Government helps the Little Guy?

little guySome people justify Big Government by claiming that it helps the Little Guy. This romantic view is largely political salesmanship. Big Government is more about helping politicians, government workers, and powerful special interest groups than the Little Guy.

Let’s look at how government policies harm the Little Guy.

Little Guy realities

Before we begin, let’s review two fundamental truths about the Little Guy:

First, the old saying, “Sh_t rolls downhill” is true. Problems and negative effects tend to “roll downhill” and impact the Little Guy. This is true whether the source of the problem is government, market forces, or… bad weather. Just the way it is.

Second, the Little Guy has less cushion to absorb any negative impact. An unexpected bill for $1,000 might be unpleasant for a well-off family, but crippling for the Little Guy.

Redistribution

Schemes to redistribute money from the rich to the poor typically end up harming the Little Guy as well.

To illustrate, assume that government aims to raise taxes on the rich by $25,000 each and redistribute this to the poor.

Many people will take steps to avoid paying $25,000 of additional taxes. They might work less to keep their income down. They might invest their money in ways that avoid taxes but are less productive or useful to society. Business owners will try to pass the cost to customers via higher selling prices or to employees via lower pay or benefits or fewer jobs.

To the extent that they have less disposable income due to lower income or higher taxes, they will also spend less money on things like cars, houses, vacations, etc. This puts jobs at risk.

All these reactions impact the Little Guy in some way. Higher prices for consumers. Fewer jobs and lower incomes for employees. The negative impact of higher taxes is not confined to the rich.

Let’s say the average rich guy ends up getting stuck with $10,000 of the $25,000 tax increase, while the average Little Guy gets hit with $500 in higher cost of living, lower pay, or fewer jobs. Although $500 is much smaller than $10,000, the $500 might harm the Little Guy more.

Stagnation

Big Government often leads to economic stagnation. Stagnation harms everyone, but it does greater harm to the Little Guy because he is less able to afford harm.

For example, stagnation may cause a business executive or entrepreneur to make half a million dollars instead of a full million. That is a large and painful hit in absolute terms, but still a very good living. It can be more painful for the Little Guy when stagnation prevents him from getting a good full-time job, or keeps his pay from rising with inflation.

Minimum wage

As discussed in this post, minimum wage makes it more difficult for the people with the least valuable work skills to land a job. This robs the Little Guy of opportunities to build skills and better himself.

Furthermore, if minimum wage goes high enough to harm businesses, the businesses harmed the most will be small, marginal, and low-profit. That is, Little Guy businesses.

Regulations

Government regulations also harm the Little Guy. Regulations can contribute to economic stagnation that harms the Little Guy as discussed above, but it goes beyond that.

A heavy regulatory burden harms the Little Guy entrepreneur more than large corporations:

  • Large corporations have departments of people to work on compliance. Little companies do not.
  • Powerful and well-connected people can influence government regulations to their advantage. The Little Guy cannot.
  • Large incumbent companies sometimes use regulations as a tool to reduce competition from smaller companies or to prevent pesky new competitors from starting up.

Occupational licensing also harms the Little Guy. Licensing requires potential workers to jump some hurdle before they can work in a certain occupation. For example, before Sally can work as a cosmetologist, she might have to spend $500 and hundreds of hours on training, or pay $250 for a test. This makes it more difficult for the Little Guy to enter a new occupation and earn a living.

Regulations may or may not protect consumers, but they generally make life more difficult for the Little Guy.

Property restrictions

Overly strict land-use and zoning restrictions harm the Little Guy. It is increasingly expensive to buy or rent in many of our largest cities, which prices the Little Guy out of those markets.

Restrictions increase the value of existing property while creating a shortage of affordable housing. In other words, the restrictions boost the wealth of incumbent property owners while harming the Little Guy.

Let’s not forget rent control. It’s supposed to help the Little Guy, but it tends to create housing shortages, poorly-maintained properties, or both. Shortages, because squeezed profit margins reduce the incentive for property owners to supply housing. Poorly maintained properties, because artificially low rents can make normal maintenance cost-prohibitive.

Price controls

Government puts price controls on items other than rent.

The goal of price ceilings is to protect consumers from high prices. However, this often results in shortages because suppliers want to supply less at the artificially low price. With shortages, politically well-connected people can get special treatment. Rich people can afford to buy things on the black market. The Little Guy has no connections or money, and suffers the most.

The goal of price floors is to protect suppliers from low prices. But who is harmed the most by paying higher-than-market prices? The Little Guy.

Public schools

Under-performing public schools harm the Little Guy. Poor families that live in districts with under-performing schools don’t have many options. This is particularly true if school choice is banned or limited.

Wealthier families have many more options. They can afford to move to a better school district, send their kids to private schools, or hire private tutors.

Environmentalism

Putting subsidized solar panels on your roof requires money or a good credit rating. The Little Guy is less likely to have these. But his electricity bill may go up.

Policies like carbon taxes or cap-and-trade increase the cost of utilities. Who can least afford higher utilities? The Little Guy.

Government help

Now, does this mean that government does nothing to help the Little Guy? Of course not. Government offers various types of assistance that help offset the harms described above.

But this should not be viewed as true success. Government taking with the left hand while giving with the right does not necessarily leave the Little Guy better off. Government assistance typically provides only a subsistence existence.

Government assistance is also not good for the dignity of the Little Guy. It can become the “narcotic” that FDR warned us about, the “subtle destroyer of the human spirit” that weakens the self-reliance of the Little Guy and makes him dependent on government.

Opportunity

Better for the dignity and prosperity of the Little Guy to provide him opportunities rather than a government handout. Opportunities to get a better education, get a job, grow income, afford life in the city, or start a small business.

What is most likely to give the Little Guy these opportunities? The freedom and competition of free-market capitalism.

As mentioned, bad things “roll downhill” and impact the Little Guy. Well, good things also roll downhill. It’s better for the Little Guy if the prosperity of capitalism rolls downhill than the stagnation of Big Government. As some evidence of this, poor people in the freest capitalist countries have incomes ten times greater than poor people in the least-free countries.

If we really want to help the Little Guy, we should pursue economic growth and capitalism.

An aside

My primary purpose for blogging is to defend free-market capitalism. If you wonder why my posts discuss government so much, there is a good reason.

The heart of capitalism is economic freedom. Government is by far the greatest inhibitor of economic freedom. Therefore, when I point out the flaws of government, I am indirectly defending freedom and capitalism. If readers realize that government harms the Little Guy, maybe they will romanticize government less and be more open to giving freedom a chance.


I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.

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3 thoughts on “Government helps the Little Guy?

  1. Great stuff! — Did not know of your Case For Capitalism until seeing your response to Dan Mitchell’s Class-Warfare Taxation column.

    If people generally understood how badly government hurts the economy and reduces our living conditions in so many ways, there would be widespread voter rebellion. But few people think about this, or believe it. I have been hoping a story might make the point, but have had little success generating any interest there, either. But you might be amused by the tale at SWEEP16.com … the domain name coming from my belief that sweeping away the 16th Amendment would be the greatest blow for Freedom since 1776.

    Keep up the good work — Eventually people will pick up on it! — Ralph

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    1. Thanks Ralph! Sitting here today, it is hard to believe that the US existed for more years without the income tax than with. We cannot even conceive of government that spends only 7-8% of GDP, as was the case prior to 1913.

      I’m sure you’re right that ‘sweep 16’ would equate to more freedom. Unfortunately, I’m also sure that it’s politically highly unlikely to be achieved! So I’ll settle for Fair taxes, flat taxes, or lower rates without deductions….

      John

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      1. Yes, it is astonishing to remember that (0 income tax for about 140 years)!! It is also astonishing to consider the harm done by the tax code that we put up with.

        Yes, fair tax, flat tax, lower rates, fewer brackets, fewer loopholes, simplification … there are a LOT of improvements that could be made to a 70,000 page tax code!! But the Founders were right not to trust the feds with the power to tax incomes. And I believe you are right that the DC pols would never go for SWEEP16 or probably even any of the improvements you suggest, even if the Republicrats campaign on them. Here in the Land of the Free, the federal tax code, thru obamacare, requires that men buy medical insurance that covers maternity. And so the subtitle of SWEEP16 is “Texas Says No”. The States will have to force it on DC.

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