Be Our Guest: “How to make Brexit Really Worthwhile – Example: Financial Regulation”

Be Our Guest is an open invitation to NOL‘s readers to participate with us. Pretty much anything is on the table. The latest article comes from the Freeconomist, who is following up on his earlier piece about making Brexit worthwhile via information asymmetries. His new piece is on financial regulation through the prism of Brexit. Check out this excerpt:

I do not want to write a lengthy discussion on the question of which alternative is the least costly in dealing with the incentive problems arising from the implicit subsidy by the taxpayer. There are good reasons to believe an incremental, decentralized and evolutionary system of market-based regulation to be superior to centrally designed government regulation. (4)

But even if this is the case, private regulation arising as a response to the incentive problems resulting from explicit and/or implicit government guarantees is still costly. Indeed, the evolved system of private regulation in the UK banking industry was giving the appearance of a restrictive cartel. If my analysis is correct, this “cartel” served a useful social function, namely to deal with the incentive problems created by the implicit government guarantee. Nevertheless, it also involved costs.

At the root of the problem are the taxpayer guarantees.

Please, read the rest. It’s another excellent piece of work.

And don’t be afraid to submit your thoughts to us.

Is Dominic Cummings a hypocrite, or does the EU’s Common Agricultural Policy just suck?

Tedandralph

On Saturday, The Observer revealed that Prime Minister Boris Johnson’s recently appointed chief of staff received around £235,000 of EU farm subsidies over the course of two decades in relation that his family owns. Dominic Cummings is often portrayed as the mastermind behind the successful referendum campaign to Leave the European Union. So he is currently enemy no.1 among remain-supporters.

I am unconvinced this latest line of attack plays in Remainers’ favor (I was a marginal Remain voter in the referendum and still hold out some hope for an eventual EEA/EFTA arrangement). Instead, this story serves as a reminder of probably the worst feature of the current EU: the Common Agricultural Policy.

The CAP spends more than a third of the total EU budget (for a population of half a billion people) on agricultural policies that support around 22 million people, most of them neither poor nor disadvantaged as Cummings himself illustrates. Food is chiefly a private good and both the interests of consumers, producers and the environment (at least in the long-term, as suggested by the example of New Zealand) are best served through an unsubsidized market. But the CAP, developed on faulty dirigiste economic doctrines, has artificially raised food prices throughout the European Union, led to massive over-production of some food commodities, and denied farmers in the developing world access to European markets (the US, of course, has its equivalent system of agricultural protectionism).

These economic distortions make an appearance in my new paper with Charles Delmotte, ‘Cost and Choice in the Commons: Ostrom and the Case of British Flood Management’. In the final section, we discuss the role that farming subsidies have historically played in encouraging inappropriately aggressive floodplain drainage strategies and uneconomic use of marginal farming land that might well be better left to nature:

British farmers currently receive substantial subsidies through the European Union’s Common Agricultural Policy. This means that both land-use decisions and farm incomes are de-coupled from underlying farm productivity. Without the ordinarily presumed interest in maintaining intrinsic profitability, farmers may fail to contribute effectively to flood prevention or other environmental goals that impacts their output unless specifically incentivized by subsidy rules. If the farms were operating unsubsidized, the costs of flooding would figure more plainly in economic calculations when deciding where it is efficient to farm in a floodplain and what contributions to make to common flood defense. Indeed, European governments are currently in the perverse position of subsidizing relatively unproductive agriculture with one policy, while attempting to curb the resulting harm to the natural environment with another. These various schemes of regulation and subsidy plausibly combine to attenuate the capacity of the market process to furnish both private individuals and local communities with the appropriate knowledge and incentives to engage in common flood prevention without state support.

Our overall argument is that it is not just the direct costs of subsidies we should worry about, but the dynamics of intervention. In this case, they have led not only farmers but homeowners and entire towns to become reliant on public flood defenses with significant costs to the natural environment. There is limited scope for the government to withdraw provision (at least in a politically palatable way).

Turning back to The Observer’s gotcha story, it isn’t clear to me that Cummings is a hypocrite. I think the best theoretical work on hypocrisy in one’s personal politics comes from Adam Swift’s How Not To be Hypocrite: School Choice for the Morally Perplexed. In it Swift argues that the scope to complain about supposed hypocritical behavior, especially taking advantage of policies that you personally disagree with, can be narrower than intuitively imagined, mainly because of the nature of collective action problems. Swift’s conclusion is that, in some circumstances, leftwing critics of private schools are entitled to send their own children to private schools so long as others continue to do so and burden of doing otherwise is too strong. Presumably, this also means that strident libertarians are not hypocritical to use public roads so long as a reasonable private alternative is unavailable.

In an environment where every farmer receives an EU subsidy, it might be asking too much of EU-skeptic farmers to deny it to themselves. Instead, it seems legitimate and plausible to take the subsidy while campaigning sincerely to abolish it.

Free lunch: college edition

Andrew Cuomo recently proposed making college free taxpayer funded for middle class New Yorkers. He argues that college is a “mandatory step if you really want to be a success.” For the sake of argument, let’s assume that he’s making adequate adjustments for vocational training.

As a SUNY employee, I’m not sure how to feel about this. On the one hand, it means an increased demand for my services. On the other hand, it means increased pressure to keep costs down, which could mean a fall in my future earnings potential. Increased admissions pressure means I might have easier to teach students, but also probably means less chances for the low-income students coming from the worst public schools.

At best, we’re looking at a middle-class to middle-class transfer that will trade off the benefits of market pressure against the benefits (to families paying for school) of not having to think too hard about how to manage a large expense.

I won’t go into the issue of signaling (see Bryan Caplan), or the sheer wastefulness of having people get bachelor’s degrees for jobs that don’t need them (see Dick Vedder… esp. table 1). These are important points, because they get at the root problem Cuomo is misdiagnosing. College is mandatory because of subsidies and subsidies will only make it worse. But we don’t even need to be that sophisticated to understand why this plan is a problem.

Here’s my basic problem with “free” college tuition: it’s too good to be true. I get the desire to help out poor people, but the average household in NY makes just under $60K/year and this plan is for all households making less than $125K. That’s “free” tuition to a lot of households that would be sending their kids to school anyways. That money has to come from somewhere. The people paying for this program will largely overlap with the people benefiting from it.

If everyone thinks their kids should go to school, then what’s the point in taking away their money to send their kids to school?! We all like burritos, so give me your money and I’ll buy us all the burritos we want. Doesn’t make sense! Giving up control of your spending can only make you worse off, so this will ultimately be a bad thing for the middle class. And that lack of control from middle class helicopter parents will likely be a bad thing for the working poor people who could have been net beneficiaries (hopefully… I’m not certain this won’t back fire on net). Even if subsidizing higher-ed were a good idea, this is almost certainly a terrible way to go about it.

“Statogenic” Climate Change?

Is climate change government-made? For some years, I have been saying to my colleagues that climate change is real. Nonetheless, I am not an alarmist and I do not believe that stating that there is a problem is a blank cheque for any policy. Unlike many of my colleagues who believe that climate change is “anthropogenic”, I argue that it is “statogenic” in the sense that government policies over the last few decades basically amplified the problem.

Obviously, there is a social cost to pollution – an externality not embedded in the price system. On that basis, many have proposed the need for a carbon tax to “internalize the externality”. The logic is that anything that brings the “market price” closer to the “social cost” is an improvement.

Rarely do they consider the possibility that governments have “pushed” the market price away from the “social cost” (Note: I really hate that term as it has been subverted to mean more than what economists use it for). Consider the example of road pricing. In my part of Canada (Quebec), road pricing was eliminated in the 1970s. By eliminating road pricing, the government incentivized the greater use of vehicles and, basically, the greater burning of fossil fuels. Thus, by definition, the return of road pricing would bring the market price and the social cost closer together (and it might do so more efficiently than a carbon tax). Thus, there can be “statogenic” climate change because governments encourage indirectly the greater use of fossil fuels.

How big is that “statogenic” climate change? I think it is pretty “yuge.” For the last few months, I have been involved in a research project with Joanna Szurmak and Pierre Desrochers of the University of Toronto regarding environmental indicators in the debates between Paul Ehrlich and Julian Simon (see Joanna’s podcast with Garrett Petersen here at Economics Detective Radio). In that paper, we mention the fact that roughly a quarter of the world consumption of fossil fuels is subsidized directly or indirectly (through price controls setting local prices below world prices). That is a large share of total consumption and, according to an OECD paper, 14% of the effort needed to attain the most ambitious climate change mitigation plan could be made by eliminating those subsidies.

Now imagine that estimate was made in 2011. These policies have existed since the 1970s! One paper from the World Bank from the 1990s argued that eliminating them back in the 1980s would have reduced greenhouse gas emissions by 5% to 9%. Imagine a level lower by 9% (just for the sake of illustration) and imagine that the growth rate of greenhouse gases would have been reduced by 9% as well. Using CAIT data, we can see how this oversimplified scenario (which is by no means a general equilibrium scenario – which is the only way to measure the overall lower levels) means in terms of lower levels of GHGs. Relative to the observed data, a 9% drop back in 1990 with a 9% reduction in the growth rate of GHGs mean that the level of GHGs in 2012 in a world without subsidies would have been more than 12% lower relative to what they were in a world of subsidies.

subsidies

Again, this is an oversimplification. However, it works against my claim. The use of sophisticated methods is likely to yield much larger differences over time. Think about it for a second – alone the policy of fossil fuel subsidies explains a lot even with the oversimplification. Now, imagine adding the fact that many countries do not practice road pricing; that some countries tax the resale of used goods forcing the production of more goods; that they discourage construction in urban environments forcing a greater population sprawl; that trade barriers in agriculture prevent us from concentrating production where it is the most efficient; and the list goes on!

When people say “anthropogenic” climate change, I hear “incentives-driven” climate change or “statogenic.”

Critics of Markets have Intervention Denial

There is a meme, an infectious idea, that has spread like a mental plague among advocates of greater governmental intervention. This idea is “intervention denial,” the claim that the US and other developed economies have had complete economic freedom. The critics of markets usually use deliberately mind-numbing language such as “capitalism,” although sometimes they do claim more starkly that today’s economies are a “free market” and practice “free banking” and “free trade.”

Many examples of intervention denial can be found by searching for the submeme “unbridled capitalism” as well as “greed” combined with “capitalism” or statements such as “people over profits.” For example, there is a web article titled “Unbridled Capitalism and the Blight of Greed” which defines “capitalism” as “the economic system in which the pursuit of wealth remains in the control of individuals, free from government regulation or interference.” The article states that “Capitalism, after all, suffers from a fatal flaw – Greed.” Intervention denial has infected well-meaning people in high places, such as the Pope, who declared, “Unbridled capitalism has taught the logic of profit at any cost.”

“Denial” in this context means the refusal to believe in evidence. For example, Holocaust denial is the refusal to accept the enormous evidence of mass murders by the Nazis. There are science denials of various sorts. Intervention denial is one of the most destructive memes in the mental universe human beings live in, because intervention denial blocks effective solutions to social problems.

Consider the claim that the US has had destructive “free banking.” This false meme originated in historians who called the US banking system prior to the civil war “free banking,” even though the banks were tightly controlled by state governments, such as prohibiting banks from establishing branches beyond the state. In true free-market money and banking, there is no restriction or imposed cost on any currency, account, or financial institution so long as its operation is honest and peaceful.

The intervention deniers claim that the USA has a free market in money and banking, disregarding the obvious facts that the US financial system is tightly regulated by the Federal Reserve (“the Fed”), the FDIC, the SEC, and the US Treasury Department. These institutions and Congress bailed out the financial system after the interventions caused the Depression of 2008, as they did with previous busts. The US dollar and interest rates are controlled by the central planning of the Fed. This is the system that intervention deniers call a “free market.”

In a truly free market, there would be no restriction, tax, subsidy, or mandate that alters honest and peaceful human action. Those who claim the US economy is “unbridled” talk as though there were no regulations nor any taxation, let alone subsidies. The extent and effects of regulations on the US economy can be read in the study “Ten Thousand Commandments” published by the Competitive Enterprise Institute, as well as the regulations data base of the Mercatus Center at George Mason University. The economic damage done by intervention can also be read in the on-going study “Economic Freedom of the World,” at freetheworld.com.

How can an economy be “unbridled” if enterprise, consumption, and produced wealth are all afflicted with heavy taxation? Intervention deniers talk as though there were no income tax, federal excise taxes, state sales taxes, value-added taxes, and taxes on buildings and equipment. A truly free market would also not have any subsidies, such as the billions of dollars now going into the big farms, along with other corporate welfare.

All these interventions – taxes, subsidies, restrictions, and mandates – distort prices, wages, interest rates, profits, and quantities. The social problems we can observe: unemployment, low wages, unaffordable housing, slow growth, recessions, pollution, can be traced back to government intervention. Consider pollution, for example. Intervention deniers claim that “capitalism” and “greed” result in pollution and environmental destruction. But a truly free market is free of subsidies. When firms and their customers do not pay the full social cost of the products, as the social cost of pollution is imposed on others, that is an implicit subsidy. In a truly free market, with full enforcement of property rights, pollution is treated as a trespass, an invasion of others’ property, requiring full compensation. The problem is not that firms and markets are unbridled, but that ecological destruction is subsidized. The subsidies combine with a legal system that bridles the population with a legal inability to sue the polluters for damages.

There is indeed a bridle to a free market: laws prohibiting force and fraud. A pure market economy consists of voluntary human action. The bridle is on thieves, not on peaceful and honest producers, traders, and consumers.

When interventions are pointed out to the deniers, they respond that these taxes, restrictions, subsidies, and mandates are of little significance. This is similar to Holocaust deniers who respond that perhaps a few Jews and Gypsies were murdered by the Nazis, but not on the large scale that they deny. Intervention deniers do not deny the existence of the Federal Reserve system, but they claim it is a private free-market organization. Deniers of all sorts reject data and other evidence, use undefined terms such as “capitalism” and “greed,” and point to their favored authors, articles, and data as though these present unbridled truth.

“Greed” means wanting and taking more than one morally deserves. A person morally deserves that which is earned by labor and received from voluntary gifts. The honest acquisition of wealth may be avarice, but not greed. Thieves are greedy, and those who indirectly steal by getting government to do or protect their forced taking are also greedy. Intervention denial is ultimately a refusal to think it through, to fully understand the ethics, politics, and economics of human life.

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/

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?!