A Shackled Leviathan That Keeps Roaming and Growing (Regulation)
Do robots dream of paying taxes? (Bruegel)
The Janus of Debt (Project Syndicate)
A Shackled Leviathan That Keeps Roaming and Growing (Regulation)
Do robots dream of paying taxes? (Bruegel)
The Janus of Debt (Project Syndicate)
I’ve been reading through some recent (2021 and 2015) papers on the impacts of various tax and subsidy changes. Here is a short review of the latest to be learned from the research. My tl;dr takeaway is that taxes and subsidies are less distorting than my priors expect. Unless otherwise stated, all papers are in the American Economic Journal: Economic Policy.
“Complex Tax Incentives” by Abeler and Jäger 2015 (http://dx.doi.org/10.1257/pol.20130137). They run an experiment where subjects do some work for pay and compare how their subjects respond to changes in income taxes. If the tax structure is simple, higher taxes mean less effort; if the tax structure is complex (with 22 different rules determining the optimal level of work), subjects make smaller adjustments to their effort and some don’t react at all. Most of the average impact is from the people who don’t react at all, who also tend to have lower cognitive ability.
“Unemployment Insurance Generosity and Aggregate Employment” by Boone et al 2021 (https://doi.org/10.1257/pol.20160613). During the Great Recession, a number of states changed the maximum benefit an unemployed worker could receive. They compare neighboring counties in different states and find that higher unemployment insurance benefits had very small impacts on aggregate employment. They also point out flaws in previous work by Hagedorn and co-authors who had found much larger impacts.
The Journal of Policy Analysis and Management in 2015 sponsored a point/counterpoint debate on this overall topic as well. Moffitt comes down on the side that most of the programs in the US safety net have been shown to have very small labor disincentives – with SNAP (food stamps) close to 0, extending unemployment benefits by one week increases average unemployment spells by 1/10 of a week, and EITC increasing work, though housing subsidies reduce employment by 4 percentage points. Mulligan, on the other hand, argues that ACA is effectively a 20% marginal income tax on those who are affected by it and that social programs responding to the Great Recession reduce the rewards to working by about 12%.
“Asymmetric Incentives in Subsidies: Evidence from a Large-Scale Electricity Rebate Program” by Ito in 2015 (http://dx.doi.org/10.1257/pol.20130397). Voters tend to prefer receiving subsidies for reducing bad behavior than being taxed for it. California set up an electricity rebate program where, if you reduced your electricity usage by 20% in the summer of 2005, you would get a 20% rebate each month. It turns out that Californians living on the coast reduced their electricity usage, but folks living inland where it warmer and they use more electricity for air conditioning did not.
“How is Tax Policy Conducted Over the Business Cycle” by Vegh and Vuletin in 2015 (http://dx.doi.org/10.,1257/pol.20120218). They compile a dataset of 60 countries from 1960-2009 and their marginal tax rates for VAT, corporate, and personal income taxes. They find that: tax rates are “more volatile in developing countries than in industrial economies” and “tax policy is acyclical in industrial countries and mostly procyclical in developing countries”. This matches the fact that government spending tends to be procyclical in developing countries and countercyclical in industrial economies.
“Do People Respond to the Mortgage Interest Deduction? Quasi-Experimental Evidence from Denmark” by Gruber, Jensen, and Kleven in 2021 (https://doi.org/10.1257/pol.20170366). In 1986-87 Denmark significantly decreased the tax break high and middle-income households receive in paying mortgage interest. Over the following years, they find that “a tightly estimated and robust ZERO EFFECT of tax subsidies ON HOMEOWNERSHIP for high- and middle-income households,” but that average house SIZES and PRICES decrease significantly [emphasis mine]. Low-income households, however, had only a very small change in their eligibility, so one would not expect there to be a large difference. So the paper cannot address whether the deduction encourages homeownership for poorer households. It does suggest that a cap on the deduction would reduce deficits without much cost in ownership rates.
“The Macroeconomic Effects of Income and Consumption Tax Changes” by Nguyen, Onnis, and Rossi in 2021 (https://doi.org/10.1257/pol/20170241). From 1970-1997 the UK shifted their tax burden from income taxes (70% to 55% of revenue) to consumption taxes (15% to 35%). They have some good news: as theory predicts, consumption taxes are less distortionary and so the move increases GDP, consumption, and investment. Further, government spending shrinks. I’m not entirely convinced by their identification strategy, based on identifying exogenous changes in “a narrative measure of consumption and income tax liabilites changes” [sic]. But at least the arrows are all in the right direction.
“Income, the Earned Income Tax Credit, and Infant Health” by Hoynes, Miller, and Simon in 2015 (https://dx.doi.org/10.1257/pol.20120179). They find that higher EITC payments reduce the probability that a baby will be low birthweight, both because families are able to get more prenatal care and because they smoke less. This is the only paper of the set that has an economically-large impact of tax policy changes.
“Heterogeneous Workers and Federal Income Taxes in a Spatial Equilibrium” by Colas and Hutchinson in 2021 (https://doi.org/10.1257/pol/20180529). Some places are simultaneously more expensive to live in and more productive work environments, and thus they tend to pay workers more there to compensate. But if you have a progressive income tax code, that will tax people more for living in expensive places. It seems reasonable to assume that higher-productivity (higher-income) individuals will also be more mobile, so they will be more likely to move to lower-productivity/lower-wage places to escape the progressive income tax. But moving high-productivity people to lower-productivity places also impacts wages and rents for everyone else. They find that these deadweight losses amount to 0.25% of GDP, mostly from the federal income tax (0.14%), with state income taxes (0.07%) and payroll taxes (0.04%) the rest. Moving to a flat tax would reduce these distortions to 0.16% of GDP. Adjusting income taxes by a location-based cost of living index would reduce it to 0.09% of GDP, but also make poorer people worse off.
I’ve been playing a city management game called Sim Empire. It’s a lot like the old classics of Pharaoh, Caesar, or Anno Domini. You are building a town out of nothing, lay out the streets, houses, businesses, and municipal buildings – even houses of worship. The more of your citizens’ needs you can satisfy, the more lavish their homes become – and therefore the more you can collect from them in taxes.
The game has made me aware once again of the sheer beauty of the invisible hand of the market. Here then are some random thoughts on the economy of these types of games.
My citizens don’t have enough grain. If I don’t build enough grain farms, they could starve (in some games, yes). It’s a wonder they don’t revolt and throw me out of office! Oh, but I built enough police stations to cover every square pixel, so they daresn’t, and enough military that no outsider feels safe ‘liberating’ them. If only I allowed free markets, though, some entrepreneurial bitizen would notice the price of grain was high, farm some land, and provide for everyone. No tyrant needed!
The one chief advantage my underlings have is a powerful one: if I don’t provide for their every whim, they will refuse to pay taxes. Apparently my military apparatus is not sufficient to take their money by force, despite being strong enough to remain in power. If I’ve neglected the game for a while due to the pressures of real life, I see 75% of the country simply refusing to pay taxes and nothing to do about it.
Actually, there is one thing I can do about it: go to the free market. What? I thought there wasn’t a free market in my empire. Well, there isn’t, but there is a free international market with no tariffs, quotas, or other restrictions. Well, there is one restriction: no trading outside of 6am-6pm. The one chief advantage Sim Empire has over its older cousins is that I can work with other tyrants. If one has too much wood or grain, there is a marketplace where they can sell their excess to me. I can also sell my excess stone or porcelain.
I’ve noticed, though, that this free market is rather odd. The price of raw materials is higher than the price of finished products. Clay, for instance, right now costs 40-45 gold and wood costs 50, while porcelain – made from clay and wood! – costs 35-40. And you get less porcelain than you put in clay and wood! It’s a real money loser. It occurs to me that I should stop my porcelain factories altogether, sell the clay and wood I used to be using on the market, buy porcelain, and pocket the difference. If enough of us do that, the prices ought to revert. … But why are they doing that in the first place?
I am pleased to announce our Empire runs on hard metal money: gold. No fiat currency here! So no inflation, right? I’m actually dubious. There is no actual limit on the amount of gold I personally can amass, nor on the amount other players can create. The developers never come in to take gold out of the system, so I actually predict as the number of players increase and the amount of gold increases faster than the number of goods being traded, the prices of goods ought to go up over time as well. For an example of real life silver and gold-based currencies, economies, and countries being destroyed by inflation, head on over to Crash Course History for Spain and China.
A reminder that being on the gold standard won’t solve all your problems.
It’s been a heck of a year. Thanks for plugging along with Notes On Liberty. Like the world around me, NOL keeps getting better and better. Traffic in 2019 came from all over the place, but the usual suspects didn’t disappoint: the United States, United Kingdom, Canada, India, and Australia (in that order) supplied the most readers, again.
As far as most popular posts, I’ll list the top 10 below, but such a list doesn’t do justice to NOL and the Notewriters’ contribution to the Great Conversation, nor will the list reflect the fact that some of NOL‘s classic pieces from years ago were also popular again.
Nick’s “One weird old tax could slash wealth inequality (NIMBYs, don’t click!)” was in the top ten for most of this year, and his posts on John Rawls, The Joker film, Dominic Cummings, and the UK’s pornographer & puritan coalition are all worth reading again (and again). The Financial Times, RealClearPolicy, 3 Quarks Daily, and RealClearWorld all featured Nick’s stuff throughout 2019.
Joakim had a banner year at NOL, and four of his posts made the top 10. He got love from the left, right, and everything in between this year. “Elite Anxiety: Paul Collier’s ‘Future of Capitalism’” (#9), “In Defense of Not Having a Clue” (#8), and “You’re Not Worth My Time” (#7) all caused havoc on the internet and in coffee shops around the world. Joakim’s piece on Mr Darcy from Pride and Prejudice (#2) broke – no shattered – NOL‘s records. Aside from shattering NOL‘s records, Joakim also had excellent stuff on financial history, Richard Davies, and Nassim Taleb. He is also beginning to bud as a cultural commentator, too, as you can probably tell from his sporadic notes on opinions. Joakim wants a more rational, more internationalist, and more skeptical world to live in. He’s doing everything he can to make that happen. And don’t forget this one: “Economists, Economic History, and Theory.”
Tridivesh had an excellent third year at NOL. His most popular piece was “Italy and the Belt and Road Initiative,” and most of his other notes have been featured on RealClearWorld‘s front page. Tridivesh has also been working with me behind the scenes to unveil a new feature at NOL in 2020, and I couldn’t be more humbled about working with him.
Bill had a slower year here at NOL, as he’s been working in the real world, but he still managed to put out some bangers. “Epistemological anarchism to anarchism” kicked off a Feyerabendian buzz at NOL, and he put together well-argued pieces on psychedelics, abortion, and the alt-right. His short 2017 note on left-libertarianism has quietly become a NOL classic.
Mary had a phenomenal year at NOL, which was capped off with some love from RealClearPolicy for her “Contempt for Capitalism” piece. She kicked off the year with a sharp piece on semiotics in national dialogue, before then producing a four-part essay on bourgeois culture. Mary also savaged privileged hypocrisy and took a cultural tour through the early 20th century. Oh, and she did all this while doing doctoral work at Oxford. I can’t wait to see what she comes up with in 2020.
Aris’ debut year at NOL was phenomenal. Reread “Rawls, Antigone and the tragic irony of norms” and you’ll know what I’m talking about. I am looking forward to Dr Trantidis’ first full year at NOL in 2020.
Rick continues to be my favorite blogger. His pieces on pollution taxes (here and here) stirred up the libertarian faithful, and he is at his Niskanenian best on bullshit jobs and property rights. His notes on Paul Feyerabend, which I hope he’ll continue throughout 2020, were the centerpiece of NOL‘s spontaneity this year.
Vincent only had two posts at NOL in 2019, but boy were they good: “Interwar US inequality data are deeply flawed” and “Not all GDP measurement errors are greater than zero!” Dr Geloso focused most of his time on publishing academic work.
Alexander instituted the “Sunday Poetry” series at NOL this year and I couldn’t be happier about it. I look forward to reading NOL every day, but especially on Sundays now thanks to his new series. Alex also put out the popular essay “Libertarianism and Neoliberalism – A difference that matters?” (#10), which I suspect will one day grow to be a classic. That wasn’t all. Alex was the author of a number of my personal faves at NOL this year, including pieces about the Austro-Hungarian Empire, constructivism in international relations (part 1 and part 2), and some of the more difficult challenges facing diplomacy today.
Edwin ground out a number of posts in 2019 and, true to character, they challenged orthodoxy and widely-held (by libertarians) opinions. He said “no” to military intervention in Venezuela, though not for the reasons you may think, and that free immigration cannot be classified as a right under classical liberalism. He also poured cold water on Hong Kong’s protests and recommended some good reads on various topics (namely, Robert Nozick and The Troubles). Edwin has several essays on liberalism at NOL that are now bona fide classics.
Federico produced a number of longform essays this year, including “Institutions, Machines, and Complex Orders” and “Three Lessons on Institutions and Incentives” (the latter went on to be featured in the Financial Times and led to at least one formal talk on the subject in Buenos Aires). He also contributed to NOL‘s longstanding position as a bulwark against libertarian dogma with “There is no such thing as a sunk cost fallacy.”
Jacques had a number of hits this year, including “Poverty Under Democratic Socialism” and “Mass shootings in perspective.” His notes on the problems with higher education, aka the university system, also garnered plenty of eyeballs.
Michelangelo, Lode, Zak, and Shree were all working on their PhDs this year, so we didn’t hear from them much, if at all. Hopefully, 2020 will give them a bit more freedom to expand their thoughts. Lucas was not able to contribute anything this year either, but I am confident that 2020 will be the year he reenters the public fray.
Mark spent the year promoting his new book (co-authored by Noel Johnson) Persecution & Toleration. Out of this work arose one of the more popular posts at NOL earlier in the year: “The Institutional Foundations of Antisemitism.” Hopefully Mark will have a little less on his plate in 2020, so he can hang out at NOL more often.
Derrill’s “Romance Econometrics” generated buzz in the left-wing econ blogosphere, and his “Watson my mind today” series began to take flight in 2019. Dr Watson is a true teacher, and I am hoping 2020 is the year he can start dedicating more time to the NOL project, first with his “Watson my mind today” series and second with more insights into thinking like an economist.
Kevin’s “Hyperinflation and trust in ancient Rome” (#6) took the internet by storm, and his 2017 posts on paradoxical geniuses and the deleted slavery clause in the US constitution both received renewed and much deserved interest. But it was his “The Myth of the Nazi War Machine” (#1) that catapulted NOL into its best year yet. I have no idea what Kevin will write about in 2020, but I do know that it’ll be great stuff.
Bruno, one of NOL’s most consistent bloggers and one of its two representatives from Brazil, did not disappoint. His “Liberalism in International Relations” did exceptionally well, as did his post on the differences between conservatives, liberals, and libertarians. Bruno also pitched in on Brazilian politics and Christianity as a global and political phenomenon. His postmodernism posts from years past continue to do well.
Andrei, after several years of gentle prodding, finally got on the board at NOL and his thoughts on Foucault and his libertarian temptation late in life (#5) did much better than predicted. I am hoping to get him more involved in 2020. You can do your part by engaging him in the ‘comments’ threads.
Chhay Lin kept us all abreast of the situation in Hong Kong this year. Ash honed in on housing economics, Barry chimed in on EU elections, and Adrián teased us all in January with his “Selective Moral Argumentation.” Hopefully these four can find a way to fire on all cylinders at NOL in 2020, because they have a lot of cool stuff on their minds (including, but not limited to, bitcoin, language, elections in dictatorships, literature, and YIMBYism).
Ethan crushed it this year, with most of his posts ending up on the front page of RealClearPolicy. More importantly, though, was his commitment to the Tocquevillian idea that lawyers are responsible for education in democratic societies. For that, I am grateful, and I hope he can continue the pace he set during the first half of the year. His most popular piece, by the way, was “Spaghetti Monsters and Free Exercise.” Read it again!
I had a good year here, too. My pieces on federation (#3) and American literature (#4) did waaaaaay better than expected, and my nightcaps continue to pick up readers and push the conversation. I launched the “Be Our Guest” feature here at NOL, too, and it has been a mild success.
Thank you, readers, for a great 2019 and I hope you stick around for what’s in store during 2020. It might be good, it might be bad, and it might be ugly, but isn’t that what spontaneous thoughts on a humble creed are all about? Keep leaving comments, too. The conversation can’t move (forward or backward) without your voice.
What dominates the millennial economic experience? Impossibly high house prices in areas where jobs are available. I agree with the Yes In My Back Yard (YIMBY) movement that locally popular, long-term harmful restrictions on new buildings are the key cause of this crisis. So I enjoyed learning some nuances of the issue from a new Governance Podcast with Samuel DeCanio interviewing John Myers of London YIMBY and YIMBY Alliance.
Myers highlights the close link between housing shortages and income and wealth inequality. He describes the way that constraints on building in places like London and the South East of England have an immediate effect of driving rents and house prices up beyond what people relying on ordinary wages can afford. In addition, this has various knock-on effects in the labour market. Scarcity of housing in London drives up wages in areas of high worker demand in order to tempt people to travel in despite long commutes, while causing an excess of workers to bid wages down in deprived areas.
One of the aims of planning restrictions in the UK is to ‘rebalance’ the economy in favour of cities outside of London but the perverse result is to make the economic paths of different regions and generations diverge much more than they would do otherwise. Myers cites a compelling study by Matt Rognlie that argues that most increased wealth famously identified by Thomas Piketty is likely due to planning restrictions and not a more abstract law of capitalism.
Rognlie also inspires my friendly critique of Thomas Piketty and some philosophers agitating in his wake just published online in Critical Review of International Social and Political Philosophy: ‘The mirage of mark-to-market: distributive justice and alternatives to capital taxation’.
My co-author Charles Delmotte and I argue that for both practical and conceptual reasons, radical attempts to uproot capitalism by having governments take an annual bite out of everyone’s capital holdings are apt to fail because, among other reasons, the rich tend to be much better than everyone else at contesting tax assessments. Importantly, such an approach is not effectively targeting underlying causes of wealth inequality, as well as the lived inequalities of capability that housing restrictions generate. The more common metric of realized income is a fairer and more feasible measure of tax liabilities.
Instead, we propose that authorities should focus on taxing income based on generally applicable rules. Borrowing an idea from Philip Booth, we propose authorities start including imputed rent in their calculations of income tax liabilities. We explain as follows:
A better understanding of the realization approach can also facilitate the broadening of the tax base. One frequently overlooked form of realization is the imputed rent that homeowners derive from living in their own house. While no exchange takes place here, the homeowner realizes a stream of benefits that renters would have to pay for. Such rent differs from mark-to-market conceptions by conceptualizing only the service that a durable good yields to an individual who is both the owner of the asset and its consumer or user in a given year. It is backward-looking: it measures the value that someone derives from the choice to use a property for themselves rather than rent or lease it over a specific time-horizon. It applies only to the final consumer of the asset who happens also to be the owner.
Although calculating imputed rent is not without some difficulties, it has the advantage of not pretending to estimate the whole value of the asset indefinitely into the future. While not identical and fungible, as with bonds and shares, there are often enough real comparable contracts to rent or lease similar property in a given area so as to credibly estimate what the cost would have been to the homeowner if required to rent it on the open market. The key advantage of treating imputed rent as part of annual income is that, unlike other property taxes, it can be more easily included as income tax liabilities. This means that the usual progressivity of income taxes can be applied to the realized benefit that people generally draw from their single largest capital asset. For example, owners of a single-family home but on an otherwise low income will pay a small sum at a small marginal rate (or in some cases may be exempted entirely under ordinary tax allowances). By contrast, high earners, living in large or luxury properties that they also own, will pay a proportionately higher sum at a higher marginal rate on their imputed rent as it is added to their labor income. Compared to other taxes on real estate, imputed rent is more systematically progressive and has significant support among economists especially in the United Kingdom (where imputed rent used to be part of the income tax framework).
This approach to tax reform is particularly apt because a range of international evidence suggests that the majority of contemporary observed increases in wealth inequality in developed economies, at least between the upper middle class and the new precariat, can be explained by changes in real estate asset values. Under this proposal, homeowners will feel the cost of rent rises in a way that to some extent parallels actual renters.
For social democrats, what I hope will be immediately attractive about this proposal is that it directly takes aim at a major source of the new wealth inequality in a way that is more feasible than chasing mirages of capital around the world’s financial system. For me, however, the broader hope is the dynamic effects. It will align homeowners’ natural desire to reduce their tax liability with YIMBY policies that lower local rents (as that it is what part of their income tax will be assessed against). If a tax on imputed rent were combined with more effective fiscal federalism, then homeowners could become keener to bring newcomers into their communities because they will share in financing public services.
The affirmation that one should not judge the historical past with current values forms a topic as widespread as the disobedience to it. However, a conscious exercise of the evaluative critique of the past allows us to identify continuities and disruptions in institutional patterns, i.e., in systems of incentives that are considered legitimate, whether by virtue of a question of social utility or principles.
Caste systems are obvious examples in which a differentiated attribution of rights, that is to say the legal protection of the interests of individuals assigned to a certain ethnic group, was interpreted as legitimate because it was a matter of principle.
While a caste is defined by an ethnic component, or at least with respect to its physiognomic marker, in the status system the ethnic differences lose preponderance, to transfer it to the different private orders or privileges that determine a function within the society. In both cases, both in the system of castes and status, it should be noted that they not only define privileges for its members but mainly establish obligations: war, worship or field work, for example. While the cult is reserved for a certain caste, in the status societies the cult is an institutionalized function, an order, whose members fulfilled certain procedures of admission and permanence.
In any case, beyond the similarities and differences in the systems of castes and status, what matters in this case is to emphasize that such attributions of rights and obligations, that is, of legal protection of interests, collective or particular, do not respond to a question of social utility but of principles. In the first place, because in such societies the power is fragmented and therefore there is no central power that can perform a critical judgment on the social utility of a given system of incentives; at the most, if there is a king, he assumes a role of primus inter pares, an arbitrator between castes or statuses or protector of order.
The emergence of central governments demanded the emergence of stable bureaucracies supported by a tax system to be systematized in a public accounting, that is, a calculation of utility. On the other hand, the incorporation of abstract procedures from private law to the administration of the government, displacing the systems of sages, mandarins, humanists, etc., allowed a better centralization and control and rational administrative decisions. However, what is important to note here is that such institutional innovations did not necessarily depend on a disruptive change, such as a revolution, but that many cases occurred through an evolutionary process, in which more efficient institutions displaced obsolete ones.
The emergence of central governments replaced fragmented political and social systems, because centralization allows a calculation of utility in decision making, which yields better results -not always but most of the time- than a decision system based mainly on honour. Most of the time but not always, since there is the possibility that, in a situation of extreme complexity, the calculation of utility has a wide margin of error and, in contrast, in such situations, a pattern of decisions based on emotions, traditions, or moral principles work as a kind of heuristic better adapted to the circumstances. After all, for the calculation of utility to be viable, it must have tools such as an accounting system, a literate bureaucracy, an abstract procedural system, among others. If you do not have such means, hardly a decision based on utilitarian issues is far from whimsical and arbitrary. Faced with such cases, traditional structures could be more efficient.
Another issue to consider is not to be confused between the rationalization of political power in a central administration – public budgets and control of their execution, a neutral and efficient tax system, administrative decisions of a particular nature adopted according to abstract and general procedures – with the rationalization of each subsystem of society and even of the individual in particular.
It is true that, as indicated by Max Weber, the bureaucratization of political power leads to the gradual bureaucratization of the rest of society: the generalization of the same accounting system for all companies, in order to verify compliance with tax obligations, the public instruction of the whole population, to name a few examples. These processes of rationalization are extremely beneficial and generate a jump in productivity. This is what William Easterly, in his work The Quest for Economic Growth, highlights as a phenomenon in which knowledge leaks and spreads throughout society. In this way the relations of complementarity generated by the knowledge shared with the rest of the individuals that make up a given community are much more important than the substitution effect could give an advantage to a single possessor of such knowledge. For example, having knowledge of accounting represents an advantage over the competition, but that all companies are organized according to reasonable and homogeneous accounting principles allows a jump in productivity throughout the system that yields even greater individual profits. Likewise, not only the leaking of knowledge is beneficial for all members of society, but reached a point is inevitable.
However, this does not mean that a rationalization of the society as a whole and of the individuals that compose it is necessarily possible or desirable; much less that such process is directed from a central political power. A process of compulsive and totalizing rationalization is not always modernizing. Both in biological and cultural terms, the evolution occurs in the margins, it is the mutations of small isolated populations that allow them to adapt to changes in the environment.
Moreover, the totalizing political systems, which not only seek to define from a central power each one of the functions of the social subsystems in function of a supposed calculation of utility, also seek to build a notion of “citizenship” that stifles the sphere of autonomy that defines each individual with civic obligations. Such conceptions are the first to see the processes of innovation and creative destruction and any individual initiative as dangerous. Thus, by cutting off all possible adaptation to changes in circumstances, by mutilating all possible discoveries, it is not uncommon for such political systems to experience stagnation and be displaced by other systems more open to innovation – or at least be invaded by results of said competition, discovery and innovation processes.
The Americans who call themselves “socialists,” do not, by and large, think in terms of government ownership of the means of production. Their frequent muted and truncated references to Sweden and Denmark indicate instead that they long for a high guarantees, high services state, with correspondingly high taxation (at least, for the more realistic among them).
When I try to understand the quasi-programmatics of the American left today, I find several axes: End Time-ism, a penchant for demanding that one’s collective guilt be dramatically exhibited; old-style pacifism (to an extent), a furious envy and resentment of the successful; indifference to hard facts, a requirement to be taken care of in all phases of life; a belief in the virtuousness and efficacy of government that is immune to all proof, demonstration, and experience. All this is often backed by a vigorous hatred of “corporations,” though I guess that not one in ten “progressives” could explain what a corporation is (except those with a law degree and they often misuse the term in their public utterances).
I am concerned that the last three features – nonchalance about facts, the wish to be cared for, and belief in government – are being woven together by the American left (vaguely defined) into what looks like a feasible project. I think that’s what they mean when they mention “democratic socialism.” The proponents seem to know no history. They are quick to dismiss the Soviet Union, currently foundering Venezuela, and even scrawny Cuba, as utterly irrelevant (though they retain a soft spot for the latter). And truly, those are not good examples of the fusion of socialism and democracy (because the latter ingredient was and is lacking). When challenged, again, American proponents of socialism refer vaguely to Sweden and to Denmark, about which they also seem to know little. (Incidentally, I personally think both countries are good societies.)
The wrong models of democratic socialism
Neither Sweden nor Denmark, however, is a good model for an eventual American democratic socialism. For one thing, the vituperative hatred of corporations on the American left blocks the path of economic growth plus re-distribution that has been theirs. In those two countries, capitalism is, in fact, thriving. (Think Ikea and Legos). Accordingly, both Sweden and Denmark have moderate corporate tax rates of 22% (same as the new Trump rate), higher than the German rate of only 16%, but much lower than the French rate of 34%.
The two countries pay for their generous welfare state in two intimately related ways. First, their populace agrees to high personal income taxes. The highest marginal rates are 60+% in Denmark and 57+% in Sweden. (It’s 46% currently in the US.) The Danes and the Swedes agree to such high rates for two reasons. For one thing, these rates are applied in a comparatively flat manner. Everyone pays high taxes; the rich are not publicly victimized. This is perceived as fair (though possibly destructive to economic growth). For another thing, their governments deliver superb social services in return for the high taxes paid.
This is the second way in which Danes and Swedes pay for their so-called “socialism” (actually welfare for all): They trust their government and the associated civil services. They generally don’t think of either as corrupt, or incompetent, as many, or at least a large minority of Americans do. As an American, I think of this trust as a price to pay. (I am not thinking of gross or bloody dictatorship here but more of routine time-wasting, exasperating visits to the Department of Motor Vehicles.) The Danes and the Swedes, with a different modern experience, do not share this revulsion or this skepticism.
Denmark and Sweden are both small countries, with populations of fewer than six million and about ten million, respectively. This means that the average citizen is not much separated from government. This short power distance works both ways. It’s one reason why government is trusted. It makes it relatively easy for citizens’ concerns to reach the upper levels of government without being distorted or abstracted. (5) The closeness also must make it difficult for government broadly defined to ignore citizens’ preoccupations. Both counties are, or were until recently, quite homogeneous. I used to be personally skeptical of the relevance of this matter, but Social-Democrat Danes have told me that sharing with those who look and sound less and less like your cousins becomes increasingly objectionable over time.
In summary, it seems to me that if the American left – with its hatred of corporations – tries to construct a Denmark in the US, it’s likely to end up instead with a version of its dream more appropriate for a large, heterogeneous county, where government moreover carries a significant defense burden and drains ever more of the resources of society. The French government’s 55% take of GDP is worth remembering here because it’s a measure of the slow strangling of civil society, including in its tiny embodiments such as frequenting cafés. In other words, American democratic socialists will likely end up with a version of economically stuck, rigid, disappointing France. It will be a poor version of France because a “socialist” USA would not have a ready-made, honest, elite corps of administrators largely sharing their view of the good society, such as ENA, that made the unworkable work for a good many years. And, of course, the quality of American restaurant fare would remain the same. The superior French gourmet experience came about and is nurtured precisely by sectors of the economy that stayed out of the reach of statism.
Poverty under democratic socialism is not like the old condition of shivering naked under rain, snow, and hail; it’s more like wearing clothes that are three sizes too small. It smothers you slowly until it’s too late to do anything.
(5) When there are multiple levels of separation between the rulers and the ruled, the latter’s infinitely variegated needs and desires have to be gathered into a limited number of categories before being sent up to the rulers for an eventual response. That is, a process of generalization, of abstraction intervenes which does not exist when, for example, the apprentice tells his master, “I am hungry.”
And how ‘bout them Dodgers, hunh? Actually, how about each division’s top team? That’s a lot of winning!
— A partial response to Marx’ claim that managers are expropriating the value produced by the workers while providing nothing themselves: “The study showed that managers didn’t just influence the results their teams achieved, they explained a full 70% of the variance. In other words, if it’s a superior team you’re after, hiring the right manager is nearly three-fourths of the battle.”
— Boudreaux wonders what supposedly-enormous transaction cost prevents firms from offering workers a choice of pay packages – buying more parental time for a lower wage, for instance. One commenter notes their firm does just that, letting workers buy back vacation time. This is also, of course, standard practice in much of academia, where faculty are allowed to reduce their teaching load in exchange for a salary cut – usually funded by a research grant.
— Sumner on how labor market reforms (including cutting unemployment benefits) helped Germany and Israel to lower average unemployment rates and increase economic growth.
— But there appears to be a great deal that only deregulation will not be able to change. A new paper by Berger and Engzell finds correlation between the European-country-of-origin of people in modern US and the level of inequality and intergenerational mobility. Institutions persist for a very, very long time … again. (Homework: How does this apply to the reparations debate?)
— Another new paper by Fone, Sabia, and Cesur finds that higher minimum wages increase property crime arrests – contra expectations – so that “a $15 Federal minimum wage could generate criminal externality costs of nearly $2.4 billion.”
— A history of civil asset forfeiture tells how the British Crown’s attempt to encourage the Royal Navy to enforce trade restrictions and tariffs became so widely used in modern America.
— Summers and Sarin show that wealth taxes will take in much less than their proponents hope.
I saw a televised investigation by the pretty good French TV show, “Envoyé spécial” about current French poverty. It brought the viewer into the lives of six people. They included a retired married couple. The four others were of various ages. They lived in different parts of mainland France. All sounded French born to me. (I have a good ear for accents; trust me.) All were well spoken. The participants had been chosen to illustrate a sort of middle-class poverty, maybe. Or, perhaps to illustrate the commonness of poverty in one of the first countries to industrialize.
All the interviewees looked good. They seemed healthy. None was emaciated; none was grossly obese, as the ill-fed everywhere often are. All were well dressed, by my admittedly low standards. (I live in the People’s Democratic Republic of Santa Cruz, CA where looking dapper is counter-revolutionary.) None of those featured was in rags or wearing clothes inappropriate for the season.
The reporter took the viewer into these people’s homes. There was no indoor tour but you could see that the outside of the houses was in good repair. Most of the interviewing took place in kitchens. Every kitchen seemed equipped like mine, more than adequately. There was a range and a refrigerator in each. Every house had at least one television set.(I couldn’t determine of what quality.) No one said he or she was cold in the winter though two complained about their heating bills.
The show was geared to sob stories and it got them. Each participant expressed his or her frustration about lacking “money,” precisely, specifically. It seems to me that all but two talked about money for “extras.” I am guessing, that “extras” mean all that is not absolutely necessary to live in fairly dignified comfort. One single woman in her forties mentioned that she had not had a cup of coffee in a café for a year or more. (Keep her in mind.)
Another woman talked about the difficulty of keeping her tank filled. She remarked that a car was indispensable where she lived, to go to her occasional work and to doctors’ appointments. Her small car looked fine in the video. The woman drove it easily, seemingly without anxiety or effort.
A woman of about forty, divorced, took care of her two teenage daughters at home two weeks out of each month. She explained how she went without meat for all of the two weeks that her daughters were away. She did this so she could afford to serve them meat every day that they were with her. I could not repress the spontaneous and cynical reaction that most doctors would probably approve of her diet.
Yet, another woman, single and in her thirties, displayed her monthly budget on her kitchen table. She demonstrated easily that once she had paid all her bills, she had a pathetically small amount of money left. (I think it was about $120 for one month.) She had a boyfriend, a sort of good-looking live-in help whose earnings, if any, were not mentioned.
The retired couple sticks to my mind. The man was a retired blue-collar worker. They were both alert and in good shape. Their living room was comfy. They also talked about their bills – including for heating – absorbing all of their income. The wife remarked that they had not taken a vacation in several years. She meant that she and her husband had not been able to get away on vacation, somewhere else, away from their house and from their town. They lived close to a part of France where some rich Americans dream of retiring some day, and where many Brits actually live.
I ended up a little perplexed. On the one hand, I could empathize with those people’s obvious distress. On the other hand, I got yanked back to reality toward the end when the retired lady blamed the government for the tightness of her household budget. Then I realized that others had tacitly done the same. The consensus – which the reporter did not try expressly to produce – would have been something like this: The government should do something for me (no matter who is responsible for the dire straights I am in now).
Notably, not one of the people in the report had a health care complaint, not even the senior retired couple.
So, of course, I have to ask: Why are all those people who live far from abject poverty, by conventional standards, why do all those people convey unhappiness?
The first answer is obvious to me only because I was reared in France, where I retain substantial ties: Many small French towns are dreadfully boring, always have been. That’s true, at least, if you don’t fish and hunt, or have a passion for gardening, and if you don’t attend church. (But the French are not going to church anymore; nothing has taken the social place of church.)
And then, there is the issue of what the French collectively can really afford. This question in turn is related to productivity and, separately, to taxation. I consider each in turn.
According to the most conventional measure – value produced per hour worked – French productivity is very high, close to the German, and not far from American productivity: Something like 93% of American productivity for the French vs 95% for the Germans. (Switzerland’s is only 86%.) However, to discuss how much money is available for all French people together, we need another measure: the value of French production divided by the number of French people. Annual Gross Domestic Product per capita is close enough for my purpose. (The version I use is corrected to incorporate the fact that the buying power of a dollar is not the same in all countries: “GDP/capita, Purchasing Power Parity”).
For 2017, the French GDP/capita was $43,600, while the German was $50,200. (The American was $59,500.) Keep in mind the $6,600 difference between the French and the German GDP/capita (data).
If French workers are almost as productive as the Germans when they work, what can account for the low French GDP/capita? The answer is that the French don’t work much. Begin with the 35/hr legal work week. (1) (A study published recently in the daily Le Figaro asserts that 1/3 of the 1.1 million public servants work even less than 35 hours per week.) Consider also the universal maximum retirement age of 62 (vs 67 in Germany), a spring quarter pleasantly spiked with three-day weekends for all, a legal annual vacation of at least thirty days applied universally, a common additional (short) winter (snow) vacation. I have read (I can’t confirm the source) that the fully employed members of the French labor force work an average of 600 hours per year, one of the lowest counts in the world. Also log legal paid maternity leave. Finish with an official unemployment rate hovering around 9 to 10% for more than thirty years. All this, might account for the $6,600 per year that the Germans have and the French don’t.
There is more that is seldom mentioned. The fastest way for a country to raise the official, numerical productivity of its workers is to put out of work many of its low-productive workers. (That’s because the official figure is an arithmetic mean, an average.) This can be achieved entirely through regulations forbidding, for example, food trucks, informal seamstress services, and old-fashioned hair salons in private living rooms, and, in general, by making life less than easy for small businesses based on traditional techniques. This can be achieved entirely – and even inadvertently – from a well-meaning wish to regulate for the collective good. The more of this you do, the higher your productivity per capita appears to be and also, the higher your unemployment, and the less income is available to go around. I think the official high French productivity oddly distorts the image of real French income. I suspect it fools many French people, including public officials: They think they are wealthier than they are.
La vie est belle!
The French have nearly free health care – which works approximately as well as Medicare in the USA, well enough, anyway. (French life expectancy is higher than American expectancy.) Education is tuition-free at all levels. There are free school lunches for practically anyone who asks. University cafeterias are subsidized by the government (and pretty good by, say, English restaurant standards!) Many college students receive a stipend. Free drop-off daycare centers are common in big and in medium-size cities. Unemployment benefits can easily last for two years, three for older workers. They amount to something like 55% of the last wages earned, up to 75% for some.
That’s not all. The fact that France won the World Cup in soccer in 2018 suggests that the practice of that sport is widespread and well supported. It’s mostly government subsidized. Other sports are also well subsidized. French freeways are second to none. They are mostly turnpikes but the next network of roads down is excellent, and even the next below that. This is all kind of munificent, by American standards. The French are taken care of, almost no matter what. The central government handles nearly all of this distribution of services directly and some, indirectly through grants that local entities have to beg for.
Someone has to pay for all this generosity. After sixty or seventy years, many, perhaps most French people, still believe that the rich, the very rich, have enough money that can be pried from their clutching hands to pay for the good things they have, plus the better things they wish for. (No hard numbers here, but I would bet that ¾ of French adults believe this.) In fact, multi-fingered, ubiquitous, invasive taxation of the many who are not very rich pays for all of it.
The French value added tax (VAT) is 20% on nearly all transactions. When a grower sells $100 of apples to a jelly producer, the bill comes to $120. When the jelly-maker in turn sells his product to a grocery wholesaler, his $200 bill goes up to $240, etc. Retail prices are correspondingly high. The French are not able to cheat all the time on the VAT although many try. (Penalties are costly on the one hand, but there exists a complicated, frustrating official scheme to get back part of the VAT you do pay, on the other hand.) I speculate that the VAT is so high because the French state does not have the political will nor the capacity to collect an effective, normal income tax, a progressive income tax. Overall, the French fiscal system is not progressive; it may be unintentionally regressive. To compensate, until the Macron administration, there was a significant tax on wealth. (That’s double taxation, of course.) It’s widely believed that rich French people are escaping to Belgium, Switzerland, and even to Russia (like the actor Gérard Dupardieu).
The excise taxes are especially high, including the tax on gasoline. In 2018, the mean price of gasoline in France was about 60% higher than the mean price in California, where gas is the most taxed in the Union. An increase to gasoline taxes, supposedly in the name of saving the environment, is what triggered the “yellow vests” rebellion in the fall of 2018. Gasoline taxes are particularly regressive in a country like France where many next-to-poor people need a car because they are relegated to small towns, far from both essential services and work. (2)
All in all, the French central government takes in about 55% of the GDP. This may be the highest percentage in the world; it’s very high by any standard. It dries up much money that would otherwise be available to free enterprise. Less obviously but perhaps more significantly, it curtails severely what people individually, especially, low income citizens, may spend freely, of their own initiative.
So, with their abundant and competent social services, with their free schooling, with their prodigal unemployment benefits, with their superb roads, with their government-supported prowess in soccer, what do the French people in the documentary really complain about? Two things, I think.
Remember the woman who couldn’t afford to take her coffee in a café? Well, the French have never been very good at clubs, associations, etc. They are also somewhat reserved about inviting others to their homes. The café is where you avail yourself of the small luxury of avoiding cooking chores with an inexpensive but tasty sandwich. It’s pretty much the only place where you can go on the spur of the moment. It’s where you may bump into friends and, into almost-friends who may eventually become friends. It’s the place where you may actually make new friends. It’s the best perch from which to glare at enemies. It’s where that woman may have a chance to overhear slightly ribald comments that will make her smile. (Not yet forbidden in France!) The café is also just about the only locale where different age groups bump into one another. The café is where you will absorb passively some of that human warmth that television has tried for fifty years but failed to dispense.
This is not a frivolous nor a trivial concern. In smaller French towns, a person who does not spend time in cafés is deprived of an implicit but yet significant part of her humanity. The cup of coffee the woman cannot afford in a café may well be the concrete, humble, quotidian expression of liberty for many in other developed countries as well. (After all, Starbucks did not succeed merely by selling overpriced beverages.) The woman in the video cannot go to cafés because the social services she enjoys and supports – on a mandatory basis – leave no financial room for free choice, even about tiny luxuries. She suffers from the consequences of a broad societal pick that no one forced on her. In general, not much was imposed on her from above that she might have readily resisted. It was all done by fairly small, cumulative democratic decisions. In the end, there is just not enough looseness in the socio-economic space she inhabits to induce happiness.
She is an existential victim of what can loosely be called “democratic socialism.” It’s “democratic” because France has all the attributes of a representative republic where the rule of law prevails. It’s “socialistic” in the vague sense in which the term is used in America today. Unfortunately, there is no French Bureau of Missing and Lost Little Joys to assess and remedy her discontent. Democratic socialism is taking care of the woman but it leaves her no elbow room, space for recreation, in the original meaning of the word: “re-creation.”
The second thing participants in the documentary complain about is a sense of abandonment by government. Few of them are old enough to remember the bad old days before the French welfare state was fully established. They have expected to be taken care of all their adult lives. If anything is not satisfactory in their lives, they wait for the government to deal with it, even it takes some street protests. Seldom are other solutions, solutions based on private initiative, even considered. But the fault for their helplessness lies with more than their own passive attitudes. An overwhelming sense of fairness and an exaggerated demand for safety combine with the government’s unceasing quest for revenue to make starting a small business, for example, difficult and expensive. France is a country where you first fill forms for permission to operate, and then pay business taxes before you have even earned any business income.
The French have democratically built for themselves a soft cradle that’s feeling more and more like a lead coffin. It’s not obvious enough of them understand this to reverse the trend, or that they could if they wished to. There is also some vague worry about their ability to maintain the cradle for their children and for their children’s children.
(1) I am aware of the fact that there exists a strong inverse correlation between length of week worked and GDP/capita: In general, the richer the country, the shorter the work week. Again, this is based on a kind of average. It allows for exceptions. It seems to me the French awarded themselves a short work week before they were rich enough to afford it.
(2) You may wonder why I don’t mention the French debt ratio (amount of public debt/GDP). All the amenities I describe must cost a lot of money and the temptation to finance them partly through debt must be great. In fact, the French debt ratio is lower than the American: 96% to 109% in 2018 according to the International Monetary Fund. This is a little surprising but all debtors are not equal. A country with near full employment and plenty of talent is better able to pay off its debts than one with high long term unemployment and a labor force decreasingly accustomed to laboring. The latter is, of course, a predictable result of inter-generational unemployment and underemployment. Nowadays, it’s common to cross paths in France with people over thirty who have never experienced paid work. International investors think like me about the inequality of debtors. Investors flock to the US but they are reserved about France.
[Editor’s note: You can find the entire, longform essay here if you don’t want to wait for Parts II and III.]
The most omnipresent slogan of libertarianism in the digital age is the one that argues, or maybe just declares, taxation is A, theft is B, and A is B. Everyone has a gut feeling about being stolen from or coerced into losing his or her property, and so whether it’s extortion or theft anyone is apt to understand what “taxation is theft” means on a primitive level.
Even if anyone can understand what it means, it seems there’s little agreement about what it encourages — since, “the government’s up to no good again” doesn’t really have a telos behind it and pitching a preferred state of arrangements is useless without appropriate connected action.
I was thinking about this, and ran into a short essay by Gina Lunori that looks to answer the question, with the same frustration.
I heard someone praise a conscientious objector who refused
to fight in Iraq, and I asked him if he was still paying taxes. He told
me that the government hadn’t created a “conscientious objector”
category for taxpayers, so he was sorry to say he wasn’t able to
stop paying. As if you only have a conscience when the
government issues you a permit for one!
I told him I know people who’ve stopped paying their taxes
without waiting for permission, just by lowering their income and
living below the tax threshold. He told me that he wasn’t prepared
to make that kind of sacrifice. If I had a pocket calculator I could
have told you the maximum price of his conscience. If I had a
quality postal scale I probably still couldn’t discern its weight.
Like Walter Mitty these armchair peaceniks burn their draft
cards in their daydreams, meanwhile the people who serve in the
military in their place are equipped, and shipped, and paid for by Walter Mitty’s tax dollar.
The biggest obstacles to change aren’t the few who are
abusing the government, but the many who are submitting to it and
facilitating the abuse.
A government that loved liberty would be trying at every
opportunity to expand and protect that liberty. Our government
tries everything it can to evade the few protections that have
survived since its founding. Look at how shamelessly it has
whisked people off to Cuba — Cuba! — in order to sweep them out
from under the protection of the Constitution.
A person who loves liberty would not shovel coal into a
tyrant’s engine just to earn a higher salary. Why does a person in
the United States who claims to love freedom, and who is
intelligent enough to understand that the government is freedom’s
enemy, still feel that it’s worthy of respect to be a taxpayer, and the
more salary — and therefore the more taxes — the more respect?
If you love liberty, if you hate war, you should at once withdraw
your support from the government. Withdrawing your moral
support isn’t enough — it’s your practical support that the
government feeds on — it doesn’t give a damn what your opinions
This is something you must do because you know the
difference between right and wrong and you know, when you look
the facts straight in the face, that when you willingly give practical
support to the government you participate in its wrongs. But this is
more than a matter of personal integrity.
Imagine the power of this statement. What if every person
who felt that the government had lost their moral support also
withdrew their practical support? What if only one in ten did? It
would be the beginning of the end. It would be that nonviolent
revolution we’re praying for.
Maybe the best tests of intellectual integrity are consistency and hypocrisy. How do the people that swear off voting as aggression feel about funneling taxed income to the government to enable its aggression? How do the people that mantra “taxation is theft” feel about surrendering their goods, each and every year, in a way they would never, ever tolerate from a burglar?
In the ninth weekend of demonstrations, the politics of envy seem to dominate. (Soak the rich again!) The Government must give us more money. Lower some taxes but impose or re-impose others especially the former tax on wealth.
Far behind: Introduce a degree of popular initiative in the political process: allow groups of citizens to initiate legislation, to implement it, and to abrogate it.
I can’t tell if those who want more money are the same as those who demand popular initiative in legislation. It’s a problem with grass root movements. They make attribution difficult.
Pres. Macron’s response is all over the place. It sounds like the work of an old man although the pres. is only 41. I think I know why this is: Nearly all the past thirty presidents and prime ministers are graduates from the one same school. Maybe they just crib the class notes of their predecessors.
Notably, Mr Macron’s response – contained in an open letter – to the nation includes more “save the Planet” proposals as if he had forgotten that an environmentalist tax set the barrels of powder on fire to begin with. Little chance he will be heard by the Yellow Vests although his open letter may serve to rally the main part of the population around him as the lesser of several evils.
Notably, the president, on his own, mentioned the possibility of limiting immigration although that’s not high in any of the Yellow Vests demands. Curious.
The president’s proposed themes are supposed to be debated widely and on a national scale. They are expected to give rise to suggestions on how to govern France. The suggestions will be collected at the municipal level (a good idea; the French like their mayors) in complaint books called “cahiers de doléances.” The latter sounds to me like a very bad idea. The last time those words were used on a large scale, was around 1788-89. The ruling circles lost their heads soon afterwards. (I mean literally.)
Keep things in perspective: If you add all the demonstrators nationally in every town any Saturday, you arrive at a very small number although it’s made up of persistent people . They are persistent because they represent a large minority facing serious, possibly unsolvable problems. Many ordinary French people have grown weary of the disruptions the Yellow Vests have caused. There is also huge revulsion against the acts of violence that accompany Yellow Vests demonstrations (not necessarily their own acts).
Cool heads counsel the president to dissolve the National Assembly and to call for new elections. Supposedly, this would bring up elected representatives more in tune with the people’s mood. My own guess is that new elections would result in the isolation of the Yellow Vests and bring an end to their movements. Just guessing.
Did I forget anything?