Author Archives: Nuetzel

Do Not Rot Productive Capital

21 Saturday Feb 2015

Posted by in Taxes

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Dividend and capital gains income are taxed at lower rates than regular wage and salary income. That such income is taxed lightly strikes progressives as offensive, but the intent and effects of these lower rates is not to redistribute income to rentiers. Rather, relatively low dividend and capital gains tax rates are in place because they limit double-taxation, minimize taxation of inflationary “gains”, and reward successful risk-taking.

Dividends, and ultimately capital gains, derive from corporate earnings. Corporate income in the U.S. is taxed at the highest rate in the OECD, with a top federal rate of 38% (though the rate drops to 35% above a certain level of earnings). Dividends may or may not be paid to shareholders from corporate income, but if so, they are subsequently taxed again as personal income. If dividends were taxed as regular income to individuals, the combined federal taxes (corporate and individual) on that marginal income in upper brackets would be in excess of 75%. With state corporate and personal income taxes added on, the after-tax dividend received by an individual shareholder from each dollar of pre-tax corporate income could then be less than 10 cents in some states.

The top federal tax rate on dividends is 20%, versus 39.6% for regular income. One reason that dividend income is taxed at lower rates than wage and salary income is recognition of the confiscatory nature of double taxation, as illustrated above. Realized capital gains are taxed at the same rate as dividends for the same reason. A capital gain is the increase in the value of an asset over time. Such gains are taxed only when an asset is sold, when the gain is realized. The low tax rate on gains from the sale of corporate stock also limits double taxation (and even triple taxation).

Stock prices tend to rise along with the expected stream of future after-tax corporate earnings and dividends. A prospective buyer of shares knows they will incur taxes on future dividends, which limits the price they are willing to pay for the shares. So, higher future earnings will be taxed to the corporation when they occur, higher future dividends will be taxed to the buyer of shares when dividends are eventually paid, and the resulting gain in the share price received by the seller today is taxed as a capital gain to the seller. Triple (and anticipatory) taxation! A relatively low tax rate on capital gains at least helps to limit the damage from the awful incentives created by multiple taxation of the same income.

Another important reason for taxing capital gains more lightly than wages and salaries is that the tax, in the presence of inflation, diminishes the real value of an asset. As an example, compare the following situations in which the price level increases by 20% over five years: Worker Joe earns $10 an hour to start with and $12 an hour at the end of year 5; Saver Dev earns $1 dividends per share of the Prophet Corp (which he plans to hold indefinitely) to start with and $1.20 at the end of year 5; Retiree Cap buys one share of Gaines Corp worth $100 at the start and sells it for $120 at the end of year 5. On a pre-tax basis, these three individuals all keep pace with inflation. The real value of their pre-tax earnings, or the share value in Cap’s case, is unchanged after five years. Cap keeps pace by virtue of a $20 capital gain, so the real value of his share is unchanged.

If all three types of income are taxed at the same rate, Joe and Dev both keep pace with inflation on an after-tax basis as well. But what about Cap? After taxes, the proceeds of his stock sale are $115. Cap’s after-tax gain is only 15%, less than the inflation that occurred, so the real value of his investment was diminished by the combination of inflation and the capital gains tax. The same would be true for farmland, artwork, or any other kind of asset. It is one matter to tax flows of income that change with inflation. It is another to tax changes in property value that would otherwise keep pace with inflation. This is truly a form of wealth confiscation, and it provides a further rationale for taxing capital gains more lightly than wage and salary income, or not at all.

There are further complexities that influence the results. For one thing, all three individuals would suffer real losses if inflation pushed them into higher tax brackets. This is why bracket thresholds are indexed for inflation. Another wrinkle is the “stepped-up basis at death”, by which heirs incur taxable gains only on increases in value that occur after the death of their benefactor. This aspect of the tax code was recently discussed on Sacred Cow Chips here.

The third rationale for taxing capital gains more lightly than wage and salary income is an attempt to improve the risk-return tradeoff: larger rewards, ex ante and ex post, are typically available only with acceptance of higher risk of loss or complete failure. This is true for private actors and from a societal point of view. It is hoped that lighter taxes on contingent rewards will encourage savings and their deployment into promising ventures that may entail high risk.

This post was prompted by a article in The Freeman entitled “A Loophole For the Wealthy? Demystifying Capital Gains“, by Dr. Kim Henry. I was somewhat surprised to learn that Dr. Henry is a dentist. His theme is of interest from a public finance perspective, and he provides a good discussion of the advantages of maintaining a low tax rate on capital gains. My only complaint is with the first of these two points:

“[The capital gains tax rate] is lower for two important reasons:
1. Although the gain is realized in one year, it actually took place over more than one year. The wine did not increase in value just in the year it was sold. It took 30 years to achieve its higher price.
2. Capital gains are not indexed to inflation. …”

To be fair, Dr. Henry’s point relative to the time required to achieve a gain probably has more to do with the riskiness of an asset or venture’s returns, rather than the passage of time per se. If an asset’s value increases by 4% per year, the three points raised above (multiple taxation, taxing of inflationary gains, and rewarding successful risk-taking) would be just as valid after year 1 as they are after year 5.

Taxing income from capital is fraught with dangers to healthy investment incentives, which are primary drivers of employment and income growth. Double taxation of corporate income is not helpful. Capital gains taxes suffer from the same defect and others. But capital income is a ripe target for those who wish to score political points by inflaming envy. It’s a dark art.

Precaution Forbids Your Rewards

19 Thursday Feb 2015

Posted by in Regulation

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The precautionary principle (PP) is often used to justify actions that radically infringe on liberty, but it is an unreliable guide to managing risk, both for society and for individuals. Warren Meyer makes this point forcefully in a recent post entitled “A Unified Theory of Poor Risk Management“. The whole post is worth reading, but PP is the focus of second section. Meyer offers the following definition of the PP from Wikipedia:

“The precautionary principle or precautionary approach to risk management states that if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific consensus that the action or policy is not harmful, the burden of proof that it is not harmful falls on those taking an action.”

He goes on to explain several problems with PP, the most important of which is its one-sided emphasis on the risks of an activity while dismissing prospective benefits of any kind. Enough said! That shortcoming immediately disqualifies PP as a guide to action. Rather, it justifies  compulsion to not act, which is usually the desired outcome when PP is invoked. We are told to stop burning fossil fuels because CO2 emissions might lead to catastrophic global warming. Yet burning fossil fuels brings enormous benefits to humanity, including real environmental benefits. We are told to stop the cultivation of GMOs because of perceived risks, yet the potential benefits of GMOs are routinely ignored, such as higher yields, improved nutrition, drought resistance and reduced environmental damage. Meyer asks whether there is an irony in ignoring these potential gains, as it entails an acceptance of certain risks. Forced energy shortages would bring widespread economic decline. Less-developed countries face risks of continuing poverty and malnutrition that could otherwise be mitigated.

The terrifying risks cited by PP adherents are generally not well-founded. For example, climate models based on CO2 forcings have extremely poor track records. And whether such hypothetical warming would be costly or beneficial, on balance, is open to debate. The supposed risks of GMOs are largely based on pseudoscience and ignore a vast body of evidence of their safety. As Meyer says:

“… the principle is inherently anti-progress. The proposition requires that folks who want to introduce new innovations must prove a negative, and it is very hard to prove a negative — how do I prove there are no invisible aliens in my closet who may come out and eat me someday, and how can I possibly get a scientific consensus to this fact? As a result, by merely expressing that one ‘suspects’ a risk (note there is no need listed for proof or justification of this suspicion), any advance may be stopped cold. Had we followed such a principle consistently, we would still all be subsistence farmers, vassals to our feudal lord.”

The PP has obvious appeal to statists and fits comfortably into the philosophy of the regulatory state. But it’s a reasonable conjecture that widespread application of the PP exposes the world to greater natural and economic risks than without the PP. Under laissez-faire capitalism, human action is guided by the rational balancing of benefits against costs and risks, which has brought prosperity everywhere it’s been practiced.

Nullifying The Federal Blob

17 Tuesday Feb 2015

Posted by in Uncategorized

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When must a state acquiesce to the demands of the federal government? The question is not as straightforward as many believe. The U.S. Constitution is fairly explicit in “enumerating” the federal government’s powers, which at least tells us that the answer must be “sometimes,” not simply always or never. Powers not specifically granted to the federal  government are generally reserved by the states. This is the principle of federalism, but in practice it leaves plenty of room for disagreement. The federal government has grown enormously in size and in the scope of its activities. It seems inevitable that tensions will arise over specific questions about the limits of federal authority. And over time, in response to challenges, the courts have interpreted some of the enumerated powers more expansively. There is an ongoing debate over what avenues, in addition to the courts, states may follow in challenging federal power. Some have framed it as a debate over state “nullification” of specific federal laws versus a constitutional convention to establish clearer limits on the reach of federal power.

Recently, nullification has been all the rage, as this article in The Hill makes clear. So-called “mandates” often require states to enforce federal laws, which is likely to provoke some objections. And major pieces of federal legislation have become so complex that details must be sorted out by the administrative agencies in charge of implementation. This involves lots of rule-making and delegation of authority that has frequently imposed burdens on state governments. States are increasingly refusing to cooperate. From The Hill:

“The legislative onslaught, which includes bills targeting federal restrictions on firearms, experimental treatments and hemp, reflects growing discord between the states and Washington, state officials say. …

Friction between the states and the federal government dates back to the nation’s earliest days. But there has been an explosion of bills in the last year, according to the Los Angeles-based Tenth Amendment Center, which advocates for the state use of nullification to tamp down on overzealous regulation.”

Later in the same article, the author discusses an effort to organize a constitutional convention:

“… conservatives are pushing for states to invoke Article 5 of the Constitution and hold a ‘convention of states’ to restrict the power and jurisdiction of the federal government. The group Citizens for Self-Government is leading the charge, and three states — Alaska, Georgia and Florida — have already passed resolutions calling for the convention. Another 26 states are considering legislation this year, according to the group’s president, Mark Meckler. It would take 34 states to call a convention. At the convention, Meckler said the states would work to pass amendments that impose fiscal restraints, regulatory restrictions and term limits on federal officials, including members of the Supreme Court. ‘We’ll have [Article 5] applications pending in 41 states within the next few weeks,’ he said. ‘The goal is to hold a convention in 2016.’”

Libertarians are split on the issues of nullification and a constitutional convention. The latter  is addressed by A. Barton Hinkle in Reason, who questions the necessity of a convention and sees certain risks in the effort, such as new provisions that could “backfire”, the possibility of a “runaway convention”, and efforts to riddle the Constitution with “primary laws,” rather than merely improving it as a framework for governing how we are governed.

As for nullification, Robert Levy, board chairman of The CATO Institute, distinguishes between situations in which a state is asked to enforce a federal law and those involving federal enforcement of a law deemed to be unconstitutional by a state. He asserts that states cannot resolve the latter type of dispute via nullification:

“Fans of nullification count on the states to check federal tyranny. But sometimes it cuts the other way; states are also tyrannical. Indeed, if state and local governments could invalidate federal law, Virginia would have continued its ban on inter-racial marriages; Texas might still be jailing gay people for consensual sex; and constructive gun bans would remain in effect in Chicago and elsewhere.

… If a state deems a federal law to be unconstitutional, what’s the proper remedy? The answer is straightforward. Because the Supreme Court is the ultimate authority, the remedy is a lawsuit challenging the constitutionality of the suspect federal regulation or statute.”

Not surprisingly, the Tenth Amendment Center strongly disagrees with the limits on nullification described by Levy:

“Levy’s entire argument rests on the idea that the federal courts possess the sole and final authority to determine the constitutionality of an act. … Levy never addresses the fundamental question facing those who oppose nullification: how does one reconcile the undeniable fact that the state ratifying conventions adopted the Constitution with the understanding that it was creating a general government with specific, limited powers and the idea that a branch of that very same federal government has the final say on the extent of its own powers? Quite simply, you can’t.”

These recent efforts to reign in the federal government are exciting. I am watching the progress of the Article 5 convention effort with great interest. I am not sure I buy into Levy’s arguments against nullification because checks on power should cut both ways: the Constitution allows states to retain powers not specifically granted to the federal government, so the states should guard those powers jealously. It matters not whether the question involves state enforcement of a federal law or a federal law that violates states rights. Likewise, powers specifically granted to the federal government should serve as a check on “state-level tyranny”. Again, that leaves plenty of room for disagreement before the courts.

Consequentialists Dismiss Obamacare Consequences

15 Sunday Feb 2015

Posted by in Obamacare

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The King vs. Burwell case now before the U.S. Supreme Court turns on whether the Affordable Care Act (ACA, or Obamacare) authorizes the payment of federal subsidies to consumers in states that do not sponsor their own state health insurance exchanges (up to 37 states, by some counts, depending on how certain “hybrid” exchanges are treated). In those states, Obamacare must be purchased on the federal (or a hybrid) exchange. Proponents of the law strongly desire the court to uphold the subsidies. However, the “plain language” of the law states that tax credits apply only to insurance purchased “through an Exchange established by the state.” That language does not appear to support the governments position in the case. In addition, one of the chief architects of the ACA, Jonathan Gruber, seemingly exposed the real intent of this provision:

“What’s important to remember politically about this is if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits — but your citizens still pay the taxes that support this bill. So you’re essentially saying [to] your citizens you’re going to pay all the taxes to help all the other states in the country. I hope that that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges.”

Who could have given a better description of the motive?

Others insist that the awkward language in the ACA on this point might have been a typographical error, that the tax credits were intended to subsidize purchases on any exchange, and that other wording in the legislation makes the legislative intent “ambiguous” at worst. Harvard law professor Laurence Tribe subscribes to this view. Tribe argues elsewhere that a ruling which finds federal-exchange subsidies illegal would throw the health insurance market into turmoil. Thus, taking a “consequentialist” approach, Tribe argues that the court should be reluctant to disrupt the market by ruling that subsidies were intended to be unavailable to states without exchanges under the ACA. This conveniently dismisses the fact that Obamacare itself has had and will continue to have so many negative “consequences.”

Obviously, not all agree that a ruling against the government would be such a travesty. A victory for the King plaintiffs would not increase anyone’s premiums. What it would do is prevent the IRS from shifting the burden of those premiums from enrollees to taxpayers. According to  Michael Cannon,  arguments against the plaintiff’s case have:

“… misrepresented the impact of a potential ruling for the plaintiffs by ignoring three crucial facts: (1) a victory for the Halbig [and King] plaintiffs would increase no one’s premiums, (2) if federal-Exchange enrollees lose subsidies, it is because those subsidies are, and always were, illegal, and (3) the winners under such a ruling would outnumber the losers by more than ten to one.”

Nevertheless, the  consequentialist argument suggests that the court might be reluctant to rule against the government in the absence of a viable and immediate alternative to Obamacare. That belief helped motivate the most recent GOP plan, sponsored by Senators Richard Burr, Orin Hatch and Representative Fred Upton, which is due for a vote in the House of Representatives next week. This alternative has been called “Obamacare Lite” by some GOP critics, and it does retain a few of the most popular Obamacare provisions. However, it eliminates some highly intrusive aspects of the ACA (the individual and employer mandates) and attempts greater reliance on markets to control costs. This review in the Washington Free Beacon is mostly favorable. Peter Suderman at Reason explains that the proposal would involve tax credits designed to promote affordability, but they would be less distorting and less generous than under the ACA. Here is a fairly complete but mixed review of the GOP alternative.by Robert Laszewski:

“My sense is that voters will end up liking parts of both Republican and Democratic ideas. They might ask a reasonable question: Why can’t we take the best from both sides? If Democrats would just admit Obamacare needs some pretty big fixes, and Republicans would be willing to work on making those fixes by putting some of these good ideas on the table, the American people would be a lot better off. In fact, I am hopeful that this is eventually what will happen once Obamacare’s failings become even more clear (particularly the real premium costs) and both sides come to understand that neither will have a unilateral political upper hand.”

Laszewski is critical of the plan’s potential for creating a new set of winners and losers, but his objection losses sight of the fact that distortions in the ACA create so many winners and losers as to be indefensible. For example, the ACA limits differences in age rating, effectively transferring wealth from younger premium payers to much wealthier seniors, while the GOP plan loosens those limits. Similar distortions were created by Obamacare’s mandates, taxes, lack of choice in health coverage, revocation of individual coverage, poorly designed provider incentives and reduced physician reimbursements, to give a short list.

I like many of the ideas in the Republican plan, but it is a compromise. Its reforms should reduce the cost of coverage. It increases choice, leverages market incentives, and reduces tax distortions, including the tax advantage of employer-provided coverage. At the same time, it wholly or partially retains ACA provisions that make coverage more affordable at low incomes and provide continuous coverage for those with pre-existing conditions. It also encourages the creation of state pools for high-risk individuals. These provisions might or might not  mollify “consequentialist” sentiment on the Supreme Court, leading to a majority ruling against the government in King vs. Burwell. If not, and while the question before the court is more narrow, the irony would be for the court to uphold the many destructive consequences of Obamacare.

Dismal Implications of Aggregate Analysis

12 Thursday Feb 2015

Posted by in Macroeconomics

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Economic aggregation is basic to traditional macroeconomic analysis, but it distorts and drastically oversimplifies the enormous number of transactions and the vast network of decision-makers that comprise almost any economic system, especially a market economy. There are some basic problems with aggregating across individuals and markets, but these are typically glossed over in macro-policy analyses. Instead, the focus is on a few key outcomes, such as aggregate spending by sector and saving, masquerading as collective “decisions” amenable to behavioral analysis. In this kind of framework, the government sector occupies an equal place to consumers and business investors. It is usually depicted as a great exogenous demander of goods and services, capable of “stabilizing” demand in the event of underconsumption, for example.

An insightful post by Gary Galles at the Mises blog drives home the inherent distortion involved in the analysis of macro-aggregates: “How Economic Aggregation Hides the Problems of Interventionism“.  The problems start with a nearly complete misapplication (if not neglect) of the basic problem of scarcity, as if that problem can be solved via manipulation of aggregate constructs. Galles offers a simple example of the macro distortion of “net taxes,” or aggregate taxes minus government transfer payments. Both taxes and transfers are complicated subjects, and both are subject to negative incentive effects. The net-tax aggregation is of little use, even if some rudimentary supply function is given treatment in a macro model.

By its very nature, aggregate government activity is distorted by the prices at which it is valued relative to market activity, and intervention in markets by government makes market aggregates less useful:

“For example, if government gives a person a 40 percent subsidy for purchasing a good, all we know is that the value of each unit to the buyer exceeded 60 percent of its price. There is no implication that such purchases are worth what was paid, including the subsidy. And in areas in which government produces or utilizes goods directly, as with defense spending, we know almost nothing about what it is worth. Citizens cannot refuse to finance whatever the government chooses to buy, on pain of prison, so no willing transaction reveals what such spending is worth to citizens. And centuries of evidence suggest government provided goods and services are often worth far less than they cost. But such spending is simply counted as worth what it cost in GDP accounts.”

Galles article emphasizes the unintended (and often unpleasant) consequences that are bound to flow from policies rationalized on the basis of aggregate macro variables, since they can tell us little about the impact on individual incentives and repercussions on the ability of markets to solve the problem of scarcity. In fact, the typical Keynesian macro perspective lends itself to slow and steady achievement of the goals of collectivists, but the process is destined to be perverse: more G stabilizes weak aggregate demand, or so the story goes, but as G expands, government entwines itself into the fabric of the economy, and it seldom shrinks. Taxes creep up, dependencies arise, regulation grows and non-productive cronies capture resources bestowed by their public sector enablers. At the same time, the politics of taxes almost ensures tat they grow more slowly that government spending, so that the government must borrow. This absorbs saving that would otherwise be available for productive, private investment. As investment languishes, so does growth in productivity. When economic malaise ultimately appears, we hear the same policy refrain: more G to stabilize aggregate demand! All the way down! Perhaps unemployed dependents are simpler to aggregate.

Aggregation masks the most basic issues in economics. A classic lesson in the complexity of creating even a simple product is told in “I, Pencil“, by Leonard Read. In it, he allows the pencil itself to tell the story of it’s own creation:

“Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred. “

How many individual decisions and transactions are involved, throughout all intermediate and final stages of the process? How many calculations of marginal value and marginal cost are involved, and ultimately how many prices? While the consumer may think only of the simple pencil, it would be a mistake for a would-be “pencil czar” to confine their planning to final pencil transactions. But macro-analysts and policymakers go a giant leap further: they lump all final transactions together, from pencils to pineapples (to say nothing of the heroics involved in calculating “real values”, an issue mentioned by Galles). They essentially ignore the much larger set of decisions and activities that are precedents to the final transactions they aggregate.

Dogma, Intolerance and The Decline of Inquiry

11 Wednesday Feb 2015

Posted by in Marketplace of Ideas

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Bias in academic research is more common than most people realize. Some recent posts on this topic by Lee Jussim on the Psychology Today Rabble Rouser blog caught my eye. In “Psychology’s Political Diversity Problem“, Jussim shows the abstract of a paper he coauthored on the decline in political diversity among psychological researchers, and the nefarious effects that decline has had on the scope and quality of research. From the abstract:

“This lack of political diversity can undermine the validity of social psychological science via mechanisms such as the embedding of liberal values into research questions and methods, steering researchers away from important but politically unpalatable research topics, and producing conclusions that mischaracterize liberals and conservatives alike;”

Similar phenomena can and have corrupted other areas of research, such as climate science, in which outright fraud has been committed (East Anglia, temperature records) amid a   breakdown in the integrity of the peer-review process. The destructive mechanisms, according to Jussim and his coauthors,  are “self-selection, hostile climate, and discrimination” against researchers holding minority views. I would add that research often will be colored when future funding is perceived as contingent on the nature of the findings.

Jussim follows up with another post on the Rabble Rouser blog entitled “Liberal Bias Distorts Scientific Psychology (and Education)“. In this post, he links to a “disclaimer” essentially stating that his conclusions are NOT a condemnation of the personal morals, competence, or fair-mindedness of so-called liberals in his profession (I disagree with his use of the term “liberal”– these are leftists, not real liberals). He also elaborates on the article he coauthored and provides links on various dimensions of the topic, such as this post by economist Michael Munger entitled “Our higher education system fails leftist students.” From Munger:

“Our colleagues on the left could choose to educate their liberal students, but since education requires ‘collision with error,’ that is no longer possible. That’s because the faculty on the left were themselves educated by neglect, never confronting counterarguments, in a now self-perpetuating cycle of ignorance and ideological bigotry.”

Of course, none of this is new. Bryan Caplan, who is a big fan of the Jussim article, confronted the same topic ten years ago as it pertained then (and still does) to academic economists:

“Even if we control for quality of publications, the gatekeepers – journal editors and referees – also feel virtually no financial cost of rejecting articles they find ideologically distasteful. So there is probably more discrimination against right-wingers than the data suggest, not less. …

If there is no discrimination, how does it happen that Alex [Tabarrok] and I and half the other staunch libertarian economists in the world are all in the same department? Segregation is the predicted effect of worker-on-worker discrimination. And that’s what we see.”

These are the lamentations of some extremely talented academics, not amateurs or pseudoscientists. This is not sour grapes; they are all engaged in a principled fight against bad odds. More importantly, they marshall powerful arguments that their respective fields of study suffer greatly from the effects of “monoculturalism”. After all, differences and argument are the essence of vibrant research and, ultimately, truth-seeking.

Peak-Resource Myopia Serves the State

08 Sunday Feb 2015

Posted by in Peak Oil

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smith-marx-schumpeter-keynes We often hear we’re at the “peak” availability of some resource, but what’s really meant is that we’re at a cliff’s edge, about to run dry. These claims are usually uninformed and have been wrong historically. Of course, scarcity is real; it’s why I do economics and love markets, which solve the problem of scarcity through voluntary, arms length cooperation in balancing needs and wants with the availability of resources. But scarcity at any point in time rarely implies anything about the availability of resources going forward. Current knowledge and conditions, and existing technology for extracting and utilizing resources, provide signals about opportunities; they should not dominate our outlook for the future in a dynamic economy.

The view that the availability of resources is subject to hard limits, or that they will “run out”, is discussed by David Henderson in his post “The Jevons Fallacy,” regarding the “peak” views often credited to economist William Jevons. Henderson quotes his own bio of Jevons:

“Jevons failed to appreciate the fact that as the price of an energy source rises, entrepreneurs have a strong incentive to invent, develop, and produce alternate sources. In particular, he did not anticipate oil or natural gas. Also, he did not take account of the incentive, as the price of coal rose, to use it more efficiently or to develop technology that brought down the cost of discovering and mining (see natural resources).”

Don Boudreaux has a few thoughts on Henderson’s post and the topic of scarcity, emphasizing the contribution of human ingenuity to the supply of resources:

“Atoms are created and made into matter by the impersonal forces of nature (or, if you are a theist, by God). In contrast, matter is made into resources only by human creativity, especially when this creativity is unleashed and directed by markets. So more humans – and more markets – quite realistically (and, so far, historically) mean an increasing, not a decreasing, supply of resources.”

A 2005 post at the humansunderrated blog made the same point: “Only one resource truly matters and that is the human mind.” And the human mind, guided by market signals, is what ultimately solves the problem of scarcity. It does not get solved when human initiative is shackled by regulation, insecure property rights, or protected monopoly interests, which are all varieties of government failure.

In “Peak Nonsense,” Michael Lynch concurs:

“And so here we go again on the trial of exhaustion theory, one step removed from the scientism of central planning where decline rates are projected and a social cost of depletion is calculated for an extraction tax. But it is all bad science. ”

There is no end to scarcity. It will always be with us, but we have not reached peak oil, peak fossil fuels, peak food, or peak anything. The dreary viewpoint credited to Jevons and Thomas Malthus is misguided as long as people remain free to engage in voluntary production and trade. The “peak” perspective serves the interest of statists who’d prefer to impose arbitrary limits on our productive potential.

Stimulus and The Infrastructural Itch

06 Friday Feb 2015

Posted by in infrastructure

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Politicians may be rightly convinced that to utter the phrase “investment in infrastructure” is to goose the dopamine levels of voters and political reporters. It is an hypnotic mantra, especially if it can be paired with “economic stimulus”. And it seemingly matters not whether the benefits of an actual project exceed costs. The time-lines involved in infrastructure investment, legislative, planning, and construction, almost guarantee an absence of political accountability for projects that end badly.

Apparently, it doesn’t even matter whether an infrastructure project actually gets underway. President Obama knows that the promised spending can go to any pet initiative. This is driven home in “Infrastructure Bait and Switch” by Warren Meyer. He distinguishes between two types of this “B&S”:

“The first time around [Obama] sold the stimulus bill as mainly an infrastructure spending bill — remember all that talk of shovel-ready projects? Only a trivial percentage of that bill was infrastructure. At most 6% was infrastructure, and in practice a lot less since Obama admitted later there were no shovel-ready projects. … The rest of it was mainly stuff like salary support for state government officials. Do you think he would have as easily sold the ‘wage support for state government officials’ bill in the depth of a recession? No way, so he called it, falsely, an infrastructure bill.

The other bait and switch that occurs is within the infrastructure category. We have seen this at the state level in AZ several times. Politicians love light rail, for some reason I do not understand, perhaps because it increases their personal power in a way that individual driving does not. Anyway, they always want money for light rail projects, but bills to fund light rail almost always fail. So they tack on a few highway projects, that people really want, call it a highway bill and pass it that way. But it turns out most of the money is for non-highway stuff.”

Meyer links to this post in support of his “6%-was-infrastructure” claim, and he is right.

Holman Jenkins makes the same basic point in “The Infrastructure Medicine Show“, noting that the temptation to misallocate resources into boondoggles is made worse by the perception that “free money” is available by virtue of the Federal Reserves’s zero interest rates policy:

“In the U.S., why does top-down infrastructure enthusiasm always seem to turn to California-style bullet trains—i.e., projects certain to lose money but beloved by politicians and pork-barreling interest groups?”

I disagree with Jenkins’ assertion that public infrastructure investment should only follow economic growth. Rather, it should occur on an ongoing basis to meet important needs as they arise, and the threshold for any project’s benefits should match the opportunity cost of private capital investment. To some approximation, this might help protect against crowding out of the sort decried by John Cochrane.

The supposed infrastructure crisis, so often invoked by politicians, appeals to any motorist who has ever encountered a pothole. But in terms of basic transportation infrastructure, the “crisis” is something of a myth. In fact, if the widely anticipated revolution in autonomous vehicles transpires, it will greatly diminish needs for expanded transportation infrastructure of all kinds.

President Obama touts infrastructure investment in his new budget proposal using the Keynesian language of economic stimulus. But in another interesting post, Warren Meyer points out that a proposal to run budget deficits of $500+ billion going forward, in the middle of an economic expansion, is not exactly sensible as countercyclical fiscal policy. When might the U.S. government run a budget surplus? In a mild fit of sarcasm, Meyer highlights an irony:

“While those evil private short-term-focused private actors have used the improving economy to de-leverage back below 2007 levels, governments have increased their debt as a percentage of GDP by just over 50% since just before the last recession.”

P.S.: Jerry Brown wasn’t the focus here, but I love the cartoon above. It’s a nice depiction of the boondoggling impulse common to so many politicians.

Can Federal Regulation Enrich Your Web? What?

05 Thursday Feb 2015

Posted by in Net neutrality

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Do you really believe that government regulation of the internet will keep it “open”, fast and innovative? Really? Then you will be happy with today’s FCC decision to reclassify broadband internet service providers (ISPs) as “common carriers.” (The link above will take you to a Google search page with another link to “Washington Conquers the Internet“.) This puts the ISPs on the same regulatory footing as land-line and wireless voice services. The FCC’s action is a legal move that will pave the way for regulation of rates and service rules with the supposed aim of “net neutrality”.

The FCC chairman, Tom Wheeler, has recently argued that because the wireless carriers have enjoyed tremendous growth under the common carrier rules, there is no reason to fear that the broadband industry would suffer under the reclassification. However, as Peter Suderman explains, the common carrier rules applied only to wireless voice services, not to rapidly growing wireless data services. Wheeler’s argument is therefore misleading:

“... it suggests that Wheeler wants to pursue reclassification not because the wireless sector has been successful under Title II, but because of the service that has been successful without it.”

The FCC would almost assuredly reclassify wireless data as well as broadband as common carrier services.

Net neutrality is a misnomer, as Sacred Cow Chips has noted in the past here, here, and here. These posts cover shortcomings of so-called net neutrality such as mis-pricing of services, subverting incentives for network maintenance and growth, massive non-neutral subsidies for network hogs, the potential threat to free speech, and a negative impact on the poor. Warren Meyer at Coyote Blog expresses his dismay at the utter naivete of those who think that “net neutrality” sounds appealing:

“Here is my official notice — you have been warned, time and again. There will be no allowing future statements of “I didn’t mean that” or “I didn’t expect that” or “that’s not what I intended.” There is no saying that you only wanted this one little change, that you didn’t buy into all the other mess that is coming. You let the regulatory camel’s nose in the tent and the entire camel is coming inside. I guarantee it.”

Today’s FCC decision will also expose unsuspecting internet users to federal and local fees and taxes averaging about $49 per year. According to this calculation, that’s an increase in average broadband cost of about 9%. I believe that the estimate of the negative impact on subscribership given at the link is mistaken and too large (even in the update at the bottom), but there will certainly be a negative impact that could run into the millions of subscribers.

Finally, there is little doubt that FCC Chairman Wheeler felt strong pressure from the White House (another link at a Google search page) to reclassify ISPs as common carriers. President Obama is one of those souls who find “net neutrality” appealing, but I’m cynical enough to think that he merely finds the politics of “net neutrality” appealing. Big government can’t wait to control your “open internet”.

Postscript: This video is a lighthearted take on what the FCC is getting us into.

Big Tax & Spend Party In Obama’s Head

04 Wednesday Feb 2015

Posted by in Big Government, Taxes

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President Obama has thoughtfully dangled lots of freebies before the eyes of Americans in his proposed budget under the guise of “middle-class economics.” It’s not clear that the middle class will benefit over the long haul, but this certainly isn’t about forsaking present pleasure for future gain. It’s just about politics. Obama hopes his budget establishes a superior negotiating position with Republicans, and he hopes that the opposition to many of his giveaways will allow Democrats to tar the GOP as hard-hearted. In introducing his proposal, the president derided what he called the “mindless austerity” of the sequestration spending caps (which his budget would exceed by a mere $74 billion), but as Reason notes, the “sequestration process was the White House’s idea in the first place.”

Investor’s Business Daily has this to say in their editorial:

“The era of big government would be back with a vengeance. Obama wants a preposterous 7% spending hike this year for government agencies — with more nanny-state money for schools, early-childhood education, roads and bridges, child care, green energy and corporate welfare for manufacturers.”

All of these priorities are behaviorally non-neutral, heavily cross-subsidized and of questionable value, at best. Of course, everybody wants a high-speed rail line as long as the fare is heavily subsidized. Beyond that yearning, the poor state of American transportation infrastructure is something of a myth. Just as stupefying is the proposed increase in defense spending, which will end up as the most popular provision among hawks in Congress. From Reason:

“President Obama’s budget requests $561 billion for defense spending, which includes the biggest baseline Pentagon budget ever. Sequestration caps for military were already loosened from initial levels in a budget deal made in 2013. And the Pentagon has managed to keep spending freely on boondoggles like the Joint Strike Fighter—a $400 billion futuristic fighter that has serious trouble with basic functionality, like flying—and a program to build new nuclear bombers and subs expected to cost about $350 billion. This is not a picture of a fighting force that is desperately starving for cash.”

On the revenue side, the Obama budget would increase taxes by $1.6 trillion over 10 years. Some of the details are discussed here, including $200 billion in corporate tax reform. As explained by Timothy Taylor, the so-called reform is a hodge-podge of 67 different provisions. For the 2017 budget year, these would add revenue of about $19 billion, but when Taylor totals the top ten provision, those come to $49 billion. The $30 billion difference consists of various items such as “simplification and tax relief for small business,” which might represent sensible changes, and “incentives for manufacturing, research, and clean energy.” Those are tax breaks and subsidies. From Taylor: “Clearly, the temptation to redistribute the “special deductions, credits, and other tax preferences,” rather than ending them, remains strong.”

The current 35% U.S. corporate income tax rate is the highest in the industrialized world. The idea of corporate tax reform is to reduce the tax rate in exchange for eliminating various deductions, which is laudable in itself. Unfortunately, the Obama plan also proposes a tax on corporate profits earned and held abroad (not repatriated). Taylor explains the rub:

“Here, I’ll juse [sic] make the point that the U.S. is unique among the major economies in that it claims the right to tax the profits of U.S. corporations wherever in the world they are earned. Other countries only tax profits earned within their borders. Of course, this is one reason why U.S. companies sometimes seek to merge with a foreign firm and transfer their official ownership abroad. A foreign-controlled domestic company in the United States is taxed only on its U.S. profits; in contrast, if a company with the same structure is a U.S.-controlled firm, then the U.S. government claims the right to tax its foreign profits as well. This is a real issue for US corporate tax reform in a globalizing economy, and the approach in this budget document bascially just doubles down on going after revenue from abroad.”

Other tax increases proposed by Obama include an increase in the rate on dividends (already double-taxed) and capital gains (with its implicit inflation tax on wealth), capital gains taxation of assets at death (elimination of stepped-up basis), higher estate taxes, limits on itemized deductions, and several others. All of these complexities in the tax code could be eliminated entirely with real tax reform and simplification, but that would prevent the president’s beneficent “middle-class economics,” more appropriately called middle-class pandering. Higher taxes undermine economic growth: first, by reducing disposable income and spending, the traditional Keynesian explanation; second, and more fundamentally, by reducing incentives to work, invest and take risks that increase the economy’s productive potential over time. When it all plays out, a budget with a $1.6 trillion increase in taxes, no matter where the direct burden falls, will not help the middle class.

Finally, the Obama budget includes optimistic assumptions about economic growth. Even under that outlook, the budget deficit is expected to rise from  $474 billion in 2016 to $687 billion in 2025. The debt will keep expanding, absorbing private saving, leaving a smaller pool of capital available for private investment.

The president’s efforts to grow the state apparatus continue with this budget proposal. It might be “toast” as a package, but the political bidding war continues. Much depends on the ability of Americans to resist the goodies dangled before them by the White House candyman. That much is required to reverse the ongoing slide into dependency on the state.