Category Archives: Taxes

Is Australia’s Carbon Tax Repeal Really Market Enhancing?

Some libertarians cheer whenever there is any tax repeal. However, we need to distinguish taxes in form versus taxes in substance. Taxes in substance have no relation to a benefit or penalty attached to the payment. Taxes in form, but not in substance, pay funds to the government, but are tied to some benefit or compensation for damages.

It is standard economic theory that the best way to prevent pollution, as with other negative The effects, is to make the polluter, hence also the buyer of its products, pay the social cost of the pollution. The economist Arthur Cecil Pigou provided a thorough explanation in his 1920 book The Economics of Welfare. A tax on pollution has since then been called “Pigovian.”

One of the most discussed Pigovian taxes has been on the use of carbon-based fuels such as coal, natural gas, and oil. A “carbon tax” can be on the fuel inputs or on the emission outputs. The most effective Pigovian levy is on the emissions, as that provides an incentive to reduce pollution such as by capturing the carbon before it gets spewed out. If the polluter does not compensate society for dumping on the commons, then in effect it gets subsidized, as it sells its output at less than the total social cost of production.

Many countries have been confronting pollution with inefficient policies such as regulations, credits for offsetting pollution with purchases of forest lands, and permits that can be traded. Australia enacted what was called a “carbon tax” with the Clean Energy Act of 2011, implemented in July 2012. But this was not a Pigovian tax. The Act created a “carbon price mechanism,” a cap-and-trade emissions trading scheme that at first set a price per ton of emissions. This mandated price had the effect of a ‘carbon tax’. But after 2015, the mechanism would have transitioned to a trading scheme.

However, in 2013 the newly elected prime minister sought a repeal of the “carbon tax” emissions trading scheme. In 2014, parliament passed the repeal.

The opponents of emissions taxes claim that this increases costs to business and households. This is narrowly true, but policy should consider the total costs to society. The pollution imposes a social cost on Australia and the rest of the world. This is not a cost paid in explicit money, but costs in the form of illness, a less productive environment, and possible effects on the climate.

The opponents of emission levies overlook that the absence of compensation for the pollution costs is in effect a subsidy to the polluters and their customers. A pollution charge is not a tax in substance, but rather the prevention of this subsidy, and compensation for dumping toxic materials on other people’s property.

The repeal did not provide a replacement, and this creates uncertainty for business about any future anti-pollution policy. This policy uncertainty reduces investment and growth.

The best way to implement a pollution tax is as a replacement of other taxes. Taxes in income, sales, and value added impose the excess burden of higher costs and less output and employment. If politicians are concerned with tax costs, why are they not repealing these taxes? When a pollution tax replaces such market-hampering taxes, the total costs paid by consumers does not increase, but rather shifts in favor of less- polluting products.

Actually, the revenue obtained from Australia’s brief carbon tax was used to compensate taxpayers and affected companies. But the most effective policy would have been to have an explicit tax on pollution instead of a trading scheme, and to lower other tax rates, along with a transitional compensation to those with net losses.

Some opponents claim that Pigovian charges would be good if applied globally, but in a single country, would put its industries at a disadvantage. But that would not happen with a “green tax shift,” the replacement of inefficient taxes with a “green tax” on pollution. A green tax shift would reduce the environmental cost of pollution while not increasing the total tax costs for the country’s economy.

California Times Six

I live in California. It’s a great state. Too great.

A proposition to split California into six states may be on the ballot in 2016. “Six Californias” has announced that it has collected sufficient signatures. Why six? California’s population of over 38 million is six times lager than the US state average. The ruling powers may find a way to block the proposal, as some opponents claim that the signature gathering was unlawful. If “Six Californias” does get on the 2016 ballot, in my judgment, this will be a rare chance for fundamental reforms.

Many Californians have said that the state is too big to govern effectively. But the governance problem is not size, but structure. After the property-tax limiting Proposition 13 was adopted in 1978, taxes and political power shifted from the counties and cities to the state government. California could be governed well if decentralized, but the concentration of fiscal power to the state has made the state among the highest taxed and worst regulated in the USA.

There have been many attempts to reform the lengthy California constitution, but they have all failed. Attempts to replace the Proposition 13 have gone nowhere. The best option is to start over. Creating new states would provide six fresh starts.

Critics of the six-state plan say that the wealth of the new Californias would be unequal. The Silicon Valley state would include the high-tech wealthy counties of San Francisco, San Mateo, and Santa Clara, among others. The promoter of this initiative, Timothy Drapers, happens to be a Silicon Valley entrepreneur.

But the current 50 US states are also unequal in wealth. The income inequality problem is a national and global problem. Income can become more equal without hurting production by collecting the land rent and distributing it equally among the population. Since the critics of Six Californias are not proposing or even discussing this most effective way to equalize income, their complaints should be dismissed as irrelevant, immaterial, and incompetent.

US states have been split in the past. Maine was split off from Massachusetts in 1820, and West Virginia was carved out of Virginia in 1863.

If the initiative passes, a board of commissioners would draw up a plan to divide the state’s assets and liabilities among the six new states. A good way to do this would be to divide the value of the assets by population, but to divide the liabilities (including both the official debt and the unfunded liabilities such as promised pensions) by the wealth of each state. That would go a ways to deal with the inequality problem.

California’s complex water rights could be simplified by eliminating subsidies, instead charging all users the market price of water. There could continue to be a unified water system with a water commission with representatives from the six state.

If this measure is approved by the voters and by Congress, each state will design a constitution. The new constitutions should be brief, like the US Constitution, in contrast to the lengthy current California constitution that contains many provisions best left to statute law.

The new constitutions should retain the declaration of rights in the current state constitution, including Article I, Section 24: “This declaration of rights may not be construed to impair or deny others retained by the people.” This wording, similar to the US 9th Amendment, recognizes the existence of natural and common-law rights. This text should be strengthened with something like this: “These rights of the people include the natural right to do anything which does not coercively invade the properties and bodies of others, notwithstanding any state interest or police power.”

These new constitutions will be an opportunity to replace California’s market-hampering tax system with economy-enhancing levies on pollution and land value. There should be a parallel initiative stating that if Six Californias passes, the states will collect all the land rent within their jurisdictions and distribute the rent to all six states based on their populations. A tax on land value is by itself market enhancing, better than neutral, because it promotes an efficient use of land, it reduces housing costs for lower-income folks, and eliminates real-estate bubbles. Combined with the elimination of taxes on wages, business profits, and goods, the prosperity tax shift would raise wages and make California the best place in the world for labor and business.

This is all a dream, but the past dreams of abolishing slavery, having equal rights for women, and eliminating forced segregation all came true. This proposition will at least provide a platform for discussing such fundamental reforms.
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This article was first published at http://www.progress.org/views/editorials/california-times-six/

How the Rentenbank Stopped Inflation

After World War I, Germany had to pay reparations to the United Kingdom and France. Having sold off its gold, the German government had no specie with which to back its currency, the mark. Therefore Germany issued fiat money, not backed by anything. It was called the Papiermark, the paper mark.

With its economy in ruins, the German government printed more and more currency with which to pay its bills, and the German expansion of money became the world’s most famous example of hyperinflation.

The inflation induced alternative currencies in Germany. In 1922, the Roggenrentebank was established, issuing notes backed by rye grain. In 1923 several local governments issued small-denomination loan notes denominated in commodities such as rye, coal, and gold. The commodity front served as a price index relative to marks for the notes.

The inflation came to a halt with the replacement of the Papiermark with a new currency, the Rentenmark on October 15, 1923*. One Rentenmark could be exchanged for a trillion Papiermarks.

The Rentenmark was fronted by bonds indexed to amounts of gold. Since the US dollar was backed by gold then, the Rentenmark was thus also pegged to the US dollar at 4.2 RM to $1. To “back” a currency means to exchange it for a commodity at a fixed rate. It was not enough to merely index the units of the Rentenmark to gold. To become stabilized, the new currency needed to be fronted by a commodity that was actually used. That commodity was real estate.

The Deutschen Rentenbank, the central bank of Germany, established reserves that included industrial bonds as well as mortagages on Germany’s real estate. A currency is fronted when the issuer has collateral that it can deliver in exchange for indexed units of the money. Real estate rentals payable in Rentenmarks were fronts for the new German currency. “Rente,” derived from French, means income in German, such as a pension.

After having stabilized the money, the Rentenmark was replaced by the legal-tender Reichsmark in 1924 one-to-one, although Rentenmark notes continued to serve as money until 1948.

Previous attempts to front a currency with land value failed, because such frontage is insufficient. In France during the early 1700s, John Law’s bank issued money on the collateral of land in Louisiana, but that hypothetical land value did not constrain the over issue of the banks’ notes. Then during the French Revolution, the government issued “assignats” on the collateral of confiscated church land, but that too did not prevent the inflation of the money.

Land rent cannot “back” a currency, since there are no uniform units of land that can be exchanged for units of money. But land rent can be a “front” for money when taxes are payable in that currency, which helps give that money its value. But that alone does not prevent an excessive expansion of the money. To stabilize the currency, it also needs to be backed by or indexed to some commodity. And gold has been a common and suitable backing for paper and bank-account currency.

The German experience also shows that the gold backing does not require large amounts of gold. It is sufficient for stabilization that there is some credible limit to the expansion of the money. The Germans were lucky in 1923 in having monetary chiefs such as Hans Luther of the Finance Ministry, and Hjalmar Schacht, Commissioner for National Currency, who maintained the gold index by limiting the expansion of the new currency.

But as the experience of France, shows, it is risky to depend on the integrity of monetary chiefs. Permanent monetary stability requires a structure of money and banking that is self-correcting. That structure is best provided by free-market banking, in which the real money (outside money) is some commodity beyond the control of the banks, and the banks issue “inside money” or money substitutes backed by the real money. Competition and convertibility prevent inflation.

Any kind of tax can serve to help endow money with value, but a land-value tax offers the greatest frontage for currency, because in effect, LVT acts as a mortgage on land value, and the government can take over land when the tax is not paid. Unlike with taxes on income, nobody goes to prison for not paying a real estate tax, because the rent serves as a reliable collateral. Land rent can serve as collateral not just for real estate loans, but also for taxation, and for currencies. All countries can have “renten money” when they covert from market-hampering taxes on production to market-enhancing taxes on the economic surplus that is land rent.

* This was corrected from an earlier typo listing the year as 2013 instead of 1923.

Growing Weed in Humboldt County (and the Economics of Prohibition)

And yet California, long the marijuana movement’s pacesetter, and a haven for high-capacity growers, finds itself in the perhaps-unwelcome position of losing outlaws like Ethan. Should the state follow Colorado’s and Washington’s leads in legalizing recreational use, as is expected, already-fragile economies in the north—specifically in the “Emerald Triangle” of Mendocino, Humboldt, and Trinity counties, home to some quarter of a million people—could be crippled. The “prohibition premium” that keeps marijuana prices, and those economies, aloft would fall, possibly so precipitously that many growers would lose their incentive and (perhaps ironically) leave for more-punitive regions. In recent years, many growers have reportedly left California for places like Wisconsin and North Carolina—markets where a pound of marijuana might fetch double what it does in the Golden State. Legalization helps keep growers out of jail, but regulation slashes their profit margins.

This is from Lee Ellis in The Believer. Read the whole thing, it’s a great piece of journalism, although I don’t link to this because I think it’ll teach readers anything new. I just like it because it reports on one of my old stomping grounds. I don’t smoke much pot anymore, but there is nothing quite like smoking weed from Humboldt County.

Are libertarians more intelligent than conservatives and liberals?

The short answer is “yes.”

Jonathan Haidt, a moral psychologist at NYU’s Stern School of Business, published a paper in 2012 with three colleagues exploring libertarian morality. Dr Haidt is well-known for his work on studying morality among conservatives and liberals in the US, but has become increasingly interested in libertarians (or, at least, he can no longer ignore us).

Among the factors that Haidt and his colleagues explore and compare with liberals and conservatives is intelligence, or at least one common measure of it:

The Cognitive Reflection Task is a set of 3 logic questions that have correct and intuitive answers. Correct answers on these questions is said not just to measure intelligence, but also to measure a person’s ability to suppress an intuitive response in service of the cognitive reasoning required to solve these problems.

[...]

Results.

Table 3 shows that libertarians find the correct answers to these questions at a slightly higher rate than liberals and moderately higher rate compared to conservatives (also see Figure 4).

Interpretation.

The cognitive reflection task provides a behavioral validation of the hypothesis that libertarians have a more reasoned cognitive style. In our dataset, this measure inter-correlates with both Need for Cognition [...] and Baron-Cohen Systemizer [...] scores, with libertarians scoring higher than both liberals and conservatives on all three measures. Taken together, a convergent picture of the rational cognitive style of libertarians emerges.

Although the Cognitive Reflection Task is just one test among many that attempts to measure intelligence, and although I am not a big believer that intelligence tests are any good at detecting intelligence (they are, however, great for analyzing structural issues within a society or across different societies), it’s hard to argue with the results: Libertarians score higher on intelligence tests than either liberals or conservatives. Here is the paper. I’d be very interested in reading through more literature that deals with this, but libertarians are new to a lot of scholars (which is why Haidt’s “common-sense” approach is being considered groundbreaking for including libertarians).

You don’t really need to read the paper though. Dr Amburgey, the house liberal of this blog, explains well why liberals tend to score slightly lower on intelligence tests than libertarians. Here, for example, is Dr Amburgey trying to tell me that the CIA is not really arming rebels in Syria if it goes through proxies like Qatar and Saudi Arabia. It’s an intelligent response, to be sure, but a libertarian – slightly more superior in his cognitive abilities, according to science – knows better.

Notes  On Liberty‘s house conservative*, Dr Delacroix, amply demonstrates why conservatives are not in the same league as liberals or libertarians.

With the fact that libertarians are more intelligent than liberals and conservatives in mind, I’d like to take a moment to a) bask in the glory of it all, and b) go back to Rick’s question about the One Big Change that I’d like to make.

I think that there is a way to incorporate open borders into a One Big Change-style reform while also leaving room for other improvements such as financial competition in the markets (rather than between governments) and competing tax regimes. I’d dig deeper and go a little more structural. I’d federate the entire world, and I wouldn’t make the federation out of the current agglomeration of nation-states, either. I would destroy the states currently in place and federate the administrative units that currently operate underneath the nation-state.

This, I think, would do a great job of incorporating open borders (everyone is part of the same federal union now), financial competition (no more national banks), tax regimes (you can more easily vote with your feet), and a common legal system that protects individual rights such as private property and freedom of religion.

*Dr Delacroix is, of course, a libertarian. He just calls himself a conservative out of spite for liberals, and because he mistakenly thinks of himself as a paternalistic defender of the common man from Leftist condescension and aggression.

La France et Apple

Les réserves financières

de la France: 30 milliards de dollars
de la Russie: 400 milliards de dollars
d’Apple: 159 milliards de dollars.

J’ai enseigné pendant vingt-cinq ans au beau milieu de Silicon Valley. J’y ai gardé des copains, bien sur. De plus, j’habite à Santa Cruz, Silicon Valley-Plage pour ainsi dire.

Il y a de plus en plus de jeune Français bien diplômés à Silicon Valley. Je n’en n’ai pas fait le rescencement. J’en entend parler et je les reconcontre par hasard. Il me semble qu’
on pense beaucoup de bien d’eux ici, de leur niveau de compétence, de leurs habitudes de travail.

On est bien obligé de se demander pourquoi ils ne sont pas en France ou la charcuterie est très supérieure et les vacances beaucoup plus longues qu’aux Etats-Unis.

Vu d’ici, on dirait que c’est la débandade de la formidable et radieuse colonie de vacances que se sont octroée les Français vers 1970. Je suis ce que je peux depuis ici de l’actualité politique française. J’ai l’impression qu on n’aborde jamais le grand problème de fond: l’état nounou n’est pas viable. On ne discute que telle ou telle reformette, telle ou telle diminution des telle out telle prestation sociale.

Le président de la grande banque d’investissement Lazare frères présentait l’autre jour son livre sur les réformes à l’émission que j’estime assez, “On n’est pas couché.” Une de premières choses qu’il dit c’ est qu’il est  “de gauche”. Qu’est-ce que cela veut dire?

On se croirait en 1946, comme si personne n’avait rien appris en soixante-huit ans. Misère!

Le capitalisme marche très bien quand on le laisse. C’est une vraie machine à fabriquer des emplois. Quand on l’empêche de faire son boulot, les gens fuient, à commencer par les meilleurs, comme on pourrait s’y attendre si on s’autorisait à y penser.

Regulation doesn’t have to mean licensure!

In my effort to become more misinformed I’ve started listening to the news. On PBS Newshour I learned that the National Taxpayer Advocate is pushing to restrict who can professionally prepare tax returns. It turns out the Institute for Justice is (so far) successfully beating back these efforts.

So why is anyone concerned? Surely because it’s poor people going to (potentially unqualified) preparers. Why not just go to H.R. Block? They’re cheap and trustworthy, but poor people probably make their decision of where to go the same way they decide how to bank. They want someone local and personal. That’s not going to change. Back to Newshour:

If you have someone who’s– who’s not ethical or doesn’t know what they’re doing, they’d have even more incentive to not sign a tax return and kind of just operate in the shadows.

I think that’s the correct prediction. Create licensure, and poor people will be less protected. Frankly, I doubt that even certification will make a difference; I think Joe Blow’s decision of who to get to prepare his return won’t be likely to change. What I think would help is a simplified tax code, and especially as it treats poor people.

The Theory of the Non-Working Class

In the USA, people of age 16 and above are considered of working age. Of those of that age range, those who are working, seeking work, or hired but not yet working, are designated to be in the labor force. The labor force participation rate is the number of people in the labor force divided by the number of those of working age.

From 1950 to 2000, the labor force participation rate in the USA rose from 59 percent to 67 percent. Much of that increase came from the doubling of the participation rate of women, from 30 percent in 1950 to 60 percent in 2000. But total labor participation has declined since 2000 to 63 percent.

While the portion of women in the US labor force rose, the portion of men has been declining. The prime working years are considered to be from age 25 to 54, and one sixth of the men of that age range are not working. In 1950, only four percent of men of that range were not employed.

Many of those not working are not seeking work, and are therefore not counted in the labor force. They are also not counted as unemployed, because by definition, the unemployed are those actively seeking work plus those who have been hired but not yet started to work for wages. Two thirds of working age men are not seeking work, although some who sought work but stopped because they were discouraged, would take a job if offered.

About 40 percent of the men seeking work have been unemployed for six months or more. The chronically unemployed are less likely to become employed, so the long-term unemployment feeds on itself.

The real wage of lower-skilled workers has been falling since 1970. For workers who did not finish high school, the real wage (adjusted for inflation) has fallen 25 percent. That fall in wages is offset somewhat by the availability of new products such as cell phones and by the fall in the relative prices of electronics and other goods, but the cost of housing, medical care, taxes, and college tuition have risen to offset some of that productivity gain.

There are several reasons why male labor participation has fallen. First, more men are attending college. Second, due to the expansion of the war on drugs, the portion of men in prison has risen. Third, as more women work for wages, some male partners choose home production, doing house work and child care at home, which is real labor but not counted in the output data. Fourth, more people are obtaining government’s disability income. Very few on disability go back to work. Fifth, many in the first of the baby-boom generation, born during 1946-1950, are retiring.

The downward trend of labor participation will continue. The Congressional Budget Office estimates that the participation rate will fall to 61% by 2024. CBO calculates that the Affordable Care Act reduce the labor force by more than 2 million jobs. Workers will be able to quit their jobs without losing medical coverage, and the expansion of Medicaid will induce many more adults to obtain medical care without having a job.

One of the problems with a lower labor participation rate is that it reduces the ratio of workers to non-workers. Social Security and Medicare are supported by transferring income from workers to non-workers. A smaller labor participation rate will use up the trust funds and create a deficit for these programs sooner. Also, fewer workers results in lower economic growth, which implies that more of those in poverty will stay that way.

Much of the labor participation decline is not voluntary, but caused by tax and subsidy policies. Without taxes on wages and enterprise profits, both wages and employment would be higher. If the funds now going into Social Security instead went into tax-free private retirement accounts, those who retire would rely on their own past savings rather than transfers from those working. Without the income-tax distortion caused by tax-free medical insurance and taxed money wages, workers would be able to choose the insurance plan that fits them best rather than having to accept the limited plans offered by employers and the government.

The best alternative to taxing wages is to tax land rent or land value. But even without such a fundamental shift in policy, the labor force participation rate can be made more voluntary with employee and self-employment incentives for those long out of work, such as tax offsets and exemptions from restrictions (e.g. licensing, union rules, and city zoning) that prevents working at home, and exemptions from litigation risks. Immigration reform – legalizing those already in the country and allowing more of those with labor skills into the country, would also substantially increase the labor population.

The basic problem with labor world-wide are restrictions on hiring and firing labor, and the heavy costs imposed by taxes, regulations, and mandates on employers. If an employer, including a self-employer, could simply hire a worker without having to deal with forms and regulations, and with no taxes on the employer and the employee, we would have full employment at wages that would provide a decent standard of living. The labor problems we have are iatrogenic, a disease caused by the doctor, in this case, the economic malady caused by government policy. The government people look to for solving economic problems has caused them in the first place.

Wait, what?!

There won’t be a MotoGP race at Laguna Seca this year and here’s why…

Unlike COTA and IMS, which are both privately owned, Laguna Seca is a non-profit operated by the Sports Car Racing Association of the Monterey Peninsula (SCRAMP), on property owned by the Monterey County parks department. This unique status disqualifies the facility from accepting large government subsidies available to tracks like COTA and IMS–the latter which reportedly received $100 million in state grants this year for track and facility upgrades to secure major events like MotoGP. “We can’t compete with that,” Campbell told the Herald. “Here, there are no tax credits or state subsidies.”

Hasta La Vista, Laguna Seca, Motorcyclist, January 2014

So the non-profit on public property isn’t eligible for subsidies but private tracks are?!

California’s Environmental Mal-Litigation

The worst intervention by governments, aside from aggressive war, is excessive litigation. Taxes are burdensome, but they are predictable. The reason that enterprises are not entirely crushed by taxation is that much of the tax burden is at the expense of land rent, so it ends up destroying the economy’s surplus, but not totally wreaking the economy. Regulations act as a tax to impose costs on enterprise, and much of the cost is passed on to workers and the public, so they make us poorer but don’t totally stifle the economy. Subsidies create distortions that generate inequality and the boom-bust cycle, but subsidies is what politics is all about. The worst intervention, that does the most to crush enterprise and employment, is vicious litigation.

A prime example of litigative intervention is the California Environmental Quality Act. CEQA is codified at the Public Resources Code Section 21000 et seq. As California’s web site for CEQA states, “Most proposals for physical development in California are subject to the provisions of CEQA.” The “frequently asked questions” web section explains that “CEQA is a self-executing statute.” That means that “its provisions are enforced, as necessary, by the public through litigation and the threat thereof.” Past court cases can be seen on the web site of the California Natural Resources Agency.

As described by a “Schumpeter” blog article in the 25 January 2014 Economist, “The not so Golden State,” this law “has mutated into a monster.” Anybody in California may file a CEQA lawsuit against any project using environmental protection as an excuse. The plaintiffs win half the cases. If someone sues a company and loses, the defendant still has to cover his legal expenses. Many of the lawsuits under CEQA are also against governmental development projects and against permits by local governments to enable private development.

Suppose a developer seeks to build an industrial park. If he hires non-union workers, the union attacks with a CEQA lawsuit. So the builder hires expensive union labor. Suppose someone owns a gasoline station, and a competitor wants to set up a station nearby. The station owner stops the potential competitor by filing a CEQA case. In 2011, there were 254 “California disinvestment events,” in which companies employing more than one hundred workers either left the state or expanded in another state rather than in California. This is estimated to have gotten worse in 2012 and 2013.

The litigations and regulations of California fall hardest on manufacturing. California’s high sales tax and low property tax also induces cities to favor retail stores over manufacturing. Hostile policies in California are largely responsible for the flight of manufacturing to other states and to foreign countries. As noted by the Economist article, electronic devices are designed in “Silicon Valley,” the region from San Francisco to San Jose, but manufactured in Asia. Some environmentalists realize that CEQA does little to protect the environment, but attempts to reform the law have stalled. The frivolous lawsuits reward lawyers, unions, companies seeking to stifle competition, and “not in my backyard” opponents of development.

Litigation is the worst way to handle social problems. Lawsuits impose unpredictable and expensive costs on enterprise. Such laws let opportunists exploit legitimate job-creating industries. Excessive litigation is further rewarded by making the winning defendants of lawsuits have to pay their legal costs. We then get excessive malpractice suits that force doctors to buy expensive insurance. Federal and state laws that enable litigation for job and housing discrimination and environmental protection end up enriching lawyers who get much of the gains.

The best ways to handle environmental destruction is with covenants and easements, along with a liability rule for damages. If some development harms the natural environment, then the government assesses the damage, and the polluter pays for the damage, either as a one-time charge or as periodic payments for on-going pollution. Developers know in advance that they are liable for damage, and so they would have the incentive to prevent the payment by doing their own environmental assessment. The issue would be between the developer and the state, without involving attorneys and court costs.

Economic theory has recognized for the past hundred years that the optimal policy for pollution is a charge paid by the polluters, passed on to the customers, fully compensating society for the damage. That can be done by a pollution tax.

English common law traditionally provided law-suit protection against potential negative effects and damages to one’s property. Litigation can be a useful enforcement and restitution tool, but it has to be within a sensible legal system. In the English tort system, if a plaintiff loses a law suit, the loser has to pay the legal costs of the winner. So if a company sues another firm just to stifle competition, using the environment as an excuse, and that company loses the lawsuit, then that company has to pay the legal costs of the winning competitor. That would stop frivolous or phony law suits. And that is why the lawyer lobby will stop such a legal reform in the USA.

Myths about Libertarianism

Many articles have recently appeared in magazines, web sites, and social media criticizing free markets and libertarian ideas. It seems to me that this opposition is a result of a growing interest in freedom as people realize that the economies of the world are in serious trouble. As people see continuing high unemployment, slow growth, ever greater government debt, environmental disaster, more turbulent weather, and endless wars, some folks seek solutions in greater freedom while others seek solutions in greater state control. The critics of libertarianism and economic freedom have fallen for several fallacies.

1. Critics confuse today’s mixed economies, a mixture of markets and government intervention, with a “free market.” A truly free market is an economy in which all activity is voluntary for all persons. Government intervention changes what people would otherwise voluntarily do. A pure market would not impose the taxation of labor and capital. It would not prohibit trade with Cuba. Free markets would not subsidize industry. Any peaceful and honest action would be free of restrictions and taxes. That is not the economy we have today in any country.

2. Critics use the term “capitalism” to falsely blame markets for economic trouble. Those opposed to private enterprise call today’s economies “capitalist.” They then note that the economy has trouble such as poverty, great inequality, unemployment, and recessions. The critics conclude that “capitalism” causes these problems. This illogic uses a sly change in meaning. They use the term “capitalism” as a label for the current economies and also to refer to free markets. It makes no sense to label the economy as XYZ and then say XYZ causes problems. The critics use the double meaning of “capitalism” to blame the non-existing free market for social problems. This confusion is often deliberate, as I have found that it is almost impossible to get the critics to replace their confusing use of the term “capitalism” with clearer terms such as either the “mixed economy” or the “pure market.”

3. Critics think that the “market” means “anything goes.” For example, they think that a free market allows unlimited pollution. They often call this, “unbridled capitalism.” But freedom stops at the limit of harm. In a pure market with property rights for all resources, pollution that crosses outside one’s own property is trespass and invasion. This violation of others’ property rights would require compensation, and that payment would limit pollution.

4. Critics confuse privatization with contracting out. They then blame private enterprise for problems such as occurs with private prisons. When government contracts with private firms to produce roads, it is still a governmental road. When governments hire private contractors to provide services in a war, it is still government’s war. Government sets the rules when firms do work under contract. Genuine privatization means transferring the whole ownership, financing, and operation to a private firm.

5. Critics overlook subsidies. Government distorts the economy with subsidies to agriculture, energy production, and other corporate welfare. The biggest subsidy is implicit: the greater land rent and land value generated by the public goods provided by government and financed mostly from taxes on labor and enterprise. Critics not only ignore this implicit subsidy but also overlook the explicit subsidies to agriculture and programs such as the promotion of ethanol from corn.

6. Critics do not understand the crowding out of private services because of government programs. The critics of libertarianism say that with less government, old folks and poor folks would starve and die because they would not receive social security and medical care. What they overlook is that the reason many of the elderly have little savings for retirement is that government took away half their income while they were working. Income taxes reduce their net wages, while sales taxes raise the cost of living. Low-income people pay little or no income tax, but they pay hefty sales and excise taxes, and they indirectly pay property taxes from their rental payments to landlords. Libertarians want to abolish poverty and have a society where all people have good medical care. They just want to accomplish this by letting workers keep their full pay, which would enable them to pay for their own medical services. Also, with no taxes on interest and dividend income, people would be better able to provide for their own retirement income, indeed to have much more than social security now provides.

7. Critics fail to understand contractual governance. A pure market would not consist of isolated individuals. Human beings have always lived in community associations. In a free market, communities such as condominiums, land trusts, and civic associations would provide the public goods that the members want.

8. The critics of market believe that corporations control the economy, exploit labor, and plunder the planet. Corporations do have power, but mainly because they obtain subsidies and monopoly privileges from governments. But labor unions and lawyers also lobby the government for power and favors. Rather than blaming private enterprise, the critics should examine how the structure of government enables special interest to obtain power and wealth.

Leo Tolstoy wrote in 1905 that nobody really argues with the economics and philosophy of Henry George and public revenue from land rent; the critics either misunderstand the concepts, or they create misinformation. The same applies to critics of libertarianism. The fact that the critics falsify the free market in criticizing it implies that the actual concept is sound, otherwise they would provide valid arguments.

Nobody has refuted the free market and the libertarian ethic of “live and let live”. The critics of liberty either misunderstand it or else falsify it. Even when their errors in logic, their false evidence, and their confused terminology are pointed out, the critics persist in their falsification. They are stubbornly anchored to their viewpoints. Why this is so is a problem I will leave to psychologists to figure out.

Some quick thoughts about political entrepreneurship

The Wall Street Journal has a weekend interview feature with an entrepreneur who founded Airbnb, a company that has been getting rich by exploiting the so-called “sharing economy.” Overall it’s an interesting read (I think the term “sharing economy” is misleading, but it is a stroke of marketing genius; “I’m not making money: I’m helping people share stuff!”).

However, after reading Rick’s recent thoughts on entrepreneurship and re-reading my own musings on how democracy works, this passage stood out to me like a sore thumb:

By year’s end, Airbnb says it will have booked more overnight stays than the Hilton and InterContinental hotel chains.

As might be expected, hoteliers and hospitality-industry regulators are suspicious of the Airbnb model. In October, New York state sued the company for violating a law passed in 2010—just when Airbnb was picking up steam—barring private citizens from renting an entire apartment for less than 30 days.

Why on earth would New York state undertake such a ridiculous ban? Ostensibly for safety reasons, right? Or maybe to better ensure that labor regulations remain up to par?

The law that hotel chains used to sue its competition strikes me as the perfect example of how cronyism works. The hotel chains are losing some of their market share to innovative competitors, but instead of improving upon their own models they turn to the political process, which (at least in the US) provides guaranteed access to any faction who would like to use it.

Just like in the marketplace, though, guaranteed access does not mean guaranteed results. Enter the entrepreneurial spirit. Except instead of finding ways to make money, the political entrepreneur is finding ways to prevent competition. This second type of entrepreneurship is also driven by self-interest. Libertarians, I think, recognize the dual nature of self-interest (in markets: good; in government: bad), but I cannot think of any literature off the top of my head that deals with this topic.

What I can note is that many people get the nature of self-interest completely wrong. In the minds of many, if not most, people, self-interest is something that only occurs in the marketplace. From this mindset springs many of the fallacies about government regulations and taxes that we often read about in the press. Whether this mindset is a product of genuine or willful ignorance is a topic that I think deserves further scrutiny.

Why is it, for example, that many people do not see that self-interest drives the political process itself? I know that the discipline of ‘political economy’ deals with self-interest in the political process, but even here I see a tendency to treat political entrepreneurs as more noble than the entrepreneur of the marketplace (with a few exceptions, of course). Support for higher taxes on corporations, or support for more stringent government regulations, is often very prominent among the general public and among elites. The general public thinks it is supporting itself against “big corporations” when it supports these policies, as do elites, but in reality these regulations and taxes are driven by an entrepreneurial process that desires to favor one faction over all others.

Am I missing anything? I know I’m missing a bunch of stuff.

A Drip of Local Flavor

The city of Little Falls, New York is missing nearly 400,000 gallons of water.

Located about twenty-five miles from me; the small central New York city is unable to locate over half of water that had been distributed in 2011.  This amounts to about $300,000 dollars in wasted tax payer dollars and on top of that the city is expected to raise water rates.

Unsure whether the losses are caused by leaks, faulty meters or anything else the lead plant operator Daniel Benett says “”Some of it may be going in the ground. Some of it may be not captured by meters. We don’t really know. That’s why we’re out trying to fix as many leaks as we can,”

The cost of replacing the system is reported at a million dollars a mile which Benett assured citizens “The labor is the smallest cost ’cause the guys have to be here to work anyhow,”

Which  leads me to wonder what are those workers doing on a regular basis if it would cost no additional labor hours to do additional work.

Unequal Poverty: Tricks (Part Two of two)

In the previous installment:

I explained how the general standard of living in America, denoted by real income, grew a great deal between 1975 and a recent date, specifically, 2007. This, in spite of a widespread rumor to the contrary. The first installment touched only a little on the following problem: It’s possible for overall growth to be accompanied by some immobility and even by some regress. Here is a made-up example:

Between the first and the second semester, grades in my class have, on the average, moved up from C to B. Yet, little Mary Steady’s grade did not change at all. It remained stuck at C. And Johnny Bad’s grade slipped from C to D.

Flummoxed by the sturdiness, the blinding obviousness of the evidence regarding general progress in the standard of living, liberal advocates like to take refuge in more or less mysterious statements about how general progress does not cover everybody. Or not everybody equally, which is a completely different statement. They are right either way and it’s trivial that they are right. Let’s look at this issue of unequally distributed economic progress in a skeptical but fair manner.

It’s awfully hard to prevent the poor, women and minorities from benefiting

I begin by repeating myself. As I noted in Part One, it’s too easy to take the issue of distribution of income growth too seriously. Some forms of improvements in living standard simply cannot practically be withheld from a any subgroup, couldn’t be if you tried. Here is another example: Since 1950, mortality from myocardial infarctus fell from 30-40% to 5-8%. (from a book review by A. Verghese in Wall Street Journal 10/26 and 10/27 2013). When you begin looking at these sort of things, unexpected facts immediately jump at you.

Fishing expeditions

The US population of 260 millions to over 300 million during the period of interest 1975-2007 can be divided in an infinity of segment, like this: Mr 1 plus Mr 2; Mr 2 plus Mrs 3; Mr 2 and Mrs3 plus Mr 332; Mr 226 plus Mrs 1,000,0001; and so forth.

Similarly, the period of interest1975 to 2007 can be divided in an infinity of subperiods, like this: Year 1 plus year 2; year 1 plus year 3; years 1, 2, 3 plus year 27; and so forth. You get the idea.

So, to the question: Is there a subset of the US population which did not share in the general progress in the American standard of living during some subperiod between 1975 and 2007?

The prudent response is “No.” It’s even difficult to imagine a version of reality where you would be right to affirm:

“There is no subset of the US population that was left behind by general economic progress at any time during the period 1975- 2007.”

Let me say the same thing in a different way: Given time and good access to info, what’s the chance that I will not find some Americans whose lot failed to improve during the period 1975 to 2007? The answer is zero or close to it.

This is one fishing expedition you can join and never come back empty-handed, if you have a little time.

Thus, liberal dyspeptics, people who hate improvement, are always on solid ground when they affirm, “Yes, but some people are not better off than they were in 1975 (or in —– -Fill in the blank.)” The possibilities for cherry-picking are endless (literally).

Everyone therefore has to decide for himself what exception to the general fact of improvement is meaningful, which trivial. This simple task is made more difficult by the liberals’ tendency to play games with numbers and sometimes even to confuse themselves in this matter. I will develop both issues below.

To illustrate the idea that you have to decide for yourself, here is a fictitious but realistic example of a category of Americans who were absolutely poorer in 2007 that they were in 1975. You have to decide whether this is something worth worrying about. You might wonder why liberals never, but never lament my subjects’ fate.

Consider any number of stock exchange crises since 1975. There were people who, that year, possessed inherited wealth of $200 million each, generating a modest income of $600,000 annually. Among those people there were a number of stubborn, risk-seeking and plain bad investors who lost half of their wealth during the period of observation. By 2007, they were only receiving an annual income of $300,000. (Forget the fact that this income was in inflation shrunk dollars.) Any way you look at it, this is a category of the population that became poorer in spite of the general (average) rise in in American incomes. Right?

Or, I could refer to the thousands of women who were making a living in 1975 by typing. (My doctoral dissertation was handwritten, believe it or not. Finding money to pay to get it typed was the hardest part of the whole doctoral project.) One of the many improvements brought about by computers is that they induced ordinary people to learn to do their own typing. Nevertheless, there was one older lady who insisted all along on making her living typing and she even brought her daughter into the trade. Both ladies starved to death in 2005. OK, I made them up and no one starved to death but you get my point: The imaginary typists fell behind, did not share in the general (average) improvement and their story is trivial.

So, I repeat, given a some time resources, I could always come up with a category of the US population whose economic progress was below average. I could even find some segment of the population that is poorer, in an absolute sense, than it was at the beginning of the period of observation. Note that those are two different finds. Within both categories, I could even locate segments that would make the liberal heart twitch. I would be a little tougher to find people who both were poorer than before the period observation and that would be deserving of liberal sympathy. It would be a little tough but I am confident it could be done.

So, the implication here is that when it comes to the unequal distribution or real economic growth you have to do two things:

A You have to slow down and make sure you understand what’s being said; it’s not always easy. Examples below.

B You have to decide whether the inequality being described is a moral problem for you or, otherwise a political issue. (I, for one, would not lose sleep over the increased poverty of the stock exchange players in my fictitious example above. As for the lady typists, I am sorry but I can’t be held responsible for people who live under a rock on purpose.)

Naively blatant misrepresentations

A hostile liberal commenter on this blog once said the following:

“Extreme poverty in the United States, meaning households living on less than $2 per day before government benefits, doubled from 1996 to 1.5 million households in 2011, including 2.8 million children.”

That was a rebuttal of my assertion that there had been general (average) income growth.

Two problems: first, I doubt there are any American “households” of more than one person that lives on less than $2 /day. If there were then, they must all be dead now, from starvation. I think someone stretched the truth a little by choosing a misleading word. Of maybe here is an explanation. The commenter alleged fact will provide it, I hope.

Second, and more importantly, as far as real income is concerned , government benefits (“welfare”) matter a great deal. Including food stamps, they can easily triple the pitiful amount of $2 a day mentioned. That would mean that a person (not a multiple person- household ) would live on $1080 a month. I doubt free medical care, available through Medicaid, is included in the $2/day. I wonder what else is included in “government benefits.”

The author of the statement above is trying to mislead us in a crude way. I would be eager to discuss the drawbacks of income received as benefits in- instead of income earned. As a conservative, I also prefer the second to the first. Yet, income is income whatever its source, including government benefits.

The $2/day mention is intended for our guts, not for our brains. Again, this is crude deception.

Pay attention to what the other guy asserts sincerely about economic growth.

Often, it implies pretty much the reverse of what he intends. In an October 2013 discussion on this blog about alleged increasing poverty in the US, asked the following rhetorical question:

“Or have Americans’ standard of living only improved as the gap [between other countries and the US] closed?“

I meant to smite the other guy because the American standard of living has only increased, in general, as we have seen (in Part One of this essay posted). A habitual liberal commenter on my blog had flung this in my face:

“….Since 1975, practically all the gains in household income have gone to the top 20% of households…” (posted 10/23/13)

(He means in the US. And that’s from a source I am not sure the commenter identified but I believe it exists.)

Now, suppose the statement is totally true. (It’s not; it ignores several things described in Part One.) The statement says that something like roughly 60 million Americans are richer than they, or their high income equivalents were in 1975. It also says that other households may have had almost stationary incomes (“practically”). The statement does not say in any way that anyone has a lower income in 1975. At best, the statement taken literally, should cause me to restate my position as follows:

“American standards of living have remained stationary or they have improved….”

You may not like the description of income gains in my translation of the liberal real statement above. It’s your choice. But the statement fails to invalidate my overall assertion: Americans’ standard of living improved between 1975 and 2007.

What the liberal commenter did is typical. Liberals always do it. They change the subject from economic improvement to something else they don’t name. I, for one, think they should be outed and forced to speak clearly about what they want to talk about.

Big fallacies in plain sight

Pay attention to seemingly straightforward, common liberal, statist assertions. They often conceal big fallacies, sometimes several fallacies at once.

Here is such an assertion that is double-wrong.

“In the past fifteen years the 20% of the population who receive the lowest income have seen their share of national income decrease by ten percentage points.” (Posted as a comment on my blog on 10/21/13)

Again, two – not merely one – strongly misleading things about this assertion. (The liberal commenter who sent it will assure us that he had no intention to mislead; that it’s the readers’ fault because, if…. Freaking reader!)

A The lowest 20% of the population of today are not the same as those of fifteen years ago, nor should you assume that they are their children. They may be but there is a great deal of vertical mobility in this country, up and own. (Just look at me!)The statement does not logically imply that any single, one recognizable group of social category became poorer in the interval. The statement in no way says that there are people in America who are poor and that those same people became poorer either relatively or in an absolute sense. Here is a example to think about: The month that I was finishing my doctoral program, I was easily among the 20% poorest in America. Hell, I probably qualified for the 5% poorest! Two months later, I had decisively left both groups behind; I probably immediately qualified for the top half of income earners. Yet, my progress would not have falsified the above statement. It’s misleading if you don’t think about it slowly, the way I just did.

I once tried to make the left-liberal vice-president of a Jesuit university understand this simple logical matter and I failed. He had a doctorate from a good university in other than theology. Bad mental habits are sticky.

B Percentages are routinely abused

There is yet another mislead in the single sentence above. Bear with me and ignore the first fallacy described above. The statement is intended to imply that the poorer became poorer. In reality, it implies nothing of the sort. Suppose that there are only two people: JD and my neighbor. I earn $40, neighbor earns $60. In total, we earn. $100 Thus my share of our joint income is 40%, neighbor’s is 60%. Then neighbor goes into business for himself and his income shoots up to $140. Meanwhile, I get a raise and my income is now $60.

In the new situation, my share of our joint income has gone down to 30% (60/60+140), from 40%. (Is this correct? Yes, or No; decide now.) Yet, I have enjoyed a fifty percent raise in income. That’s a raise most unions would kill for. I am not poorer, I am much richer than I was before. Yet the statement we started with stands; it’s true. And it’s misleading unless you pay attention to percentages. Many people don’t. I think that perhaps few people do.

My liberal critic was perhaps under the impression that his statement could convince readers that some Americans had become poorer in spite of a general (average rise) in real American income. I just showed you that his statement logically implies no such thing at all. If he want to demonstrate that Americans, some Americans, have become poorer, he has to try something else. The question unavoidably arises: Why didn’t he do it?

Was he using his inadequate statement to change the subject without letting you know? If you find yourself fixating on the fact that my neighbor has become even richer than I did because he more than doubled his income, the critic succeeded in changing the subject. It means you are not concerned with income growth anymore but with something else, a separate issue. That other issue is income distribution. Keep in mind when you think of this new issue that, in my illustration of percentages above, I did become considerably richer.

Liberals love the topic of unequal progress for the following reason:

They fail to show that, contrary to their best wish, Americans have become poorer. They fail almost completely to show that some people have become absolutely poorer. They are left with their last-best. It’s not very risky because, as I have already stated, it’s almost always true: Some people have become not as richer as some other people who became richer!

Policy implications of mis-direction about income growth

The topic matter because, in the hands of modern liberals any level of income inequality can be used to call for government interventions in the economy that decrease individual liberty.

Here are a very few practical, policy consequences:

A Income re-distribution nearly always involves government action that is, force. (That’s what government does: It forces one to do what one wouldn’t do out of own inclination.) That’s true for democratic constitutional governments as well as it is for pure tyrannies. In most countries, to enact a program to distribute the fruits of economic growth more equally it to organize intimidation and, in the end, violence against a part of the population. (For a few exceptions, see my old but still current journal article: “The Distributive State in the World System. “Google it.) This is a mild description pertaining to a world familiar to Americans. In the 1920s, in Russia, many people (“kulaks”) were murdered because they had two cows instead of one the 1920s twenties.

Conservatives tend to take seriously even moderate-seeming violations of individual liberty, including slow-moving ones.

B Conservatives generally believe that redistribution of income undermines future economic growth. With this belief, you have to decide between more equality or more income for all, or nearly all (see above) tomorrow?

It’s possible to favor one thing at the cost of bearing the travails the other brings. It’s possible to favor the first over the second. This choice is actually at the heart of the liberal/conservative split. It deserves to be discussed in its own right; “ Do your prefer more prosperity or more equality?” The topic should not be swept under the rug or be made to masquerade as something else.

If you are going to die for a hill, make sure it’s the right hill.

PS: There is no “income gap.”