Deficits Are a Symptom of Statist Excess

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One thing’s clear with respect to President Trump’s budget proposal and the ongoing debate over appropriations: federal spending will increase and add to future budget deficits. This follows the Tax Cuts and Jobs Act (TCJA) enacted late last year, which many expect to add upwards of $1 trillion to deficits over the next 10 years. I have offered mixed praise of some of the reforms and rate cuts in the TCJA, though it does not accomplish much in the way of tax simplification and it will almost certainly require a large increase in federal borrowing. Ultimately, however, dollar for dollar, a tax cut giving rise to a deficit inflicts lower (or even negative) costs on the private sector than an unfunded spending binge, which is costly in the most basic terms: resources devoured by government.

Cost of Spending

The cost of an extra dollar of government spending at the most basic level is the value of lost opportunities to which the resources absorbed by government otherwise could have been put. When the government spends an extra dollar, and if the government pays a competitive market price, the goods and services exchanged for that dollar by private party “A” would be valued at more than one dollar by other private parties who lost the opportunity to trade with “A” for those same goods and services.

There might be a strong case for incremental spending in any particular instance, of course. Can we benefit from more national defense? Infrastructure? Grants of foreign aid? Subsidies for this industry or that? This technology or that? This cultural program or that? Public aid? Primary research? Regulatory budgets? I’d favor very few of those as general spending priorities. However, there are many subcategories and so many special interests that it is difficult to control spending as long as compromise is needed to accomplish anything.

The Trump budget is a mix of cuts in non-defense spending and large increases in defense, infrastructure outlays, and border security. On balance, it would lead to substantially higher budget deficits over the next ten years. He won’t get all of what he wants, but it would be astonishing if larger deficits are not an outcome.

Unfortunately, government is typically inefficient in the execution of its tasks and it is less responsive to price incentives than private buyers, who are fully vested in “ownership” of the dollars they spend. Government agents, no matter how honorable, simply do not have the same kind of stake in the outcome as a private owner. Obviously, spending by federal agencies is influenced by the political process, which creates opportunities for side rewards for those who direct or influence spending and those who receive the payments. These side rewards are pure private rents arising from public largess. For a private party, the profitability of transacting with government may well exceed the normal return to capital or entrepreneurship. The efficiency of government spending is compromised by its political nature and the uneconomic behavior of government agents. I therefore have strong doubts about the cost-benefit comparison of almost any public initiative.

Un-Taxing

The government ultimately acquires its funds from taxes enforced via coercive power. After all, tax collection requires a considerable enforcement effort. A tax payment of one dollar requires the sacrifice of things that would have been acquired, now or in the future, in voluntary, private transactions valued more highly than one dollar by the taxpayer. That is the nature of gains from voluntary trade foregone. The result is that one dollar of taxation extracts more than one dollar of value from the private sector. Conversely, a reduced tax liability of one dollar means that private parties can engage in an extra dollar of voluntary trade and benefit from the surplus.

There are few forms of taxes that don’t distort incentives in the private market. Taxes may blunt incentives for work, saving, and deployment of capital in productive uses. To the extent that these private decisions are twisted by taxes in ways that differ from fully voluntary decisions, there is a further loss of value and resource waste. Eliminating these distortions is always a worthy goal.

Funding Deficits

Government has ways other than immediate taxation of paying for excess spending. One is to borrow from the public, domestic or foreign. Those who purchase the government’s debt, loaning their money to the government, do so voluntarily. That debt carries an interest obligation by the government, and it must repay the principle some day. That will require new taxes and their attendant distortions, even more borrowing, and/or some other method of extracting value from the private sector. A principle known as Ricardian equivalence holds that the effects of government outlays are the same whether financed by taxes or borrowing, because taxpayers know that future taxes will be owed to pay off government debt, and so they discount that liability into their behavioral calculus.

Additional borrowing can create an unstable financial environment if borrowing occurs at interest rates higher than the economy’s rate of growth. Borrowing might also “crowd out” private borrowers, absorbing saving that would otherwise be used to finance investment in the economy’s productive capacity. In other words, the resources acquired with that extra dollar of government spending will lead to less private investment and a sacrifice of future production.

Sneaky Inflation Tax

Another way that government can pay for spending is by imposing an inflation tax. This amounts to a devaluation of privately-held assets accomplished by inducing unexpected inflation. It allows government debt to be extinguished in the future with dollars having reduced purchasing power. Essentially, more currency (or its electronic equivalent) is placed into circulation: money printing, if you like. That sets up the “too-much-money-chasing-too-few-goods” inflation cycle. But like any other tax, the inflation tax is involuntary and creates waste by inducing the public to respond to distorted incentives.

Summary

An additional dollar of government spending absorbs a dollar of resources, and destroys more value than that given lost surplus to those who would otherwise have benefited from those resources. Moreover, the spending often fails to return a full dollar in benefits, often lining the pockets of elite grifters in the process. Ultimately, the funding for incremental spending must be commandeered from private parties via taxes or an inflationary taking of assets. Public borrowing might conceal the reality of taxes for a time, but it may crowd out productive investment that would otherwise enhance economic growth. So a case against incrementally larger government can be made in terms of resource costs as well as the distortionary effects of taxes and dissipation of future private growth.

By the same token, an ostensible reduction in taxes might be illusory, to the extent that future taxes or an inflationary taking will be necessary to cover the debt one day. On the other hand, there is no direct resource cost involved, and a tax reduction unbinds constraints and distortions on private incentives, which is unambiguously beneficial. And that’s true as long as the tax reductions aren’t targeted to benefit particular sectors, parties or technologies in any new misadventures in government central planning.

Deficits, in and of themselves, are either irrelevant or possibly damaging to long-term economic growth. You’ll get them with either tax cuts or spending hikes. But spending hikes absorb real resources, whereas tax cuts release resources by transforming a dead weight loss in private markets into proper gains from trade. If deficits are a problem, and if eliminating them requires costly tax distortions, then the real problem is the expanse of the state.

Progressives: Paul Doesn’t Want Peter’s Money? What a Hypocrite!

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Red & Blue States

I’ve heard the following assertion over and over: blue states are “doners” of federal tax revenue and red states are donees. In other words, states dominated by Democrats contribute more than they take from the federal budget, while Republican states take more than they contribute. But the facts are somewhat ambiguous. And to the extent that it is true, policies that would improve the net position of blue states would be very unpopular with the progressive Left. Furthermore, progressives expose their confusion regarding the ethics of sound governance by calling the red state opposition to an expansive  federal government “hypocritical”.

The relative positions of red and blue states in terms of federal dollars is the topic of an excellent article by Megan McArdle, whom I haven’t featured on this blog for a while. Originally, the claim that blue states “gave” to red states via the federal budget was based on data from 2005, but a lot of fiscal water has passed under (and over) the bridge since then. Also, the original presentation used state totals of federal outlays minus revenues without accounting for differences in the size of state populations. Many blue states are relatively populous, so some the state rankings may shift when expressed on a per capita basis. McArdle reproduces a chart from a report by the New York State Comptroller using 2013 data:

… deep-blue New Jersey is the biggest donor state. But red-blooded Wyoming is the next biggest, and North Dakota makes the list too. There is certainly a preponderance of blue states at that end of the spectrum, but it’s not a clear ‘Donor states are blue’ story. And if we match the 2013 data to the closest election (2012) we find that New Mexico, the biggest net recipient, went for Obama in 2012, as did Virginia, Maryland, Maine and Hawaii. What’s driving the net subsidies isn’t anything as simple as political identification.

Wyoming and North Dakota contributed lots of federal revenue from taxes arising from the fracking boom.

McArdle goes on to consider policies that would reduce the flow of budget dollars to donee states:

Most of the transfers do not come from ‘red state welfare’ like agricultural subsidies. They derive from Social Security, Medicare, Medicaid, unemployment insurance, food stamps, welfare, the maintenance of the national highway system, the purchase of goods and services for the federal government, and the operation of federal facilities and lands.

If blue state liberals consider this out of whack, what do they want to change?

  • Do they want to move toward a flatter, less progressive federal tax code?
  • Do they want to cut Social Security, Medicare and Medicaid?
  • Do they want to return unemployment insurance and similar entitlement programs entirely to the states?
  • Do they want to hand over the national parks to the states, or privatize them?
  • Would they like to downsize the federal workforce?
  • Should we redistribute military bases from red states to blue? (Those relocations might meaningfully alter the state electorate, making it easier for Republicans to get elected. …)

Of course not! But like McArdle, I’m of the opinion that many of the policy changes on that list, or at least reforms of existing policies, are in order. Perhaps the allure of steeply progressive federal taxes has faded for blue state Democrats with the new reality of the Tax Cuts and Jobs Act. The law restricts deductions for mortgage interest, a hit on those borrowing against high-end homes. It also limits deductions for state and local taxes, eliminating a federal tax subsidy to high-earners living in states with high taxes. State and local politicians who support high taxes will no longer receive a “discount”, courtesy of taxpayers in  other states, on the natural political liability of high taxes.

The categorization of blue states and red states as federal donors and donees is not quite as unambiguous as most Leftists imagine. Be that as it may, the flows of revenue and spending between the federal government and states is a consequence of demographics, regional business environments, and many other factors, but most of all the set of policies promulgated over the years in Washington DC. An objective assessment of the federal government’s largess indicates that most of those policies are in need of drastic reform, yet statists resist, demand more, and act as if “red states rubes” should be grateful for the dysfunction and the federal cash it brings. To progressives, it is hypocritical to oppose an expansive federal government on this basis. The absurdity of that claim is self-evident, but such is the confused state of progressive discourse. Perhaps a better adjective for red state opposition to federal profligacy would be “principled”.

 

Rural Broadband and Federal Intrusion

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Rural telecommunications service is often inferior in speed and quality to what is available in urban areas. This is one basis of the so-called “digital divide” in the U.S., the gaps that exist between various groups in terms of access to broadband telecom service. The urban rural “divide” is actually much smaller than the gaps that exist within urban areas, but much of the attention in public policy debates seems to focus on rural broadband availability. Telecom infrastructure is far more expensive to provide in the hinterlands due to the distances and occasional natural barriers that must be traversed. This was true before the revolution in wireless technology and still is, though wireless has reduced the severity of the tradeoff. Given the cost differential, it strikes me as unreasonable for rural users to expect the same levels of service at the same cost as urbanites. They can either pay the higher cost of provision to receive high-end service, make do with service levels that can be delivered at rates they are willing to pay, or go without. Or, if a high level of service is critical and the user is unwilling to pay the cost, they can move to a place at which it is available at lower cost.

For many years, however, public policy has been premised on the notion that rural telecom users deserve subsidies from the general user population, or from taxpayers, in order to promote equal access to basic telephony and, more recently, broadband access. The Universal Service Fund, to which telecom users pay a fee on their bills every month, is based on this premise. Its extension to broadband is a classic example of first-world luxury made necessity, now asserted to be an obligation owed by society to every individual. It is the philosophical underpinning for a huge allocation of federal funds for rural telecom spending that is now expected as part of President Trump’s infrastructure plan

Broadband Availability

The quality of telecom service includes speed and other factors (such as latency, which refers to data delays). Here, I’ll confine the discussion to the speed at which data can be downloaded (upload speeds are always a bit slower). Minimum speeds of 5 – 8 Mbps are required to stream HD video, according to the FCC. Higher speeds are necessary for heavy users with several devices or “running more than one high-demand application at the same time.”

Broadband speeds vary tremendously across the U.S., but it’s important to remember that speeds are increasing dramatically over time. Small towns are undoubtedly concentrated at the lower end of the distribution of speed availability at any point in time. Today, the gap between the availability of speeds in urban and rural areas is minimal up to about 10 Mbps, but it widens above that level. In fact, the speeds available via certain wireline technologies can vary significantly even within one small town (to say nothing of the significant variation within urban areas). Away from town, the availability of wireline broadband is much more limited. Fixed wireless broadband service (point-to-point) can often be deployed at speeds comparable to wireline service, and those speeds and their availability will increase with the rollout of new (5G) wireless technology. Still, that might not be an option in many isolated communities and remote locales without additional facilities like relay stations. Satellite service is often available at speeds up to 25 Mbps, in-town or out, but like wireless, it has some reliability issues.

Nevertheless, to one degree or another, broadband service is often available in rural areas, or can be available if customers are open to a range of alternative technologies (and again, available speeds are increasing). Obviously, some technologies are better suited to reaching particular areas, depending on distances and terrain. Many rural communities are finding affordable solutions that combine technologies that best leverage existing infrastructure and the natural features of the landscape.

Alms or Unfettered Choice

A reality of life in a hard-to-serve location is that broadband service will be costly… for someone. Enter the interventionists, who view “rurals” with paternalistic sympathy. Rural customers, and certain solutions for broadband delivery discussed above, are already subsidized by the federal government in some instances. And again, the Trump Administration is ready to throw more federal money at rural telecom infrastructure. These subsidies are questionable from a public finance perspective because they presume that rural areas are “underserved” on a cost-benefit basis, a case that is often dubious.

The biggest rub is that most people who live in rural areas do so by choice, a point recently articulated by Nick Gillespie. He recounts the experiences of his ancestors, who came from poor European villages to America to seek a better life. By comparison, today’s American rural population is highly privileged. Few are mired in circumstances beyond their control, contrary to the popular view. Gillespie notes that rural median income is only about 3.5% less than urban income (including suburbs), while rural homeownership rates are higher and poverty rates are lower than in urban areas. Indeed, it’s no secret that many urban elites purchase rural property to escape congested city life. Those are some of the would-be recipients of federally-funded rural broadband infrastructure.

In the end, Americans tend to live where they do by choice. Alternatives not acted upon generally reveal a preference for staying put. Some people prefer the amenities of small town or country life for any number of reasons, including a generally low cost of living. They accept the disadvantages of a rural life such as the lack of proximity to advanced emergency treatment facilities and, at least historically, less connectedness to media. Obviously, city dwellers tend to prefer urban amenities and accept the disadvantages of city or suburban life, like congestion. Those who wish to move from country to city, or vice versa, are free to do so, but they must pay the cost of the move. Likewise, it’s reasonable to expect that those desiring to transform the amenities of a place to their liking should pay the cost. Bringing almost any form of broadband infrastructure to areas with low population density is a costly proposition, but today’s rural consumers have more choices than ever before, and the speed and quality of broadband will continue to improve there without federal intervention.

Rural vs. Urban Adoption Gaps

The rural population is older on average, and it is less educated on average, so rural adoption rates are always likely to be lower. This point has been emphasized by Brian Whitacre, who has stated that the urban-rural “digital divide” might always exist to some extent. But this phenomenon is not unique to rural areas. Adoption rates within urban areas are highly variable, and the intra-urban broadband gaps by race, age, and income dwarf the urban-rural gap. That too is unlikely to change any time soon.

Federal Cash for Cronies & Conferees 

Last year, FCC Commissioner Michael O’Reilly warned of the dangers of direct federal involvement in broadband infrastructure investment. These include the market distortions caused by picking winners and losers among providers based on non-market assessments, the graft that such a process invites, discrimination in favor of high-cost fiber technology, poor coordination across government bureaucracies, and insufficient oversight leading to chronic overpayments. Sadly, however, even Ajit Pai, Chairman of the FCC and a man whose opposition to network neutrality I have applauded, has proposed more federal spending on rural telecom infrastructure. The big telecom recipients of the buildout funds don’t mind the subsidies, of course. The rural recipients of new services at artificially low cost can’t mind too much. But federal taxpayers and broadband ratepayers should question this activity. I’m hopeful that there will be a silver lining: it is likely to be private infrastructure.

5G Wireless: The NSA Wants You On Its Plan

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Please no, Mr. President, do not even flirt with putting the federal government in charge of building and operating a new 5G wireless network! Sure, you’ll hate to disappoint the hawks on the National Security Council (NSC), but please let this remain outside the scope of your infrastructure plan!! For one thing, the private sector already has it underway, and the task is not straightforward. Excessive government involvement would almost surely botch the job. Let’s face it: while shrill calls for central planning of one form or another are constantly heard from leftists and populists, the government is really lousy at it. But then good central economic planning is impossible, given the impossibility of knowing and tracking the vast and dynamic information flows necessary to get it done, not to mention knowing and executing the appropriate responses to that information. There is a better tool for that called “markets”.

Scott Shackford reports that the chairman of the FCC, Ajit Pai, reacted with swift condemnation to the 5G discussions taking place within the NSC. Do read the whole Shackford piece. Apparently, there are some in the NSC who imagine government being good at building, maintaining, and securing a wireless network. This despite the antiquated nature of the federal government’s information systems and, as Shackford notes, their poor security. There is also the potential threat that communications over such a network would be subject to monitoring by nosey law enforcement and other public officials. If national security always implies state control, I’ll take less, but I don’t believe that’s the case for a minute.

The government tends to be a poor custodian of infrastructure — really public assets in general, and there is a reason: incentives are lacking. Private communication networks keep improving thanks to private incentives, like the prices and profits that promote efficient behavior and the market pressures to offer data plans that private users value. The government, on the other hand, struggles even to maintain the interstate highway system, which is simple technology by comparison. But statists tend to view the lack of private incentives as a feature: it’s free! And as a consequence, it is over-utilized and under-maintained. Ultimately the taxpayer is on the hook for capital costs and any upkeep that can be mustered, not the user, but the user suffers the degraded quality of those assets. A nationalized wireless network and its users would suffer the same fate.

Private infrastructure like wireless networks is best encouraged by eliminating regulatory roadblocks to private construction and operation of those assets. That includes the welcome rollback of the stifling network neutrality rules. Low taxes also help, not to say special incentives for wireless carriers.

Protectionist Ugly: Trump Makes Bad on Tariffs

I’ve reacted favorably to much of the Trump Administration’s economic agenda, but foreign trade has been a huge area of concern. Trump’s rhetoric on trade was bellicose on the campaign trail. Thus far in office he has succeeded in upending or threatening trade agreements: he pulled the U.S. out of the Trans-Pacific Partnership (TPP) negotiations, a multilateral trade agreement involving 11 of our Asian trading partners; he has also promised that NAFTA will be renegotiated. This week, he imposed tariffs on solar panels produced in China and washing machines built in South Korea. You will now be forced to pay a penalty tax on any purchase of those products.

Renegotiating existing trade agreements is one thing (though my ideal is unilateral elimination of trade barriers), as is a general preference for bilateral agreements, particularly if they remain focused on trade and not extraneous social issues. But I sincerely hope that the latest move is not the start of a long rollout of tariffs and other protectionist measures. Unfortunately, more such moves are expected.

What possible logic can explain these actions? To hear Donald Trump tell it, the U.S. must enforce trade laws and establish a “level playing field”. So, perhaps this is a form of negotiation. If so, are the cards we hold so strong that we can afford to risk retaliation in the form of tariffs levied on our own exports? Do our trading partners value our business so much that they will not retaliate? Would those countries offer to remove any subsidies they grant their own export industries? Would they tell those industries they must be price followers regardless of cost structure and taxes, charging no less than their American competitors? Can we dictate the terms of trade with these parties? Trump apparently thinks so, but we shall see. I believe the answer is almost certainly no.

Retaliation is likely; this is how trade wars begin, and they have a way of precipitating economic contraction. But that risk represents only one part of the cost of Trump’s tariff action. The real problem is the likely impact of the Trump tariffs on American consumers, American production, and on America’s long-run competitiveness.

  1. Prices: Tariffs are essentially a tax on imports. A significant share of the burden of that tax will be borne by consumers. The price they pay for the import will rise to reflect a portion of the tariff. If, instead, they opt to purchase the American product after the imposition of the tariff, that is a coerced and suboptimal decision based on their existing preferences. They are likely to pay more to the American producer than in the absence of the tariff on the import because American producers will face less competitive pressure. Thus, American consumers will be penalized by the tariff whether they continue to purchase the import or not.
  2. Output: Quantities purchased fall when prices rise. That is the law of demand. American consumers will buy less of the import and less overall, so consumers lose on both price and quantity. But it’s worse than that, because domestic producers gain a degree of market power under the tariff. They have greater leeway to price above marginal cost, which implies output restraint. It is therefore quite possible that domestic output will decrease as well.
  3. Competitiveness: Handicapping foreign competitors eases the pressure on domestic producers to perform by reducing costs, pleasing customers, creating value, and innovating. This is not likely to be a sudden change. Rather, it would manifest in a gradual deterioration of competitiveness. Perhaps no one abroad will want our exports, but domestic consumers will have little recourse except to pay the tariff for the foreign good they preferred to begin with. Meanwhile, if other domestic industries are reliant on tariffed imports as inputs to production, they too will suffer a loss of competitiveness.

I tend to be skeptical of any claim that a foreign government facilitates (or engages in) predatory pricing on American markets. Of course they might. And I know… the U.S. itself has thrown subsidies at solar panels in the past. (Well how unfair!) However, the facts are that in a variety of industries, foreign producers actually have cost advantages over U.S. producers. The very idea of trade is to take advantage of such differences for mutual gain. We buy things from others precisely because we can’t do it all ourselves, at least not without great sacrifice (high cost).

It is all too easy for domestic producers to cry “protect us”, and to claim that national security demands protection. These claims are often accepted with little if any analysis. The pleas for protection are characteristic of rent-seeking crony capitalism. And it isn’t as if Americans have nothing to gain in the exchange: cheap consumer goods and cheap inputs for domestic producers. The income released via low foreign pricing is available for other uses, including saving, larger quantities, or spending on other goods.

American consumers pay the price of trade restrictions and tariffs in several ways. The restrictions not only cost them directly in terms of higher prices, but they also represent a violation of consumer sovereignty and tend to restrain output. That a central authority would deign to prohibit or penalize certain consumer decisions is abominable. One can assert that the actions protect workers, but that is a fiction and holds only in the short-run at best. Remember that workers are consumers in the first instance. Ultimately, the trade restrictions degrade the ability of those workers to compete on world markets. In short, they are destructive. At the link above, George Will quotes Henry George to that effect:

What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.

Jordan Peterson Is Not Complacent

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It’s a hoot to watch Jordan Peterson‘s videos — he stands before crowds doing … crisply-articulated philosophy, seemingly on the fly. He is an outspoken psychologist at the University of Toronto who covers a lot of intellectual ground with an impactful delivery. One of Peterson’s primary messages is so simple as to seem trite: take control of yourself, because you can and you should for your own sake and those around you! But his treatment is an empowering tonic for both men and women, and many are listening. He has toiled away as a professional psychologist, a professor, an author and a philosopher for many years; his ascent to notoriety has been recent and fairly meteoric. Luminaries like Tyler Cowen and Noah Smith now call Peterson one of the top public intellectuals in the western world.

However, Peterson takes positions that are seemingly hard for the Left to swallow: he believes in the power of individual action; that freedom of expression is the basis of personal and academic freedom; that identity politics is destructive (whether on the Right or the Left); and that white privilege is a lie.

Predictably, the Left has attacked Peterson and attempted to characterize him as a spokesman for the far-right. He meets challenges of this kind with a kind of charged equanimity, exposing falsehoods with quick-footed logic, empirics, and honest reflection. Dan Sanchez has written a nice summary of the attacks on Peterson and shows them to be wholly without foundation. He has critics in both ends of the political spectrum, as Sanchez observes:

“[Far right] critics don’t understand what Peterson is saying, because they are mired in the mindsets of politics and war. The way of politics and war is to confront an enemy horde by amassing your own horde: whether it be on the battlefield, in street demonstrations, or in voting booths. It is to fight tribal barbarism by tending toward the tribal and the barbaric yourself. But the way of the heroic, civilized individual is to lead by example and to lead by appealing to the interests of those whose behavior you want to influence.”

And in Peterson’s own words, quoted by Sanchez, tribal barbarism is the way to social ruin:

…where we’re making your group identity the most important thing about you. I think that’s reprehensible. I think it’s devastating. I think it’s genocidal in its ultimate expression. I think it will bring down our civilization if we pursue it. We shouldn’t be playing that game.

On those assertions, Sanchez notes the following:

… Peterson’s claim that identity politics is ‘genocidal in its ultimate expression’ is no exaggeration. Hitler’s military invasions and death camps were the ultimate expression of the racialist and nationalist identity politics that spiritually drove Nazism. And Stalin’s weaponized famines and ‘gulag archipelago’ were the ultimate expression of the class warfare identity politics that spiritually drove Soviet communism.”

So Peterson clearly condemns groupthink on both the Left and Right. He celebrates the value of people as individuals, and he urges us all to realize our value through individual responsibility and productive effort. Help yourself, help those you love, and help others. That’s a call to real human action, as distinct from the seeking of rents through the political process. Peterson is both a fascinating personality and thinker. His ideas and passion can be a powerful antidote to the complacency that plagues so many today. I hope he continues to gain prominence.

Prohibition Disaster: Opioid Edition

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Opioid deaths in the U.S. keep climbing inexorably. However, at the same time, prescriptions for all opioids have decreased for four straight years (2013-2016), according to the Center for Disease Control, and prescriptions for high-dose opioids have decreased for seven straight years (2010-2016). Further decreases are expected when prescriptions are reported for 2017. How does the declining supply square with the increasing death rate? Contrary to popular belief, opioid prescriptions are not now and never were the cause of opioid overdose deaths. The causes are  complex, but they have everything to do with ill-fated efforts to regulate prescriptions and prohibit some opioids.

Fatal Fun

In this informative interview, Dr. Jeffrey Singer explains that 75% of opioid deaths occur among “recreational” users who have never obtained a legitimate prescription. The recent increases in overdose deaths have been dominated by “other synthetic opioids” like fentanyl and heroin, both of which are illegal (except for fentanyl in patches or anesthesia). Oddly, heroin is not legal for medical use in the U.S., despite the fact that it is less than half as powerful as Dilaudid, which Singer says is used fairly routinely to relieve severe pain.

Singer debunks a widespread notion about the dynamic underlying opioid deaths:

…first of all the narrative that everyone has bought into, and this is very frustrating to us practitioners, is that the opioid overdose death problem is a direct result of doctors prescribing pain medicine for patients. So, the popular notion is that I’d write a prescription for an opioid for my patient for pain, my patient becomes a drug addict, and then starts resorting to all sorts of illegal behavior in search of the drug. He becomes a dope fiend, and then he eventually overdoses and dies. … That is not what’s going on.

From the very beginning, the problem of opioid use was driven by an appetite for recreational drugs. Certainly there are people with legitimate medical needs who develop a dependence or addiction and ultimately turn to the black market for continuing supplies. Dr. Singer does not deny that. But there are also individuals who manage to use these drugs recreationally without ever compromising their lives or livelihoods (see Singer’s anecdote about the “Father of American Surgery”, William Halsted). Unfortunately, however, there are recreational users who become dependent or addicted, just as some do with alcohol.

Where do the opioid supplies come from? Of course, heroin and fentanyl make their way onto the market from overseas, and supplies of prescription opioids also make their way onto the black market. For a real buzz, a lot of oxycodone can be extracted from a OxyContin capsule to bypass its slow release. In fact, illegally-obtained OxyContin became a major source of recreational opioid use following its introduction in the 1990s. At the time, physicians were encouraged to be more aggressive in addressing pain management. But the increase in legitimate use for pain brought a concomitant increase in leakage of pills onto the black market. Rx pads are stolen, a few patients might sell legitimate prescriptions, and pills are stolen from medicine cabinets at parties or over at Grampa’s place, for example.

We’re Watching You, Herr Doktor

Efforts to reduce the availability of opioids have been underway for a number of years now. The DEA has mandated reductions in the quantity of opioids manufactured (25% in 2016 and 20% in 2017). The crackdown on so-called “pill-mills” might have helped stem the flow of opioids to the illegal market, especially in Florida, but the measures included strict supply quotas that have harmed those with legitimate needs for the medications. The DEA reclassified hydrocondone as a Schedule II drug, imposing maximum dosages that are too low to relieve the pain experienced by some patients. All 50 states now have prescription drug monitoring programs (PDMPs), which follow prescribing doctors and patients. Singer says PDMPs have a chilling effect on doctors even when their patients’ needs are legitimate. Finally, the FDA has supported pharmaceutical companies in developing “abuse-deterrent formulations” that can’t be crushed or liquified. And those companies have a strong incentive to do so as they can obtain new patents in the process! Some states have required insurers to cover the new formulations, ending the sale of cheaper generics. That is a nice crony deal for big pharma!

While Endangering Lives

The restrictive policies have led to substitution of heroin for opioid pills, as this Notre Dame study shows. The policies endanger: 1) patients with legitimate needs for pain management; 2) occasional users who are otherwise productive members of society; and 3) heavy recreational users. With greater reliance on black market heroin, there is no way for users to tell exactly what they’re getting: it’s probably impure and it’s often amped with fentanyl, or fentanyl sold as heroin. Fentanyl is 50 times as powerful as morphine and 7 – 8 times as powerful as heroin! Singer describes the severe information problem facing users of black market intoxicants:

… when I go into the supermarket or liquor store to buy a bottle of liquor and I see on the label it says, let’s say, ’80 proof,’ or ‘15% alcohol,’ the thought never crosses my mind that it may not be that, that it could be adulterated with all sorts of impurities or laced with something that could kill me. I believe what it says on the label, because it’s legal, and in the legal market. 

Number one, they have competitors and number two, I have recourse if I’ve been defrauded and injured. But, when were dealing with the illegal market, you go to somebody in a subterranean way who says, ‘Yeah, I have what you want.’ And you don’t know if it’s the dose, you don’t know if it’s pure, that’s what’s happening. In fact, what we’ve learned, because of the narrative that it’s a doctor’s prescribing, since about 2010, 2011, all of the policies of both the federal government and the state governments have been aimed at curtailing the amounts of opioids prescribed.

Prohibition always creates more danger for users. Adulteration of is one side of it. In “Legalizing Opioids Would Dramatically Reduce Overdose Deaths“, Harvard economist Jeffrey Miron adds that prohibition leads to mixing with other legal or illegal substances:

“In 2013, 77 percent of deaths involving prescription opioids involved mixing with either alcohol or another drug. If opioids are easily accessible, people tend to use the substance they desire; when access is limited, however, some consumers obtain an insufficient quantity and therefore improvise with alcohol, benzodiazepines, and other drugs. Taking these drugs together increases the risk of overdose, especially when dealing with depressants like opioids ….

Miron and Singer both discuss the risks created by prohibition for users who have developed tolerance to the drugs. Miron says:

“[Tolerance] makes usage less dangerous as the body develops resistance to opioids’ respiratory-depressing effects. … [but] under prohibition users who have developed tolerance get cut off, whether by legal or medical restrictions or by being forced into non-[Medically-Assisted Treatment] treatment. Tolerance then declines, according to medical experts in drug rehabilitation, so users who resume use are more prone to suffer an overdose.

One study proposes that environmental factors also influence tolerance, and that ‘a failure of tolerance should occur if the drug is administered in an environment that has not, in the past, been associated with that drug.’ Therefore, prohibition may increase the chance of overdose by driving users out of their routine into unfamiliar settings in which their tolerance against the respiratory effect of opioids is diminished. 

Finally, by encouraging the development of a black market, prohibition drives up prices, prompting some users to engage in crime to finance their highs. Prohibition itself cedes the market to underworld elements, whose competition culminates in gangsterism and violence.

Medically-Assisted Treatment

Singer believes resources should be redeployed: less drug regulation and interdiction efforts and more harm reduction programs and medically-assisted treatment (MAT):

… when you take [Methadone] orally, it gets absorbed from the gut. It levels that bind with your opioid receptors enough so you won’t experience withdrawal symptoms. … And the idea behind methadone maintenance is that you get used to not, it’s sort of, behavior modification. You’re blunting withdrawal symptoms, but you’re getting used to not feeling the high. And then it’s hoped that over time, you can be tapered off the methadone. And now you don’t crave the high anymore, and you’re over your addiction problem. That’s the idea behind medical-assisted treatment, whether it’s methadone or Suboxone or others.

While doctors, within limits, can prescribe drugs to treat pain, they aren’t authorized to prescribe Methadone or Suboxone to treat addiction. But MAT can actually prevent people from dying! In addition, Singer mentions needle exchange programs to prevent the spread of hepatitis and HIV, and safe injection rooms:

…you go into the room, you inject there, and then you leave. The needle is then discarded by the people who run the place. And not only that, but you have the bonus of somebody being around there with Narcan so if you overdose, because again, you’re using an illegally obtained substance, so you don’t know really what’s in it. … in Switzerland, they reported that teen heroin use has come down, because when the kids see these people going in and out of the clinic to get their injection, it doesn’t look cool.

Conclusion

There are solutions to the deadly nature of the opioid epidemic, but prohibition is not one of them and never will be. If anything, prohibition in varying degrees has aggravated the dangers of opioids. To truly solve the problem, we should eliminate restrictions on the production and distribution of legal opioids for pain management, legalize heroin, and stop interfering in markets. That would be merciful for patients in real pain, make recreational use of opioids dramatically safer, and put an end to the gangland violence associated with underground competition. Second, redirect those resources into MATs and other harm reduction programs. Miron notes that legalization has worked in other countries, like Portugal and France, to reduce overdoses and opioid deaths. As a political matter, however, these steps might not be feasible unless we get over the cultural bias stigmatizing recreational opioid use as “evil”, and the idea that laws and enforcement can actually prevent people from trying to get high.

Open Borders and Club Goods

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The question of open borders divides libertarians as much as any. The arguments for open borders made by the likes of Bryan Caplan, Alex Tabarrok, Don Boudreaux and Sheldon Richman are in many ways quite appealing. Fewer borders means greater opportunities for gainful trade among individuals. For the U.S., the economic gains from in-migration have been unquestionable. From a pure libertarian perspective, governments should never interfere with the non-violent actions of free individuals, including freedom of movement. These great economists contend, in effect, that there is no real moral distinction between government actions that confine individuals within borders and those that keep people out, though our conciences are less burdened by the latter because the world abroad seems so large.

There is a gnawing contradiction in this viewpoint, however. It relates to the appropriate scope of “ownership”. At the link above, Caplan says:

The only principled libertarian objection to this is that the citizens of each country are its rightful owners, so they’re entitled to regulate migration as they see fit. … But if you believe this, there is no principled libertarian objection to any act of government. Fortunately, the belief that citizens are countries’ rightful owners is crazy. The social contract is an utter myth. Contracts require unanimous consent, and no country has ever had unanimous consent.

The Character of a Good

I contest Caplan’s assertion that any one act of government is like all others. Yes, there is always a danger of a majoritarian tyranny in any democracy. But there is also the question of sovereignty, for which borders of some kind are necessary. If policies governing those borders are established legislatively, they should be subject to checks and balances: executive consent as well as judicial review of disputes.

I also contest Caplan’s statement that ownership implies unanimous consent. In fact, there are many forms of property over which decisions do not imply unanimous consent of joint owners. One such form is the subject of what follows, and I believe that form of “ownership” is applicable to one’s citizenship or residency status.

To keep things simple, I’ll frame this discussion only in terms of citizenship. I therefore abstract from issues like green cards, visiting worker programs, and the presence of resident aliens in general. For a nation, the essence of barriers to immigration can be addressed by considering the simpler case of citizens versus non-resident non-citizens. For purposes of this discussion, if you are allowed to arrive on a nation’s shores, you will be a citizen.

If a country’s citizenship can be considered a good worth acquiring, what is its real character? It is privately possessed and not tradable, but not all goods are tradable. An important taxonomy of goods in the public finance literature is based on two dimensions: exclusivity and rivalrousness. The former is the degree to which other parties can be excluded from enjoyment or use of the good or resource.

Most goods have at least some degree of exclusivity: you can be denied admission to a concert, the use of an appliance or furniture, and even parks and port facilities. Pure public goods like national defense and the air we breath are completely non-exclusive, however. Broadcast television is non-exclusive as well, as long as you have the equipment to watch it.

Rivalrousness is the degree to which the use or enjoyment of a good precludes another’s use or enjoyment. My friend can’t eat the steak if I eat the steak. That’s rivalrous. But my friend and I can both enjoy the concert. That’s non-rivalrous. A private good is both exclusionary and rivalrous. A public good is neither.

Citizenship as a Good

Citizenship can be viewed as a bundle of attributes much as any good, but it is an extremely complex bundle: it includes the individual rights enshrined in a nation’s constitution (if any), the personal and economic opportunities available by virtue of access to in-country markets and resources, the culture(s), and any personal risk reduction provided collectively, i.e., a safety net via public support. How, then, would one classify citizenship, or its component attributes, in terms of exclusivity and rivalrousness?

First, the entire citizenship bundle has a high degree of exclusivity. A nation can decide on closed borders, or partially open borders, if it chooses to do so, just as a theme park limits its gate. That is the political decision at hand. The degree of exclusivity of individual components of the bundle matters little if the bundle itself is highly exclusive.

At a high level, citizenship itself is non-rivalrous. My citizenship does not preclude citizenship for anyone else. Therefore, at the level of the bundle, citizenship is exclusive but non-rivalrous, so it has the character of what economists call a “club good“. Citizens are already part of the club; to that extent they are joint “owners”. Like many clubs, decisions about new membership need not be unanimous.

Classification of citizenship attributes as goods is trickier. The exclusivity of citizenship makes the non-rivalrous public goods available to citizens into club goods. Once admitted, for example, you are free to engage in speech, practice a religion of your choice, own a weapon, and receive due process and habeas corpus without interfering with any other citizen’s ability to exercise the same rights. You get national defense and a judicial system. You have equality of opportunity to the extent that your pursuit of economic gain does not interfere directly with anyone else’s opportunities. On the other hand, the freedom of assembly is rivalrous to at least some extent, as we learned last year from events in Charlottesville, VA. In fact, there may be congestion limits to some of the other freedoms mentioned above. 

Access to a nation’s markets permits mutually beneficial trade to take place. An individual’s participation usually does not rule out participation by others, so it is essentially non-rivalrous. (In some markets the entry of new sellers may be limited and exclusionary.) Of course, a nation’s resources are scarce; exploiting them for gain or enjoyment necessarily prevents others from using the same resources. From the point of view of existing citizens, these resources are non-exclusive and rivalrous, and are therefore classified as “common resources”, subject to congestion effects, but they are still exclusive to those citizens. The key here is not whether there are gains from trade, but that there is some rivalrousness embedded in this citizenship attribute.

In addition to the basic rights mentioned earlier, the entire legal structure, regulatory apparatus, and the political process are complex attributes of citizenship. These bear on the limits of legal conduct: Can you buy or sell liquor on Sundays? Do businesses require licensure? Is abortion legal? And on and on. In a democracy, the ability to participate in the political process is non-rivalrous: it does not prevent others from participating. However, the range of possible outcomes of the process can also be viewed as an attribute, and these outcomes, as they are promulgated, are certainly rivalrous. If the “other” side gets extra votes, then the power of my vote is diminished. So the limits of legal conduct are exposed to political rivalry. In the case of open borders, a large number of citizens may not favor existing rules, regulations, and the allocation of public spending.

So the attributes of citizenship are mixed in terms of rivalrousness: Some are rivalrous but many are not. The citizenship bundle, at a more detailed level, is therefore a mix of club goods (exclusive but non-rvalrous) and some goods that are rivalrous. This is important, because under the classical description club goods are public goods provided privately; they are therefore under-provided from the perspective of social welfare and the Pareto criterion that a new citizens can be made better off without making any existing citizen worse off. That might not be the case in the presence of congestion effects.

Should a Club Good Be Unrestricted?

Citizenship has value at the margin to both existing citizens, who should be regarded as established club members, and non-citizens. The foregoing establishes that there are some private (exclusive and rivalrous) attributes attached to citizenship. Sometimes this is due to the impact of congestion on the provision of public goods. Patrick McNutt, in his survey of literature on “Public Goods and Club Goods“, summarizes some basic conditions under which public goods are provided by clubs:

The public good is not a pure public good, but rather there is an element of congestion as individuals consume the good up to its capacity constraint. What arises then is some exclusion mechanism in order to charge consumers a price for the provision and use of the good. Brown and Jackson (1990, p. 80) had commented that the purpose of a club ‘is to exploit economies of scale, to share the costs of providing an indivisible commodity, to satisfy a taste for association with other individuals who have similar preference orderings’. For Buchanan and Ng the main club characteristic is membership or numbers of consumers and it is this variable that has to be optimised.

Citizenship (or residency) is generally not price rationed, though there are certainly costs to the immigrant. I make no pretense here as to the determination of an optimal membership from a club or larger social perspective. My point is that rationing membership is a rational choice by club members, or citizens in this case.

Okay, I Like My Club

Tribal affiliations, and ultimately nation states, were a natural outgrowth of early competition for resources, especially when identifying threats from outsiders was a constant preoccupation. Territorialism was a byproduct, and with the establishment of agriculture, the peoples of these early societies probably identified strongly with their homelands.

Modern nation-states have evolved from those early patterns, and nations continue to differ in terms of language, culture, and governance. Successful nations are undoubtedly more liberal (in the classical sense) and open to trade and cross-border movement. Maybe one day all nations will be united under the principles of libertarianism… don’t count on it! For now, to one degree or another, a nation’s inhabitants have an interest in minimizing economic and political risks and retaining access to resources within their borders. I don’t believe that desire is irrational or immoral. If the inhabitants of a nation have a moral obligation to share their rights, wealth, and political process with all comers, then they must accept the possibility that their rights will be compromised, and possibly even complete upheaval. They suffer a loss of sovereignty and a loss in the expected value of their citizenship.

There is obviously no limiting principle to the open borders policy, as Tyler Cowen says. Existing citizens would be obligated to accommodate all those who land upon their shores, granting them the full rights and opportunities accorded to all other residents. Perhaps there would be economic gains in the short or long run, as most libertarians would predict. But perhaps there would be some losses along the way. Perhaps there would be political stability after a large influx of new residents, but perhaps not. And ultimately, perhaps changes in the political climate would feed back to the detriment of economic performance. One simply cannot say, a priori, how things would go. There are risks to the existing citizenry, and if they are obliged to accept those risks, those might well include having to feed, clothe and house new residents. There should be no absolute obligation to accept those risks. If the debate is about individual liberty, then surely imposing those risks via open borders would  abrogate the rights of existing citizens.

Addendum: A Note on the Goods Taxonomy

Given the two dimensions of goods discussed above, exclusivity and rivalrousness, goods are classified as follows:

  • Private goods: exclusive and rivalrous;
  • Public goods: non-exclusive and non-rivalrous;
  • Club goods: exclusive but non-rivalrous: e.g., a concert;
  • Common resources: non-exclusive but rivalrous: the air we breath; an aquifer;

Another category is sometimes defined: contestable goods, which have the character of public goods or even club goods when under light use, and are common resources when under heavy use. There is a difference between an empty park and a crowded park; or an empty road and a crowded road.

See ThoughtCo. for a good exposition on the taxonomy.

Replacing the Top Banana

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Almost all “dessert bananas” consumed in the U.S. are of one variety: the Cavendish. Dessert bananas are consumed raw, as opposed to “cooking bananas”, or plantains. This post by Steve Savage on his Applied Mythology blog provides some history of the commercial banana and the reasons why the market is dominated by a single banana cultivar. Many other cultivars exist across the globe, but there are sound economic reasons for the dominance of the Cavendish. For starters, people like them!

Incredibly, bananas became one of the early modern fruit staples, available at an affordable price at all times of the year, even in the dead of winter far from the hospitable growing conditions of the tropics. At that time, the dominant banana variety was the Gros Michel, but it fell victim to a fungus called Panama Wilt in the 1950s (still, populations of the Gros Michel survive today). The Cavendish proved to be an excellent replacement, though banana enthusiasts claim that it is inferior to the Gros Michel. Nevertheless, the Cavendish has reigned as the “top banana” in international commerce ever since. Now, however, the Cavendish is threatened by a relatively new strain of the same fungus that ravaged the Gros Michel. The impact so far has been felt mainly in Asia, but it is expected to spread.

This vulnerability has led to criticism of the industry’s reliance on the Cavendish as an example of “extreme monoculture”. Savage regards this as uninformed. He acknowledges the wide diversity of banana cultivars around the globe, but he asserts that the critics do not have a sound understanding of the highly-calibrated economics of growing, transporting, ripening and delivering bananas at the optimal point in the ripening process. The Cavendish meets the requirements of that process far better than the many other varieties, so its long-time dominance in export markets reflects rational decision-making:

First of all, a banana for export has to be seedless. Many wild bananas have large, very hard black seeds – not something that has much consumer appeal. …

By the way, seedless bananas (or rather, bananas with tiny, undeveloped seeds) are not GMOs, as the term is popularly understood. Domestication of the banana began several thousand years ago as early farmers selectively bred those plants producing the most desirable fruit for consumption: less seeds and more pulp. Savage goes on:

“Next, the banana needs to be productive in terms of overall yield per tree or acre. … The usable per-hectare yields of the Cavendish variety are quite high, and that is why it has been a both economically viable and environmentally sustainable choice for a long time. …

But probably the most limiting requirement for a banana variety to be commercially acceptable is that it has to be shippable. … Very few of the wonderful range of cultivated or wild banana types could ever do that, but because the Cavendish can be shipped this way, the energy and carbon footprint of its shipment is small. This crop has a very attractive ‘food-miles’ profile.

In addition, Savage explains that the ripening process must be manageable and predictable. For all of these reasons, the Cavendish (and the Gros Michel in its time) has been an ideal choice in international commerce.

There are many potential solutions to the new challenge faced by the Cavendish, but they may or may not be able to provide a viable replacement before the new fungus presents a full-fledged crisis. You can learn about some of these alternatives at the Bananas.org forumoron other industry sites. For one thing, the Cavendish has shown to be protected from the fungus when grown in mixed plantations with papaya and coffee. In Taiwan, Cavendish bananas have been bred to resist the fungus. Other varieties are grown in central America and the Caribbean, including a surviving Gros Michel population, though it’s doubtful that it could survive the new fungus. There is also the so-called Apple Banana and the Berry Banana. While a greater variety of banana choices would be welcome to consumers, it is not clear how well these exotic bananas would meet the requirements of growers, shippers, grocers and consumers, and at a price that balances the interests of all parties.

There might also be a role for biotechnology in the effort to replace the Cavendish. Genetic engineering (GE) is a promising avenue through which disease-resistant varieties might be created, as it has with the papaya in Hawaii. It is also possible for GE to enhance the nutritional quality of crops. However, you can bet that food activists will condemn any attempt to leverage GE in banana farming.

You’re Entitled To Better Returns Than Social Security

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It’s one thing for indignant seniors (or anyone nearing retirement) to defend the crappy returns they get on their lifetime Social Security payroll taxes … er, contributions, against the arguments of reformers. It’s another for younger individuals to rant about the threat to the crappy returns they will get while resisting an idea for reform that would almost certainly improve their eventual well-being: privatization. Both of the aforementioned reactions are marked by confusion over the use of the word “entitlement” in federal budgeting, though in another sense, entitlement is manifested in the very defensiveness of the reform critics. At its root, this self-righteous naiveté is a product of ignorance about the program, its insolvency, how its rewards compare to private savings, and longstanding media propaganda favoring big government as grubstaker… because it feels virtuous.

There’s really not much to like about Social Security, though the status quo will always appeal to some.

Insolvency: The trust fund held $2.7 trillion of reserves at the end of 2016, but benefit payments are growing faster than contributions (plus interest on the public bonds held by the fund). The wave of retiring baby boomers and increasing longevity (and a declining number of workers per retiree) are placing a strain on the system. According to the trustees, depletion of the fund will begin in earnest in 2022, and the Old Age Survivors and Disability Insurance (OASDI) fund will be exhausted by 2034. This might be delayed if the economy and employment grow faster than expected. The actuarial deficit through 2091 is $2.8 trillion, as Brenton Smith notes in this post.

The returns are lousy: Two years ago, I posted an examination of the returns earned on Social Security “contributions” in: “Stock Crash at Retirement? Still Better Than Social Security“. The title is an accurate summary of the conclusions.

Suppose you are given an option to invest your FICA taxes (and your employer’s contributions) over your working life in a stock market index fund. After 40 years or so, based on historical returns, you’ll have stashed away about 12 – 18 times your total contributions (that range is conservative — 40 years through 2014 would have yielded 19x contributions). A horrible preretirement crash might leave you with half that much. At the low-end, you might have as little as 4.5 times contributions if the crash is as bad as the market decline of 1929-32. That would be very bad.

But you don’t have that option under current law. Instead, the return you can expect from Social Security will leave you with only 1 to 4 times your contributions — without further changes in the program — based on your current age, lifetime earnings, marital status and retirement age. The latter range is based on the Social Security Administration’s (SSA’s) own calculations, as quoted in ‘Social Security: Saving or Tax? Proceeds or Aid‘ on Sacred Cow Chips.”

Reforms? The prototypical reform proposals always involve cutting benefits or raising taxes in one way or another. No wonder there is so much suspicion among the public! For seniors and near-retirees, the lousy returns noted above are at least fairly certain: generally, reform proposals haven’t applied to those of age 55+. Nonetheless, those projected returns are not a promise. There is a risk that the benefits could be changed or eroded by Congress, as discussed here by Lance Robert. For youngsters, the returns are much more uncertain, and changing the structure of distant benefits is always more politically palatable.

Examples of typical reform proposals include delaying the age at which benefits can be claimed, increasing the income cap on payroll taxes, and changing the way in which benefits are indexed to inflation. Many of the “new ideas” shown at this link are variations on finding additional tax revenue or delaying benefits. Rep. Sam Johnson has proposed a set of fairly conventional reforms, including gradual increases in the retirement age and elimination of the earnings test, so that some income could be earned without reducing benefits. Also, Johnson’s plan would redistribute benefits toward low-income beneficiaries. AARP provides a summary of 12 proposals, one of which is to index benefits for life expectancy at each age: as expected longevity increases, annual benefits would decrease. There are other proposals with a strongly redistribution aspect, such as reducing benefits for those with high lifetime earnings or means-testing benefits.

Better ideas: There are currently some incentives in place for retirees to delay benefits for a few years, and some of the proposals at the “new ideas” link would attempt to strengthen those rewards. Another idea mentioned there is to offer an inducement to delay claims by allowing at least a portion of future benefits to be taken as a lump sum. This is more novel and has greater potential savings to the system in a world with increasing longevity. To the extent that retirees can privately invest at more advantageous returns, they might be willing to accept a substantial discount on the actuarial value of their benefits.

The interests of future beneficiaries would be served most effectively by allowing them to choose between contributing to the traditional program or setting a portion of their contributions aside in a private account. These accounts would give individual workers flexibility over investment direction. As discussed above, better returns than the traditional program can be had with near-certainty given sufficient time until retirement. Michael Tanner at CATO is correct in insisting that workers control their own accounts should they opt-out of the traditional program. And the government itself should stay out of private capital markets. 

It is this proposal that is always greeted with the most vitriol by opponents of reform. The very idea of private accounts seems to them an affront. One explanation is the fear of financial risk, but this would be mitigated by limiting the opt-out to younger workers with adequate time for growth. Another explanation is the fear that lower-income beneficiaries would not fare well under this reform. In fact, there is a strong semblance of redistribution in the system’s existing benefit formulas, but these features do not amount to much once adjusted for the differing life expectancies of income groups and the benefits paid to survivors. There is no reason, however, why the private account option would prevent redistribution through the traditional portion of contributions. Moreover, there is value in creating greater transparency when it comes to redistribution, as it promotes more effective scrutiny.

Funding: Unfortunately, the Social Security program has long relied on funding current benefits to retirees with dollars contributed by current workers. This is one of the biggest areas of misunderstanding on the part of the public. Allowing workers to opt-out would improve the long-term benefits received by those retirees, but it would also remove a portion of the funding for current retirees, thus accelerating a portion of the system’s unfunded obligations. A similar acceleration of the funding gap would accompany any reform to discount future benefits in exchange for payment of a lump sums in advance. The tradeoff is favorable over a time horizon lengthy enough to cover the retirement of today’s younger workers, but the near-term shortfall can only be met by reduced benefits, borrowing, or new sources of funds.

Asset Sales: The best option for bridging the funding needs of a transition to private, individually-controlled accounts is to sell federal assets. I have discussed this before in the context of funding a universal basic income, which I oppose. The proceeds of such sales, however, could be used to pay the benefits of current and near-term retirees so as to allow the opt-out for younger workers. The asset sales would have to proceed at a careful and deliberate pace, perhaps stretching over a decade or more, but those sales could include everything from unoccupied federal buildings to vast tracts of public lands in the west, student loans, oil and gas reserves, and airports and infrastructure such as interstate highways and bridges. In 2011, it was estimated that the federal government owned $1.6 trillion worth of liquid assets alone. The value of less liquid federal assets would be in the many trillions of dollars. (Read this eye-opening assessment of federal assets.) Of course, these assets would be more productive in private hands.

Sustainability: The outrage greeting ideas for entitlement reform largely denies the economic reality of inadequate funding. Social Security is just one example of an unsustainable entitlement program. Few participants in the system seem to realize that their benefits are paid out of contributions made by current workers, or that surpluses of the past were simply borrowed by the government and used to fund other spending. It was sustainable only with a sufficient number of contributing workers to support a stable class of retiree-beneficiaries. It cannot withstand an expanding class of longer-living beneficiaries relative to the labor force.

Ideally, reform would address the system’s insolvency as well as the weak returns to beneficiaries on their payments into the system. Self-direction and individual control over at least a portion of invested contributions should be viewed as a long-term fix for both. It will yield much better returns than the traditional system, but for workers this depends on the amount of time remaining until retirement. Young workers can elect to opt-out of the traditional system at little risk because they have the time to invest over several market cycles, but older workers must be circumspect. In any case, it is unlikely that politicians would take the chance of allowing older workers to opt-out, then face a potential backlash after a market downturn.

The insolvency problem, and the short-term funding shortfall created via the opt-out alternative, require hard decisions, but asset sales can bridge a large part of the gap, if not all of it. Lump-sum benefit payments might also be made at a savings, but they would worsen the short-term gap between benefit payments and contributions. In the long-run, the tradeoffs would become more favorable as today’s young workers age and retire with the more handsome returns available via individually-controlled and privately-invested accounts.