- On being black in Baltimore Olga Khazan, the Atlantic
- What Europeans talk about when they talk about Brexit London Review of Books
- Time to worry James Grant, Weekly Standard
- The English question Paul Harris, Aeon
How well do you understand public finance? Below is a quiz. Answer whether the statements are true or false, and briefly explain why. If you think that the statement is only sometimes true, or true under particular conditions, say “maybe” and explain. My answers follow the quiz, but first write down your own answers.
1. After a high tax on land value is in place, it will impose a burden on landowners and reduce the productivity and efficiency of the economy.
2. The most efficient way to pay for a city bus service is to make the bus riders pay for the full cost.
3. The best way to decide whether a club should have a party is by a yes-no vote, with the majority of those voting deciding the outcome.
4. No decentralized pricing system can optimally provide collective consumption.
5. Subsidies that reduce the price of goods below the cost of production typically have net benefits to society.
6. The best policy for government budgets is always to avoid deficits, hence to finance all spending from current revenues such as taxes and fees.
7. The best way to handle pollution is with restrictive regulations, as these are less costly than pollution taxes or permits.
8. The least worst tax for the USA would be a flat-rate income tax with no deductions or credits.
9. The least worst tax for the USA would be a national sales tax that replaces the income tax.
10. A pure free market generally fails to provide adequate public goods and to efficiently and equitably handle externalities such as congestion and pollution.
1. False. A tax on land value reduces the price of land and replaces what would have been paid in mortgage interest. A land-value tax pushes land to its most productive use, increasing productivity and efficiency.
2. False. The best way to pay for mass transit is to charge riders only when the service would otherwise be too crowded, and just enough to prevent congestion. The rest of the cost is best paid for from the increase in the land rent generated by the transit.
3. False. The best way to decide on a club party is the method called “demand revelation.” Each member records the most he would pay for the party. The amounts are added up. If the total is greater than the cost, have the party. To keep the members honest, if any member changed the outcome, relative to stating one’s cost, that person has to compensate the group an amount equal to the net loss of everyone else (their stated values minus their costs). This method is better because it measures how much the members want the party, not just whether they want it.
4. False. Collective consumption paid for by land rent can be decentralized, because the rent reflects the demand to be located there, and the land will not flee, hide, or shrink when its rent is tapped to pay for collective goods.
5. False. The social cost of taxes that pay for subsidies is greater than the gain to consumers.
6. False. Government borrowing can be a good policy if the funds are spent for investments that are more productive than if the funds were spent in private investments. Otherwise, the budget should not have a deficit.
7. False. A charge or tax on pollution, based on its damage, is more effective than regulations and permits, and the funds can replace taxes that harm the economy.
8. False. A land-value tax is better for the economy than a flat-rate income tax.
9. False. A land-value tax is better for the economy than a national sales tax.
10. Some textbooks say this is true, but the better answer is, False. Private communities such as homeowners’ associations and shopping centers can and do provide public goods from the site rentals. In a pure market, pollution is trespass that requires compensation. Private transit can have congestion charges. A pure free market would have contractual governance that could adequately provide public goods and prevent pollution and congestion.
Part One: Stimulation.
This essay does not require any specialized or advanced knowledge of economics. It does require an open mind and moderate alertness.
It’s must be difficult for the average working stiff with a job or school attendance, or both, a mortgage, and a family, to make sense of the daily economic news. It’s not because you are ill-informed, it’s because the media gives economic news in bits and pieces without tying them together, and usually without context. I suspect few of the big media commentators understand the context or try to link the fragments, anyway. Those who do understand tend to assume that everyone is aboard the same train they are riding. They don’t have much to say to those who are still at the station.
Major exceptions are the Financial Times, which has a strong pro-Obama bias, and the Wall Street Journal, which does not. Even with those, you have to read them every other day to get the big picture. So here, is the straight dope. (If you are concerned about my qualifications, a valid point, you will find a link to a fairly up-to-date version of my vita on the front of this blog.)
We are not facing one economic crisis but two. One is more or less routine, the other is almost unprecedented. The mildly re-assuring noises the media are currently making are about the first crisis, the almost-routine crisis only.
The first crisis is a conventional recession. Recessions are historically a normal part of capitalism. Healthy capitalist economies are on a growth path most of the time. There are several measures of economic growth and contraction. The easiest to understand is Gross Domestic Product, “GDP.” There are criticisms of this measure but we don’t care right now, for our narrow purpose.
GDPs grow at varying rate at different times and in different countries. A US GDP growth of 3.5 % per year makes nearly everyone happy. Countries that are at an early stage of development, such as India, and have a long way to go, often experience annual growth of 6% or 7%. China’s GDP growth has often topped 10% .Western European countries have been pleased with annual rates of growth of 2% for many years. There is a lesson here; don’t lose track of it.
National economies don’t always expand, sometimes, they contract. That’s a lot like the income of someone on an hourly wage instead of a straight salary. The prodigious economic growth of western countries under capitalism in the past 150 years is made up of series of expansions followed by contractions. We had overall growth because the contractions were both less in magnitude and shorter in duration than the periods of expansion.
The word “recession” means either two consecutive quarters of contraction of the national economy or it means any damn thing you want. Serious people only use the term in connection with the definition above. That’s what I do because I try to be a serious person.
Recessions are tricky because you only know about them after the fact, when the national statistics come out. Anyone who says, “We are in a recession” is either speculating or making propaganda. Economic commentators try to read the existence of a recession, and the waning of a recession, by studying other economic events. Those are events believed to be associated with recessions and to which numbers are attached that are collected frequently.
Here are two main ones: Unemployment figures and stock market indexes. There are others you can learn about if you become interested. When national unemployment goes down and the main stock market indexes go up for a while, commentators tend to announce the end of a recession. I think that liberal commentators give those a lot of weight under Democrat administrations, and conservative commentators under Republican administrations.
The reading of these signals is not an exact science, by a long shot. I just believe those readings are better than nothing if you take care to follow several. That’s a big “if,” of course.
Incidentally, there are very good scholarly, academic studies regarding the connections between various indicators and economic growth/contraction. I suspect few commentators keep abreast of those. I wouldn’t be surprised if it were none. I would be pleasantly surprised if some did.
Now, on to the current situation. When President Obama took office, it’s pretty clear the US was in a recession, or entering one. The President had nothing to do with it. There was much discussion everywhere about whether his buddies in Congress caused it. Fact is that there have been recessions with Republican as well as with Democratic administrations, and with Congressional domination of one or of the other major party.
The political elites of most countries, including many American Republicans believe in something called “Keynesian economics.” You don’t need to read Keynes to know as much as they do. Here is the gist: In modern developed societies, the government is such a large economic actor that it can influence decisively the path of the national economy. Thus, Keynesians believe that government has the power to stop or to improve on recessions. Governments may do this by engaging in spending, public spending, spending tax money, or borrowed money. (Keep I mind that, with the interesting exception of a few oil rich countries, governments have no money except what they can take in taxes and what they can borrow.)
Real conservatives, and libertarians who are not especially conservative, think that Keynesian economics is a dangerous hoax. They argue that government spending aggravated and deepened past recessions including the one associated with the Great Depression of the nineteen thirties. Fortunately, we don’t have to consider here who is right. (Full disclosure: I am one of them.)
A point that’s not in dispute is that government spending usually entails bigger government debt. More on this later.
Keynesian public spending is forthrightly intended to stem the spread of unemployment. The reasoning is simple: When people lose their job, or fear losing their job, they, and often, their neighbors, spend less. This lowered spending in turn slows down the national economy. This induces more unemployment: If I stop buying my daily latte because I am unemployed, or I fear I might soon be, and if others do the same, the barrista at my local coffee shop will lose her job. And so forth.
The fewer people earn a living, the smaller the national economy. If I merely forgo buying a car for the time being, the indirect effects on the national economy are even worse.
Hence, good Keynesian government spending should have very quick effects. It should stem the spread of unemployment rapidly and durably. It used to be the case that government had the ability to spend money quickly through public works. Hitler, for example, reduced quickly very high German unemployment by hiring the unemployed, and many underemployed, essentially to dig holes: Go to work in the morning; get a government check in the evening; spend the next day.
This approach has become difficult to employ for a variety of reasons, including permitting processes related to safety and to environmentalist zeal. Thus, if my city of Santa Cruz decides to build another breakwater for its harbor today, it’s unlikely anyone will get a paycheck for handling a tool for eighteen months, or more. Most past recessions lasted less than eighteen months.
As I write, only 10% or 15 % of the stimulus package money decreed by the President has been spent. Either, that’s not enough to stem the spread of unemployment, or, it’s not really a spending spree intended to stimulate. If the latter, what’s the purpose?
There is a beginning of an answer if you look at parts of the package that have a well-known name attached. One such is financing for a train from Disneyland to Las Vegas. It was put in by Harry Reid, the Senate Democratic Leader. There is no way the bulk of the corresponding money will be spent until five or even six years from now, except for studies employing a handful of specialists. Those specialists are not suffering from high unemployment, by the way. This part of the package does nothing to put to work Tom, Dick and Harry. The money won’t be spent for a long time because such a project needs a lot of planning, including for permitting to satisfy environmentalists.
What is the real purpose of this part of the stimulus package, then? At least, it makes Harry Reid look good with his voters. At worst, Harry Reed is using his muscle in Congress to satisfy special interests. I don’t know if the latter is true. I have not researched it. It’s plausible.
My conclusion: Even if you subscribe to Keynesian views on how to jump-start a national economy in recession, the measures taken by the administration six months ago do not work and cannot work.
Those who say, “Give it time” don’t know what they are talking about. The essence of government spending for stimulus purposes is speed. If you don’t stop and reverse unemployment quickly, the recessionary spiral worsens. If you did nothing at all, it would stop on its own, in good time, anyway.
Why do I care about the stimulus package’s lack of effectiveness?
Two reasons. First its part of a mass of unprecedented government spending. I mean unprecedented in the absence of a major war, like WWII. It increases public, government indebtedness to a worrying extent. Public debt has consequences, in the long run and in the not- so-long-run. More on this in the next episode of this posting.
The second reason, I care is that I detect a social and political project markedly different from the one announced by the administration in the current oversize government spending. I have not become a conspiracy theorist. I am relying on public information, including the President’s own past statements, those of his close advisers and, above all, my knowledge of what went on in Western Europe between about 1980 and 2000. I will address this alternative project in a subsequent posting also.
You have been good but there will be a quiz!
Current events update:
The Wall Street Journal has a good discussion of the Maine public health plan in today’s issue. It’s on p. A12, in the editorial section. It’s a fiasco. We care because it has important features in common with what we know of Obamacare.
Cool people tend to dismiss Rush Limbaugh, even conservatives. Limbaugh is bombastic and he exaggerates. That’s vulgar. However, he must have an army of good researchers because he comes up within a short time with hard evidence of allegations against his political adversaries. One of the wildest allegations from the right is that Obamacare entails “death boards.” Well, what do you know: Today, on-air, he reads excerpts from a Veterans Administration practitioner guidebook that sounds for all the world to me like a “death book.”
The convicted mass murderer of 270 people in the air over Lockerbie, Scotland receives a hero’s welcome in his home-country of Libya. He had been freed on compassionate grounds by the gutless Scottish Minister of Justice. (Yes, there is such a thing.) I saw it on television. This is not hearsay.
I think the enthusiasm greeting him in Libya should be written in the accounts book. It should enter into any calculus, side-by-side with collateral damage, next time this country has reason to consider bombing anything in Libya. It should not be long.
It’s unreasonable to treat in exactly the same way those who hate us and those who harbor sheer evil in their hearts, and our old friends. The stupid Scots should get a pass. The evil Libyans shouldn’t. There is no ethical system in the world that requires that this country do otherwise, not even Christianity. You are supposed to forgive your enemies after they have stopped harming you, not while they are cutting your throat, not even when they are impotently clamoring their wish to do it.
By the way, I am told by those who should know that Arabs respect this kind of thinking.
Warning: Some parts of this essay may be considered pornographic. (I sure hope so because I need another source of income.) It is mostly addressed to adult women but you should feel free to read it whatever your sex, or sexual orientation, or sexual orientations. If a young girl happens to read it, I am persuaded that it will do her more good than harm in the long run.
The leftist media have a new battle-horse: Republicans are waging “war on women,” they say. They claim that the Republican Party is using contraception denial to undermine women’s freedom. The other morning, I am laboring on the elliptical at the gym maintaining my three-pack. I am watching MSNBC (no choice, I live in Santa Cruz) when comes on an elegant, attractive Professor of Political Science. I don’t know from what university she is and I don’t care. It’s obvious she was invited because of her telegenic appeal. She is a light-skinned African-American woman, quite pretty, with an extremely neat hairdo of a hundred tight little tails. (What do you call those again?) Perfect!
The telegenic professor asserts calmly that the Republican Party is deliberately trying to limit the progress of women into the professions by denying them contraception.
Got it? “Copulate without protection. Become pregnant. Kiss law school good-bye! One less ho in a position of power or influence!”
I wouldn’t believe this enormous absurdity happened on television if I had not heard it myself. We are all more or less guilty for letting this kind of stuff be said without booing. Yes, I think booing is a moral obligation. Continue reading
The Greeks are rioting in the extreme cold. They have been rioting now for weeks to protest austerity measures their coalition government is attempting to impose on them. It’s an emergency government trying like hell to borrow money from richer countries, especially Germany so Greece, the state can pay its bills. The creditors and would-be creditor countries headed by Germany are saying such things as (I am paraphrasing):
You have many more public servants per 10,000 citizens than we (Germans etc, ) have. You will have to reduce the number by so many thousands by such and such a year as a condition of our lending.
Your government’s tax receipt as a percentage of GDP is much smaller than ours. There is also abundant evidence of massive tax cheating that is unheard of in our countries. You are going to have to improve the collection of taxes by such and such. (Note that this say nothing about tax increases.)
The creditor countries are all democracies whose tax-payers have the ability to express what they think about the bailouts of other countries. It’s their money. Their national politicians are lending to a nation-state that my local banker in his best days would not have given a second look to. The long and the short of it is that Greece, the country, is a bad credit risk. That’s why its government would have to pay something like fifteen percent interest if it could borrow money on the open market. For a comparison, I have US Government bonds purchased six years ago that pay 4,6 %. That was considered very good then. It’s even better now.
Note that there is no info about what private Greek concerns have to pay to borrow on the open market. I would not be surprised if they were able to borrow at normal rates. I wonder why this information is lacking. Massive privatization surely looks good with respect to a country where government finances are such a debacle. Big innovations work out best when it’s impossible to say: Situation normal; everything working just fine.
Ordinary Greeks are rioting against the prospect of cinching their belts a lot tighter. They are even thinking Communism again because this all comes as a surprise. For thirty years, they were allowed to believe that Greece was economically more or less a kind of southern version of Germany, not quite as prosperous and productive but pretty damn close and on its way there. Continue reading
I am anti-war, but if war there must be, then the people should be honest about its financing, and pay for the war while it goes on rather than pushing the finance to future generations. The War in Iraq was fiscally dishonest in that the costs were not in the official federal budget, and it was paid for by borrowing. The World Wars and Civil War were also paid for in large part by with war bonds and money creation. As this year is its bicentennial, it is worth looking at how the War of 1812 was financed.
At first, Congress doubled the tariff to pay for the war, but since trade shrunk during the war, tariff revenue shrank rather than grew. The US Constitution empowers Congress to levy a direct tax if it is apportioned by state population. So Congress levied a direct tax on property, mostly on real estate. The states could take a 15 percent discount if they collected the taxes themselves and transferred the revenues to the federal government. Most states took advantage of this, which spared the federal government the expense of assessing the real estate and taxing the landowners. Another federal tax was levied in 1815 to pay for the war of 1812, and then the federal property tax terminated.
Adam Smith wrote that wars should be paid for by taxes rather than borrowing, so that the people would not favor a war unless it was needed such as to defend against foreign aggression. If the War in Iraq had been finance by taxes, it would most likely not have started!
The use of real estate taxes for the War of 1812 is a lesson for public finance. If taxes there must be, then instead of a national sales tax or flat-rate income tax, the federal government could tax the states rather than the people. Let the states pay, at their option, their share of the budget based on their share of population. This works best if there is a federal tax on land value rather than on income or goods. If all states did this, there would not have to be any federal tax bureaucracy.
Unfortunately, as Hegel observed, people and governments do not learn the right lessons from history. At least libertarian candidates should learn from the War of 1812. Two hundred years ago, the federal government was able to pay for national defense without an intrusive income tax. We don’t need stinking taxes on wages and goods. Let the states finance the federal government. Let the states then have whatever public finance system they want. Political power would then flow back from the federal to the state level, and this decentralization would be good for liberty. Remember the War of 1812!