Category Archives: Taxes

The 100th Anniversary of the Defeat of Economic Land

The year 2014 is the 100th anniversary of an economics article that was the final nail in the coffin of classical economics, as it marked the victory of the neoclassical economics war against land. This was a victory so great that economists today do not even realize that there had been such an academic war.

Alvin Saunders Johnson (1874-1971) was an American economist at several universities, including Columbia, the University of Chicago, and Cornell. He was a co-founder of the New School at New York City. In 1902 he wrote “Rent in Modern Economic Theory: An Essay in Distribution.” Johnson, along with other economists who were turning the classical theories of the 1800s into the neoclassical doctrines of the 1900s, generalized “rent,” from the yield of land, into any surplus above opportunity cost, i.e. above the cost needed to put a resource to its most productive use. For example, a movie star paid $1 million to act in a movie, whose next best opportunity is being a salesman earning $100,000, has an economic rent of $900,000.

In 1914, Johnson published “The Case against the Single Tax” in The Atlantic Monthly. As has been well explained by Prof. Mason Gaffney in The Corruption of Economics, Johnson played a major role in suppressing, by falsification, the land-tax ideas of Henry George. Land is now visible everywhere except in academic economics. For example, the generation of land value by public goods is not even mentioned in the general textbooks.

Johnson correctly stated that a tax on the entire rent of land would bring the purchase price down to zero, but he expressed it as: “the value kernel of landed property will have been seized by the state.” In policy analysis, we need to examine inflammatory vocabulary. The moral case for land-value taxation rests in the proposition that the benefits of nature belong to all humanity equally, that the creation of local land values by population and commerce belongs in equal shares to the members of those communities, and that the rentals generated by public works may be used to pay the providers, whether this be private-sector or government providers. None of this is confiscation or seizing by the state.

In Georgist ethics, the people own the rent, not the chiefs of state. A government may justly act as the agent of the people to protect their property, such as the atmosphere, from damage, and a government may, as the agent of the people, collect the rent to distribute it among them, or to use to pay for public goods. The premise that the rent belongs to the people implies that the rent is not being seized from the landowners as though these title holders are the morally legitimate owners, but rather that the state is facilitating the collection of the rent to the proper owners, the people. Hence the terminology used by Johnson taints his analysis and begs the question of the proper ownership of land rent.

Johnson continues his attack by calling the single tax on land value “propaganda for the universal confiscation of land.” Henry George had unfortunately stated in Progress and Poverty that “It is not necessary to confiscate land; it is only necessary to confiscate rent.” The Latin origin of “confiscate” is “confiscare,” from “fiscus” meaning the government’s treasury. Fiscal policy is about governmental revenue and spending. Thus in linguistic origin, to confiscate means simply to tax, to transfer assets to the public treasury. But in modern popular usage, to “confiscate” means to take by force, with the implication that the state is seizing property that was legitimately owned. And despite George’s statement that it is only the rent, not the land itself, that is being “confiscated,” Johnson attacks the single tax as confiscating the land.

Moreover, by dismissing the theory behind the single tax as “propaganda,” Johnson denigrated the logic and evidence for land-value taxation in an anti-scholarly manner, and thus he himself indulged in propaganda.

Johnson’s mixing up the ownership of land and of its rent is also shown by his statement that if all the value of land is taxed, the revenue would cover the costs of government, “provided, of course, that the public can manage the lands as efficiently as they are now managed by their private owners.” This despite the statement of George that “I do not propose either to purchase or to confiscate private property in land.” Land-value taxation would not disturb private titles; it would not alter private control and possession. The government would not “manage the lands.”

Johnson states that much of the financial wealth of the middle class is in land value, and that the full taxation of land value would take more value from them than they would regain in the removal of other taxes. Of course in 1914, the 16th Amendment had just been enacted in 1913, and the middle class did not yet suffer from the income tax.

Nevertheless, Johnson’s statement is illogical. Suppose the total land rent is $1 trillion, and the cost of government is half of that; then the rent does not disappear, but is distributed back to the people in cash. So the effect of land value taxation would be to equalize the ownership of the rent, and a person who owned an average amount of rent would get half back in cash, and half back, ideally, in valued public goods. If government is squandering some of the rent, then the remedy is to give it all back to the people. Then the average land owner is in a neutral position.

Johnson falsely declared that “The Single Tax is, then, essentially a device for the spoilation of the middle class.” One could justly say that Johnson’s malicious attack was a device for the spoilation of the remedy for poverty, depressions, and land conflicts. What has spoiled the middle class is high taxes on their wages and on the goods they buy. Johnson’s falsifications were the spoilation of a policy that could have promoted sustainable prosperity and prevented needless economic inequality. Johnson’s propaganda succeeded in helping squash land-value taxation, but to the ruin of economies worldwide.

With the neoclassical victory against land, most economists today suffer from cognitive dissonance. Even if economists reject an egalitarian view of natural resources, they know that the supply of land is inelastic, so public revenue from land rent avoids the excess burden that other taxes have. But they do not extend this knowledge to the rest of theory and to policy. Mason Gaffney calls this the “corruption of economics.” I call it “academic brain freeze.” At any rate, it is worth marking the 100th anniversary of Johnson’s attack.

Blaming Finance, Ignoring Real Causes

The fall 2014 Cato Journal has an article, ‘The Financial Crisis: Why the Conventional Wisdom Has It All Wrong,” [pdf] by Richard Kovacevich, Chairman Emeritus of Wells Fargo. The author is correct in saying that the conventional wisdom is wrong in blaming the slow recovery on the “uniqueness of a financially led economic recession.” The US economy recovered from the severe 1980 recession within two years, while now the economy is creeping like a turtle.

The economic cause of recovery and growth is simple. Economic investment – the production of capital goods – drives the business cycle. Recessions are caused by a sharp fall in investment. Then, as the prices of raw materials fall, and as land rent drops, a depression reduces these costs of production, therefore increasing profits, so investment recovers. Government can boost the recovery by further reducing the costs of production, by decreasing the taxes and regulations it imposed previously. This is the “supply side” policy of increasing investment and production by reducing the costs of regulations and taxes.

But this time around, the federal government did the opposite. Costly regulations have magnified, with an anti-supply-side effect. Every year, there are thousands more regulations that hamper enterprise, and finally, regulations plus taxes have achieved the tipping point of making it too costly for enterprise to invest and hire labor.

After the Crash of 2008, the federal government had two basic policy options: it could help the economy recover with market-enhancing supply-side policies, or else the government could enact the welfare-state agenda of greatly increased governmental medical services. The government chose the latter option, which imposed even greater costs on enterprise and labor.

When the recession hit the economy in 2008, one of the responses was TARP, the Troubled Asset Relief Program. As the article states, one of the problems with TARP was that it did not focus on the troubled banks, but imposed the policy on all banks. The banks that were not troubled had to obtain the funds and then pay interest on them. TARP imposed the impression that all banks were in trouble, which destroyed confidence, and then Congress responded to the turmoil by imposing 25,000 pages of Dodd-Frank regulations.

None of the financial regulations, going back to the Great Depression, confront the causes of the boom and bust. The fundamental cause is massive subsidies to land values. The Cato article focused on the financial industry, but the more fundamental issue is government policy regarding real estate. The problems of the financial industry originate in their financing of real estate.

The history of the Americas has been that of grabbing land and enslaving labor. In the American colonies, the British government promoted European settlement to control land and to profit from trade. After the defeat of the French in 1763, the United Kingdom changed policy to avoid conflict with the people of Quebec and with the Indians, by restricting western speculation and migration. That annoyed the landed interests enough to declare independence, and to establish a constitution that would better extend and protect land speculation. Huge grants of land were given to railroads, veterans, colleges, and speculators.

After the public domain was disposed of, the government continued the subsidy of the large landed interests with implicit policies that are invisible to the public and to most economists. The provision of public works, welfare to the poor and elderly, and artificially cheap credit, all generate greater land rent and land value. This amounts to a vast redistribution of wealth from workers, tenants, and enterprise owners, to landowners, especially the concentrated owners of commercial and farm land.

With a fixed supply of land, much of the gains from an economic expansion is captured by higher land rent and land value, which then attracts speculation that carries real estate prices to unsustainable heights. When land values crash, they bring down with them the financial system that provided the loans. None of the financial regulations touch this basic cause, and land-value seeking is so deeply ingrained in American culture that people favor it even at the price of high taxes, high unemployment, and the destruction of liberty.

Ask a typical American, “Would you favor a tax reform that eliminates taxes on your wages, on interest from your financial assets, and on buildings, replaced by a tax only on land values?” The answer is, “No! I would rather suffer unemployment, insecurity, crime, poverty, and loss of liberty, than have my precious land taxed!”

“OK, then, would you favor the complete replacement of government’s public goods with private, contractual, provision that eliminates the subsidy to land values?” “No! We need government to provide these things!”

Then you ask, “So why do you want the word ‘liberty’ put on our coins?” The answer is, “I want liberty so long as it is not put into practice!”

And that is why government deals with the superficial financial appearances, and not the implicit reality that causes the booms and busts.

The California Solar Energy Property-Tax Exemption

California exempts solar energy equipment from its property tax. The exemption will last until 2025. The California Wind Energy Association has complained that this exemption puts solar energy at an artificial advantage relative to other renewables such as windmills. Biomass, the use of biological materials such as wood and leftover crops, is also at a relative disadvantage.

Rather than eliminate the solar tax exemption, the other energy industries should seek to eliminate the property tax on all energy capital goods. With this exemption, the government of California is recognizing that property taxes on capital goods – buildings, machines, equipment, inventory – impose costs that reduce production and innovation. Since this tax is toxic, the property tax should be removed from all improvements.

The best revenue neutral tax shift would be to increase the property-tax revenue from land value by the same amount as the reduction in the taxation of capital goods.

The other energy industry chiefs call the solar property-tax exemption a subsidy. We need to distinguish between absolute and relative subsidies. An absolute subsidy occurs when government provides grants to firms, or limits competition. A relative subsidy occurs when one firm or industry receives a greater subsidy than its competitors. All absolute subsidies are also relative subsidies, because they exist relative to the rest of the economy. But if the subsidy is not in funds or protection, but from lower rates on industry-destructive taxes, this is a relative but not an absolute subsidy.

Suppose that there are patients in a hospital suffering from continuous poisoning. The doctor stops poisoning one patient, and he recovers. But the other patients are still being poisoned. The other patients complain that it is not fair for one patient to be singled out for favored treatment. But the just remedy is not to resume poisoning the recovered patient, but to stop poisoning the others. The taxation of capital goods is economic poison, which the state recognizes would poison the solar energy industry they seek to promote. But why poison the other industries? The property tax should exempt all capital goods, all improvements.

A broader issue is the subsidies to energy. All forms of energy, except human muscles, are subsidized by the state and federal governments. Energy from oil and coal are implicitly subsidized by exempting them from the social costs of their environmental destruction. There is no economic need for any subsidies. But to obtain the true costs of energy, governments should also eliminate taxes not only on their capital goods but also on their incomes and sales. We cannot know whether renewable energy can stand on its own until we eliminate all the government interventions, including taxes, subsidies, and excessive regulations.

Since a radical restructuring of public finances is politically impossible today, a politically feasible reform would be to exempt all capital goods investments from the property tax. If this needs to be revenue-neutral, California could replace its cap-and-trade policy with levies on emissions. The relative subsidy to solar power is unfair to the other energy industries, but the real unfairness is the property tax on their investments.
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This article first appeared at http://www.progress.org/views/editorials/the-california-solar-energy-property-tax-exemption/

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.