Deductions are the Cheez Doodles of tax policy: Everyone likes them; everyone who studies the matter knows they are not good for us; and nonetheless, most people will get very indignant if you attempt to replace them with something more wholesome.
This is why deductions rarely go away, no matter how stupid and detrimental to the fiscal and economic health of the republic. For example, virtually every wonk in Washington, from radical libertarian to fervent socialist, can agree upon at least one thing: the tax deductibility of employer-sponsored health insurance is a terrible idea. On the one hand, it costs the government a packet of money every year, money that has to be raised by higher taxes on someone else. On the other hand, it encourages employers to load as much compensation as possible into the health benefit package, which distorts our economy and contributes to ballooning costs. There is nothing nice to be said about this particular tax deduction, except that it undoubtedly seemed like a good idea during World War II.
And yet, when it comes time to, say, pass a major health-care reform, or reform the tax code, do our nation’s legislators start with the obvious, and get rid of this egregiously stupid deduction? I regret that there is no way to convey my hollow, despairing laugh in pixel form. Of course they don’t touch it. The very egregiousness of its immense costs, the massive distortions it has induced in American consumption patterns, mean that getting rid of it would be far too disruptive.
Megan McArdle, “Republicans Turned the Tax Code Into a Weapon”, Bloomberg View, 2017-11-03.
December 27, 2019
QotD: The perils of tax reform
December 25, 2019
Repost – The market failure of Christmas
Not to encourage miserliness and general miserability at Christmastime, but here’s a realistic take on the deadweight loss of Christmas gift-giving:
Christmas gifts under the tree.
Photo by Kelvin Kay via Wikimedia Commons.
In strict economic terms, the most efficient gift is cold, hard cash, but exchanging equivalent sums of money lacks festive spirit and so people take their chance on the high street. This is where the market fails. Buyers have sub-optimal information about your wants and less incentive than you to maximise utility. They cannot always be sure that you do not already have the gift they have in mind, nor do they know if someone else is planning to give you the same thing. And since the joy is in the giving, they might be more interested in eliciting a fleeting sense of amusement when the present is opened than in providing lasting satisfaction. This is where Billy Bass comes in.
But note the reason for this inefficient spending. Resources are misallocated because one person has to decide what someone else wants without having the knowledge or incentive to spend as carefully as they would if buying for themselves. The market failure of Christmas is therefore an example of what happens when other people spend money on our behalf. The best person to buy things for you is you. Your friends and family might make a decent stab at it. Distant bureaucrats who have never met us — and who are spending other people’s money — perhaps can’t.
So when you open your presents next week and find yourself with another garish tie or an awful bottle of perfume, consider this: If your loved ones don’t know you well enough to make spending choices for you, what chance does the government have?
December 23, 2019
The lousy economics of gift-giving – “non-cash is a poor receipt of value”
Tim Worstall explains why gift-giving at Christmas is so economically inefficient:
Christmas gifts under the tree.
Photo by Kelvin Kay via Wikimedia Commons.
The point being made is dual, that individuals have agency and that utility is entirely personal.
To unravel that jargon.
Individuals, peeps, are able to make choices. We delight in making choices in fact, “agency” is the opposite of “anomie”, that feeling that society determines what we may or can do that so depresses the human spirits. We get to choose to get up at 6 am or 8. Have coffee or tea when we do. Go buy the latest platters from the newly popular beat combo, pay the ‘leccie bill or have the coffee out at an emporium.
Having choices, making them, makes people happier.
Secondly, utility. The result of those choices, which of them will maximise happiness, is different for each and every individual. Sure, we can aggregate some of them – food is usually pretty high up everyones’ list, that first litre of water a day tops most. But the higher up Maslow’s Pyramid we go the more tastes – and thus happiness devoured – differ.
So, we make humans happier by their having the choice to do what they want, not what others think they should want or have.
Thus, give people cash at Christmas not socks.
Balancing that is the obvious point that the care and attention with which a present is considered is part of that consumption of happiness. The boyfriend who actually listens to the type of clothing desired and goes gets it provides that joy that a bloke has, for once, been listening. Or the book that would never have been individually considered but was chosen because it might – and does.
Sure.
But the point isn’t about Christmas at all. That’s a way of wrapping the point so it can be left underneath the tree of knowledge.
December 2, 2019
QotD: Evidence of markets in classical civilizations
If we turn, however, to the ancient world, the evidence must almost always be indecisive. Very few ancient writings have survived. Obviously, two thousand years are a long time; and ancient civilisation did collapse. Add to this that far fewer documents relating to economic matters were produced or could be preserved than has been the case with us. There was no printing: everything had to be copied by hand. The best writing material was papyrus, which was both expensive and fragile. The normal writing materials for accounts and administrative documents were waxed tablets, which were scraped and reused, and thin wooden sheets, which were thrown away once they had served their purpose.
The literary remains of Greece and Rome which have come down to us through generations of copying and recopying are the products of a rather snobbish culture, and contain little direct information about economic behaviour. The great writers, as Finley observes, do seem to have lacked the conceptual framework for intelligent discussion of finance and commerce. Even otherwise, these were matters they regarded as beneath the notice of history. Thucydides, for example, gives full discussion to the political causes of the Peloponnesian War, but says nothing of what we know from the archaeological evidence was the complete Athenian displacement of Corinth in the pottery markets of the Western Mediterranean world.
During the past century or so, the rubbish dumps of Egypt have revealed a mass of the everyday documentation we have for no other area of the ancient world. There are tax records, and commercial correspondence, and administrative commands, among much else. The problem here is that Egypt was always an exception. From its earliest history, its geography opened it to capture and exploitation by rent-seeking élites. The Pharaohs were worshipped as gods and given whatever they demanded. The Ptolemies organised the country into one gigantic state enterprise and used the proceeds for making a big noise in the Hellenistic world. The Roman Emperors kept up the monopolies and requisitions, treating Egypt as their personal property, and so far as possible isolating it from the rest of the Empire. The documentary evidence, therefore, we have from Egypt may not be representative of the ancient world as a whole.
But this, plus the material archaeology, is all we have. And if we want to know anything for economic motivations and behaviour, we must press the evidence we have as hard as we can. The history of the ancient world is, in many important respects like a mosaic that has been broken up with many of its tiles thrown away. The whole must be reconstructed from the parts remaining. It is a difficult enterprise, but it can be attempted.
If there is little direct, there is much indirect evidence. This is scattered through the surviving body of ancient literature. It consists of casual remarks, illustrations to arguments, even comments that are in themselves foolish. It is a question of looking for this evidence, and of knowing how to use it.
An interesting example of how evidence can be extracted and used comes not from our own ancient world, but from pre-Columbian South America. Deirdre McCloskey has looked at the geographical distribution of Mayan obsidian tools. She notes that, the farther from the sources of their obsidian, the smaller was the ratio of blade weight to cutting length. She comments:
By taking more care with more costly obsidian the blade makers were earning better profits; as they did by taking less care with less costly obsidian.
What we have here, then, is evidence that illiterate, stone age toolmakers were at least as conscious of opportunity cost as any Victorian mill owner, and rather more so than the average socialist planner of the next century. So long, of course, as this is evidence — this is, so long as the tools are distributed as claimed — we have empirical reason for doubting the Polanyi claim that,
previously to our time no economy has ever existed that, even in principle, was controlled by markets…. Gain and profit made on exchange never [before the nineteenth century] played an important part in human economy.
Sean Gabb, “Market Behaviour in the Ancient World: An Overview of the Debate”, 2008-05.
November 27, 2019
QotD: The evolution of markets
We believe that there is a natural inclination to promote our own welfare and that of our loved ones. We further believe that, given reasonable security of life and property, this inclination will lead to the emergence of a system of voluntary exchange. That is, we will seek to trade the things we have or can create for other things that we regard as of greater value to ourselves.
In doing so, ratios of exchange that we call prices will be revealed. These prices, in turn, will provide general information about what should be produced, in what ways and in what quantities. Furthermore, changes in price will provide information about changes in preferences or in abilities to produce. Custom will set aside one or more goods to serve as money. Institutions will emerge that channel savings into productive investment, that spread risk, and that moderate expected fluctuations in price. Laws will develop to police the transfer of property and performance of contracts.
We believe that market economies emerge spontaneously and are self-regulating and self-sustaining. This is not to say that all market societies will be the same. Their exact shape will depend on the intellectual and moral qualities of the individuals who comprise them. They will reflect pre-existing patterns of trust and honesty and the general cultural and religious values of a people. They will also be more or less distorted by government intervention. But we do say that market behaviour is natural — that, in the absence of extreme government coercion, or extreme disorder, buying and selling to increase our own welfare is what we naturally do.
Sean Gabb, “Market Behaviour in the Ancient World: An Overview of the Debate”, 2008-05.
November 8, 2019
QotD: Exports are costs; imports are benefits
With respect, you’re mistaken. To see why, look at the matter at the level of your household. What you export from your household is your labor; what you import are the goods and services that you purchase with your income. Suppose that you were given the option of continuing to do one or the other of these activities but not both. That is suppose that you could either (a) continue to export (that is, continue to work) but no longer import (that is, no longer bring into your household any goods and services) or (b) continue to import into your household goods and services for your consumption but no longer work. Which option – (a) or (b) – would you choose?
You would clearly choose option (b).* The reason is that you supply the fruits of your labor to others in order to increase your ability to consume. What you export from your household is a cost that you willingly incur in order to be able to import into your household the goods and services that you and your family consume. What is true at the level of the household is here true at the level of the national economy: the goods and services that Americans export to foreigners are the costs that we willingly incur in order to be able to import into our country the goods and services that we receive from foreigners in exchange. Exports are the means; imports are the end.
* If I’m mistaken and you’d choose option (a), please call me as I have several household repairs to be done and I’d be delighted to have you do the repairs for me for free.
Don Boudreaux, “Exports are Costs; Imports are Benefits”, Café Hayek, 2017-10-17.
August 10, 2019
QotD: Progressives and spontaneous order
Conduct an on-going experiment: whenever well-meaning “Progressives” (of which there are very many) propose this government intervention or oppose that policy of reducing government’s role in the economy, ask if these “Progressives'” stated reasons can be understood to be nothing more than a reflection of a failure to understand the power and range of spontaneous-ordering forces in private-property settings. The answer will almost always be “yes.” Very often, no further explanation for “Progressives'” policy stances is necessary.
“Progressives” simply don’t “get” spontaneous order in human society. They see a problem and leap to the only conclusion that for them is sensible – namely, that that problem’s only realistic “solution” is that it be directly addressed by government officials. Indeed, even “Progressives'” frequent misdiagnoses of the results of trade-offs as being “problems” (or “market failures”) reflect a failure to understand spontaneous-ordering processes. Many phenomena and patterns that “Progressives” assume to be problems – for example, increasing inequality of monetary incomes – are often the benign results of the countless and nuanced individual trade-offs made by individuals. For “Progressives,” though, these “outcomes” are often assumed to be the consequence of sinister designs.
Don Boudreaux, “Bonus Quotation of the Day…”, Café Hayek, 2017-06-24.
June 26, 2019
QotD: “Right-wing central planning is as foolish as left-wing central planning”
The real world is populated by politicians and lobbyists rather than philosopher-kings, but a government of philosopher-kings that tried to micromanage the economy in the way Beattie suggests would fail, just as all similar attempts at putting the economy under political discipline have failed. Right-wing central planning is as foolish as left-wing central planning.
Kevin D. Williamson, “Right-wing central planning is as foolish as left-wing central planning”, National Review, 2017-06-12.
April 27, 2019
QotD: When McDonald’s came to Moscow
[In an NPR broadcast] McDonald’s is positively portrayed as being an excellent, almost heroic, force for good. McDonald’s manner of doing business is celebrated as changing social norms for the better – for making the world (or at least Russia) not only a more consumer-friendly place, but also a more pleasant, a more polite, a more respectful, and a (yes) more happy place.
Listeners are reminded at the start of the clip that Americans smile a lot, including at strangers. Russians – and, especially, Russians under Soviet domination – did not smile very much. Then McDonald’s opened in Moscow in 1990. McDonald’s trains its workers to smile at customers, and to be polite and friendly. We then learn – from one of the Russians who worked at that McDonald’s in Moscow – that that restaurant became a place of pleasant refuge for Muscovites. The simple, smiling friendliness and politeness that Americans take for granted was, in Russia, actively sought after by many Russians and embraced by their choosing to dine at McDonald’s.
Commerce – voluntary exchange – is essential for what Deirdre McCloskey calls “market-tested betterment.” This betterment, however – and Deirdre would agree – is manifested not only in new and better material products but also in the ways in which businesses treat consumers. In market economies consumers are valuable to businesses; in these economies consumers are treated by businesses as respected guests. In contrast, in non-market economies – in economies in which prices and profits are prevented from moving in market-clearing directions – consumers are treated by ‘businesses’ as repellant pests.
Don Boudreaux, “Doux Commerce, avec Sourires“, Café Hayek, 2016-06-17.
January 6, 2019
The demands to re-nationalize British passenger railways
In the Continental Telegraph, Tim Worstall points out the mutually exclusive claims about the state of British passenger rail services and the counter-productive demand to shuffle it all back into the state’s tender mercies:
Wikimedia caption – “This is the Bring Back British Rail, a reverse image of the old BR logo, (now used by the TOC’s) to show we are heading the wrong way with Rail in the UK”
A standard whinge in Britain today is that rail privatisation has failed – just look, the trains are so crowded! The thought that people flocking to use something proves failure being a most odd one of course. That more people use the train sets to travel longer distances more often should be seen as a triumph of privatisation, not a proof of its failure. And we should note that the last few decades of British Rail did show – population adjusted – falling ridership.
There’s also a certain puzzlement at the next cry of outrage – that ticket prices are too high. If people are flocking to use something etc then it’s difficult to insist that prices are too high. […] Popularity both proves that the basic system is wrong and also that prices are too high. Tough this economics stuff, isn’t it?
As to the congestion part, well, on those popular lines and routes the route itself is running at capacity. It’s just not possible to squeeze more trains onto the tracks without them running into each other. Ah, but goes the cry, government should do something! But the tracks are already run by government, that we’re not getting more track capacity is government’s fault. Giving us a good guide to how it would be if government ran it all – as history tells it was like when government did.
As to the prices, well, that overcrowding shows us that prices are too low. We need some method of rationing that access to something being over-used. Price is always the best method of rationing. Thus prices should be higher to relieve that over-crowding – while we wait a few decades for government to pull thumb out and provide more track capacity.
Thameslink Class 700 Desiro City at London Blackfriars in 2016.
Photo by Alex Nevin-Tylee via Wikimedia Commons.
December 25, 2018
Repost – The market failure of Christmas
Not to encourage miserliness and general miserability at Christmastime, but here’s a realistic take on the deadweight loss of Christmas gift-giving:
In strict economic terms, the most efficient gift is cold, hard cash, but exchanging equivalent sums of money lacks festive spirit and so people take their chance on the high street. This is where the market fails. Buyers have sub-optimal information about your wants and less incentive than you to maximise utility. They cannot always be sure that you do not already have the gift they have in mind, nor do they know if someone else is planning to give you the same thing. And since the joy is in the giving, they might be more interested in eliciting a fleeting sense of amusement when the present is opened than in providing lasting satisfaction. This is where Billy Bass comes in.
But note the reason for this inefficient spending. Resources are misallocated because one person has to decide what someone else wants without having the knowledge or incentive to spend as carefully as they would if buying for themselves. The market failure of Christmas is therefore an example of what happens when other people spend money on our behalf. The best person to buy things for you is you. Your friends and family might make a decent stab at it. Distant bureaucrats who have never met us — and who are spending other people’s money — perhaps can’t.
So when you open your presents next week and find yourself with another garish tie or an awful bottle of perfume, consider this: If your loved ones don’t know you well enough to make spending choices for you, what chance does the government have?
November 12, 2018
QotD: The importance of prices
I frequently teach economics principles courses, offering many college students their first exposure to the subject. While we cover all the basics — supply and demand, elasticity (consumer and producer sensitivity to price changes), taxation, trade, and externalities — I’m under no illusion that most of them will remember a lot of the material come a year from now, much less longer.
But there is one thing I hope all my students remember forever — the role of prices and private property. In particular, I want them to remember how these mechanisms are vital for a free and prosperous society. I make it clear to them that I think this material is of the utmost importance. In fact, prior to beginning our discussion of prices, I tell them I will be thrilled if the price system is one thing they remember from the class fifteen years from now.
Prices and private property rights are fundamentally important. Failure to grasp how these forces work leads to positively detrimental outcomes.
Abigail Blanco, “Marxism on the Menu: Why This Communist Restaurant Failed”, Foundation for Economic Education, 2016-12-27.
November 5, 2018
QotD: Technological advance and the Knowledge Problem
Technology’s heightening of society’s complexity outstrips its heightening of the social planner’s informational capabilities. Hayek, like [Adam] Smith, drew a lesson for policy: Except in the most clear-cut cases of systemic harm, like air pollution, the supposition that government officials can figure out how to improve the results of decentralized (i.e., voluntary) decision making becomes more and more outlandish. In his Nobel lecture, Hayek called that supposition the pretense of knowledge. As intellectuals who ponder the complex workings of the social world, we really know little aside from one hardy fact: If those who participate in an activity do so voluntarily, each is probably bettering his or her own condition. The more complex the system is, the more skeptical we ought to be about claims to knowledge that go beyond and against that hardy fact.
Fred Foldvary and Daniel Klein, The Half-Life of Policy Rationales, 2003.
August 5, 2018
August 4, 2018
QotD: Supply and demand
… that terribly simplistic stuff about supply and demand in those econ 101 classes is actually true. Prices are not some arbitrary numbers thrown at something by the capitalist neoliberals in order to do down the proletariat. They’re vital and essential information about who wants what and who is willing to produce what. Where the supply and demand curves meet is where the market will clear and the market price will be the market clearing price. The meaning of this is that when you decide to arbitrarily throw a price at something you’re going to up set that balance. And if you tell producers that the price will be lower than the market one then they will produce less. And as demand curves slope downwards so will consumers desire more at that lower price. Thus price fixing below the market price produces a shortage, a dearth.
This is not some optional feature, it’s an essential fact about our universe. It is the explanation for those food shortages that Venezuela has been having. More than that it’s the only explanation we need or desire. Fix prices below the market price and you will have shortages. Stop fixing prices and you will stop having shortages.
So, well done to Venezuela for giving in to reality there. And this is something that we need to take on board too. Rent controls which fix the price of housing below the market price will lead to a shortage of housing. And the opposite applies too – fix the price of labour above that market price with a minimum wage and you’ll have an excess supply of labour. Or, as we usually call that, an excess of unemployment.
The price of something simply is the price of something and don’t ever forget it.
Tim Worstall, “Congratulations To Bolivarian Socialism – Finally A Sensible Economic Policy In Venezuela”, Forbes, 2016-10-15.
