Monthly Archives: September 2012

Don’t blame people, blame the system Mitt

Poor Mitt Romney – apparently no one ever taught him the first rule of politics: always assume you are being recorded. The issue at hand though is not so much his ham-fisted point making, but rather that he, like so many other politicians, decries the effects of government policies while ignoring the underlying causes.

What government gives in benefits they take away in choice.

Both the left and the right work their constituencies into a lather by heaping denigration upon individuals rather than upon the system that fosters the behavior they impugn. When government intervenes they not only give but take as well. What they give in benefits they take away in choice. Government programs crowd out or eliminate private markets that would permit the individual to take personal responsibility. For example, Social Security participation is mandated by law. We cannot opt out. After being robbed of 12.4% of our income whom but the wealthiest has anything left for private retirement? Social Security offers supplemental income for children with disabilities (to help pay for care). There currently exists no private insurance market for disability/long term care for those under 18. Likewise, there is no private market for unemployment insurance. Is this surprising? Why opt to pay for something that is already “free.” Private disability insurance for adults exists however only a minority of workers have such coverage. It offers little to lower wage workers relative to the “free” offerings of Social Security disability. People are not stupid. You can’t blame them for choosing “free” over “not free” given the choice. And you certainly can’t blame them when there is no choice at all. The solution is to fix the system, not the people. Phasing out government monopolized programs like social security, unemployment insurance, and welfare would give people back their natural incentive to look out for themselves. They would purchase their own individual (a) disability policy, (b) unemployment policy and (c) save for their own retirement. Elimination of the taxes that pay for these programs would permit higher wages thus offsetting or eliminating net costs. These changes alone would mean the private market would cover 99% of what people are currently receiving as government “handouts.” Private charity would easily handle the 1% of cases where extreme bad luck has left some unable to care for themselves. And even if you believe in the government “safety net” concept, surely it should be for the bottom 1%, not the bottom 50%.

The left is no more immune to this chicanery then the right. They decry the evil one-percenters and crony-capitalists without addressing what created them. Their outrage is the moral equivalent of leaving all the windows and doors of your house wide open while on vacation and then being surprised that someone robbed you. Maybe hunting down the robbers and putting them in jail will make you feel better, but wouldn’t it make sense to just lock your house? The solution to combat cronyism and corporate welfare is to simply eliminate government authority in the arenas that the large corporations are controlling. End the bailouts, the money printing, fractional-reserve lending and bogus deposit “insurance”, the tariffs, the competition-eliminating regulations, the subsidies and the mandates. All of these are mechanisms by which government helps big business to the detriment of everyone else. Big banks and big business are big and powerful because of government standing behind them like the kid on the playground who has the big bully backing them up.

The left and the right have something to learn from Mitt’s gaffe: don’t blame people for simply using the bad tools government gives them. Destroy the bad tools.

The Value Myth

Are teachers underpaid? How much is a teacher worth? To answer this we must first define “value”. Although it is a common myth, there is no such thing as intrinsic value. Gold has no more intrinsic value than a lump of mud. The act of digging a hole has no more intrinsic value than teaching. By “intrinsic” I mean objectively measurable. Value is an entirely subjective human construct (just as “beauty” is.) It cannot be measured like density or boiling point. However, subjectivity does not imply lack of consensus. In broad strokes we rank things quite similarly (i.e. we prefer gold over mud). But at the finer scales our value rankings are different and can shift over time. These differences are in fact a necessary condition for commerce. Generally speaking, one values things they want more highly than things they already have. For example, if I buy your wristwatch for $10 then I value the wristwatch more than the $10. Likewise, you value the $10 more than the wristwatch. The value of the wristwatch is not $10, it is either more than $10 or less than $10 depending on who you ask. If that seems counterintuitive, consider this: would you sell your $10 bill for my $10 bill? No, because you gain nothing in the exchange. Then why sell a wristwatch for $10 if you gain nothing in the exchange? Both parties realize a gain in an exchange due to their different value rankings (within the context of that trade).

Both parties realize a gain in an exchange due to their different value rankings

So how does understanding subjective value relate to determining if teachers are underpaid? In a free (non-coercively influenced) market, every completed trade is “fair” in the sense both parties subjectively gained. In a free market being “underpaid” simply means there was a willing buyer that you failed to find that valued what you sold more than the party you sold it to. Subsidized public schooling is at best a semi-free market. It has actually driven wages higher, not lower, than they would be in a free market. We know this because if teachers were underpaid then private schools would poach the best teachers with elevated pay. In fact the reverse is true. Private school teachers make on average 25% less than public school teachers. And yet some would like to widen the disparity even more. For example at the “Save our Schools” rally in 2011 (see video at 3 min.) a woman implied we should spend $72 trillion/year on education (I guess the public schools indeed failed her in that she lacked the math skills to realize that spending $1 billion/child would come to that sum).

So how do we align the fact that most if not all of us value teaching above say professional football and yet teachers make far less? The cumulative effect of our individual value rankings when filtered through supply and demand across an economy can result in apparent societal ranking of value at odds with the ranking of value of the individuals making up that society. Teachers don’t make less than football players because “society” values them less. They make less because of math. A small number divided by a very small number is bigger than a large number divided by a very large number. (e.g. what each pays in property taxes or tuition far exceeds what one might spend on watching professional sports yet teachers make less because in part they vastly outnumber (about 4,000 to 1) professional football players).

If you really think teachers are underpaid you are certainly free to start a private school and pay them exactly what you feel is appropriate. That’s the advantage of a free market vs government; nobody’s approval is needed for you to immediately take advantage of the mistakes of others in the market

You didn’t put that fire out

Nestled deep within President Obama’s infamous “you didn’t build that” speech is a subtle statist sentiment that has escaped the slings and arrows of his detractors. Perhaps because, being statist themselves, they agree with it. He says:

“The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together.  There are some things, just like fighting fires, we don’t do on our own.  I mean, imagine if everybody had their own fire service.  That would be a hard way to organize fighting fires.”

There are two flaws in this statement, the first philosophical, the second practical. The philosophical flaw is the implication that a necessary condition for success is human cooperation (true) that is facilitated by government action (false). This notion rests on the faulty premise that absent government coercion certain types of cooperation are simply not possible. To underscore this sentiment he utilizes what many statists consider to be the “slam dunk” example against privately supplied “public goods”: fire fighting. Alas, he has picked just about the most easily debunked example.  This one is almost too easy to dispense with. Here goes:

To the statist the question is this: We want to protect our homes from fire, but how shall we pay for this service? If your house is burning down you aren’t going to compare prices, therefore market failure is implied. In fact some have made the most ironic of arguments against privatization of such services by citing the recent example of a public fire department that allowed a house to burn due to lack of fee payment. The irony lies within their straw man argument that mischaracterizes the distortions of normal market incentives inherent in a public monopoly as being examples of flaws in putative private market.

To understand how any private market works requires an understanding of incentives. Who has an incentive to prevent property destruction? The owner and the insurer. In a private system insurers would REQUIRE homeowners to purchase fire protection (if not outright inclusion of such costs in the premium). Because the insurer wants to be reasonably confident that these companies are competent, the insurer will have a vested interest in auditing and regulating these fire companies to be sure they know what they’re doing. And the fire companies will welcome such regulation because meeting the insurer’s standards will ensure they are on the insurer’s short list of approved fire mitigation vendors. The mutually beneficial incentive structure of the relationships ensures their continued maintenance. No outside compulsion or force is necessary. The homeowner is protected from fire and loss, the insurer is protected from loss and the fire company receives remuneration for their valuable service to both parties.

What would be the benefits of this private system over the current system? The amount the homeowner pays will be related to risk. Riskier homeowners pay more, less risky ones pay less. Our current system simply assumes expensive homes are somehow inherently more likely to catch fire than inexpensive homes. This is absurd on its face.  In a private system costs will be driven downward as each party tries to minimize risk. Owners suffer fewer losses, insurers pay fewer claims and fire companies decrease their capital overhead and operate more efficiently. In our current monopoly system, fire prevention technology may help the owner and the insurer however it has minimal to no impact on the budget of public fire departments. Because there is no price feedback in the public system, resources may be under or over allocated due to budgets driven by bureaucrats rather than customers.

So, the President is wrong. If we all had our own fire service it would work just fine. It is indeed possible to cooperate without the gentle fist of government.

The Mortgage Interest Myth

There is a persistent myth that the Home Mortgage Interest Deduction (HMID) does the following: (a) promotes home ownership by (b) providing a financial benefit to the middle class taxpayer. That’s the funny thing about myths; they aren’t true. In fact, the truth here is the exact opposite. The HMID has not expanded homeownership in any meaningful way. Between 1960 and 1997 the rate of owner occupied homes has bounced around in the 62-66% range. This is no different than other Western countries that lack a tax favored deduction for mortgage interest. Why? The HMID is a government subsidy and subsidies drive the costs of whatever they are subsidizing upward (healthcare, education, sugar, etc). The government is effectively paying people to engage in approved behavior (home buying). However, these subsidies do not occur in an information vacuum: home sellers are aware of this subsidy and adjust asking prices upward accordingly. There is no net benefit to the buyer (who pays more upfront and is then reimbursed by the government) or to the seller (who gets more when selling but paid more when buying). The only consistent beneficiary is the real estate agent. The National Realtors Association lobbies hard to maintain the HMID. Their protestations to the possibility of losing this part of the tax code make clear current policy benefits them. Their reaction makes sense in light of the fact that by their own admission the HMID drives prices upward (as much as 15% higher) thus effectively keeping all home prices 15% higher than they otherwise would be. A government-sponsored program that maintains artificially high prices is beneficial for what reason again?

The second part of this myth is that the HMID actually benefits the middle class. As of 2009 only 22% of federal returns took advantage of the HMID and of that only 30% were classified as “middle class”. In other words, only a mere 6% of returns constitute middle class usage of this deduction. The average tax savings for people in this group is only $152/year. The primary beneficiaries of the HMID are the “wealthy” – those making over $200k/year. Over 70% of returns above $200k/year claim the HMID. Because the wealthy pay disproportionately more tax they reap a likewise disproportionate advantage from this deduction with an average savings of $1862/year. Technically no taxpayers “benefit” from the HMID. Absent this deduction they would have paid a lower price for their home so their net payment is roughly the same.

Eliminating tax subsidies coupled with a lowering of marginal rates would allow a tax savings to be spread around to ALL taxpayers, not just a narrow few. In fact, Obama’s own “Deficit Commission” aka the bipartisan Bowles-Simpson Deficit Reduction Plan called for eliminating nearly ALL tax exemptions coupled with lowered rates. Those benefiting the most (the wealthy with large exemptions) from current exemptions will effectively pay more tax even with decreased marginal rates because the net benefit to all other taxpayers from lowered rates must come from somewhere if revenue neutrality is maintained.

It’s time to let go of tax myths that act as obstacles to change and move toward a simplified tax system (ideally the Fair Tax but for now we are discussing income tax) with a low (and ideally flat) rate structure and broad base that is built on a relative foundation of fairness (to the extent that the concept of “tax fairness” is not an oxymoron) that does not attempt to manipulate behavior by rewarding a few for behavior that many are unable to participate in.