There is No Entitlement to a Government-Created Monopoly

Local governments routinely set up taxi cartels, limiting the number of cabs in order to boost profits of (and campaign contributions from) owners. As George Will explains in the Washington Post, one plucky immigrant, with help from the Institute for Justice, has managed to break the cartel in Minneapolis. In response, the cartel is claiming that the loss of their entitlement to monopoly profits is akin to a regulatory taking. Will concludes by stating it would be a good idea if the people who think that they have a right to use government coercion to obtain unearned wealth would leave the country as entrepreneurial immigrants arrive:

Paucar, 37, embodies the best qualities of American immigrants. He is a splendidly self-sufficient entrepreneur. And he is wielding American principles against some Americans who, in their decadent addiction to government assistance, are trying to litigate themselves to prosperity at the expense of Paucar and the public. …In 1937, New York City, full of liberalism’s itch to regulate everything, knew, just knew, how many taxicab permits there should be. For 70 years the number (about 12,000) has not been significantly changed, so rising prices have been powerless to create new suppliers of taxi services. Under this government-created scarcity, a permit (“medallion”) now costs about $500,000. Most people wealthy enough to buy medallions do not drive cabs, any more than plantation owners picked cotton. They lease their medallions at exorbitant rates to people like Paucar who drive, often for less than $15 an hour, for long days. … Paucar moved… Unfortunately, Minnesota has a “progressive,” meaning statist, tradition that can impede the progress of people like Paucar … 343 taxis were permitted. He wanted to launch a fleet of 15. That would have required him to find 15 incumbent license-holders willing to sell their licenses for up to $25,000 apiece. …[He] helped persuade the City Council members, liberals all (12 members of the Democratic Farmer-Labor Party, one member of the Green Party), to vote to allow 45 new cabs per year until 2010, at which point the cap will disappear. In response, the cartel is asking a federal court to say the cartel’s constitutional rights have been violated. It says the cap – a barrier to entry into the taxi business – constituted an entitlement to profits that now are being “taken” by government action. …By challenging his adopted country to honor its principles of economic liberty and limited government, Paucar, assisted by the local chapter of the libertarian Institute for Justice, is giving a timely demonstration of this fact: Some immigrants, with their acute understanding of why America beckons, refresh our national vigor. It would be wonderful if every time someone like Paucar comes to America, a native-born American rent-seeker who has been corrupted by today’s entitlement mentality would leave.

It’s the Government’s Money — They’re Just Letting You Keep It

At a policy forum yesterday, I mixed it up a bit with Jason Furman and Kate Baicker over the concept of “tax expenditures” and whether it is accurate to describe exclusions, deductions, credits, etc. as “government spending.”  I previously laid out my views on the matter here

Earlier this month, my colleauge Andrew Coulson took issue with someone who claimed that “yes, vouchers or tax expenditures in the form of tax credits are public funding.”  Coulson cited court cases that disagreed.  He then commented:

When I see obviously counterfactual, readily falsified claims such as [this], by people who should know better, I’m always deeply puzzled as to how and why they occur. Somebody throw me a bone here.

Here are two possible explanations. 

  1. People who describe the revenue lost to tax breaks as “government spending” wish to suggest that the money, though in private hands, actually belongs to the government, and therefore the government has the right to take it and spend it on something else.  Taking those resources out of private hands (i.e., by eliminating the tax break) is therefore not a tax increase, but merely a reallocation of government resources.
  2. Alternatively (but no less opportunistically), some describe the revenue forgone as “government spending” because they do not like how private actors are spending that money.  Defining it as government spending subjects it to limitations that would preclude the objectionable expenditures — such as when teachers’ unions object that tax credits make it easier for the citizenry to spend their own money on religious schools (read: the unions’ non-union competitors).

Unfortunately, as Jason Furman gleefully pointed out in an email, even Cato scholars sometimes use the term “tax expenditure” — without the scare quotes.

Immigration and American Exceptionalism

John Derbyshire has a post on immigration that perfectly captures the small-minded nativism that too often underlies opposition to immigration:

A nation has a distinctive culture. The U.S.A., which is much further than the world average from any other consequential country, and has endured several character-forming great national crises, has a culture more distinctive than most. Small boys in 1950s England could pick out an American at 200 yards. Our football (which we love) is nothing like the rest of the world’s soccer (which we find extremely boring, and which the rest of the world can keep, far as we’re concerned).

Most of the people of a nation are strongly attached to that nation and its culture. (This is called “patriotism.” Try the word out a few times. Stress on the firts syllable. It’s not that hard to spell.) They like their culture. They don’t want to see their culture transformed by uncontrolled mass immigration from places with utterly different cultures.

You may think it would be good for them to have their nation so transformed, but they don’t believe you. They like their culture. They’re attached to it. They don’t want to see it transformed in ways they do not approve, and have never voted for.

Derbyshire is right that America has a culture more distinctive than most. But the rest of this passage gets things completely backwards. What makes America exceptional is not a shared love for American football. We’re distinct because we’re the first nation explicitly founded on a set of political ideals. Patriotism, as the Founders understood it, was never about blind loyalty to our nation and its political leaders. Rather, the Founders believed that patriotism is about a commitment to the ideals they enunciated in the Declaration of Independence.

Derbyshire thinks that high levels of immigration are a threat to American exceptionalism, but the truth is the exact opposite. A big part of what makes American culture distinctive is our strong work ethic, our disrespect for authority, and our appetite for risk-taking. A big reasons for these traits is the fact that almost all of us are descended from people who valued liberty and opportunity enough to leave everything they knew behind and bear the tremendous costs and risks of crossing an ocean (or more recently, a desert) in search of freedom and opportunity. That steady stream of immigrants has always been an important source of cultural vitality. Whenever America’s elites became too complacent, a new crop of freshly minted Americans came along and challenge their dominance.

Derbyshire’s counterparts in the 19th Century no doubt warned that American culture would be “transformed by uncontrolled mass immigration from places with utterly different cultures” like Ireland, Italy, and Germany. And they were absolutely right. The details of American culture today are dramatically different from the WASP-y culture that dominated our elite institutions a century ago. It would have been unthinkable a hundred years ago to have a Catholic majority on the Supreme Court, for example.

But we’re a better country with a more distinctive culture thanks to the new cultural influences that previous waves of “uncontrolled mass immigration” brought with them. It’s important that we teach each new generation of immigrants about the values and ideals that make America distinctive, but there’s no reason to think that the current wave of mostly Hispanic immigrants will embrace these ideals any less enthusiastically than past waves did.

The real danger is that if we slam the door shut on new immigrants, our culture will gradually become stagnant and parochial like the countries most of our ancestors fled. In those countries, the defining cultural attributes center around things like what kind of clothes you wear, what kind of food you eat, and what sports you play. We’ll know that American culture has truly ceased to be distinctive when we start to define ourselves primarily by our shared love of American football.

Schumer’s 0.15 Cent Solution

On Wednesday, the Joint Economic Committee held hearings on gasoline prices and whether they are on the up-and-up. Sen. Chuck Schumer (D-N.Y.), the committee chairman, made his position — and the position of many of his fellow senators — perfectly clear. The oil companies should be busted up, he said, and lower prices will naturally flow.

Really? The best witness he had on hand to back him up was Thomas McCool, director of applied research methods at the U.S. Government Accountability Office (GAO). McCool contended that mergers and acquisitions in the oil sector in the 1990s have increased wholesale prices by 1-7 cents per gallon. Now, it would appear on its face that tossing the economic equivalent of an atomic bomb into the oil sector to reduce wholesale prices by a few pennies a gallon might not be the best idea in the world. Nonetheless, a close read of McCool’s testimony suggests that it’s an awfully thin reed to hang public policy on.

The first thing we notice is that McCool’s testimony relied exclusively on past GAO reports. The fact that there is a mountain of peer-reviewed academic work on this subject was unacknowledged in his testimony. This, unfortunately, is par for the course at the GAO. The implicit attitude over there is “if we didn’t do the study, the study isn’t worth looking at.” As a consequence, most GAO analysts are horribly ignorant about many of the issues they discuss. Now, I don’t know if Thomas McCool is familiar with the economic literature on these questions or not, but given his job title, I would doubt it.

Luckily, not all federal agencies act as if they are the font of all conceivable wisdom. The Federal Trade Commission recently published a thorough study on oil markets with due attention paid to the external literature on the subject. In a paper commissioned for that study from University of Iowa economist John Geweke, we find that academic researchers have been unable to lay down any good evidence that mergers and acquisitions have, on balance, increased consumer prices,” a finding all the more telling given the higher quality of that work. As Geweke notes in passing regarding an earlier GAO study on mergers and acquisitions in the oil business, which used roughly the same methodology as the more recent study, “assessment of the technical work in the GAO report is hampered by the fact that the report’s documentation of data and estimation methods does not generally meet accepted academic standards.” Geweke’s criticism was echoed in the FTC’s analysis of GAO’s 2004 study, which was savaged [pdf] by the commission’s economists (see the appendix).

Second, it’s important to note the distinction between changes in posted rack prices (which is what GAO used to reflect wholesale prices) and retail prices. The two are not the same. As the staff of the Bureau of Economics of the FTC noted back in 2004,

Rack wholesale prices and retail prices do not always move together, in part because rack prices do not necessarily measure actual wholesale transaction price, which are also affected by discounts, and in part because significant quantities of gasoline reach the pump without going through jobbers.

Hence, GAO did not find that retail pump prices increased by 1-7 cents per gallon. I didn’t even find that wholesale prices increased by 1-7 cents per gallon. It purported to find that posted rack prices increased by 1-7 cents per gallon. That may - or may not - have increased retail pump prices. FTC economists, for instance, agree with GAO that the Marathon-Ashland merger increased posted rack prices, but found no evidence that retail pump prices increased as a result.

In sum, what GAO found is equivalent to finding that this or that led Ford to increase the suggested retail price of a car by x. Maybe it did, but that “suggested retail price” has little to do with actual prices paid by new car buyers on car lots. Did McCool make this distinction clear? Not on your life.

Third, McCool’s depiction of GAO’s 2004 findings is highly suspect even in the particulars. The 2004 GAO study that McCool relied upon for his claims actually were two separate studies packaged under one binding.

One analytic exercise provided a total of 10 estimates of the effects of mergers and acquisitions on posted rack prices. Those estimates cover three types of fuel (conventional, reformulated, and specially blended gasoline for the California market) and different geographic areas. Seven of the 10 estimates — all involving either conventional or reformulated gasoline — found that mergers and acquisitions increased wholesale fuel prices by 0.15 cents per gallon to 1.3 cents per gallon. Although mergers and acquisitions were found to increase wholesale California gasoline prices by 7-8 cents per gallon, that finding was not at a level of confidence normally thought of as statistically significant. And interestingly enough, the GAO study did not find a statistically significant increase in wholesale gasoline prices in the eastern part of the United States.

Another analytic exercise examined eight of the 2,600 mergers and acquisitions that occured between 1994-1999. GAO provided 28 estimates of the effects of those mergers on posted rack prices for branded and unbranded conventional, reformulated, and California-specific gasoline. In 16 cases, GAO found a positive and statistically significant impact on posted rack prices ranging from 0.4 cents per gallon to 6.9 cents per gallon. In seven cases, they found a negative and statistically significant effect, ranging from a price decline of 0.4 cents per gallon to 1.8 cents per gallon. In five other cases, they found no statistically significant effects at all.

Yet McCool glosses over these more careful observations in his oral presentation for the more arresting “1-7 cents per gallon” impact estimate. Media coverage might have been somewhat different had McCool said that GAO found no evidence that mergers and acquisitions have increased posted rack prices in the eastern half of the United States, but some evidence to suggest that mergers and acquisitions increased posted rack prices by somewhere between 0.15 and 3 cents per gallon in the western half of the United States (the findings of the more comprehensive study of the two undertaken by GAO) … but that posted rack prices and a quarter will buy you a cup of coffee for all the good they will do the analyst because posted rack prices and retail prices are two different things. But that wouldn’t have made the members of the committee very happy, and GAO is not in the business of going out of its way to offend the people funding their operations.

In McCool’s defense, at the back of the written testimony he submitted to the committee, he breaks down the study’s findings by merger. According to GAO, the Exxon-Mobil and Marathon-Ashland mergers increased posted rack prices by 2 cents per gallon and reformulated gasoline (posted rack) prices by 1 cent per gallon. The Shell-Texaco merger, however, reduced reformulated gasoline (posted rack) prices by about a half cent per gallon. The Tosco-Unocal merger increased California gasoline (posted rack) prices by 7 cents per gallon.

A note about the Tosco-Unocal merger that provides the upper-bound estimate offered by Mr. McCool - the GAO finding pertains to the (posted rack) price of branded gasoline. The (posted rack) price of unbranded gasoline was actually found to decline. Economists at the FTC note that

Tosco had a branded presence in few of the cities affected by the merger and, where it did, Unocal typically did not have a significant branded presence. Under these circumstances, it is virtually impossible to imagine an anticompetitive theory that would be consistent with a large increase in branded prices but no increases in unbranded prices. Had the GAO researchers understood this problem, they would have recognized that their result must be flawed.

Fourth, McCool’s discussion of the mergers and acquisitions in the 1990s leaves much to be desired. For instance, 2,600 mergers and acquisitions are dutifully noted without the proper context. To wit, the mergers and acquisitions occurred because oil companies were hemorrhaging red ink due to historically low oil prices. Many of these companies simply could not survive on their own. Thus, the mergers and acquisitions. That is a vital aspect of the story that colors the mergers and acquisitions in a far different way than they are being colored by “the trust busters.”

McCool testified that increased consumer prices that followed from a merger can either be good or bad. Mergers will prove bad, he said, if they allow companies to exercise market power. Mergers will be good, however, if they allow for more efficient operations. Unfortunately, he does not tell us whether the mergers and acquisitions in the 1990s that he flagged as having driven up price were “good” or “bad.”

That aside, this sort of argument is a primitive construct. If a merger or acquisition improves efficiency, it will give that company greater pricing power by definition, so this isn’t an “either/or” game. Nonetheless, the observation that it might well be economically healthy if a merger increased fuel prices is quite important and well worth making in a more aggressive manner than it was in the testimony.

Fifth, McCool’s riffs about the oil market were so dodgy that one gains little confidence in GAO’s ability to sort any of these issues out. For instance, McCool contends that domestic refining capacity has not expanded enough to keep pace with demand. I don’t know what that is supposed to mean. Demand for gasoline is only manifested in response to price. If gasoline prices were zero, demand would be nearly infinite. If prices are around $3.00 per gallon, demand for gasoline would be less. So McCool can only be arguing that we don’t have enough domestic refining capacity to meet demand given current prices. Well, that’s flatly wrong. We do indeed have enough gasoline to go around given today’s price. If it were otherwise, service stations would be shutting down because they could not get enough gasoline from wholesalers to keep the pumps flowing. Obviously, they do.

McCool buttresses his contention that refining capacity is seriously constrained by noting that no refinery has been built in the United States since 1976 and then making a big deal of the fact that utilization rates have increased from 78% in the 1980s to 92% in the 1990s. But those observations prove nothing. Regarding the former, investors find it a lot cheaper to expand capacity in existing refineries than to build new refineries altogether - and that’s what they’ve been doing. Regarding the latter, high utilization rates = efficient operations. Excess refining capacity means capital is being wasted. It’s certainly true that if we had more slack refining capacity that we could respond to unexpected supply disruptions more quickly, but it costs money to maintain that reserve and McCool offers no analysis to suggest that this sort excess refining capacity “insurance policy” would be a good buy.

Another example: McCool observes that gasoline inventories are low and then spends some time discussing why the industry is generally inclined to minimize inventory levels as a cost-savings device. This is true enough, but is not particularly pertinent to the present situation. Inventory levels over the three month period of February - April 2007 fell by 15 percent, the steepest drop in history. EIA reports that this occurred because of labor strikes in Europe that disrupted fuel imports and an unusually large degree of refinery maintenance of late. In short, McCool told the wrong story.

McCool also indulged in the kinds of things that constantly grate on the nerves. For instance, he contends that “most of the increased U.S. gasoline consumption over the last two decades has been due to consumer preferences for larger, less-fuel efficiency vehicles ….” This is true in a sense but is a reflection of the underlying fact that real (inflation adjusted) gasoline prices in the 1990s were the lowest in U.S. history. Consumer preferences for gas guzzlers didn’t come out of the clear blue sky. Accordingly, it would be more accurate to say that “most of the increased U.S. gasoline consumption over the last two decades has been due to historically low gasoline prices in the 1990s.” But that would have been less pejorative.

GAO’s analysis is a lot less helpful to the mob than one might think given the number of times it has been offered up as a rationale for Hugo Chavez-style assaults on the U.S. oil sector.

OECD Admits That Tax Competition Leads to Better Tax Policy

The bureaucrats in Paris are a schizophrenic bunch. The OECD’s Committee on Fiscal Affairs seeks to thwart tax competition in order to prop up Europe’s uncompetitive welfare states, yet the professional economists in the organization frequently write about the benefits of lower tax rates and the liberalizing impact of tax competition – a division discussed in this article. Perhaps there is hope that the economists will triumph in this internal battle. A new report from the OECD notes how tax competition is lowering tax rats and creating more efficient tax systems. There is an unfortunate sentence expressing concern that tax competition could reduce income redistribution, though this may have been inserted to placate some of the European governments that dominate the OECD:

Globalisation, especially the increased mobility of capital and highly-skilled labour, fosters greater tax competition. While corporation tax is only one among many factors that shape firms’ location decisions, it has a significant impact. Most OECD countries have cut their corporate tax rates over the past decade, some by a considerable amount. Similarly, empirical evidence indicates that lower income tax rates can be attractive to highly skilled migrants. Many governments have also reduced the top marginal rate of income tax, which is an important determinant of the effective tax rate for highly skilled workers. On average across OECD countries, the top marginal income tax rate fell from 45% in 1995 to 37% in 2005. … Globalisation also encourages the pursuit of efficiency gains in tax systems. To the extent that globalisation encourages a move to less elastic tax bases, it should improve the efficiency of tax systems. … On the other hand, tax competition could potentially reduce the ability of the tax system to contribute to the achievement of income redistribution objectives.

The Wall Street Journal likes the new report, focusing on the evidence that lower corporate tax rates are generating a Laffer Curve effect. This editorial makes the key point that the goal of lower tax rates is not to increase government, but rather to increase growth and opportunity – which is why it calls for further rate reductions:

Globalization skeptics claim the world is locked in a tax-rate race to the bottom. Luckily, they’re right – taxes are falling. But this trend also makes government finances better, strengthens economies and creates jobs. In “Making the Most of Globalization,” released yesterday, the OECD draws a direct link between lower tax rates and fiscal well-being. Over the past decade, most OECD countries cut corporate taxes, some by a great chunk, and saw average state revenues go up – not just in absolute terms. …corporate-tax proceeds have also risen as a percentage of GDP. So there’s plenty of room to cut further. By scrapping tax exemptions and lowering headline rates, governments have attracted investment, boosted growth and corporate profits, and improved tax compliance. It’s a nice demonstration of the Laffer curve at work.

Maine Moving in Right Direction While Michigan Considers Tax Hikes

Tax competition helps discipline profligate state governments. States that raise taxes cause jobs, capital, and entrepreneurial talent to escape to better fiscal environments. The Detroit News understands this relationship, which is why the paper is strongly condemning the governor for pushing irresponsible tax rate increases:

Gov. Jennifer Granholm and state House Democrats are pushing for an increase in the state’s income tax rate to erase the budget deficit. The income tax is the most easily comparable of taxes. At a 3.9 percent flat tax rate, Michigan’s income tax compares extremely well with other states and gives it a rare advantage. Pushing it to near 5 percent would throw that small edge away, particularly since fast-growing and highly attractive states like Florida, Texas and Tennessee have no income tax, and more than a dozen states across the country have either cut their income tax this year or are considering doing so. For Michigan to head in the opposite direction will give potential employers and residents yet one more reason to pass by the state. Even worse, the governor and House Democrats reportedly want to place a graduated income tax on the ballot for the fall of 2008. A graduated tax would mimic the federal tax in creating different tax rates for different income levels. This soak-the-rich approach by the Democrats will lessen Michigan’s chances of attracting the high-tech entrepreneurs Granholm says she is counting on to turn around the state’s economy. Why come here and give the state a greater percentage of the profits from their risk taking when they can locate in other states that don’t punish success?

Politicians in Maine, by contrast, may finally be learning that high tax rates have hurt state competitiveness. Lawmakers are considering a couple of proposals to significantly reduce the state’s onerous income tax rates in hope of luring new business. The Times Record reports:

The Taxation Committee is considering two competing tax reform plans — one that would lower the income tax to a flat 6 percent and another that would drop that rate to a flat 4.9 percent by adding a penny to the sales tax. …The committee has been working on its tax reform proposal for months. The goal is to replace the state’s graduated income tax system with a flat tax and bring down Maine’s top income tax rate of 8.5 percent. That high rate kicks in at a low level — $18,250 of taxable income for individuals — and adds to Maine’s reputation as one of the most overtaxed state’s in the county. … The plans are based on the same logic, said Rep. Dick Woodbury, an independent from Yarmouth, who is pushing the bolder version. He believes the lower income tax would help attract more businesses to the state. … The proposal to decrease the income tax rate to 6 percent by expanding the sales tax base appeared to have the most support Monday among committee members, although the 4.9 percent plan was picking up steam. “I like the 4.9 percent. It really does change the perception of Maine’s income tax,” said Sen. Joe Perry, D-Penobscot, the Senate chairman of the Taxation Committee. … Rep. Scott Lansley, R-Sabattus, picked up on Woodbury”s theme that the lower income tax rate would attract more business here because it would make the state more attractive to higher-paid professionals. “If the CEO moves here, the company’s going to move here,” Lansley said. “Aren’t we trying to attract more business? Aren’t we trying to keep our young people here?”

A Bit of Education Accounting

The U.S. Census Bureau just released Public Education Finances, 2005, and news stories are focusing on a national per-pupil expenditure average of $8,701, as well as state highs of $14,119 in New York and $13,800 in New Jersey.

Unfortunately, some major items such as capital costs are left out of these expenditure figures, so they understate pretty significantly total amounts spent on public education. Thankfully, the census folks also offer per-pupil “finance amounts” (they’re on table 11 of the report for those playing along at home) that are much more inclusive than the constrained “current spending” figures (table 8 ) cited in the media.

Using these more comprehensive stats, we see that in the 2004-05 academic year public school systems nationwide had average per-pupil revenue of $10,159, and the top spenders shifted a bit. Washington, D.C., took the first place position with a per-pupil haul of $17,809, New Jersey came in second at $16,213, and New York dropped all the way to third place at $15,791.

Poor New York. How can they possibly expect to educate anyone on that kind of money?