraphs and telephones hardly touch the life of the very poorest, and though if they are bad and dear they are a hindrance and burden to business, their extra cost is a small item in the expense of industry; but it would be a different matter if the actual cost of living were raised through an attempt at revenue-earning by State enterprise in a country in which the test of experience has shown it to be dear and inefficient.

Nevertheless, we have no right to shut any door on a possibility of economic reform. We know that there are countries in which the State can manage some enterprises well and profitably, and even in England certain municipalities have earned good profits for their ratepayers and also served their customers well with comparatively simple businesses, such as tramway transport. It may be that Government departments, like the rest of us, have learnt much from the war and may now be able to tackle problems of enterprise with a new freedom and success. Strongly divergent views are expressed on this point, and no one who has not been in touch with the facts has any right to be sure about it. Some say that the British Munitions Department has been a miracle of official competence and success; others that it was a costly chaos, only saved by the efforts of the business men, trained in the school of competitive enterprise, whom it called in to help it. But since there is a doubt and a new atmosphere, and since imaginative folk with big new ideas want to give England a lead, there seems to be no reason why they should not be allowed to try an experiment on a small scale, to be widened if the experiment succeeds. Freedom and individual initiative have so long been the life-blood of her national development that one is loth to see them encroached on even by the most efficient form of machine-made bureaucratic enterprise; and the ideal of progress through the improvement of the individual, and a widening and deepening of his sense of national duty, seems to be a much higher and more hopeful one than through the expansion of State regulation to a point which implies the crippling of the soul of the citizen. Some of us hope that when the war is over we shall get rid of Government control as far and as fast as possible, except where previous experience had shown it to be necessary in the interests of the weaker parties to economic bargains.

“My experience [said Sir Alfred Booth to the Cunard Company’s shareholders in April 1917] of Government control has only served to convince me more firmly than ever that individual enterprise is the only spirit which can quicken the dead bodies of capital and labor into life.... But I am not at all alarmed. When the war is over, commercial freedom will win in England just as political freedom has won in Russia, and we shall be quite content to leave the bureaucrats and the Romanoffs to cultivate their roses together in some suitable rural atmosphere.”

[Sidenote: THE DOUBTFUL FUTURE]

But with taxation what it will have to be, all is fish that comes into the net, and if the State can learn to produce and distribute better and more profitably than private enterprise, no prejudice should stand in its way. But it ought to win its spurs, if it can, in a fair field and not with the support of privileges and monopolies and subsidies, still less with the help of tariffs.

[Sidenote: THE IMPORTANCE OF TEMPER]

Apart from this possible source of revenue, concerning which one is justified in doubting whether it will ever be realized and in feeling sure that in any case it will be slow in growth, taxation is the means by which the State will have to divert from our use so much of our annual output of stuff and work that has to be devoted to national purposes. As to the extent to which it can do this, there are conflicting opinions. Some say that, owing to the enormous weight of the after-war debt charge and our impoverishment by war, it will not, for years to come, be possible to find any money, that is divert any part of our output, to purposes of social improvement. On the other hand, there is the opinion, which the huge figures of our war spending have helped to stimulate, that now that we have learnt to think in millions and in hundreds of millions, the State will never again be checked by any consideration of a few millions more or less in the cost of any reform that is accepted as needing to be done; and that the reformer will henceforward have a bottomless purse to draw on since he will always, when the war is over, be able to say, “What I ask is only the cost of one day, or one week, or one month--as the case may be--of the late war, and just consider how much good it will do!”

As to the first and pessimistic view, we cannot know how far it will be right until we know how much capital equipment will have been impaired and how much is owed to foreign nations by the time the war is over. If by the destruction of ships and the depreciation of industrial plants and of the soil’s fertility, the State’s output is seriously diminished, and if at the same time, owing to borrowings abroad and sales of securities, the country has a much smaller sum to receive every year on balance from foreigners in interest, which comes in the form of imported goods; then the total income, in the shape of goods produced at home and received from abroad, will be less, and any part of it diverted to national needs will involve a greater sacrifice than before. In so far as it is held at home debt involves no absorption of the national output, but only a transfer of part of it, by taxation, to the use of certain members of the nation who hold the debt. It is therefore only necessary to be sure that the taxation involved by it is imposed on the people who ought to have subscribed to the loans. Then those who did their duty in subscribing will get their taxes back, those who pinched themselves and did more than their duty will get more than their taxes back, and those who did not do their duty will get nothing back, which is just as it should be. This arrangement is easier to describe as desirable than to put into practice, which is one of the objections to finance by borrowing.

But even if the State’s total income, in goods produced at home and by its debtors abroad, is materially less, which has yet to be proved, it does not follow that the amount of it available for national purposes will be less if we are resolved to make a greater sacrifice for them. Everything will depend on the temper and state of mind with which we set to work and turn out goods in the first place, and in the second, regard the claim on our work that the State may make for purposes of national development and improvement, such as health, education, housing, and the dozens of other things that, in the opinion of some, need to have work put into them. If we go to work in a bad temper and have strikes, lock-outs, and quarrels about methods of production and distribution of the output, then it is likely that our output will give us little chance of drawing on it for social reform. And there is also another enormous question to be answered. Shall we have to spend in future a much greater amount on defense, or will swords be hammered into plowshares? The hope, which was so strong in the early days of the war, of secure peace and freedom from the burden of armaments has lately looked sickly, but the intervention of the United States has certainly revived it, and it seems now at least possible that the League of Honor may ripen into a League of Peace that will rid mankind of war’s nightmare.

[Sidenote: NO SHORT CUTS]

These considerations apply also to the optimistic view which holds that we shall never again be stopped by lack of money. It is only true if the taxpayers are persuaded that the objects for which they are asked to make sacrifices are a national need and ought to be paid for out of the national purse. If a people makes up its mind that a thing is worth paying for, it can and will pay for it, up to the extent of half its income and more, as the war has shown. But this cannot be done if the burden of taxation is unfairly imposed, or if a considerable minority--especially if they are those who are asked to pay most--are opposed to the objects for which taxation is raised. “Taxing the rich” looks easy, but it cannot be done indefinitely unless the rich pay willingly. The taxpayer’s power to strike, referred to in Chapter I, is still a real one. If the rate of taxation takes more from the producer and from the owner of accumulated or inherited wealth than they believe to be just, then the incentive to production and accumulation will be checked, and the tree which bears the plums will have been killed, or weakened in its fruitfulness. For national defense every one is ready to have his money taken, and in war-time there is much less tendency than usual to grumble about the manner in which the money is raised. For national improvement and for what Mr. Lloyd George once called a “War Budget against poverty and squalidness” there may some day be the same cheerfulness and readiness on the part of those who pay. It may be that war will have taught them this lesson. If so, in spite of all its horrors, the war will have opened the way to a great stride forward along the road of progress. But there are no short-cuts on this road, and only by the education of the individual to a just view of his duty as a producer and worker, and of the claim of the State upon his product for national needs, can full use be made of wealth for purposes worthy of any nation that intends to be a leader in human progress.

FOOTNOTES:

[1] _Public Finance_, p. 42.

[2] _A General History of Europe_ (350-1900), by Thatcher and Schwill, pp. 9-10.

[3] Seligman, _The Income Tax_, p. 122.

[4] _Herbert Spencer_, by Hugh Elliot.

[5] _Money and the Mechanism of Exchange_, Jevons, p. 64.

[6] _Study of Sociology_, ch. vii, p. 160.

[7] _Critiques and Addresses_, p. 10.

[8] Quoted by Messrs. Gide and Rist, _History of Economic Doctrines_.

[9] Speech at Baltimore, April 18th, 1864.

[10] Since this chapter was written I have been fortified by seeing its main contention endorsed by Professor Sprague, of Harvard, in an article in _The Economic Journal_ for April 1917, which embodied an address given by him to the American Economic Association.

[11] Chisholm’s _Analysis of the Public Accounts_, p. 509.

[12] A New York banker’s circular, dated April 14th, 1917, says: “Posterity will chiefly benefit from the struggle for freedom and should pay its part.”

[13] Written in March 1917.

[14] _Meaning of Money_, pp. 64 _et seq._

[15] These dates are chosen to fit those of the balance sheets of the other banks, which are only published half-yearly.

[16] _Meaning of Money, loc. cit._

[17] A report of the Committee of Public Accounts quoted in the London _Economist_ of August 26th, 1916, p. 357, shows that the British Admiralty and the War Office were buying against one another.

[18] _Wealth of Nations_, Book V, Chap. II, Part 2.

[19] _Political Economy_, Part VI, §§ 588 _et seq._

[20] Book V, Chap. I, Part II, “Of the Expense of Justice.”

[21] Chisholm’s _Analysis_, p. 424.

[22] _Ibid._, p. 416.

[23] Seligman, _The Income Tax_, p. 132.

[24] About sixty cents.

[25] Seligman, _The Income Tax_, p. 103.

[26] The full text of the Fabian suggestion is as follows:

“What is suggested is that, so far as incomes not exceeding £2,500 a year are concerned, whether earned or unearned, it should be open to any person assessed to ask that all the taxable receipts of all the members of his family, living in the same household with him and sharing in its expenses, or maintained elsewhere wholly or partially at his expense, should be aggregated for assessment as a Family Income; and that Family Incomes so arrived at should, for income tax purposes, be divided by the number of members of the family (husband, wife, children, stepchildren, father and mother, or grandparents only) _actually maintained therefrom_. There could then be allowed from the combined Family Income, in respect of each person maintained therefrom, whatever Abatement each portion of such income would justify if it were that of one person only.”--_How to Pay for the War_, pp. 237-8.

In order to prevent the suggested abatements and allowances from exempting too many people altogether from income tax, these writers suggest that “nothing in them should be allowed to reduce the tax actually payable below the minimum of, say, a penny in the pound on the income prior to the deduction of any abatement or allowance.”

[27] “All persons being required to make returns of the whole of their income, from whatever source derived.”--Chisholm’s _Analysis_, p. 425.

[28] _Wealth and Welfare_, p. 371, 2.

[29] Seligman, _The Income Tax_, p. 165.

[30] _British Budgets_, by Sir B. Mallet, pp. 105 and 493.

[31] I have developed this platitude in a book called _Poverty and Waste_, published in 1913.

Transcriber’s Notes

Perceived typographical errors have been silently corrected.

Odd-page headers have been rendered as sidenotes and moved to appropriate locations.