How do we evaluate taxes?

Ahhh, it’s spring! The weather is warming; the trees are blooming; and our minds turn inevitably toward taxes. In addition to filing our 1040’s in time for April 15th, the average worker (over 25 years old) has already lost an additional $2,000 this year to the federal government’s payroll (FICA) taxes on income.

At the state level, the Governor and the legislature just passed property tax reform. People are mildly irritated at the recent 16.7 percent increase in the sales tax rate on April 1st. But they’re looking forward to lower property tax bills in the future.

All of this begs the question: How should we evaluate taxes?

Economists answer this question with three criteria.

Continue reading "Happy April 15th to you and yours!"

This evening, I attended a showing of Michael Moore’s movie Sicko...

I wasn’t expecting much, so maybe it was easy to exceed my expectations. But I was pleasantly surprised that the movie wasn’t far more painful for me to watch. Although certainly not without its flaws, it has something to add. And the movie was well-made, humorous in places, poignant in others-- effective and provocative.

Moore is quite critical of insurance companies and HMO’s-- and quite complimentary of the health care systems of France, Cuba, Canada, and England. With that combination, you would expect him to be optimistic about the United States moving toward single-payer health care. But his cynicism toward our government-- in particular, the often-unsavory relationship between politicians and interest groups-- leads him to criticize our system (correctly in many cases) without embracing government as a practical means to his desired end.

Some examples? Early-on, he mentions that Medicare fails to cover a lot of things (although he fails to pile on by talking about the program’s extraordinary expense). And he points to the government’s selective provision of health care to the heroes of 9/11. He also notes that the government provides awesome health care for the detainees at Guantanamo. (He could have bolstered this with the observation that our troops receive health care that is largely illegal in the states-- since interest groups have restricted competition from competent providers like physicians’ assistants and nurse practitioners.) Implicitly, he notes the absurdity of restricting trade in pharmaceuticals, health care services, and health insurance. In a word, he isn’t happy with the status quo, but he’s not at all optimistic that our government can or will fix the problem.

The problem with health care-- from the point of an economist-- is that government is too heavily involved in health care: in addition to the above examples, we could also list Medicare, Medicaid, and most notably, government’s subsidy of health care insurance (as a non-taxed form of compensation).

Because of the subsidy, ironically, those who can afford health care insurance have too much of it. First, by definition, something that is subsidized will be purchased too much (at least in terms of efficiency). Second, imagine how insurance typically operates: it covers rare, catastrophic events. In contrast, health care “insurance” covers everything from allergy shots to cancer. By way of analogy, car insurance of this type would cover everything from door dings and oil changes to severe car accidents. And what would happen to the cost of oil changes, the paperwork associated with oil changes, etc.? We’d have exactly the same sort of mess we have in health care.

With government’s current level of involvement-- very far from a market-based system-- one can make an argument that a single-payer plan would be an improvement over the status quo. But of course, one can also argue that a single-payer plan would be even worse. A quick look at our education system and the post office indicate that a government-run monopoly is unlikely to deliver decent quality with any kind of efficiency or without special interest politics. This seems to be Moore’s dilemma in the proverbial nutshell.

Sure, there were examples of poor analysis in the movie. For example:
-There was a strange reference to “full employment” in England (when all of Europe struggles with significantly more unemployment than us-- due to various employer mandates Moore seems to appreciate);
-He repeats the common reference to U.S. infant mortality rates (vastly oversold since we treat premies different for the purposes of that statistic);
-He repeats the tired canard that schools just need more money (while they already spend more than $10K per student; how much more money do you want to inject into a government-run entity with tremendous monopoly power?); and
-His analysis of other countries seems to miss the important factor that their populations are smaller and more homogeneous than ours.

And I suppose that other viewers-- perhaps most who would see Moore’s film-- could see a call for bringing socialized medicine to the U.S. in Moore’s work. But a more nuanced reading of the film points to an idealistic but laudable desire that our health care system would be something better-- without holding out much hope that our politicians will be able to deliver us closer to that outcome.

-- Also see Dr. Don Condit’s Acton Commentary: What’s Wacko about Sicko? -- Ed.

Last month marked the 75th anniversary of the beginning of FDR’s “New Deal”.

The Great Depression is the most famous event in U.S. macro-economic history. Most or all of my students know that it happened in the first half of the 20th century. They have no sense of what caused it-- except perhaps to lay blame on the 1929 stock market crash. And they have a vague sense that the New Deal policies of FDR were helpful in ending it.

Because their impressions of the New Deal are limited, it is relatively easy to communicate what economists know about the Great Depression and the New Deal.

The Great Depression was noteworthy for its length and depth. A typical recession-- probably what we’re dealing with now-- is relatively short (e.g., 6-9 months in length) and features a slowdown in economic activity (negative output growth with reduced income and production). The most notable feature, politically, is a modest increase in unemployment. Even unemployment of 6-7% is enough to induce howls of pain from the unemployed and unlikely promises to make things better by a range of politicians (e.g., the recent macro “stimulus package”).

That said, some recessions are (much) more severe than others. For example, in fighting the inflation of the mid-late 1970s, we ended up with double-digit unemployment in the early 1980s. In further contrast, the Great Depression lasted for more than a decade and featured unemployment as high as 25%.

One quick way to note the limits of the New Deal: unemployment was 19% in its 6th year.

Markets may have trouble “adjusting”, but they don’t have that much trouble. So, it is wise to look at government policy during the 1930s to fill out one’s hypothesis of cause/effect about the Great Depression. Economists point to four major policy blunders:

1.) four tax increases, including the initiation of Social Security’s payroll tax on income-- a tax on labor, thus making it more painful to hire workers

2.) a shrinking money supply-- not from the Fed actively reducing it, but from passively sitting by while confidence decreased, lending activity dropped, and the amount of money in the system fell (in contrast, note the Fed’s activity-- or even hyper-activity in recent days)

3.) the Smoot-Hawley Tariff Protection Act of 1930 is generally considered the primary catalyst for the stock market crash of 1929-- as investors looked forward to the devastating impact this would have on international trade and the significant impact it would have on our economy

4.) the imposition of laws that would prevent wages and prices from adjusting downward (as they need to do in a recession): most notably, price floors (e.g., in farming), wage floors (the minimum wage), and a spate of pro-union legislation.

Bad policy was responsible for the bulk of the Great Depression-- and perhaps is entirely responsible for its length and continued depth.

Finally, the most famous part of the New Deal could not have been all that effective. The government worked hard to create jobs-- most famously, through the Works Progress Administration (WPA). And it was successful in part. But in doing so, it must have destroyed at least as many jobs. To note, where did the money come from to create the jobs? From the private sector-- where economic activity was squashed and jobs were destroyed as a result. Government spending is typically a shell game-- moving resources from one area to another, creating some and destroying other. Moreover, government rarely does things in an efficient manner, so one would expect the net effect to be negative. And again, if one looks at the results, it is clear that government policy was not a cure for a struggling economy.

With Amity Shlaes’ recent book, The Forgotten Man: A New History of the Great Depression, I’ve seen two interviews (with her) and an op-ed (by her) on the topic.

As Christians, we believe that history matters. As an economist, I know that economic history matters. May we study both-- to learn both the good and the bad from our past.

One of the most frustrating things about politics is the use of simplistic labels to categorize political beliefs-in particular, the terms “conservative” and “liberal.”

Instead of a “left-right” political spectrum, Libertarians are quick to note that people embrace various degrees of freedom (or government) in two separate realms: economic markets and personal or social behaviors. A popular and useful “two-dimensional” quiz along these lines is available at www.theadvocates.org/quiz.

A two-dimensional quiz results in four categories. Conservatives are described as those who prefer a large degree of economic freedom, but significant limits on personal freedom. Liberals are those who prefer a large degree of personal freedom, but significant limits on economic freedom. “Statists” want a lot of government intervention in both realms. Libertarians favor minimal government involvement in both realms.

While a two-dimensional quiz is preferable to a one-dimensional spectrum, it still falls short in that it reduces complex policy preferences into relatively narrow categories.

In particular, the terms “conservative” and “liberal” are immediately complicated by the fact that there are various types of each. At the end of the day, unless adjectives are added to these one-word labels, they are not particularly helpful for drawing lines in shifting political sands.

Some pundits are quick to make such distinctions. And so, for example, they commonly make references to more specific groups like fiscal conservatives and environmentalists.

But many others use the simple but muddy terms, adding to the confusion. Perhaps it is a desire to unify things under a single label. Perhaps it is driven by a desire to make politics into an “us vs. them” (conservative vs. liberal) contest. In any case, the tendency to use simplistic labels is more tempting under three circumstances.

First, when the general public does not pay much attention to politics (as is common), then labels are a convenient though flawed way to communicate about politics with most people. At some level, this is as unavoidable as the 30-second “sound-bite.” The fact of the matter is that most people are busy mowing their lawns and raising their kids and aren’t going to give much time to thinking about politics. Thankfully, we live in a country where this is possible!

Second, labels will be more prevalent when politics are not likely to solve much in terms of policy. Quick labels allow politicians to distract the general public from the inability of politics to address certain problems.

Third, when much is at stake in terms of political power, labels allow a political party to shore up its base and demonize its opponents. When combined with a general inability of politics to address our problems, the result will be more demonization — and shoring up the base indirectly by criticizing “them.”

As such, labels often encourage people to focus on who (or what) they oppose instead of who (or what) they support. We see a lot of this today. For example, people routinely vote for “the lesser of two evils” rather than avidly supporting a certain candidate.

From there, the essay continues by describing different types of libertarians, different types of conservatives, and different types of liberals.

The title of Curtis White’s provocative but flawed essay in Harpers...

As an intro to his primary topic (politics), White has some provocative things to say about the contemporary (American) understanding of our “beliefs”...

The most bewildering and yet revealing gesture of a truly fundamental American theology takes place when an individual stands forth and proclaims, “This is my belief”. Making such a simple and familiar statement implies at least three important things. First, it implies that I have a right to my belief. Whether this right is God-given, one of the laws of nature, or simply something we wrangled politically out of the process of constitution-making, it is something we believe we have. Second, my statement carries with it the expectation that you ought to respect my belief, or at least my right to it, even if my belief makes no sense to you at all. Third, and most important, my belief doesn’t have to make sense in order to carry legitimacy.

And now to how this relates to politics...

On the basis of this belief I not only will claim the right to order my own life but also will feel free, without embarrassment, to enforce my belief universally through the election of politicians and through the sponsorship of legislation...

What we require of belief is not that it make sense but that it be sincere. This is so even for our more secular convictions....Clearly, this is not the spirituality of a centralized orthodoxy. It is a sort of workshop spirituality that you can get with a cereal-box top and five dollars. And yet in our culture, to suggest that such belief is not deserving of respect makes people anxious...

Consequently, it’s difficult to avoid the conclusion that our truest belief is the credo of heresy itself. It is heresy without an orthodoxy. It is heresy as an orthodoxy. The entitlement to belief is the right of each to his own heresy....For Nietzsche, European nihilism was the failure of any form of belief (a condition that church attendance in Europe presently testifies to). But American nihilism is something different. Our nihilism is our capacity to believe in everything and anything all at once. It’s all good!...

Once reduced to the status of a commodity, our anything-goes, do-it-yourself spirituality cannot have very much to say about the more directly nihilistic conviction that we should all be free to do whatever we like as well, each of us pursuing our right to our isolated happinesses. Worse yet: for that form of legal individual known as the corporation, the pursuit of happiness can mean fishing with factory trawlers, clear-cutting forests, and spreading toxins across the countryside with all the zeal of a child sprinkling candies on a cupcake.

Let me jump in here by saying that White is correct insofar as he goes. But it’s odd to point out corporations (and in a part I excised, “social morality” interest groups) without pointing to the role of special interest groups in politics-- rather than corporations or concerned citizens per se.

And now, White goes with a relatively obscure but effective Biblical reference. Among other things, this gives him the title to his essay...

Aren’t these the false gods that Isaiah and Jeremiah confronted, the cults of the “hot air gods”? The gods that couldn’t scare birds from a cucumber patch? Belief of every kind and cult, self-indulgence and self-aggrandizement of every degree, all flourish. And yet God is abandoned. For first and foremost, “the Lord is a God of justice” (Isaiah 30:18). And that is the problem that we ought to have at heart: our richness of belief masks a culture that is grotesquely unjust.

“Grotesquely unjust”...Preach it, brother! Given the differences in our worldviews and his limited training in political economy and economics, I don’t think we point to the same set of policy issues. In any case, he’s right on the proverbial nose with his critique...

White does see some good news:

A more positive way of looking at the situation I have described is to say that through the concept of religious freedom, American political culture has succeeded in mediating the competing claims of true religion and idolatry. If it has not purged the hatred from this distinction, it has at least prohibited most of the violence. And if there is wisdom in this, it is less the wisdom of benevolence than the pragmatism of imperial policing....

But then he gets silly on us...

Capitalism has been so successful in this orchestration of reality that it has even created the illusion that, in spite of every fact, the Market works for all of us, or will eventually. In spite of the fact that the poor are ever greater in number, and that education, health care, and retirement are ever more inaccessible, the majority of Americans persist in believing (with all the obliviousness of Voltaire’s Dr Pangloss) that our economic system is “the best of all possible worlds”. This is a form of wishful and magical thinking no stranger than the belief that a statue of the Madonna can cry.

Here, White reveals his bias and ignorance-- or his “wishful and magical thinking” (if he prefers). He’s pointing the finger at the Market. But all three of these realms are largely controlled by the Government! And in each of those, it is clear that Government involvement has caused vast damage to the poor. I love it when people blame “capitalism” to embrace government-- when government is so heavily involved already!

His last three words are “the Market God”. But White is blind to his own idolatry-- a blind critique of markets (not that some critique is not available to him) and a blind, idolatrous embrace of “the Government God”.

Robert George in the November 2007 issue of Touchstone on democracy, Catholic social teaching, and the confusion of means and ends...

Catholicism...preaches democratic ideals and promotes democratic institutions in the political sphere....

This teaching is put forth not as a mere prudential matter...but as a matter of justice in the dealings of human beings with one another. At is core is the idea that of all systems of political governance, democracy best comports with the foundational anthropological and moral truth that every human being, as a creature fashioned in the very image and likeness of God, possesses a profound, inherent, and equal dignity.

The principle of basic human equality demands not only that the interests of all be taken into account, without discrimination, in distributing the benefits and burdens of common life, but also that all competent adults have a voice in deciding between options for political choice...

Democracy, however, is fundamentally a means rather than an end in itself....[T]he common good of political society is fundamentally an instrumental good rather than an intrinsic good.

In this respect, the common good of political society is unlike the common life of the family and the koinonia of the church. The point of political society is provided by the ends or purposes it serves. The state, whether constituted democratically or otherwise, is fundamentally a means to those ends; it is in no sense an end in itself.

By contrast, the family and the church, though they may also be means to many valuable ends, are not mere means....

From there, George continues by repeating John Paul II’s caution against idolatry toward government and democracy-- as well as his warning that unjust ends accomplished through democracy are ungodly. Despite the common reference to polling results-- and although majority vote may legitimize a viewpoint in the secular realm-- the right-ness of something cannot be determined by such a criterion.

The subtitle of Damon Root’s article in Reason-- food for thought for Dems (and GOP’ers) and a history lesson on an important but obscure figure, Moorfield Storey...

With Republicans apparently uninterested in pleasing the libertarian segments of their coalition, some liberals and libertarians—Daily Kos blogger Markos Moulitsas, former Democratic National Committee press secretary Terry Michael, and Reason contributor Matt Welch among them—have suggested an alternative: the libertarian Democrat, the sort of liberal who favors both free speech and free trade, both the right to bare pornography and the right to bear arms.

It’s far from clear, however, that the Democratic Party has room for candidates who favor a smaller, less intrusive government. But it did once. The Democratic Party actually has a very distinguished libertarian legacy, one that combined principled anti-imperialism, respect for economic liberty, and a firm commitment to civil rights. If the would-be libertarian Democrats are looking for a historical model, they should consider the Boston attorney Moorfield Storey (1845–1929).

A fierce critic of imperialism and militarism...An advocate of free trade, freedom of contract, and the gold standard...An individualist and anti-racist, Storey was the first president of the National Association for the Advancement of Colored People (NAACP), where he argued and won the group’s first major Supreme Court victory, Buchanan v. Warley (1917), a decision that relied on property rights to strike down a residential segregation law....

To read more, click here:

I’m really proud of this essay. The history is very interesting; the philosophical and religious links are provocative; and the contemporary applications are important and wide-ranging.

Enjoy! eric

---

We observed a dubious centennial this year. In 1907, Indiana became the first state in America to pass a eugenics law.

Eugenics is the study of the hereditary improvement of the human race by controlled, selective breeding. The word derives from its Latin components — eu meaning “well” or “good” and genics meaning “born” or “birth.” Eugenics, then, seeks the products of “good birth” or being “well born” (better human beings or a better human race) through selective breeding.

From there, two categories emerge: Positive eugenics is the study of “good” outcomes achieved through breeding; negative eugenics is the study of “bad” outcomes, when undesirable characteristics are lessened or eliminated through selective breeding.

Beyond mere study, eugenics typically leads to a set of recommended practices. Beyond mere science, eugenics has always been connected to various worldviews and related to other theories. And beyond what we knew about science a century ago, we now have a greater understanding of the extent to which genetics affect such outcomes. In sum, eugenics is a pseudo-science loaded with philosophical and ethical baggage.

For more on the history of eugenics and the current applications of eugenics, click here...

Well...except Goliath is mostly a good guy too-- and he’s the one putting rocks in the air-- and David got beat in this case by the government.

From yesterday’s (Louisville) Courier-Journal, Charlie White and Sara Cunningham report on the stand-off between homeowner David McCarty and the local Wal-Mart under construction in Lebanon, KY.

Complying with a court order, a Central Kentucky man yesterday ended his sit-down protest a few feet from a blasting site -- part of the construction of a Wal-Mart development adjacent to his property. As dusk approached, David McCarty took refuge in his house just outside Lebanon before workers set off the dynamite near his back fence.

On Wednesday, weary from months of the nearby construction work and angry over what he said was damage to his property, McCarty had been determined to keep Wal-Mart from detonating the dynamite to make way for a water line...

The explosions occurred about 5 p.m., ending an exhausting couple of days for the family, whose members say they dealt with daily noise, dust and debris for about four months before deciding to take action...

The police couldn’t intervene in the stand-off because neither side is breaking the law, said Shelton Young, chief of the Lebanon Police Department.

“There was no legal basis for us to make him go in or stop (construction workers) from detonating,” Young said. “The homeowner was just as cordial and courteous as could be to the officers and to the Wal-Mart construction people. The workers weren’t aggressive either. We stayed for a couple hours to make sure everyone was keeping friendly and then we left.”...

The McCartys, who have lived at 2040 Campbellsville Road just outside the Lebanon city limits for 10 years, are now surrounded on all sides by the development.

“They are literally on an island in a sea of construction,” Spainhour said of his clients. “You can’t stand in his yard without getting covered in dust.”...

McCarty said he is eager to sell his property. “I want out of here,” he said in an interview late Wednesday night...he gave a quote for the land to Wal-Mart officials, but would not specify the amount. He acknowledged that the quote was more than the property is worth.

“It may not be worth it right now, but when the new Wal-Mart is up and running, it will be worth every penny,” he said.

Beyond an interesting story, economists would point to the “externalities” involved here. This is a case where one party causes damage-- and benefit-- to another party. Wal-Mart is damaging McCarty by lowering the value of his property in the short-term (e.g., he can’t sit in his back yard when they set off the dynamite) and helping him by enhancing the value of his property in the long-term (his land is worth much after a Wal-Mart is next door).

But in addition to Wal-Mart’s impact on McCarty, the latter can mess with the former-- whether by sitting in his lawn chair or by demanding an artificially high price for his land (or going inside his house while they blow things up). Once Wal-Mart bought the property next to McCarty, he gained tremendous bargaining power over the company and the control of its land!

At least in theory, all of this could have been handled privately. I suspect that WalMart and McCarty could have reached a contractual agreement that was mutually beneficial. When that didn’t/couldn’t happen, the matter must be settled by some aspect of government. The police (as enforcement officers of the State) had no jurisdiction since no laws were being broken. So, it was left to a judge’s interpretation.

How hard did David and Goliath work to avoid the stand-off? It’s not reported. But in this case, a market solution was available before people started throwing stones.

(cross-posted on SchansBlog.com)

Excerpts from Clifford Krauss’ article in the New York Times (cross-posted at SchansBlog.com)...

The ethanol boom of recent years — which spurred a frenzy of distillery construction, record corn prices, rising food prices and hopes of a new future for rural America — may be fading.

Only last year, farmers here spoke of a biofuel gold rush, and they rejoiced as prices for ethanol and the corn used to produce it set records. But companies and farm cooperatives have built so many distilleries so quickly that the ethanol market is suddenly plagued by a glut, in part because the means to distribute it have not kept pace...

--> Of course, markets can suffer from gluts and bubbles, but such problems are much more likely in the face of government planning, regulation, and intervention. Central planning doesn’t work because central planners lack the knowledge and motives to do it effectively. This is not a correctable deficiency in central planners. Thus, better central planning is unlikely. (At least, that’s what the data say overwhelmingly.) Nonetheless, faith in central planning-- or interest by interest groups in using it to promote their own ends-- continues apace...


While generous government support is expected to keep the output of ethanol fuel growing, the poorly planned over-expansion of the industry raises questions about its ability to fulfill the hopes of President Bush and other policy makers to serve as a serious antidote to the nation’s heavy reliance on foreign oil.

--> Uhhh...and that’s not to mention the limits of ethanol (even at its peak, it could only provide a small fraction of the total demand) and its energy and economic inefficiencies.


“If Congress doesn’t substantially raise the renewable fuel standard,” Mr. Brady said, “then this is not just a short term problem but a long term issue, and there will be more of a shakeout in the industry.”

--> Right...What’s “the answer”? More regulation and subsidies. That’s a great answer if you’re in the business; it’s a bad answer if you’re anyone else.