How Government can Destroy a Town

An economic fable by Arthur Middleton Hughes

In a town called Libertyville, there were many prosperous citizens. Farmers brought their produce to the two general stores, and shipped a lot of corn and wheat out on the railroad. The lumber mill also exported a lot of pine siding and construction lumber to the outside world. The wealthy ones in town were the store owners, the banker, and Cyrus Bean who owned the lumber mill.  The government consisted of a mayor, several school teachers, a judge, and the sheriff who maintained law and order, particularly on Saturday night.  The income of Libertyville increased year by year because Cyrus Bean had been investing his money, and used it to bring in more and more modern equipment for his lumber mill. Ten years ago, he employed 20 men. Recently his payroll was 200 men and women, and growing. Cyrus paid good wages to his workers, and good prices to the scores of loggers who bring him wood from miles around.

The New Mayor

In January, John Hilton was elected mayor.  He campaigned on a platform: “Let’s be fair to everyone.” which sounded pretty good. After the election, John explained what he meant.

Hilton pointed out that while a lot of people in Libertyville were doing all right, some of them were downright poor.  The government should do something about that.

While most of the people were sober, hard-working types, some of them got drunk on Saturday night and wasted the money that they earned during the week. That should be stopped.

While there had never been a serious accident in Cyrus Bean’s lumber mill, no outsider had ever inspected it, either. There could be danger to the workers in the large saws that they used, and pollution of the air and water from all the sawdust. Besides, what was all this logging doing to the environment, and the wild life that depended on trees for their habitat?

Hilton proposed a generous welfare program, the abolition of the sale of alcohol, and government inspection and controls of industry and forestry.  He planned to add about 30 employees to carry out his new programs, and to pay for the increase with a hefty tax on large businesses and the wealthy.

Elected with Hilton was a new town council that supported his new ideas. They ratified his program, and he started to hire the new government staff.

The Government Begins To Act

After a few months, the citizens began to get an idea of what modern government means. The saloon was closed, and Saturday night blasts were out. Of course, most people drank at home, since liquor was easy to get in the next county.

The inspection staff found little to complain about in Cyrus’s lumber mill, but they found that the logging was destroying the habitat of the Liberty Beaver, which might become extinct if logging persisted. They ordered logging operations halted on the north side of town. They found one worker who refused to wear the dust masks provided by Cyrus for his employees. The worker got sawdust in his lungs and was hospitalized.  They ordered Cyrus to install vacuum dust catchers on all his machinery.

The welfare staff found that the poverty level in the town was over 10%.  Some children went to school with rips in their clothing, and holes in their shoes. The town provided a generous program of benefits to bring the income of all people who earned less than $20,000 up to the $20,000 level.

The taxes for the new government were progressive ones. Those with an income below $30,000 paid no tax. From $30,000 to $90,000 the tax was only 10%. Income over $90,000 paid 80%.

The Effect of the New Programs

 The effect of the new programs were felt within a few months. Many loggers were put out of work, but were able to apply for the $20,000 minimum welfare benefit, so it did not hurt their families.  Cyrus stopped hiring and postponed the expansion of his mill, because he had to use all his capital for the vacuum dust catchers — more than two million dollars in all.

Faced with these high costs, Cyrus decided to replace his ancient planning machines with new electronic ones that required only half as many workers (and had vacuum dust catchers built into them.) But this created a problem. The workers felt that the machines were a threat to their jobs. A delegation went to the new Mayor and asked him to do a study of the effect of the new machines on the community. The machines might be dangerous, they suggested, as well as being responsible for putting people out of work. The Mayor agreed, and a one year environmental study was ordered, with Cyrus having to wait until it was completed before he could buy the machines. In the meantime, however, he had to install the dust catchers.

After a while, Cyrus found that he had to quit the pine shelving business altogether. The reason was that his competition in the neighboring counties had installed the new modern automatic wood planers. With his old machines, and the dust catchers, Cyrus could not get his price low enough to meet the competition. He layed off half his employees.

Property owners on the north side of town applied for a reassessment of their property taxes. Their land had been valued for the timber, which was now worthless, since logging was banned. When Hilton and the town council would not agree, the landowners took the town to court where an expensive lawsuit dragged on for months.

Many people who worked at low wage jobs like waitress, car wash, parking attendant, pumping gas, and sales clerk found that they could do better applying for welfare than working. They did so. The line at the welfare office was never empty.

The result of all of this was that the expenses of the new government were more than double what the taxes brought in. Hilton and the town council asked the banker to help them with the sale of bonds to make ends meet. “The generous welfare payments will pick up sales in the stores,” he pointed out, “and this consumer spending will help everyone. We just need a loan to help us out until our economy recovers.”

Everyone condemned Cyrus for shutting down half his mill. They pointed out that he still had his large house, and drove around in a Lincoln Continental, while half his employees were now on welfare. The town Public TV channel had a Nature program on the Liberty Beaver, showing them happily playing undisturbed in the north woods.

Two years later

 Of course, the economy never did recover. The wealth of a community really depends on two things: the work that people do, and the investment in productive capital. In Libertyville, the amount of work done went down as employee after employee decided to “take this job and shove it” and applied for welfare benefits.

The tax on business and the wealthy took away the savings that would otherwise have been used for investment. The town eventually declared bankruptcy and was taken over and run by the state.

Of course, Libertyville is a myth. But is it so different from the United States today?

About Arthur Middleton Hughes

Arthur is currently Vice President of The Database Marketing Institute based in Fort Lauderdale, FL. Arthur is the author of 11 books, the latest of which is Strategic Database Marketing 4th Edition (McGraw-Hill 2012). A BA graduate of Princeton with an MPA in Economics and Public Affairs, Arthur taught economics at he University of Maryland for 32 years. He is an Austrian Economist.
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