Topic: Tax and Budget Policy

What We Do Next Is Correct the “Powerful Perception”

Reihan Salam comments on Alan Reynolds’ important op-ed in yesterday’s Wall Street Journal:

Anyway, even if Reynolds is right and we haven’t actually seen as big an increase in inequality as most observers believe, we still have a powerful perception that is driving political outcomes, including the drift of centrist Democrats away from pro-market policies. Merely pointing out that the statistics are somehow misleading (an important and valuable contribution if it’s true) won’t change that. So even if Reynolds is right, the political question — what do we do next? — remains an open question.

I find this a puzzling statement. The “powerful perception” of outsized increases in inequality is driven in large measure by the drumbeat of media rhetoric played to the time of misread inequality stats. If correcting that mistake cannot change the false perception driving political outcomes, then what can?

If Reihan believes, as I do, that Reynolds is right, then he ought to use his voice as a political commentator to help try to correct the misperception. If the correct belief about inequality becomes more widespread, then inequality will be seen as less of a problem and demand for policies meant to “fix it” will start to dry up. Then, maybe, what we do next won’t be misguided or counterproductive.

Health Policy in New Mexico

Last Friday, at the invitation of the Rio Grande Foundation, I spoke to state legislators in New Mexico about Gov. Richardson’s proposal to expand Medicaid.  In brief, I argued that Richardson’s proposal would trap more New Mexicans in low-wage jobs, make private-sector health care more expensive, and purchase little health for the money spent.

The Rio Grande Foundation just posted my powerpoint presentation on their website. (Let me know if it loses something without narration.)

Pork and Elections

Representative Henry Bonilla (R-TX) lost his seat in Congress in a runoff election yesterday, thus increasing the number of defeated House GOP incumbents to 22 (Republicans lost a total of 30 House seats, but 8 Democratic pickups were in open seats without an incumbent seeking reelection).

Interestingly, 5 of the 22 defeated Republican incumbents, including Bonilla, were members of the powerful Appropriations Committee, which controls the federal government’s purse strings and is responsible for doling out pork.

The relatively large number of defeated appropriators might be surprising for some inside-the-beltway analysts because the committee is notorious for sending boatloads of pork to the districts of congressmen who serve on the committee or face tough reelection races. 

As The Hill notes:

In the Labor-HHS-Education bill for fiscal year 2007, more than $146 million in hometown projects is reserved for appropriators’ districts, placing roughly 30 percent of the earmarked money in the hands of 15 percent of the House members. If passed as written, the average appropriator’s district would get $2.25 million compared with averages of $1.35 million for the districts of 43 politically vulnerable lawmakers who are not appropriators and $663,000 for districts that are neither competitive nor represented by an appropriator.

It has long been conventional wisdom that these pork projects help to guarantee reelection. But is it possible that the public has soured on the appropriations process?

After all, former Representative Randy “Duke” Cunningham (R-CA) is now in jail because of his illegal activities on the Appropriations Committee.  And appropriations-related ethical issues factored heavily into last month’s defeat of Representative Charles Taylor (R-NC), who chaired the Interior Subcommittee of the Appropriations Committee. 

It’s probably too early to declare that pork projects have changed from a political asset to a liability, but the appropriations process has certainly drawn much more public scrutiny recently.  As a result, the Republicans adjourned the 109th Congress without finishing all of the fiscal 2007 appropriations bills, preferring to instead push the issue off onto the incoming Democratic majority.  And the Democrats have already announced their plans to kick the can further down the road and avoid the fiscal 2007 appropriations process.

For the time being at least, it seems congressmen have lost their taste for pork, but don’t expect this phenomenon to last long.

If Growing Inequality Is a “Serious Problem,” Please Explain Why

Via Greg Mankiw comes this suggestion of Yale economist Robert Shiller reported in Tax Notes Today:

The IRS should be instructed to automatically adjust tax rates to keep economic inequality from getting worse, according to a new proposal outlined by Robert Shiller, a Yale University economics professor.

“We have a serious problem, and it’s a problem of growing inequality,” Shiller said on December 6 at a Library of Congress discussion in Washington. Shiller developed the proposal with Len Burman, director of the Tax Policy Center, and the two are planning to write a book on the idea.

“We need a standard or principle of income inequality. We don’t have one now,” he said. Inequality provides motivation to work harder and benefits hard work, he said, so “we do want some inequality, but we don’t have any clear idea about where we’re going and what is appropriate.”

The standard, which Shiller calls “inequality indexation” of the tax system, would instruct the IRS to adjust brackets and rates whenever inequality worsened beyond an agreed-on level.

The question that leaps to mind is: why?

Shiller’s proposal illustrates the extent to which policy is a normative enterprise.  In order to defend Shiller’s “inequality indexation,” you need some principled basis for believing that growing income inequality is a “serious problem,” and an explanation of why it is a problem. How greater inequality per se is a problem strikes me as utterly mysterious. There are many possible causes of income inequality. Some of them reflect injustices in the system, or barriers to the development of adequately fulfilling human lives. But in this case, inequality is a side-effect of some other injustice, and isn’t really the problem. And some causes of inequality don’t reflect injustice of any kind. How a change in the pattern of the income distribution over time can be a serious problem by its very nature is baffling.

Take an highly idealized example. Suppose for a moment that all of a society’s basic laws, institutions, and rules governing market exchange are fair. Everyone starts with a perfectly equal endowment of capital of various kinds, but with different preferences and goals. There will be, say, 1,000 rounds of exchange. Now start the clock. Some people will sit out some rounds. Some people will participate every round. Given different preferences, people will be motivated to invest in different forms of knowledge and skill, pursue different kinds of work, and purchase different kinds of goods and pick different kinds of trading partners. After round 1,000, stop the clock. Now count everybody’s money income over the period. There will be a certain amount of inequality in income. Start the clock again, and stop it after another 1,000 rounds. Suppose income inequality grew. What does that tell us?

If your answer is “It tells us that the laws, institutions, and rules” were not fair after all, then the question is “How does it tells us that?” And then, if the response is, “Because inequality is unfair,” that’s just begging the question. Justice and fairness, if those ideas mean anything, have something to do with giving people what they are due. If the basic rules aren’t keeping people from getting what they are due in each voluntary exchange (which would not have occurred unless the terms were satisfactory to each party), and each got what they were due every round in which they participated, then, when we stop the clock, what each ends up with over the period–their income–is just the sum of what they were due. But no one was due any particular sum. A fortiori no one was due a sum that is a particular ratio of someone else’s sum. So a change in the ratios between incomes across periods is irrelevant.

OK. Now suppose there are two social systems, A and B, with different basic rules running side by side, but in isolation from each other. A has lower inequality in each period, and lower inequality growth between periods that does B. Is A in any sense better? Maybe, maybe not. Suppose that the average income in each decile in B is higher than in A. Wouldn’t the denizens of A rather live in B, where there is greater inequality? I would. Indeed, this is the sense in which I think things like aggregate income is a matter of justice. People are due a system under which they can do as well as possible. If there is some alternative set of rules under which everyone could expect to be better off than in the status quo, failing to transition to that alternative system of rules would be a mark of injustice. Justice may require us to shoot for a system with greater inequality.

Shiller says “we do want some inequality,” since leveling would kill effort, leaving everyone worse off.  But I don’t think we really want “some inequality.” We want a system in which everyone is doing as well as possible, and inequality is going to be a side-effect of that.  Shiller needs to say why we should want less inequality. I am willing to believe that rising income inequality does reflect some injustices in the system. Perhaps some of the rules that regulate the governance of corporations. Or elements of the electoral and regulatory system that enable predatory rent-seeking. Or the system of monopoly public provision of education that systematically disadvantages certain classes of citizens on the basis of morally arbitrary characteristics, like the property tax rate in their neighborhoods. Or price floors and labor regulations that exclude low-skilled workers from the labor market. But in each case, inequality is the symptom, not the disease. The attempt to “correct” increases in inequality through the tax system is completely arbitrary, beside the point, and almost certainly itself unjust, if rising inequality is a side-effect of deeper injustice in the structure of our institutions. And if it is not a side-effect of injustice, but just a side-effect of exchange according to just rules, then it is a non-issue.

Debbie Hammons for President!

I’m not kidding. Ms. Hammons, a Democratic state legislator from Worland, WY, this week made a bit of a splash in fly-over country by questioning a $2.2 million annual tax break for investors considering building a type of coal-gasification electricity plant in her state. 

“When is it an incentive and when is it a subsidy?” she asked. ”What if we create a false sense of commercialization?” 

It would appear from the press account that nobody there seems to have any idea exactly what she’s driving at.

Anyway, good questions, Rep. Hammons. Are you sure you’re in the right line of work?    

Zimbabwe Ignores Milton Friedman’s Advice

Before he passed away last month, Milton Friedman had the satisfaction of seeing many of his free-market policy ideas and economic insights vindicated by real-world events. 

A story in today’s Financial Times from London offers a clear, yet tragic, illustration of Friedman’s famous maxim: “Inflation is everywhere and always a monetary phenomenon.” 

Zimbabwe’s erratic and despotic President Robert Mugabe has wrecked the country’s economy during his quarter-century in power by flouting virtually every free-market idea Milton Friedman advocated, including sound monetary policy. One result has been rampant inflation. According to the FT, Zimbabwe’s finance minister “admitted that inflation—1,070 percent in the year to October—was excessive, blaming money supply expansion of more than 1,000 percent.” 

Just as Professor Friedman would have predicted!