Tag Archives: economics

“How to Energize a Lackluster Economy”

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I’m playing off Edward Lazear’s Wall Street Journal op-ed of the same title.  In his piece, he touted the benefits of a consumption tax over an income tax, but his argument flows from a number of false premises.

Lazear asserted

…over 30% of US gross domestic product is taxed away to fund federal, state, and local governments.  Tax compliance costs are also large, estimated to be around 1% of GDP.

The hidden cost of the tax system is the biggest of all—namely, the slower economic growth that results from taxing investment, which impedes the formation of capital and hinders productivity and wage growth.

So far, so good.  These taxes and their associated compliance costs are way too high (and, using 2007 data, a flat tax of 10%, with no deductions, credits, or what-have-yous that everyone pays would net the government an increase in revenue compared with the current system.  Now, whether the government needs that increase is a separate discussion).

But then he said

An easy way to remove the impediment to growth is to move toward a consumption tax by allowing the full and immediate deductibility of capital investment.

Here begins his first false premise.

The argument rests on two points.  First, consumption taxes are better for economic growth than are income taxes.

No, they’re not.  Consumption taxes are horribly regressive, and they actively hurt the poorest among us the most.

Second, allowing full expensing (immediate deductibility) of investment turns the current tax system into a consumption tax.

His second false premise is an implied one: that (income) tax structure and rates should remain essentially as high as they are, other than his deductibility of capital investment.  See above about lowering rates and eliminating deductions, credits, etc.

He went on:

Consumption taxes [his capital investment taxes] are better for economic growth because they create stronger incentives to save and invest than do income taxes.

Under an income tax, a person who consumes what he earns immediately is taxed once, specifically on the earnings that he receives in that year.  If instead he invests what he earns, the interest on that investment, which is compensation for deferring consumption, is also taxed.

This rationalization of his first false premise, though, is centered on yet a third (again implied rather than explicit) false premise: that our tax system should be used for social engineering at all—here, attempting to push money uses into this purpose instead of that—instead of solely for the three explicitly identified purposes for which taxes are permitted under our Constitution.  Those three permissible purposes are, as any grade school civics student knows, are to pay the nation’s debts, to provide for the nation’s defense, and to provide for the general welfare, which itself is explicitly defined by the next 16 clauses of Article I, Section 8.

There’s a fourth false premise (yet again, implied) that underlies all of Lazear’s argument: that businesses should be taxed at all.  Since business taxes are just another cost center for businesses, their taxes, like their other costs, are passed on to their customers—ultimately us—in the form of higher prices.  In the end, then, we pay the business’ taxes, even though it’s the company CFO who signs the check to the Treasury.

No.  Better instead to change the income tax system altogether to a flat tax (I argue for a 10% rate) that every citizen and no business pays.  No social engineering by taxation.  Full stop.

With that in place, watch how thoroughly our economy is energized.

More Government Regulation Foolishness

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Used to be, brewers could send their spent grains, the leftovers after their brewing is done and the beverage…decanted…to ranchers to add to the latter’s feed supply.  Now, though, the FDA is “proposing” a set of regulations that would require brewers to treat their spent grains as pet food(!), meaning these leftovers must be dried and packaged without human contact.

This is expensive—too expensive for most brewers to handle.  Their landfill alternative isn’t any better: one Chicago brewer says it would cost him $100,000, every year, to send his leftover grains to a landfill.

To illustrate the benefits of this arrangement, so disliked by the government, for both parties, there’s this example.

…the brewers get those leftovers removed from their facilities for free.

And

…dairy and cattle farmers like Jim Minich, who gets 30 tons of spent grain from Revolution Brewing each week.  Not only does the grain save him more than $100,000 a year in feed costs, his 750 cows also produce more milk after [getting the spent grains.]

Never mind that there’s never been a problem for cattle or for humans eating/drinking the beef or milk from spent grain-fed cows.

There might be.  Sometime.  Maybe.  Gotta regulate.

The FDA does say, after a hue and cry, that they’re looking at revising these proposed regulations.  We’ll see.

Obama’s War

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…on women and on minorities in general continues apace.

The Congressional Budget Office estimates that raising the federal minimum wage to $10.10 an hour would kill off 500,000 jobs…57% of those jobs are held by women.

Women would be disproportionately harmed: those 57% work out to a loss of 285,000 jobs for women.  I suppose, though, that given this administration’s current buzz, President Barack Obama and his coterie view this as a general good.

Obama’s war is just as devastating on other groups of Americans whom his mouth holds in high favor, but his actions plainly disdain.  The Employment Policies Institute has some of the sordid details.

  • For every 10% increase in the minimum wage, teen employment at small businesses is estimated to decrease by 4.6%-9.0%
  • For every 10% increase in the minimum wage, young black and Hispanic teen employment, in particular, looks to fall 4.9%-8.4%

Hmm….

On Denying Market Forces vis-à-vis Supply and Demand

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Here’s an interesting graph from AEIDeas:

What this illustrates is the outcome of the lack of a market for organs to be transplanted, in this graph, specifically kidneys.

As Mark Perry put it in his article [emphasis his],

While the annual number of kidney transplant operations has remained relatively flat since 2005 in a range between about 16,500 and 17,000, the number of registered patients on the waiting list continues to increase.  From about 65,000 registered patients in 2005, the waiting list for a kidney transplant has increased by more than 50% over the last eight years, and by 35,000 patients, to the 100,019 patients who are currently on the kidney waiting list.

And

We know from basic economic principles that congestion, shortages, and surpluses are always caused by a failure to apply market pricing.

Perry’s conclusion should be an obvious one:

The only realistic, long-term and truly compassionate solution to address America’s worsening kidney shortage is to legalize some form of donor compensation.  That would require Congress to amend the outdated National Organ Transplant Act of 1984 so that people who give kidneys could receive a benefit, perhaps a tax credit, tuition voucher, lifetime health coverage, or a contribution to a retirement plan.

Reasonable men can argue about the nature of the price to be offered, but the fact remains that a market is necessary—with a price to be offered for the good desired.  Indeed, with the price needing to vary with fluctuations in demand and supply, a government mandated “benefit” would seem still too suboptimal.  Let the market determine the price, in dollars.

Certainly such a market would be fraught with danger and need careful controls.  But the danger for those patients in the excess represented by the present 6:1 ratio of patients needing a kidney to patients getting a kidney—2013’s 83,000 more Waiting List patients than transplant patients—is greater.  And with an actual market, the risk of unauthorized organ harvesting—in the US, a small problem currently, but not insignificant to the victims—will go down markedly.

And there will be a sharp decrease in the number of excess patients.

Helping the Low Wage Worker

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There are lots of sources for this help; I’m only going to talk about how government can help (yes, we can and should help the least among us, and yes, Conservatives, government does have a role, if limited: there are things government can do, even here, better than the private sector).  The trick here is to prevent government mission creep and an ever-increasing government role—a difficulty that in itself makes a powerful, and not entirely illegitimate, argument against any government role at all.

Who are the low-wage workers in America?  They’re our younger teenagers, just starting out; our college students looking for part-time work while trying to remain full-time students for their longer term benefit; the parent looking for part-time work to flesh out the family income, while also needing to take care of children still at home; the high school graduate, or drop-out, trapped by that level of education in a dead-end job.  In short, they’re far and away low-skilled workers, and they’re workers with jobs whose output has very little value to the employer, even if the employer needs that work done to some degree.

So how do we—how does government—help these folks?  One solution proffered lately is the Earned Income Tax Credit as a supplement to those low wages.  The EITC even is “enjoying” a push to expand its reach.  Glenn Hubbard, writing in The Wall Street Journal, is one of those pushing this idea:

The Earned Income Tax Credit, which supplements the income of low-wage workers as they earn more, is supported by many conservatives and liberals alike.  Expanding this program’s payments for single workers (that is, beyond workers with families)—or using an alternative low-wage subsidy—would create more powerful work incentives.

He also favors means testing this aid, but on a shallower slope in order to “reduc[e] the marginal tax rate on work as the support phases out.”  The problem with this last—means testing—is that it still leaves in place that added tax on work.  I’ve written elsewhere of the doom that means testing spells for any welfare program.

Means testing welfare generally actively discourages, if not work itself, then looking for higher-paying jobs, even when the individual is qualified for that better job and it’s available—that’s the outcome of the welfare cliffs that the Pennsylvania Secretary of Public Welfare was describing in my earlier post.  We can’t means test.  Either the individual is eligible for welfare, or he is not.  Full stop.

The larger problem, though, with an EITC form of aid is that, while it might indeed encourage more folks to look for work rather than welfare, it won’t encourage employers to offer that work, and a wage subsidy actively encourages employers to suppress the wages offered for the work they do have—after all, government will make up the difference with its EITC.  Thus, there’s no help for getting out of the bottom levels.

Rather than means testing or open-endedly subsidizing, we should be applying an upper bound on the amount of subsidy offered.  A couple of examples will illustrate.

During the Clinton years, Temporary Assistance to Needy Families was enacted, replacing Aid to Families with Dependent Children, and this program had both a work requirement for aid eligibility and a maximum lifetime duration of that eligibility.  Under that program, folks went back to work, child poverty rates fell sharply, and income sources for the affected families shifted from a 33% from earned income/40% from AFDC split in 1991 to a split of roughly 60% from earned income/9% from TANF by 2000.

The GI Bill, used to educate our veterans—whether the very generous program under which I got two advanced degrees, or the current still-generous program that provides funding for four years of college at sound (if not very expensive) schools—and which benefit was earned by our military service, offers another example of a limited, finite training subsidy.  It’s overkill for initial training, but it demonstrates in a different venue the efficacy of limiting handouts and providing a hand up instead.

The subsidy also needs to be aimed at helping the low-wage worker—or the wholly unemployed—improve his situation so he can get a better job, or a job at all; it should not be just an unfocused handout of money.

Given the reason for those low wages—low value work and lack of training—the better way to help our low-wage workers (we’re not going to increase the value of work that is inherently low-value) is to facilitate their ability to get initial training either for an entry-level job (so as to potentiate getting that first job) or for moving up from a low value job to higher value one.  This can be done by any combination of subsidizing the worker as he seeks that initial training, or by paying the employer (prospective or current) that subsidy.  Subsequent training then can and should be provided by the employer (consistent with business needs) as he recognizes the value of that now known worker or sought by the worker as he looks to change directions in his working career.

In either event, a training subsidy can’t be open-ended, nor can it be means tested to be effective.  The subsidy must have an upper bound either on the total amount paid out—use it wisely—or on the time available for its use—don’t dither—or it must have both limits, and the clock must start on first use (rather than first eligibility).