Category Archives: Economic Fallacies

A tax by any other name

And so it has come to pass – nearly 100 years since the post office ceased Sunday mail delivery (dropped in 1912 primarily due to religious and workers rights reasons) the United States Postal Service will cease Saturday mail delivery later this year. This time the reasons are financial rather than ecclesiastical. The Postal Service expects this change to save $2 billion a year – although this barely scratches the surface of a $15.9 billion loss in 2012 (although $11.1 billion of that loss was the result of a Congressional mandate forcing it to pre-fund future retiree health benefits – something it requires of no other federal agency). The Postal Service is a quasi-private entity. It technically receives no funding from Congress, however it’s ability to operate is tightly controlled by Congressional whim. But one area where it does benefit from its governmental relationship is with respect to the “Private Express Statutes”. These are a set of statutes that confer on the US Postal Service a legal monopoly of letter delivery. This monopoly is enforced by a mandate that any entity delivering “letters” must charge at least 6 times the current rate for the first ounce of a single piece First-Class mail letter. Fortunately “parcels” do not fall under that mandate; otherwise FedEx and UPS would be nothing but big “What ifs”.

Although Congress is specifically authorized in the Constitution (Article 1, Section 8) to  “establish Post Offices”, such authorization does not on its face imply that the federal government is the ONLY entity permitted to do so, merely that this is one thing it MUST do. The reasoning behind establishing a monopoly position in the marketplace was the concern that private business would simply come in and “poach” business away from the more profitable mail routes. This would then mean either prices would have to rise on the less profitable (rural) routes or tax dollars would need to be employed to subsidize costs along these less profitable routes. Gee, with a justification for monopoly like that I don’t understand why we don’t establish a monopoly within each sector of the economy. Why not give Publix a monopoly on groceries in this country? Then they wouldn’t have to waste money on competing or advertising and could provide “affordable” food prices for everyone by subsidizing less profitable stores with the receipts from the more profitable stores.

Mandated monopolies, whether in private industry (e.g. utilities), or in government (Postal Service) make no economic sense. Consider the argument here: private mail delivery companies would out compete the Postal Service by charging less thereby depriving the Postal Service of income. So instead of overcharging some customers in order to subsidize the undercharging of other customers it would be necessary to overtax some people in order to provide a net benefit to some other people. How are the two processes different exactly? Both involve individuals in Group A paying more than necessary in order that individuals in Group B pay less than necessary. So if the worst outcome (raising taxes) is equivalent to what you are doing right now, then there is nothing to lose in trying the alternate approach. Best case it is a zero sum game (the money people save is simply taxed away to fund the Postal Service losses). The more probable outcome is that there is a net benefit to society when multiple entities compete for the customer’s dollar. Perhaps private competitors might be so efficient that they could provide mail service to even the “unprofitable” areas at an “affordable” price (which is what I believe UPS and FedEx currently do in the area of package shipments).

Congress should eliminate the monopoly provisions on mail delivery, let the chips fall where they may and let the market solve this problem. In the age of $20 cell phones somehow I doubt there will be an issue in providing “affordable” delivery of folded pieces of paper.

Mo’ Money, Mo’ Problems

It has recently come to my attention (thank you George Warren) that the economist Steve Keen has proposed a solution to our economic woes: the government should give people money to pay off their debts. According to Keen it is the high level of private debt (about three times that of annual US GDP ) that is causing the economy to move so sluggishly. While enormous artificial debt creation did indeed foster the previous boom and our current bust, Keen has erred in both identifying the root cause of this debt explosion as well as an appropriate solution.

It is revealing that Keen does not ask the most pertinent question: he blames the banks for the debt explosion yet he does not address how is it possible banks could collectively lend out five times the amount of money in existence ($50 trillion in private debt vs a $10 trillion monetary base (M2))? He then decries “bad lending” – lending for purely financial market speculation, but again fails to ask why it would be in a lender’s interest to make such “gambling” loans – loans that more often than not would default (hint: moral hazard).  What is the answer to these unasked questions? Government. Government interference in the market (legal tender laws, legalization of fractional reserve lending, a central bank, implied bail outs, etc) resulted in the distorted outcomes Keen identifies. Being apparently unaware that government is the root cause of the problems he cites, he then unwittingly invokes that same entity as our savior: he proposes that “government created money” (through deficits) will solve the problem of too much bank created money (loans). But government is the sole reason banks can (legally) create money out of thin air to begin with! The legality of a central bank and fractional reserve lending makes phony debt possible. In a truly free, hard money economy (where the lending of demand deposits would constitute the actual theft that it is) credit expansion and unproductive loans to gamblers would cease to exist (because loan defaults will not be bailed out.) Only time deposits are eligible to be loaned out, thus naturally regulating the debt load in an economy.

Keen falls into the trap of blaming those capitalizing on the fruits of the government created circus (speculators, brokers) with causing the circus. That’s like blaming the existence of slavery on slave traders; slave traders capitalized on a situation made possible only by governmental enforcement of the legality of slavery. It’s the same old story: government creates an artificial scenario that some other group takes advantage of and then that group is subsequently piously vilified while the root cause is ignored.

As the intricacies of lending and finance are rather opaque I shall attempt to distill what has occurred and what Keen proposes to a simple narrative. Let us imagine three friends, Dave, Bob and Gary. Dave needs $800 to buy a house. Nobody has money to lend to Dave. Gary has a solution. Gary prints money ($1000) and gives it to Bob (because Gary doesn’t want Dave to know he is the source of the money). Bob loans the money ($800) to Dave and Bob keeps $200. Dave has his house built which provides builders with money. When the house is done Dave begins paying Bob back. All the builders are sad because Dave is not paying them anymore. Others are sad because Dave buys fewer goods because he has to repay Bob. When Bob gets money from Dave he gives it to Gary who promptly burns it (to hide what he has done). Because Gary is burning the money it is not being spent and so all the sad people ask Gary to print more money (so they won’t have to lower their prices) and to give it directly to Dave so Dave does not have to pay Bob anymore. So Gary prints more money and gives it to Dave to pay Bob, who then gives it to Gary who burns it. So what is the end result here? Dave got a free house and Bob got $200 for handling the money. Seems like everyone came out ahead here, right? Almost makes counterfeiting seem noble – I wonder why it is illegal? Oh, that’s right, because it is theft. It is theft from those not mentioned in the story. It is theft from every other person who holds and is paid in dollars as their dollars become worth less (because there are now more dollars) or worthless – take your pick!

When people propose “solutions” to our economic woes that involve government bailing out some group know that it is nothing more than calls to legally do what would otherwise land any one of us in jail were we to do so individually. It is theft. To have government take from unfavored groups and give to favored groups is theft. It was wrong to bail out the banks and it is wrong to bail out individuals. The only solution is to remove all authority government has over fiscal and monetary concerns. All unfairness in our current system is attributable to crony-capitalism fostered by big government colluding with big business. Dismantle big government and you’ll dismantle the inequity it fosters.

“Wimpy” Governance

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

Words to live by for those in government. For example, the word “surplus” is supposed to denote the result of consuming less than one receives. But that is not the meaning employed by our wise overlords. Or rather, they choose to cherry-pick what constitutes “receive” and “consume” so that the difference between those terms can be any value they desire. It’s time for some myth busting: there was no Clinton surplus. The entire thing is a fabrication, an accounting sleight of hand. “Hogwash!” you’re thinking! Certainly if this had been the case the conservatives pundits would have been all over this, right? Wrong. Their collective silence speaks volumes in testament to the fact that the same “math” used to show a surplus under Clinton also shows smaller deficits under their guys (e.g. Bush Sr. claimed $1 trillion in deficits, but it was actually $1.5 trillion, likewise Clinton claimed a $62 billion surplus but actually had a $1.4 trillion deficit)

Here is the essence of the subterfuge:  Let us imagine a single mom, let’s call her, I don’t know, Julia. Julia earns $30,000 a year. She receives $5,000 a year from her ex-husband that is to be put into a savings account for her son’s education. However she has $32,000 a year in expenses and a $1,000 credit card debt. So she “borrows” $5,000 from the education account. $2,000 of it goes to the extra expenses, and $1,000 of it goes to pay off the credit card debt. Quite pleased with the situation she tells her friends she has paid off her credit cards and has a $2,000 surplus to boot! To celebrate she spends the “surplus” $2,000 on clothes and a new TV. She rationalizes owing the $5,000 to her son’s account with the idea that in the future she’ll make more money and pay it back later, but she needs it now for her and her son’s benefit, so that makes it ok. Fast forward 18 years and we find that although her pay has increased, so have her expenses, and she has continued to accumulate $5,000 IOU’s each year such that the account contains nothing but $90,000 in IOU’s. In any other arena except government this process is known as embezzlement.

One difference between what Julia did and what the government does is that the theft is legally mandated: all federal government trust funds (there are others besides social security) are required to turn over excess funds to the federal government by way of purchasing special government bonds (IOUs). The government then counts these “excess” funds as REVENUE, even though that money is obligated to future recipients. Let me repeat: the government is counting loaned money as income! That might balance cash flow but it is merely “Wimpy” can-kicking governance: “I’ll gladly pay you Tuesday for a hamburger today.” Guess what? Today is Tuesday.

“I’ll gladly pay you Tuesday for a hamburger today.”

The effect of this fake revenue is to decrease the gap between normal tax revenue and spending (the deficit), which is why every administration loves this technique. However even the government can’t hide from the effects of ignoring reality. Any money the government borrows from itself is added to the Intra-Government debt holdings account. The IG debt account is distinct from the “Public Debt” account (money lent to the government by non-government entities). The Public Debt went down under Clinton by using IG debt to pay it down (i.e. using credit card A to pay off credit card B). Adding these two numbers together reveals that total debt went up. If you don’t believe me, check for yourself; see the US Treasury data. Each and every year from 1992 to 2000 the “Historical Debt Outstanding” increases. Pundits can try and confuse the public with jargon, but at the end of the day it simply is a matter of checking just one number (total debt). If it goes up, there was a deficit, if it goes down, there was a surplus. End of story.

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.

Cutting corners

“And so you’ve got higher administrative costs, plus profit on top of that. And if you are going to save any money through what Governor Romney’s proposing, what has to happen is, is that the money has to come from somewhere.” – President Barack Obama.

President Obama made the above remark in last week’s (10/3/12) presidential “debate” (aka joint press conference) comparing the cost structure of Medicare to that of private insurance. His remarks rely on a grade school understanding of profit that is sadly shared by many.

Let’s dissect the error of his ways. “And so you’ve got higher administrative costs”: The president is being a bit deceptive here. Medicare’s administrative costs are lower because it has virtually no checks against fraud prior to payment. The system is designed purposefully this way in order to entice doctors with an easy claims process. Unfortunately it leaves the system vulnerable to every type of conman and charlatan. Kind of like saying a government-run unmanned honor system bank operates with lower costs than a private bank full of tellers and security guards.

Next he says “plus profit on top of that” in reference to private insurance: Implicit in this statement is the notion that without profit (or perhaps just “excess” profit, “excess” being defined in the liberal dictionary right next to “fair share”) everything would cost proportionately less. If he is going to be intellectually honest then using this logic there is no other conclusion then that government should run everything profit-free. Considering how well that system (communism) has worked, it is unlikely he will be intellectually honest.

However the last statement, “the money has to come from somewhere” reveals his ignorance of business. This ignorance renders him incapable of comprehending how a business could enhance profit by any method other than cutting corners. The method that eludes him is productivity improvements. These are achieved by (a) identifying inefficiencies and removing them and (b) utilizing new or existing tools. With productivity gains the consumer receives the same or a better product for a lower price while the business earns a greater profit. The profit motive encourages good businesses to enhance productivity, which benefits both themselves and their consumers. The profit motive can also encourage some businesses to cut corners on product quality. However these businesses can only cut corners to the extent consumers are willing to accept the tradeoffs. If they go too far they risk going out of business at the hands of more efficient competitors. In the long run the profit motive strengthens good businesses and weakens bad businesses.

If government operates without a profit motive (as the President implies is a superior route for purposes of saving money) it operates in an information vacuum, like a ship adrift beneath a cloudy sky with no stars to guide it. It is not possible to know if one is adding or degrading value if they never ask “what is this worth?” A prime example: baking apple pies adds value, but burning apple pies degrades value. Both involve the same use of resources (apples, labor, oven) however one process is wasteful while the other beneficial. There is no non-arbitrary method to determine which process adds value or degrades value and by how much. The only way to know is to offer each on the market and see which one more people are willing to give more in exchange for. To those that might say healthcare is different, then I ask you this: if the consumer does not directly bear the cost of the healthcare they consume, then on what basis can they draw a line and say “this is too much to spend?” Is there no amount that is too much? There is only one tool government has to maintain product access when it forces prices for scarce goods below their market rate: rationing. Rationing through waiting lists (a common practice in the single-payer no profit systems) gives the false illusion of lower nominal costs by simply ignoring the costs in terms of quality of life for those suffering while they wait or the cost of lives cut short. It may seem like voodoo to President Obama, but the desire for profit is a powerful motivator to increase efficiency and thus lower costs.

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.

Hey man, you owe me!

President Obama’s now infamous “You didn’t build that” speech offered up two worldviews that betray his social-collectivist tendencies. The President engaged in a non-sequitur fallacy in his effort to establish the validity of two falsehoods by invoking a truism that is best embodied in the quote of Isaac Newton, “If I have seen further, it is by standing on the shoulders of giants.” That is to say, we owe our entire standard of living to the countless billions that came before us. Each new innovation relies on the tools and knowledge of prior generations. No one builds anything in a vacuum. The President falsely presumes that societal advancement is necessarily impossible without government involvement (e.g. building roads and schools). This presumption rests on the notion that absent government it would simply never occur to the simpletons in society to build a road, a bridge, a school, or to pursue research. We are but helpless babes that require the gentle guidance of our wise overlords.

Upon the (false) precept that government must play an integral role in society he now presumes this establishes a basis to conclude that society (the people) are morally obligated to pay government whenever, however and in whatever arbitrary amount deemed appropriate by government. More abstractly he is saying that because party A did something for party B then it is permissible for party A to unilaterally impose an open ended arbitrary obligation onto party B in perpetuity. This is little different than a drug dealer who showers gifts on a kid for a few years and then expects that kid to return the favors by doing anything that is asked: “Hey man, you owe me!”

The President’s fatal conceit is in believing that because government plays a tangential role in producing some societal goods it must then follow that government has the right to erect a barrier to the collective goods of society that may only be breached by accepting the necessity of an arbitrary debt obligation (taxes) to that gatekeeper (government). We do not owe any particular group or individual in society anything as a consequence of something they did or are doing. If that were so then perhaps we should pay taxes to GE as well for all the things they have produced that benefit society.

The only barrier to society’s goods is a natural one: our ability to produce goods or services that society values. If we desire to take something out of society’s pot of goods, we must first deposit something equivalent to the value that we wish to withdraw. Money is merely a claim ticket to the value put in the pot; it gives us the right to withdraw that value later (which is why counterfeiters and thieves are reviled, they withdraw without putting anything in). Conspicuous consumption must be preceded by conspicuous production. Taxes represent confiscation of our withdrawal rights that are diverted to government favored industries or classes of individuals. Government puts nothing in the pot; it simply forces us to pay for things we don’t want or to overpay for things we might want. Government’s limited role in society cannot justify arbitrary taxation with specious appeals to “fair share” (an objective definition for which you will have as much success in extracting from a progressive as you will in nailing Jello to a wall.)

Needs and Wants

The TSPLOST frenzy has moved into high gear as we approach the July 31 election. The “pro” side makes some compelling arguments. Compelling that is until you actually think about them.

Needs and wants: It is argued that all projects are beneficial. Ok, I’ll bite. Every project is beneficial. But, just because some proposal IS beneficial in some tangential way, it does not then logically follow that it MUST be funded. Finishing out my basement, remodeling the kitchen and buying a new car are all beneficial for me…but does that necessarily mean I MUST do these things? No, I prioritize those things that are most important. The “pro” side seems to mistake wants for needs. Needs are limited, wants are unlimited; therein lies the danger of confusing the two.

Broad, low taxes are easier to hide than narrow, high taxes: We are told we need more revenue because motor fuel tax receipts have fallen over the last few decades (due to increased fuel efficiency). So why is the obvious solution of raising the motor fuel tax not on the table? Because it is politically unfeasible to add 30¢ of tax to a gallon of gas (currently 47¢ total or 29¢ of GA tax). However, it apparently is politically feasible to slip in a 1¢ tax on every dollar of every sale (except for motor fuel and automobiles, of course, the two things that, you know, are actually correlated to road use).

How much should we spend on roads?: Another argument is that we are spending $1 per year on roads and since this is not “working” the only solution is to spend $2 a year. In this “more is better” argument how does one ever determine “ok, this is enough.” Why not $3? $8? By what non-arbitrary method can anyone determine the ideal amount? Some say define it as a % of the economy or of tax revenue. Oh, please. Do you buy food based on what percentage it is of your total income? (“ahh yes, I better be sure I spend 5% of my pay on food this week!”). No, nobody does that. Pulling arbitrary percentages out of thin air does not provide a rational basis for determining the proper cost of anything. Ok, so how can we know the proper amount? The same way other scarce resources are allocated in a market economy: prices. If we had a mostly private road system prices would rationally allocate monetary resources where they are most needed (just as it does for other goods – prices inform us that it makes more sense to build homes out of wood than out of titanium). Heavily used roads would receive more attention (due to higher toll receipts) than lightly travelled roads.

Jobs: This argument is more of the same old Keynesian fallacies about government spending creating jobs. $18 billion in increased taxes merely removes $18 billion worth of some jobs in order to create $18 billion in other jobs. Moving money from my left pocket to my right pocket does not increase my wealth. The Keynesians are quite fond of this resource shuffle that suggests moving checkers around the board increases the number of checkers. For example, they use this argument to claim that new roads foster growth of new businesses (the “if you build it, they will come” argument). Businesses do come, however they are simply diverted from where they would have otherwise gone. Moving stuff is not the same as creating stuff.

A permanent tax to maintain a permanent bubble: For those old enough to remember Carnac the Magnificent  – the answer is: “Politicians plead to prevent a crisis of massive unemployment in heavy construction.” The question: “What will the news headline be in 2022 when the TSPLOST is up for renewal?” This tax is the quintessential government bubble: turn on the tax spigot to fill the tub but once that spigot is turned off the tub quickly drains. Anyone who threatens to turn off that spigot is vilified as anti-<insert locality> and anti-job.

The pro side insists, “We must DO something!” Yes, we must. Perhaps that “something” should be to force those in government to reprioritize expenditures with the money they already get. Maybe we’re “short” on funds due to massive mismanagement. Should we reward those that have already squandered our money with even more money, because this time, this time they promise to get it right?

On July 31, vote NO on TSPLOST.