Monthly Archives: November 2012

Arbitrary Fairness

With the fiscal cliff looming there has been renewed discussion of “fair share” and how it’s only “fair” to ask the wealthiest Americans to be pay more taxes. Yes, “ask”. I believe that is the same kind of “asking” a mugger engages in when he “asks” for your wallet. I have yet to have revealed to me a definition of “fair share” so perhaps it is time to offer one myself. The income tax system is built on the notion that one’s payment burden should correlate to net income. If your share of society’s aggregate income is 25% then it logically follows under such a system that it is not unfair to demand you pay at least 25% of total taxes. A “progressive” tax system (the one we have today and which is a plank in the Communist Manifesto) demands one pay more than their proportionate revenue stream. Some argue this is “fair” on the grounds that mere ability to pay more is sufficient grounds to take more because on balance society (supposedly) benefits. However there exists no non-arbitrary method that reveals precisely how much more above one’s revenue proportion one’s tax burden should be. How exactly do these wise sages propose to derive a fair ratio between tax burden and income share that results in a perfect balance between societal benefits at the expense of the individual? Is a 2:1 ratio fair, but a 3:1 ratio not fair? If not, why not?

Sadly the mainstream media leaves us (unsurprisingly) with the impression that top taxpayers are paying less than their proportionate share. Nothing could be further from the truth. For 2010 (IRS data) 3% of taxpayers (earning above $200,000/year) had a 27% share of income and a 52% share of all personal income taxes with an average tax rate of 22%. Yes you read that correctly, 3% of taxpayers pay over HALF of all personal income taxes even though they earn only ONE-QUARTER of income. Earners between $75k – $200k (18% of taxpayers) receive and pay about a third in income and taxes with an average tax rate of 11%, so in terms of balancing income and tax burden this group is perhaps the most “fairly” taxed. Those solidly in the middle class ($25k-$75k – 38% of taxpayers) earn 30% of all income and pay only 14% of the tax burden with an average tax rate of 6%. And lastly those in the under $25k (41% of taxpayers) range earn 9% of all income but pay a mere 1% of the tax burden with a 1% average tax rate. Including payroll and corporate taxes would alter the numbers somewhat however the overall analysis remains the same: there is only one segment of taxpayers paying far in excess of their share of national income and for some bizarre reason they as a group are the ones most vilified for not paying enough. I’m not suggesting those in the lower brackets pay more and the top less. What I am suggesting is we cut spending so that everyone can pay less.

Due to the persistent fairly tale that there was a budget surplus during the Clinton years people somehow imagine that if we simply let rates rise back to where they were under Clinton we will magically close the budget gap and have surpluses again. As the Democrats are fond of saying “the math just doesn’t work.” Allowing the top marginal rate to rise on 3% of taxpayers would raise only approximately $100 billion/year. Coupled with a projected $900 billion deficit for 2013 that barely scratches the surface.

Consider what a $100 billion increase in taxes means. It is $100 billion removed from the private sector where it could be spent OR used to build new factories, hire more employees or invest in R&D. All of these events occur regardless of current demand. They are the direct result of the speculation incentive, that is, the incentive to possibly make more money in the future by spending money today. Increasing taxes kills the speculation incentive on two fronts: slowing the rate of investment (as more money goes to taxes and less to saving) and decreasing the incentive to invest due to lowered potential after tax returns.

Instead the tax dollars are redirected to government favored entities. If you think this might produce a net benefit, then ask yourself: Is society really better off if we allow the government to funnel money to those businesses that are most effective at the art of lobbying and suckling at the government teat (the political entrepreneur) by taking from those businesses and individuals that are most effective at actually producing things people want (the market entrepreneur)? Until we can face the reality that wants are infinite but resources finite nothing will stop us from going over that fiscal cliff.

Warning, Warning!

“New Jersey has a tough price gouging law to ensure that profiteers will not take unfair advantage of people at their most vulnerable” Governor Chris Christi

Unfair advantage – so who exactly is the Solomonesque arbiter of that which is fair and unfair? In this case the states of New Jersey and New York. And how is unfairness defined? By pulling arbitrary numbers out of thin air of course! In New Jersey it is holy writ that a 10% markup above normal price level is perfectly justified and fair, but 11% is the act of a wanton criminal. In New York it is left to the highly subjective discretion of a judge to decide if one has breached the barrier of “unconscionably excessive” pricing.

The state of New Jersey is currently charging 8 businesses with violation of its “anti-gouging” laws. How horribly high must one raise prices to be so charged? Thirty-dollars. One hotel charged $119 a night rather than the usual $90 a night! Oh the humanity! Give me a break. Hotels routinely raise prices this much or more when demand is high for other reasons. So apparently it’s criminal if a storm increases demand but not criminal if the Super Bowl does? Even the gas stations under indictment only raised price by $2/gallon, which translates into an extra $20-$40 per tank. Which would you prefer? No gas at all (or the prospect of waiting for hours in line) OR a quick fill up that cost an extra $40.

Anti-gouging laws are probably the most convincing proof that politicians are completely ignorant of economics. About on part with someone ignorant of physics trying to cool their house with a refrigerator. Anti-gouging laws give birth to another set of laws that try to repair the damage caused by the anti-gouging laws: rationing laws. If controlling the seller makes a mess then try to control the buyer. Genius.

Such laws are the sole cause for all shortages following in the wake of a disaster. Although supplies can become constrained, actual shortages arise because price controls cause demand to outstrip supply (e.g. if the government decreed all BMW’s cost only $1,000 the increased demand would quickly create a shortage). Not convinced shortages are demand and not supply driven? Consider this: what happens every time there is even a whisper of possible snowfall here in Georgia? Everybody and their cousin rushes straight to the grocery store and buys up every last loaf of bread and gallon of milk. This is entirely irrational. But people are irrational beings and will irrationally increase their demand for goods they do not need. High prices are a way of telling people “hold your horses there – do you really need those 10 loaves of bread?” If a loaf of bread were allowed to go from $2 to $10 chances are high you will reconsider just how badly you need it. This will leave more available for those that truly need it.

Think of high prices as flashing red lights in the cockpit of the economy saying “warning, warning – supplies are constrained, please devote resources over here to relieving the constraint” Government’s brilliant solution is to disconnect the light. Entrepreneurs flock to high prices like cats to catnip, rapidly increasing supply and lowering prices through competition. For example, absent such laws a gas station might hire a tanker truck to travel out of state, buy up as much $3/gallon gas as it can find, haul it back and sell it for $6/gallon. But because prices can’t be raised this scenario and many others do not happen, and we are left with long lines and shortages.

Anti-gouging laws are about as effective as outlawing fevers by requiring the ill to take ibuprofen. Masking the symptoms does not cure the disease; it only prolongs the illness.

Keynesian Coin Toss

Hurricane Sandy wrought not only terrible destruction this past week, it likewise whipped a few economic fallacies to the surface. Chief among these was the unwarranted attacks on the “price gougers” and the stunning ignorance of those pontificating on the “prosperity through destruction” meme. I shall defer my defense of the gougers and turn my attention toward the “destructionists”. What pray tell might be the upside to destruction? Jobs. The same old hackneyed drivel that was laid to rest 160 years ago by Frédéric Bastiat (see “the fallacy of the broken window”) and yet it keeps popping up with every natural disaster like the game of Whack-A-Mole. Even Ph.D. economists (Duncan Black, USA Today) who should know better continue to espouse such drivel. His recent article is illustrative toward this way of thinking insofar as he seems to be suggesting that a storm is primarily beneficial not because of the illusory short term economic benefit, but rather because it is a useful tool to teach the unwashed masses how non-voluntary spending can spur economic expansion and job creation. Such an example can then be used to justify to those obstructionist dimwits in Congress that we need much larger and grander government sponsored non-voluntary (stimulus) spending. The core premise of this argument is akin to a eulogy in which the grieving are instructed to take solace in the fact that the undertaker will benefit financially from the death of their loved one.

To be sure, there will be a localized economic uptick following any rebuilding. That is the “seen” benefit. But as Bastiat taught, one must also consider the “unseen” losses. That is, all the things that could have been done but were not. This is called “opportunity” cost. We experience this every time we buy something insofar as we could have bought something else. There is nothing wrong with that. The problem arises when our will, our desires, are overridden by an outside force that corrals us into choosing something we would not, absent such coercion, freely choose. When that force is Mother Nature we don’t like it, but we accept it and move on. The Keynesian understands that if they can convince us that Mother Nature’s destruction might be positive then we will be that much more willing to accept it when Man (through his proxy the State) imposes his diversionary will upon us. In other words, if I can convince you that getting hit in the face isn’t all that bad, you’ll be much more willing to put up with having your foot stomped on.

The Keynesian tries to rationalize their position by suggesting that funds “tied up” by insurance companies or unpatriotic savers are simply “idle.” * Well, parked cars are “idle” too. Should we melt them down and make a bunch of toasters? That would certainly benefit the toaster makers and their employees, but somehow I don’t think the car owners would appreciate this. This is how the Keynesian’s sell their ideas, by dishonestly pointing at only what we can see and mumbling zombie-like “jobs” while conveniently ignoring those that provided the resources. Money is never idle. If it’s not being spent then it is being saved or invested. Saved money is lent out and spent. Invested money supports new and existing businesses and jobs. Consider what would happen if all of the “idle” stock of a company were converted to cash by a company and paid to shareholders. That company would cease to exist insofar as every asset would have been sold. I’ll say it again: money is never idle. Repairing destroyed property involves removing active resources from the economy. In order for insurance companies to pay claims they need cash, which they either (a) withdraw from a bank, thereby decreasing lendable funds or (b) they sell assets, thereby decreasing the ability of those that buy the assets to further spend. Each dollar devoted to repairs in one area of the economy represents another dollar removed elsewhere. In other words, there is no such thing as a free lunch.

Natural disasters and government stimulus are two sides of the same will-manipulating coin – wealth destruction on one side and wealth diversion on the other.

 

* Because these articles are published in newspapers where I am under a word count constraint sometimes I must leave out some discussions that are entirely germane but simply will not fit. But as this is the online mirror of the article I will include a bit more of the economics discussion here. There is in fact a legitimate route by which disasters and destructions can and do result in increased productive output. I’m not suggesting this is a good thing, but I would be remiss if I did not bring up this point and clarify that however true it can sometimes be there is a cost involved that is always overlooked when brought in the mainstream press. 

Natural disasters can in theory produce enhanced productive output, however whether you view this as good or bad depends on whether you view working 12 hours a day preferable to working 8 hours a day. The basic premise is this: if your house burns down and you have to rebuild it yourself while still carrying on all the other duties you previously had you will indeed be more productive. Not only are you building a house you are still producing enough to continue feeding and sheltering yourself as much as you were before. The obvious tradeoff here is leisure time. Formerly you could work 8 hours a day but now you must work 12 or 14, the excess time being devoted to recreating that which was destroyed. If this is indeed beneficial then perhaps the government should mandate everyone work 12 hours a day and we could grow GDP in this country by 50% in one year!

Leisure time also has value but this value, being subjective, is non-monetary. It is impossible for the state economists to account for the loss of this value when factoring in the apparent expanded productivity following a disaster. Obviously people aren’t rebuilding their own homes but the net aggregate effect is the same. If resources in the economy are devoted to (a) normal home building + (b) home reconstruction then those in the construction industry are either working more than they normally would choose to (with concomitant less leisure time) or if they are not working more then one must bid up the price of getting a home built which has the effect of you having to work more in order to afford what you want OR more people are attracted into construction keeping costs down but the loss of those employment resources from other sectors of the economy results in scarcity in those other sectors which drives wages up and hence prices, and thus we all must work more in order to afford what we used to afford in those other sectors: net result, we’re working and producing more but only obtaining the same amount of goods and services we used to get when we worked less prior to the destructive event.

 If we do not work more but borrow more then increased demand for borrowed funds will drive up interest rates which will still cost us more in the long term requiring us to work more than we otherwise would have or if money lending demand is met and interest rates stay low that means more people are saving and making do with less which is the functional equivalent of working more for the same. We either choose less leisure time and more work to have 100 units of “stuff” or we choose the same amount of leisure time and accept higher costs and therefore accept we can only now get 80 units of “stuff”. Either way the destructive event is a loss, either to goods or to leisure time.