Tag Archives: Robert P. Murphy

A Carbon Tax Would Be Fine, If Only …

01 Friday Mar 2019

Posted by in Environment, Global Warming, Taxes

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I’ve opposed carbon taxes on several grounds, but I admit that it might well be less costly as a substitute for the present mess that is U.S. climate policy. Today, we incur enormous costs from a morass of energy regulations and mandates, prohibitions on development of zero-carbon nuclear power, and subsidies to politically-connected industrialists investing in corn ethanol, electric cars, and land- and wildlife-devouring wind and solar farms. (For more on these costly and ineffective efforts, see Michael Shellenberger’s “Why Renewables Can’t Save the Planet” in Quillette.) Incidentally, the so-called Green New Deal calls for a complete conversion to renewables in unrealistically short order, but with very little emphasis on a carbon tax.

The Carbon Tax

Many economists support the carbon tax precisely because it’s viewed as an attractive substitute for many other costly policies. Some support using revenue from the tax to pay a flat rebate or “carbon dividend” to everyone each year (essentially a universal basic income). Others have pitched the tax as a revenue-neutral replacement for other taxes that are damaging to economic growth, such as payroll taxes or taxes on capital. Economic growth would improve under the carbon tax, or so the story goes, because the carbon tax is a tax on a “bad”, as opposed to taxes on “good” factors of production. I view these ideas as politically naive. If we ever get the tax, we’ll be lucky to get much regulatory relief in the bargain, and the revenue is not likely to be offset by reductions in other taxes.

But let’s look a little closer at the concept of the carbon tax, and I beg my climate-skeptic friends to stick with me for a few moments and keep a straight face. The tax is a way to attach an explicit price to the use of fuels that create carbon emissions. The emissions are said to inflict social or external costs on other parties, costs which are otherwise ignored by consumers and businesses in their many decisions involving energy use. The carbon tax is a so-called Pigouvian tax: a way to “internalize the externality” by making fossil fuels more expensive to burn. The tax itself involves no prohibitions on behavior of any kind. Certain behaviors are taxed to encourage more “desirable” behavior.

Setting the Tax

But what is the appropriate level of the tax? At what level will it approximate the true “social cost of carbon”? Any departure from that cost would be sub-optimal. Robert P. Murphy contrasts William D. Nordhaus’ optimal carbon tax with more radical levels, which Nordhaus believes would be needed to meet the goals of the United Nation’s Intergovernmental Panel on Climate Change (IPCC). Nordhaus won the 2018 Nobel Prize in economics for his work on climate change. Whatever one might think of the real risks of climate change, Nordhaus’ clearly recognizes the economic downsides to mitigating against those risks.

Nordhaus has estimated that the social cost of carbon will be $44/ton in 2025 (about $0.39 per gallon of gas). He claims that a carbon tax at that level would limit increases in global temperature to 3.5º Celsius by 2100. He purports to show that the costs of a $44 carbon tax in terms of reduced economic output would be balanced by the gains from limiting climate warming. Less warming would require a higher tax with fewer incremental rewards, and even more incremental lost output. The costs of the tax would then outweigh benefits. For perspective, according to Nordhaus, a stricter limit of 2.5º C implies a carbon tax equivalent to $2.50 per gallon of gas. The IPCC, however, prescribes an even more radical limit of 1.5º C. That would inflict a huge cost on humanity far outweighing the potential benefits of less warming.

A Carbon Tax, If…

Many economists have come down in favor of a carbon tax under certain qualifications: revenue-neutrality, a “carbon dividend”, or as a pre-condition to deregulation of carbon sources and de-subsidization of alternatives. John Cochrane discusses a carbon tax in the context of the “Economists’ Statement on Carbon Dividends” (Cochrane’s more recent thoughts are here):

“It’s short, sweet, and signed by, as far as I can tell, every living CEA chair, every living Fed Chair, both Democrat and Republican, and most of the living Nobel Prize winners. … It offers four principles 1. A carbon tax, initially $40 per ton. 2. The carbon tax substitutes for regulations and subsidies and (my words) the vast crony-capitalist green boondoggle swamp, which is chewing up money and not saving carbon. 3. Border adjustment like VAT have [sic] 4. ‘All the revenue should be returned directly to U.S. citizens through equal lump-sum rebates.'”

Rather than a carbon dividend, Warren Meyer proposes that a carbon tax be accompanied by a reduction in the payroll tax, an elimination of all subsidies, mandates, and prohibitions, development of more nuclear power-generating capacity, and contributions to a cleanup of Chinese and Asian coal-power generation. That’s a lot of stuff, and I think it exceeds Meyer’s normal realism with respect to policy issues.

My Opposition

Again, I oppose the adoption of a carbon tax for several reasons, despite my sympathy for the logic of Pigouvian taxation of externalities. At the risk of repeating myself, here I elaborate on my reasons for opposition:

Government Guesswork: First, Nordhaus’ estimates notwithstanding, we do not and cannot know the climate/economic tradeoffs with any precision. We can barely measure global climate, and the history of what measures we have are short and heavily manipulated. Models purporting to show the relationship between carbon forcing and global climate climate change are notoriously unreliable. So even if we can agree on the goal (1.5º, 2.5º, 3.5º), and we won’t, the government will get the tradeoffs wrong. I took the following from a comment on Cochrane’s blog, a quote from A.C. Pigou himself:

“It is not sufficient to contrast the imperfect adjustments of unfettered enterprise with the best adjustment that economists in their studies can imagine. For we cannot expect that any State authority will attain, or even wholeheartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure, and to personal corruption by private interest. A loud-voiced part of their constituents, if organized for votes, may easily outweigh the whole.”

Political Hazards: Second, we won’t get the hoped-for political horse trade made explicit in the “Economists’ Statement …” discussed above. As a political matter, the setting of the carbon tax rate will almost assuredly get us a rate that’s too high. Experiences with carbon taxes in Australia, British Columbia, and France have been terrible thus far, sowing widespread dissatisfaction with the resultant escalation of energy prices.

Economic Growth: Neither is it a foregone conclusion that a revenue-neutral carbon tax will stimulate economic growth, and it might actually reduce output. As Robert P. Murphy explains in another post, the outcome depends on the structure of taxes prior to the change. The substitution of the carbon tax will increase output only if it replaces taxes on a factor of production (labor or capital) that is overtaxed prior to the change. That undermines a key selling point: that the carbon tax would necessarily produce a “double dividend”: a reduction in carbon emissions and higher economic growth. Nevertheless, I’d allow that revenue neutrality combined with elimination of carbon regulation and “green” subsidies would be a good bet from an economic growth perspective.

Overstated Risks: Finally, I oppose carbon taxes because I’m unconvinced that the risk and danger of global warming are as great as even Nordhaus would have it. In other words, the external costs of carbon don’t amount to much. Our recorded temperature history is extremely short and is therefore not a reliable guide to the long-term nature of the systemic relationships at issue. Even worse, temperature records are manipulated to exaggerate the trend in temperatures (also see here, here and here). There is no evidence of an uptrend in severe weather events, and the dangers of sea level rise associated with increasing carbon concentrations also have been greatly exaggerated. Really, at some point one must take notice of the number of alarming predictions and doomsday headlines from the past that have not been borne out even remotely. Furthermore, higher carbon concentrations and even warming itself would be of some benefit to humanity. In addition to a greener environment, the benefits include more rapid economic growth, improved agricultural yields, and a reduction in the salient danger of cold-weather deaths.

Economic Development: The use of fossil fuels has helped to enable strong growth in incomes in developed economies. It has also given us energy alternatives such as nuclear power as well as research into other alternatives, albeit with very mixed success thus far. And while a carbon tax would create an additional incentive to develop such alternatives, a U.S. tax would not accomplish much if any global temperature reduction. Such a tax would have to be applied on a global scale. Talk about a political long-shot! Increasing the price of carbon emissions also has enormous downsides for the less developed world. These fragile economies would benefit greatly from development of fossil fuel energy, enabling reductions in poverty and the income growth necessary to someday join in the prosperity of the developed economies. This, along with liberalization of markets, is the affordable way to bring economic success to these countries, which in turn will enable them to consider the energy alternatives that might come to fruition by that time. Fighting the war on fossil fuels in the underdeveloped world is nothing if not cruel.

 

Inferior Schools, Venom For Reformers

28 Monday May 2018

Posted by in Regulation, School Choice, Socialism, Uncategorized

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We all want better K-12 education in the U.S., which has an extremely uneven — even dismal — record of student outcomes. The U.S. ranks below the OECD average in both math and science scores, despite spending 35% more per student than the OECD average. Yet there is a faction that leaps to the defense of the status quo with such viciousness that its members deride sensible reform proposals as classist and racist. Then, of course, they call for additional spending! These antics reveal their self-interest in doubling down on the status quo.

An obvious starting point for reform, and one that would save taxpayers roughly $40 billion (K-12), is to dismantle a federal education bureaucracy that adds little value to educational outcomes. Another element is expanding the set of alternatives available to parents over the way their children are educated. Betsy DeVos, President Trump’s Secretary of Education, favors both of these steps as general principles, though she lacks direct control over either, especially school choice.

Both of these steps are fiercely resisted by the public educational establishment and teachers unions. And no wonder! Who wants to lose their privileged monopoly power over a local market? The public school establishment does not wish to be troubled by demands that schools respond to competitive forces, that teachers be rewarded based on performance, or that schools should be answerable to parents and taxpayers. As for the federal role, the public school cartel seems to welcome federal money, even if it means that the feds impose control in the process.

Choice

For those skeptical of reforming public schools by allowing choice, Don Boudreaux proposed a useful thought experiment that I discussed in my earlier post “Public Monopolists Say Don’t Be Choosy“. It examines a hypothetical world in which supermarkets are structured like public schools. Consumers pay for their food via local taxes and must shop at one local public supermarket, and only one, at which food products are available at no additional marginal cost. However, parents are free to pay their taxes and pay for food elsewhere, at a private supermarket. Most thinking people would probably agree that this is a spectacularly bad idea. Public supermarkets would deteriorate relative to private supermarkets. Rural and inner city supermarkets would likely suffer the most. Public supermarket worker unions would lobby for higher food taxes. And of course proposals for supermarket choice would be met with hysteria. Read the earlier post for more discussion of the likely consequences.

One of the arguments often made in favor of today’s public school monopoly is that K-12 education should be regarded as a necessity, but few would take that as a compelling reason to grant government a monopoly in the retail food business. A better argument for government schools, were it strictly true, would be that education is a public good, yielding significant non-exclusive benefits to the community. And in truth there are some external benefits to society from an educated citizenry. The primary benefits of an education, however, are exclusive to the student. Kevin Currie-Knight offers an excellent treatment of the education-as-public-good question, and he concludes otherwise. And the public-good argument does not imply that parents should be denied choice in their selection of a school for their children. Ultimately, the policy question hinges on whether government schools, as currently structured, do a good job in educating students, and as Corey A. DeAngelis points out, they do not.

There is no shortage of evidence that school choice is beneficial for students and society in several respects, including academic outcomes for students and schools, racial integration, fiscal impacts, and parental satisfaction. This paper by MIT researchers found that school choice improved educational outcomes for special education students and those who were not proficient in English. This essay in Education Week, signed by nine educational researchers, emphasized the preponderance of positive findings on school choice and some additional dimensions of improvement on which they hope the education research community will focus.

The promise of choice is seldom greeted objectively by the public education establishment and its reflexive allies. To their dishonor, distortions of fact and ad hominem attacks on choice advocates are almost the rule. For example, John Stossel writes the following in “Why the Left Hates Betsy DeVos“:

“When she spoke at the Kennedy School of Government, students held up signs calling her a ‘white supremacist.’ … When she tried to visit a school, activists physically blocked her way. … The haters claim DeVos knows little about education, only got her job because she gave money to Republican politicians, and hates free public education.“

Of course, public education is not free! But it is a disgrace that someone so dedicated to the cause of improved education should be treated this way. The DeVos family has given over a billion dollars to various causes over the years, much of it to educational initiatives, and even those gifts, somehow, are seen by critics as a pretext for vilifying Betsy DeVos. But she knows much more about the poor performance of public schools than her critics care to discuss, as well as the dynamism and improvement that choice and competition can bring to education. Her critics disparage the performance of charter schools in DeVos’s home state of Michigan even while the facts show that they have performed well.

The idea that charter schools “hurt” public schools by creating educational choice is the very weakest protest a monopolist can put forward. These critics conveniently overlook the fact that most charter schools are in fact public schools! More importantly, an erstwhile monopolist must respond by adding value for consumers! If it fails to do so, it must be closed or reorganized. THAT is a good idea!

Monopoly public schools do not earn a profit in the way of monopolistic business enterprises, but remember that perhaps the greatest social costs imposed by monopolies are languid effort and a poor product. This is not to dismiss the great efforts of many teachers who toil under trying circumstances, though the current system also tends to protect bad teachers. And much of the waste in government schools is caused by bloated bureaucracy and costs imposed on teachers and schools of complying with regulation. 

The Federal Bureaucracy

Another priority of Secretary DeVos is to reduce the federal role in education. Hurry, please! The unpopular Common Core standards, implemented in 2009, proved a failure. Test scores declined for student cohorts expected to benefit the most (those in the lowest percentiles). At the last link, Nancy Thorner discusses more recent legislation:

“It was in December of 2015 that Congress passed the Every Student Succeeds Act (ESSA), that replaced the often criticized No Child Left Behind Act (NCLB). ESSA, in contrast to NCLB, signified a clear move away from federally prescribed standards. In fact, ESSA expressly forbid federal regulators from attempting to ‘influence, incentivize, or coerce’ states to adopt the Common Core.”

That’s progress, but 36 states plus DC still use those standards. Curriculum mandates are only one area of federal school regulation that must be addressed. “Educational equity” is also mandated along several dimensions, requiring schools to devote a disproportionate share of resources to various subsets of students who might not benefit from the extra instructional intensity. Then there are the administrative costs of demonstrating compliance with these mandates, not to mention the virtual prohibition under these mandates of developing innovative, local solutions to the problem of educating their charges.

There is well-deserved pushback against federal control over school discipline, which requires schools to implement policies that avoid disparate impacts on certain minorities (African Americans, Latino, and special-ed children) such that they are no more likely to receive detention, suspension, or expulsion than the general student population. This is an absurdity, potentially requiring schools to go light on offenders should they happen to belong to a minority. Even worse, if the enforcement of discipline results in an observable bias in favor of any minority, it is likely to be noticed by the minority students themselves, creating a negative behavioral incentive and potentially stoking resentment among non-minority students.

In April, President Trump signed an executive order authorizing a review of federal education rules imposed on states and local school districts. Again, central regulation is costly: it involves rule-making at the federal level to interpret enabling legislation, then review by state departments of education where specific policies are designed, which are then passed down to school districts and individual schools, who must review and attempt to implement the policies, and who then must report back on their success or failure in meeting the mandates. Resources are consumed at every level. In the end, the process creates increased complexity, and the policies have proven to be of questionable value to the goal of good education. While spending on education has soared over the past 30 years, student achievement has remained static, and the same disparities of outcome remain.

Secular Statism

Robert P. Murphy provides a brief history of U.S. public schooling. It is a fascinating take on the history of secularization of education in America. It is the story of the substitution of state for private institutions, including family and church, in the development and socialization of children. Murphy offers a telling quote:

“Thus Henry Brown, second only to Horace Mann in championing state education, commented, ‘No one at all familiar with the deficient household arrangements and deranged machinery of domestic life, of the extreme poor, and ignorant, to say nothing of the intemperate—of the examples of rude manners, impure and profane language, and all the vicious habits of low bred idleness—can doubt, that it is better for children to be removed as early and as long as possible from such scenes and examples.'”

Whoa! The K – 12 public education system, as it now stands, is striking in its failure to benefit the children and families it is intended to serve. Critics of meaningful reform do not acknowledge the abysmal condition and performance of many government schools in America today, except to insist that they need more money. These critics, including the educational bureaucracy, teachers unions, and misguided statists generally, behave as if they accept the attitudes expressed by Henry Brown. They have no respect for private decision makers — families, churches, private schools of any stripe, and private markets in general. They do not understand the power of incentives and competition to allocate resources efficiently and maximize well-being. But they know how to disparage, defame, and propagate hateful rhetoric for those with a true interest in creating a better educational system for all.

Francis, Papal Perónista, Courts Redistributional Mirage

15 Thursday Mar 2018

Posted by in Markets, Marxism, Redistribution, statism, Welfare State

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Is world poverty really increasing? Actually, no, quite the opposite, and you can blame economic liberalism, capitalism, and free markets for that. Yet we hear exactly the contrary from Pope Francis who, despite his evident compassion, has an amazingly poor understanding of economics. He misstates basic facts, offers dimly reasoned analyses of human rights, and promotes ill-considered policies. Now that the Vatican is set to release the Pope’s first feature film, no doubt a stirring piece of social justice propaganda, it seems as good a time as any to review the confounded state of Francis’ economic reasoning. This is not the first time I’ve discussed the Pope’s policy views: this link contains three previous posts from SacredCowChips on which Francis was tagged.

The False Narrative

My inspiration for this post comes from Robert P. Murphy, whose recent commentary on Francis’ pronouncements is trenchant. Murphy covers this speech written by Francis for the World Economic Forum, but delivered by a Vatican proxy, in which the Pope asserts the following:

“… governments must confront … the growth of unemployment, the increase in various forms of poverty, the widening of the socio-economic gap and new forms of slavery, often rooted in situations of conflict, migration and various social problems.“

Francis refers to increasing unemployment and poverty, and I could let that phrase pass if he was referring to certain nations or locales that have experienced chronically depressed economic growth. But Francis’ description is rather general, as evidenced by his diagnosis of causes. More on that below. Regarding his statement about trends in poverty, he is flatly incorrect. Here is Murphy:

“As the World Bank reports, the global “extreme poverty” rate in 1990 was cut in half by 2010. Back in 1990, 1.85 billion people lived on less than $1.90 per day, but by 2013, the figure had dropped to 767 million such people—meaning that more than a billion people had been lifted out of crushing poverty.“

After the Great Recession, world unemployment decreased from 2009-2015, according to the World Bank, though it is estimated to have crept up slightly in 2016-17. Again, the Pope’s woeful tale of growing unemployment and increasing poverty is nonsense.

But the world is a difficult place. In the underdeveloped world, the range and quality of goods available is extremely limited, and $1.90 represents bare subsistence, yet it’s a condition that exceeds the historical norm in many places. Movement above that threshold can represent a meaningful improvement in economic well-being.

Francis may lack an appreciation for the general enrichment in material conditions that has been taking place over the last two centuries, which is ongoing, or perhaps he believes that even greater achievements are easily within reach but for certain injustices, though he offers no qualifications. Perhaps he is mistakenly generalizing specific instances of exploitation in the underdeveloped world, which often occur with the explicit blessing of the state apparatus in exchange for kickbacks.

Rights and Markets

Even more egregious is the Pope’s presumption that private markets are at fault for any stagnation that he has identified. A notable difference between countries with successful, growing economies and those mired in stagnation is the degree to which their citizens enjoy freedoms, especially economic freedom. That is a well-established empirical fact, as Murphy explains. But the Pontiff goes further with preposterous dogma on the meaning of human rights. Again, from Murphy:

“Although inspired by concern for the poor and the marginalized, the Vatican’s message is seriously flawed…. On a conceptual level, Pope Francis posits a false dichotomy between economic freedom and human rights. … ‘Economic freedom must not prevail over the practical freedom of man and over his rights, and the market must not be absolute, but honour the exigencies of justice.’ 

What does the concept of “economic freedom” entail? It means freedom to work in any occupation of one’s choice, without permission from the government, and certainly without being conscripted into service against one’s will. It means the freedom to start a business. It means the freedom to keep what you have produced, without having your assets seized by a rapacious regime. It means the freedom to trade with people who live in another country. It means the rule of law, where contracts are interpreted fairly and government officials can’t exercise arbitrary power.“

Economic freedom, more than anything else, means that individuals are endowed with property rights. To deny such rights is to banish any reward for work and differential rewards for work well done. If free individuals are rewarded, it is a matter of their own discretion as to whether they immediately consume the reward or save it in order to accumulate wealth. Yet Francis takes the misanthropic and childish view that economic freedom, private property and markets imply exploitation. He lacks a basic understanding of the revolutionary power of markets as a form of social organization.

Within just a few hundred years, a small fraction of the many millennia during which mankind was mired in poverty and pestilence, markets have dramatically transformed the existence of most human populations. Peaceful, arms length transactions made in mutual self-interest exploit only one thing: gains from trade that would otherwise be wasted. And only a form of social organization that enables those gains can dovetail with the human rights and justice that Francis so strongly desires. The denial of economic freedom, property rights, and self-interest prohibits those gains, however, denying humanity of the wealth necessary to achieve anything like justice.

Pope Francis is a redistributionist, and that goes well beyond the charitable giving, good works and service performed voluntarily by individuals. In fact, he is a statist, advocating an economic system in which property rights are abrogated, wholly or in part, and wages above a politically determined threshold are confiscated.

The Pope and Perón

Francis is often described as a “Perónist”, after Juan Perón of Argentina, the so-called “right-wing socialist” (and sometime associate of the murderous Che Guevara). Anyone familiar with the economic history of Argentina should know that’s not praise. Here is Maureen Mullarkey from the last link:

“Both Juan and Eva understood the enchantments of populism. A charismatic pair, they ruled more by dint of personality—personalismo—than democratic procedure. Ushers of an ‘option for the poor,’ they glorified the lower classes and denigrated the wealthy. (This, while they amassed a huge personal fortune from the Eva Perón Welfare Foundation.) …

When Francis speaks of ‘the people’ as a revolutionary vanguard that ‘overflows the logical procedures of formal democracy,’ he is lapsing toward that ecstatic Peronist vision of a Third Way—justicialismo. That the disposition and design of it ended in economic collapse and misery is nothing against the splendor of the mystique.

In his youth, Francis absorbed the myth but not its lessons. Chief among them is how much Argentina’s fiscal catastrophe owed to an extravagant welfare system that favored enforced wealth redistribution over development. Among the many factors of Argentina’s historic economic crisis, one cries for attention: Perón’s increasing reliance on redistributing income, not only between industries and occupations but between skilled and unskilled workers.“

For further perspective on Francis, Perónism, and the disastrous Argentine “experiment”, see this piece by Daniel J. Mitchell.

For many years, naive Marxists have accepted the myth that central economic planners could and would direct productive and distributional activities with foresight, efficiency, and integrity. None of those is possible. The only form of social organization capable of registering and processing the myriad and dynamic signals on preferences and scarcity is free market capitalism. It is the only system capable of spontaneously harnessing appropriate responses based on the complex incentives faced by consumers and producers, and all at a minimal administrative cost for society, free of the government intervention that typifies the Peronist welfare state and corporatism.

Conclusion

Pope Francis should know better than to make claims having no empirical support. He should also have the wisdom to understand and advocate for the empowering nature of private property rights and markets. Elevating the human condition is possible only by allowing people to be free — economically free — and endowed with opportunities to earn private rewards and build wealth. Francis should realize that the massive private gains afforded by the market mechanism enable rewards which spill over, inuring to the benefit of parties external to a given exchange. On the other hand, state domination and control of economic activity gives over decision-making to selfish and ill-informed public commandants, who are all too pleased to grant special advantages to those in a position to return private favors. Such graft and mismanagement of resources comes at the expense of others. That way lies decay and a return to the much more brutal conditions of the past, unlike the mutually beneficial promise of market exchange.

Statists and Stasis: The Dismal Solutions of Anti-Capitalists

26 Wednesday Aug 2015

Posted by in Capitalism, Markets, Socialism, Tyranny

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Thought Hanging

The anti-capitalist Left is quick to condemn private businesses of unfair practices and even unethical behavior. In their estimation, certain prices are not just and profits are somehow undeserved rewards to private property, risk-taking and entrepreneurial sweat. They somehow imagine that meeting market demands is an easy matter, or worse, that market demands are not “socially useful”. Few have ever attempted to run a business, or if they have, they were unsuccessful and resent it. They also cannot grasp the social function served by private markets, to which we owe our standard of living and much of our culture.

What alternatives do these deep thinkers suggest? A socialist utopia? Jonathan Newman discusses the many practical problems presented by socialism and why it always fails to achieve success comparable to societies that rely on free markets. Newman’s treatment covers the inability of administered pricing to convey accurate information and effective incentives, the waste induced by queuing, neglect of comparative advantage, waste induced by production quotas, retarded innovation and technological development, and a deeply embedded stasis in the face of changing conditions. Little wonder that poverty is a consequence.

Warren Meyer at Coyote Blog has written of the stasis seemingly promoted by the progressives. They are quite protective of the status quo. Ironically, and quite rightly, Meyer calls them “deeply conservative”, too conservative to accept the dynamism of a capitalistic society. From Meyer:

“Progressives want comfort and certainty. They want to lock things down the way they are. They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount. Which is why, in the end, progressives are all statists, because only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave..

Progressive elements in this country have always tried to freeze commerce, to lock this country’s economy down in its then-current patterns. Progressives in the late 19th century were terrified the American economy was shifting from agriculture to industry. They wanted to stop this, to cement in place patterns where 80-90% of Americans worked on farms.“

Freezing the diffusion of technology and often the state of technology itself is a consequence of socialist policy. And technology may well be the enemy of the Left in another sense: An interesting twist is provided by Fred Foldvary of the Mercatus Center in “Government Intervention Is Becoming Obsolete“. He writes that technology is undermining all of the usual economic rationales for intervention: asymmetric information, external effects, public goods, and monopoly. The article is brief, but he refers the reader to more extensive treatments.

A good example of socialism’s perverse appeal is the rhetoric of Senator Bernie Sanders, now a candidate for the Democrat Presidential nomination. Sanders has criticized the “the dizzying (and socially useless) number of products in the deodorant category….” At Reason.com, A. Barton Hinkle wondered what Sanders might consider the appropriate number of deodorant choices in our society. Would he wish to dictate a limited number as a matter of policy? And what other “socially useless” choices might he choose to limit in his failure to grasp that these choices reflect the incredible health and vibrancy of a market economy. Here’s Hinkle:

“… central planners think they can allocate economic resources better than the unguided hand of individual free choice. Like any good scientific experiment, this one is easily replicated, and has been time and again. See, for example, Venezuela, which has now run out of toilet paper, tampons, and other basic necessities because some people there think they should make all the choices for other people. And yet for many, the repeated lesson still has not sunk in. In an unintentionally hilarious essay about Cuba not so long ago, one writer noted that “the people are hungry here. There are severe food shortages. I do not understand why a tropical island would lack fruits and vegetables . . . and my only assumption is that maybe they have to export it all.”

Never forget that government can only pursue policy objectives via coercive power. I don’t think socialists have forgotten at all. Without the power to coerce, nothing proposed or done by the state can be accomplished and enforced. This is the course that progressive, anti-capitalists must follow to achieve their collectivist vision. But Chris Edwards reminds us that “Coercion Is Bad Economics” with the following points about government:

  • When it “uses coercion, its actions are based on guesswork.“
  • Its “actions often destroy value because they [arbitrarily] create winners and losers.“
  • Its “activities fail to create value because the funding comes from a compulsory source: taxes.”
  • Its “programs often fail to generate value because the taxes to support them create “deadweight losses” or economic damage.“

By arranging voluntary, mutually beneficial trades, market forces avoid all of these problems. As Robert P Murphy explains in The Freeman, “Capitalists Have a Better Plan“.

The anti-capitalists do not hesitate to saddle private businesses with confiscatory tax and regulatory burdens in the name of their own vision of society. Want to live in a bleak world of decline? Then here’s your prescription, courtesy of the anti-capitalist Left: regulate heavily, monitor transactions, impose wage and price controls, dismantle markets, tax at punitive levels, confiscate property, censor “offensive” speech, extend dependence on the state, absorb private savings and crowd out private investment with government borrowing, and inflate the money stock. Smells like a crappy “utopia”.

The Government Inequality Machine

17 Wednesday Jun 2015

Posted by in Big Government

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Cronyism cartoon

Some perceive the government as an ideal agent of redistribution, but they fail to apprehend the many ways in which government policy undermines equality. Scott Sumner and Kevin Erdmann have written an excellent essay on this point entitled “Here’s What’s Driving Inequality” at National Review. They focus on three areas of government action with the unavoidable side-effect of upward redistribution: housing policy (at all levels of government), regulation, and excessive protections for intellectual property.

Sumner and Erdmann briefly cover Thomas Piketty’s controversial view that wealth becomes increasingly concentrated under conditions of secular stagnation. However, they note that over the past few decades:

“... almost the entire change in the share of domestic income going to capital in major developed economies was explained by rising rents on residential real estate. Non-rental capital income (including the corporate sector) still has a fairly stable share of domestic income.“

Housing policy has driven rents upward in myriad ways. For example, restrictive zoning laws, environmental regulation of new building and regulation of bank lending have all made homeownership less feasible and renting more expensive. If you’re already in your own home, you’re safe! If not, welcome to the have-nots! Here’s a story on government insurance programs that offer massive subsidies to wealthy homeowners. All these redistributional effects are compounded by a tax code that has inflated housing prices through the home mortgage interest deduction, and at the same time inflated rents via the incidence of higher taxes on rental income and real estate capital gains.

Regulation of private business activity is often viewed naively as a necessary, protective function of government, but regulation acts in perverse ways:

“Unfortunately, many government regulations tend to favor larger firms. In recent years we have seen the passage of some extremely complex regulations involving thousands of pages of rules, such as Sarbanes-Oxley, Dodd-Frank, and the Affordable Care Act. The Food and Drug Administration, the Department of Defense, and the public health-care complex tend to create opportunities for uber-firms within industries, which act as clearinghouses for public contracts and regulatory demands.”

Large firms tend to pay higher wages and salaries than small firms. By favoring large firms, regulation in turn favors their relatively high-income workers. In addition, regulation such as occupational licensing, labor regulations and local wage controls damage the health and growth potential of small firms and the mobility of individuals at the bottom of the economic ladder.

Finally, Sumner and Erdmann discuss the often bizarre extension of intellectual-property (IP) rights and the way it favors large firms:

“Copyright protections once lasted for 14 years, applied only to maps and books, and could be renewed once if the author was still alive. Now they’ve been extended to many other products, extend for 50 years after the death of the author, and last for at least 95 years for corporations. These extensions are widely seen as reflecting the lobbying power of companies such as Disney. In the high-tech sector, patents are often granted for seemingly minor and obvious innovations.“

Sacred Cow Chips featured a piece on IP several months ago called “Is The Patent a Perversion?” The Libertarian view of IP is skeptical, to say the least, and favors limited protection at most. In that post, I quoted Jeffrey Tucker of the Beautiful Anarchy blog:

“Through intellectual property laws, the state literally assigned ownership to ideas that are the source of innovation, thereby restricting them and entangling entrepreneurs in endless litigation and confusion. Products are kept off the market. Firms that would come into existence do not. Profits that would be earned never appear. Intellectual property has institutionalized slow growth and landed the economy in a thicket of absurdity.“

There is little doubt that economic mobility is not well served by excessive grants of IP rights that extend monopolies indefinitely.

Government fosters inequality in many other ways. The mere existence of a confiscatory mechanism for legal revenue collection, and a complex bureaucracy in charge of distributing the spoils and making rules, will always attract high-powered rent-seeking resources and encourage cronyism. It is a graft machine. The very complexity of the tax code creates fertile ground for transfers via obscure breaks and carve-outs, while higher tax rates on others are required to fund the exceptions. Here’s another: the Export-Import Bank, which subsidizes exports for large corporations. A nice run-down of some of the many areas of “Welfare for the Rich” was provided a few years ago by Robert P. Murphy in The Freeman.

Unfortunately, direct efforts by the government to help the poor are often mere palliatives. At the same time, many of these programs are notorious for destroying work incentives, which undermines equality and economic mobility.

Government is simply not as well-suited to promoting equality as well-functioning markets, free of government meddling and government grants of monopoly. Profits in such markets attract new resources that compete away excess returns and bid prices downward, actions that tend to promote equality. The opportunity to compete without restraint not only vitiates artificial or permanent claims to profits; along with strong property rights, it encourages invention, economic mobility and growth.