Bastiat’s Bastions

The L.A. Times reports some of the problems with the new homeowner $8000 tax credit in this story.  Besides fresh ground for tax cheats to exploit, this tax credit may not be worth getting.

In my introductory economics class, we just finished looking at how taxes get passed forward to buyers in higher prices or back to the sellers in reduced prices received.  What we saw in class was that if the buyers faced few alternatives, while the sellers had many, most of the tax gets paid for by the buyer in the form of a higher price.  If the sellers have few alternatives, but the buyers have many, the sellers pay most of the tax in terms of a lower received price, while the buyers pay only a little more than the original price. 

Of course, if the government subsidizes buyers in a market instead of taxing them, the same thing happens, but in reverse.  Subsidies are only negative taxes, so a subsidy to buyers in a market just raises the amount the buyers are willing to pay to the sellers.  Consider the $8000 tax credit to home buyers.  This tax credit merely raises the amount buyers will pay to sellers.  And since the buyers have many alternatives while the sellers, often facing foreclosures, have few alternatives but to sell, have few alternatives but to sell, the price the buyers pay ends up rising almost by the amount of the tax credit.  Few new homes are being built in response to the tax credits.  So mostly, the tax credit for buyers boosts the prices received by those facing losing their homes in a foreclosure, where only the bank receives the money. 

So those considering buying a home before the December 1st deadline because of the tax credit should probably think twice.  Most of the tax credit will go to the sellers. 

But even if some of it goes to the buyers, shouldn’t it be worth the buyer’s effort?  The answer is maybe, but  maybe not.  One provision of the tax credit is that the buyer has to live in the home at least three years, or the buyer must repay half of the tax credit, or $4000.  If the buyer faces the possibility of losing her home, facing repayment of $4000, while having to pay $7000 more for a house and getting an $8000 tax credit may not be that good of a deal.   

-MC

Some months ago I was asked to find someone who could determine the feasibility of a device reinvented by a local fisherman.   The machine was an alternator driven by a bicycle that charged a car battery bicycle.  An electric motor hooked up to the battery turned the wheel of the bicycle.

The claim was that the device produced electricity.  Of course, it produced a charge, but used more energy than it produced—a perpetual motion machine.  Such machines have been invented and reinvented for hundreds of years.  And well-meaning garage inventors reinvent perpetual motion devices with every up-tick in energy prices.   But physics triumphs and we know that the law of conservation of energy and matter still rules.  Only part of the energy from the battery gets converted to work, with the rest being converted into friction and heat.  Energy is not created out of nothing.

In trying to reinvent the health care delivery system, Senator Baucus seems to have invented a perpetual financing device , but one that will only push up prices and inhibit real innovation.  What Senator Baucus wants to do is to tax the very providers of health devices, such as heart stents, artificial hips, and diagnostic machines in order to help pay for the new health care system that the federal government is reinventing.

There is a slight problem with all of this.  Taxes collected from businesses are only partly paid by the producers, with the rest of the tax paid by the buyers in the form of higher prices.  The easier sellers can move to something not taxed to sell, the more the tax gets passed along to buyers.  The more these taxed items are covered by insurance, by other people paying the bill, the more the tax gets passed along to the buyers.  If buyers have many non-taxed alternatives and find it easier to switch to them than the sellers can switch to non-taxed goods to sell, then less of the tax gets passed to buyers and the sellers will have to pay more of the tax.  Of course, if sellers find switching easier than buyers, the taxed gets passed on to the buyers.  In other words, the side of the market that can avoid the tax the easiest by switching what they have been doing will be the side that contributes less to paying the tax.

With medical devices, it is very likely that the sellers find it easier to go from making wheel chairs to making non-taxed items than wheel chair users can switch to some non-taxed item.  Still, to the extent that the tax is borne by sellers, it reduces profits in these industries and reduces innovation as well.

What looks like will happen with this financing plan is that the tax will be passed along to buyers including Medicaire and insurance, who will raise taxes and raise premiums to pay for the higher priced devices which will lead to higher prices for the medical devices, higher premiums and higher taxes.  Of course, after a while, the increasing out-of-pocket expenses reduce purchases along the way.

This financing scheme looks as if it were designed by the same guy who hooked up a car battery to an electric motor, a bicycle and an alternator.  The problem is that both of these end up coming to halt and are unsustainable schemes.  Genius at work?  Not!

-MC

Many on the conservative side have had many negative things to say about the “Cap and Trade” system.  It should be pointed out that “cap and trade” itself, is not  the source of their ire.  Rather, many conservatives do not like limitations being placed on CO₂ emissions in the US. 

What is this “Cap and Trade” system that is being implemented in the new climate change bill?  Cap and Trade is merely an approach to regulating emissions, and it is one that efficiently reduces those emissions.  It contrasts with two other approaches: one that is called the “command and control” approach to regulation and the other is an approach that taxes emissions, such as the proposed “carbon tax” to regulate greenhouse gases a decade ago.  Before looking look at these regulatory systems, let’s look at the ideal environmental regulatory outcome.

At first glance, it would seem that no pollution would be the best regulatory outcome.  Think of what this would mean when we consider CO₂ as a pollutant.  We inhale oxygen, but if CO₂ is a pollutant and we want no pollution, then, we better hold that breath.  But we cannot.  Stopping all pollution is just too costly. Anything we do to reduce our pollution will cost us something. But, of course, pollution itself is costly, either health costs, or aesthetic costs, or costs in losses of biodiversity. The ideal, then, is really to keep the total costs of pollution and the costs of reducing that pollution to a minimum. 

Generally, each extra ton of emissions of CO₂ causes the added costs of pollution to increase.  Also, if we look to reducing CO₂ emissions, we can find some inexpensive ways to cut emissions, and after we cut emissions in those ways, to cut emissions further, we would have to employ costlier and costlier means.  To keep these total costs to a minimum, the added costs from cutting a ton of CO₂ emissions have to equal the added costs of the damage done by another ton of CO₂ emissions.  If the added costs are higher from the damage done from another ton of CO₂ than from cutting emissions, we could lower total costs by cutting emissions.  On the other hand, if the added costs of cutting emissions by a ton are higher than from the damage done from another ton, total costs could be lowered if we go ahead and pollute that ton.  The “right amount” of pollution, then, is the amount where another ton would cause costs of cutting pollution by the same amount as the costs of the damage done by another ton of pollution.

Of the three methods of pollution control to understand, the easiest to understand is the “command and control” system.  Here, the regulatory commission sets requirements for each source of pollution, monitors them for compliance, and then sets fines and punishments for those who fail to comply with the regulatory requirements.  Here, possible polluters just do what they are told or face extremely high fines or other punishments.  The “command and control” name for this regulatory type comes from the management form used in the military.  Historically, most of regulation of the EPA has been of this “command and control” type.  The best way of thinking about this approach is to recall the lines from Tennyson’s “Charge of the Light Brigade:”

Theirs not to make reply

 Theirs not the reason why

    Theirs but to do or die.

 This command and control system of regulation does not do a very good job of keeping costs of regulation down, nor does it do a good job of balancing the costs of damage with the costs of reducing emissions.  The regulatory authority just does not have information on all of the costs.  This information is mostly diffused throughout the society—various electric power generating companies have a good idea of what their costs of cutting emissions are like, so a lot of people have bits and pieces of this information, and no one knows it all. 

One of the earliest regulatory suggestions for reducing the costs of pollution control was made by A.C. Pigou in 1920 in his book, The Economics of Welfare (with the word “welfare” meaning “wellbeing”).  Pigou suggested that a tax could be levied on certain activities, such as pollution, that would give people an incentive to reduce those activities.  Economists in the 1960s and 1970s saw that such a tax would get polluters to reduce pollution in a least-cost way.  Any producer who could reduce emissions at a cost below the tax would do so, while those who could only cut their emissions at a higher cost would not.  Suppose the tax on emissions is $100 per ton.  All pollution reduction that costs more than $100 per ton will not take place, but pollution reduction that costs less than $100 per ton will take place.  Lower cost cleanup activities replace higher cost cleanup and costs cannot get any lower.

A little later on, economists came up with a slightly different approach.  The environmental regulatory authority would first decide how much emissions would be allowed, create “pollution rights” which would be tradable.  Polluters who could reduce pollution very cheaply could then reduce their emissions and sell their rights to those who could only cut their emissions at a very high cost.  If the price of a pollution permit were higher than the cost of cutting emissions, the producer could then reduce their emissions and sell off their permit.  If the emission permit sold for a price below the cost of cutting pollution, the emitter would buy up permits.  If you think that such a scheme is unworkable, think again.  We have been using tradable permits of this sort to control SO₂ emissions that cause acid rain since the 1990s, and these permits trade on the Chicago Board of Exchange, along with various commodities.

The Pigou tax on pollution, which we saw a decade ago called a carbon tax, gives polluters a constant price to respond to, and the total amount of emissions could be higher or lower and can change over time.  If the costs of cleaning up go up, we end up with higher levels of emissions.  On the other hand, the tradable permits system produces a constant level of emissions but with a price of pollution that varies.  Both of these methods minimizes the costs of cutting pollution because both produces a price for cleaning up so that those with costs of cutting a ton of emissions above that price do not cut their pollution and those with costs of cutting a ton of emissions below that price do cut emissions.  Only the low-cost emission cutters reduce their pollution while high-cost emission cutters do not, and face either taxes or having to pay for pollution permits. 

For global pollutants, such as greenhouse gases, there could be international trade in CO₂ permits.  This is the general idea behind “cap and trade.”  For this to work well, however, there would have to be a global monitoring agency that could monitor each source of CO₂  emissions and would be ready to punish those polluters who do so without a permit.  This is the part of “cap and trade” that faces the biggest difficulties.  Remember that real regulation is not done by Soloman-like regulators who are infinitely fair, but by actual people, like international soccer referees, so that various human biases rather than fairness would show through in international environmental regulation.  The problem of political bias and lack of information in regulation is seen in this warning from Pigou himself (Some Aspects of the Welfare State,” Diogenes 7:1-11 (1954), p. 10.):

It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of them could usefully interfere with individual freedom of choice. Moreover, even though economist were able to provide a perfect blueprint for beneficial State action, politicians are not philosopher kings and a blueprint might quickly yield place on their desks to the propaganda of competing pressure groups. “Fancy” finance, like a fancy franchise, whatever its theoretical attractions, has, at all events in a democracy, dim practical prospects.

“Cap and Trade,” itself is a good idea.  It is a market-based approach to efficiently reduce the amount of emission of CO₂.  The real difficulties are first, setting the right amount of emissions to allow and second, monitoring and regulating by a global authority, giving up sovereignty to regulators who are likely to want to tilt the playing field away from favoring Americans.  Before going down the road of regulating CO₂ through any approach, we should be very sure of what human reductions in CO₂ will actually accomplish and whether there are alternatives that might work better, such as re-forestation of large areas of the planet.

-MC

I am doing a little research project estimating the elasticity of demand for cigarettes. This is to help lawmakers see the effects of increasing the state tax rate on cigarettes.  In doing this, I have estimated the effects of state cigarette tax rates on state cigarette prices.  After controlling for several other factors, I have estimated that, holding these other factors constant (controlling for their variation), that for every 1-cent increase in state cigarette tax rates, the price in the state goes up by more than 1 cent, by about 1.12 cents.  The correlation is extremely strong, and I am confident the rate of increase in prices is no smaller than 1.09 for every 1 cent increase in state tax rates. 

I am sure that this is correct in terms of both my statistical estimation AND economic theory, though it does not exactly mesh with the somewhat simpler theory we saw in chapter 8.  So my first question is why is this counter to the theory in the first part of chapter 8?  For the first correct answer to this question posted here on the blog, I will give double the points I usually give. 

Now for the second question: “What is the reason for this suprising result?”  Hint: the answer has to do with what has been termed the “3rd law of demand.” For the first correct answer to this question, I will give FOUR times the usual blog comment points. Be the first on your block to win!

-MC

Economists look at a lot of numbers measuring economic activity. Good economists always remember what the numbers mean and what is ultimately important, what the ends are for people and what are merely means.

Right now, we are in the midst of a recession—a recession that looks to be quite serious. We see thousands of people losing their jobs, and when people lose their jobs, they lose their sources of income, lose their control over resources and stop being financially self sufficient, becoming someone for others to take care of. This is cause for despair for some, and true mental depression for others. Recently it was reported on the news that a man in California killed his wife, his five children and himself after becoming distraught over losing his job. That is depression.

To deal with this recession or depression or whatever term you chose to describe the downturn we are facing, the Democratic Congress has devised an “economic stimulus” plan that will push the currently large deficit up by more than 800 billion dollars. Surely, 800 billion dollars will put many people to work. The real question though, is “what will we buy when we auction away 800 billion dollars plus interest of our future?

The question of what we will be buying seems to be of little interest to President Obama and his party as he urges all haste in passing the stimulus package. Here is why such a question must be asked: It is not jobs that people really need, rather, it is the ability to buy things that is crucial. If the new jobs are not producing goods and services that people want with this stimulus package, we are just giving people money to buy but with no extra goods being produced, and all we will have done is increased the competition or the bidding war for the same old goods, driving prices for those goods ever higher.

In this story from CNN by Peter Valdes-Dapena, there are two proposals specifically designed to help out the ailing auto industry. One proposal is being pushed by Sen. Diane Feinstein, D.-Calif to not only help the auto makers, but also help the environment, or at least those are her stated intentions. The plan is to give buyers of new and more environmentally friendly vehicles a governmentally financed rebate if the dealer certifies that the buyer traded in their old gas guzzler and that their old car would be scrapped instead of being resold. To keep the dealers honest, the car’s VIN number would be tracked to make sure it did not show up in the used car market.

While there may be environmental benefits to Feinstein’s plan, the economic benefits are doubtful. Feinstein’s plan would cause cars to be destroyed so as not to compete with new cars and bring their resale value down. Think about what is really going on. Cars that still work, that still have value, would be scrapped, destroyed. Cars that could still drive some family around would no longer exist.

This reminds me of the programs of Franklin Delano Roosevelt (FDR) that failed get us out of the Great Depression. Recessions usually last about 2 years. The period from 1929 to 1941 became the Great Depression because over and over, the reactions of both Hoover and FDR to the recession, and the inaction of the Federal Reserve System, made matters worse, making the recession deeper and longer than it would have been otherwise.

One such program of FDR that he hoped would help the farmers, one that my Dad saw first hand, was one designed to boost the price of beef to help the farmers. FDR’s Department of Agriculture paid farmers for their cattle, dug large holes in fields around the country to herd the cattle into, shot the cattle and buried them in mass cow graves. While Americans were going hungry, our government destroyed food. Instead of helping to feed Americans, our government destroyed food.

The truth is destroying resources never helps our economy. In the inaugural post of Bastiat’s Bastions, Norbert Michel and I discussed why there was no silver economic lining to the destruction of New Orleans, that Katrina provided no benefit to New Orleans. Had the storm not destroyed the city, all of the resources devoted to rebuilding New Orleans and coastal Mississippi could have gone to building something else or producing something else, something that we could have had in addition to having the city. In Bastiat’s story, a boy broke a window with a stray ball (see our inaugural post again for the links to Bastiat’s story), and many people thought that the breaking of the window was a good thing, because it would increase work for other people. Bastiat, however, points out that had the window not been destroyed, the owner of the window would have still had a window, and would have bought other things had he not had to buy a new window.

Destroying one thing to only replace it means we have nothing that we would not have had. Think about this. Often when people are unemployed, they take the opportunity to finish that degree that they had started years ago or somehow prepare themselves for another occupation. Without the job that they had, their “opportunity costs” of completing the degree has fallen. So, when these individuals take jobs to merely replace something that other people already had and would have still had, if not for the destruction of their cattle by FDR or their old cars by Diane Feinstein, some people would have still had their cars and other people could have prepared for better jobs instead of wasting their time replacing cars that have been destroyed.

Keep in mind, there is no shortage of jobs, there is work to be done all around us. There are yards to be cut, houses to be painted, and people everywhere need help. People are not so much looking for jobs as looking for a way to get goods and services for their families. If we are employing people doing things that people don’t want to pay for with their own dollars, such as building new ATV trails, people will be just be receiving incomes to buy things that are not being produced.

Instead of stimulus, what we see in this package is pure waste. We may as well keep auto workers at their jobs by having the government buy up new cars, putting them on barges and dumping them off of the coast beyond the outer continental shelf. The image that comes to mind is of people being put to work by this stimulus package digging holes while other government workers come behind them to fill the holes back up.

What is the real point of this so-called stimulus package, then? Just as I was critical of Bush and the Republican Congress for wasteful spending on homeland security grants, we see even more pork in this present bill. In other words, the spending bills now being proposed to “stimulate” the economy will do more to stimulate the votes of special interest groups than to stimulate the economy.

My point, then, is that if we give a trillion dollars to people to make things that no one cares much about, we end up wasting the time and talents of our workers. And, like the person in the V8 commercial, when we realize what could have been, we will bang our heads with our hands for squandering funds on things no one wanted.

As is usual, our elected officials in Washington stand at the ready to “do something” about any problem even if doing something means making the problem worse. They are less concerned about the problem than the opportunity that it affords to spend money on their supporters. With the stimulus package, Congress is playing pork-barrel politics, which means the politicians are just using taxpayer funds and IOUs to buy their way to reelection.

-MC

I’m confused…

First, read the article, a comment from the democratic governor of New York. In the article, the Governor opines that he is favor of a tax on sugary beverages (think Coke and Pepsi). His argument is feeding Coke to kids makes them more likely to be obese. And this obesity leads to bad health outcomes on down the line. Thus, the tax on soda is called an “obesity” tax, perhaps by journalists and policy wonks that want to make it sound sexier. And just to be clear, I don’t thing the Governor is making a fiscal argument, but it is in the conversation.

In reading this article, I first thought I might have just something of a mild economic epiphany. But then as I kept writing, I’m only more confused. Perhaps you all can help me out?

First, some background on the economic arguments for taxation. There are (at least) two economic arguments for taxation.

The first is to raise revenue to fund legitimate governmental projects. Economists generally believe that the best goods to tax for this purpose are goods with inelastic demand curves (or inelastic supply curves). The idea is that with an inelastic demand curve, the tax can be absorbed with a relatively small change in quantity consumed and produced, resulting in the largest amount of tax revenue with the least amount of distortion or dead weight loss. This argument would explain why we might consider putting relatively high taxes on gasoline, liquor, and cigarettes. These goods tend to be inelastically demanded because there are few substitutes for these products.

Interestingly enough, its seems the demand for soda is not inelastic — actually quite elastic — anyone with a D or better in Econ 211 should be able to calculate if from the article. The elasticity shouldn’t be too shocking due to the fact that there are many alternative to sodas (water, juice, tea, kool-aid, beer, etc.). So if I am looking for a justification of this obesity tax, I have to keep looking…

The second reason to tax goods is to reduce the amount of some activity that generates what economist call “externalities”, or more precisely “external costs”. If person A does something, and person B is harmed, we say person A has generated an external cost. We call it an external costs because person B was external to the decision making — they are a victim so to speak.

Because in most situations, person A doesn’t have to pay for the harm caused on person B, there is too much of the activity pursued. As an example, think of smoking. It shouldn’t be too hard to figure out how person B is harmed (second-hand smoke). If we were to tax activity A, person A will do less of that activity, person B will suffer less harm, and we can get back to the optimal amount of that activity. (People who got a C in Econ 211 will also remember you could regulate smoking, say prohibiting it in certain places). In fact, the right sized tax is equal to the amount of suffering caused by 3rd parties. If the right size tax is imposed, the decision maker now truly faces the “full” cost of their actions, and the “problem” is “solved”.

While most people wouldn’t look at in quite the same way, many laws can be interpreted in the lens of external costs. If person A is, say Vince Marinello, and person B is his wife, and the activity that Vince engages in is killing his wife, the external cost is astronomical. While again it would take an odd person (such as me) to think of a prison sentence as a tax — it really is — you commit a murder and you have to pay, big time. They even take away your hair piece.

Ok, back to the obesity tax. We can’t justify it on revenue grounds…but can we justify it on the grounds of obesity causing external costs? Are there external costs associated with obesity?

Suppose I (at the writing about 6′4″ and maybe 175 pounds – make that 176 as I just had a 20 oz Coke), decide to slurp Crisco through a straw until I weigh 450 pounds. Are there external costs? Who else suffers as a result of my newfound obesity?

Nobody…right? Unless…I’ll get to the unless in a second. So there shouldn’t be a tax on obesity?

Is not being obese then just like, say, playing golf? Playing poker? Watching reality TV? It seems patently absurd that the government should tax golfers, tax reality TV, or tax gamblers (oops, scratch that last one – a post for another day). Is the governor wrong?

And finally to my almost epiphany.

Does the answer to external cost question about obesity change if we live in a world where the government has decided to pay for health care (or at least a faction of health care), and pays for it through taxing its citizenry?

I think it does. When I do the Crisco thing, your future tax bill rises due to my government funded health care expenditures, perhaps to pay for my hypertension pills.

My almost epiphany…

First the government decides to provide a service, paying for it by taxing — and then given that decision, it now makes economic sense to have further government intervention (taxes) to reduce the amount of money spent on the original service.

First, it is weird how government intervention in the first place leads to more government intervention as a result, no? The amount of invasiveness in our lives as a result of provided heath care to people is, in the end, much more ranging that simply providing health care to people, right?

Second, where does it stop? Say we were to change to a 100% inclusive government provided health care system, financed by taxes. In that world, wouldn’t any activity that might potentially increase the amount of spending on health care create an external cost? And thus, shouldn’t it too be taxed? Where does it end? A Soda tax? A chocolate cake tax? A pepperoni pizza tax? A rock-climbing tax? A failure to exercise tax? A pregnancy tax?

–CT

Late last night, I came across this article which explains the latest twist in Treasury’s Troubled Asset Recovery Program (TARP). It turns out the Treasury Secretary doesn’t plan to purchase many troubled assets – at least, not the residential mortgages people assumed were the “troubled assets.” I guess this comes as a surprise to many, but the text of the legislation actually defines troubled assets very broadly. Directly from the bill, we learn:

(9) TROUBLED ASSETS.—The term ‘‘troubled assets’’ means—
(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and
(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

So, basically, the bill gave Secretary Paulson the authority to buy anything he and the Fed Chairman decide they need to buy. The fact that the Treasury is buying stocks in companies doesn’t really require a renaming of the plan. Stocks, after all, can certainly be defined as “any other financial instrument.” Under the language of the bill, these actions are completely justified.

The bigger problem is all the “credit” we keep throwing at the “credit crisis.” According to this article, a New York research firm estimates the U.S. government has committed nearly $5 trillion to solving the crisis (so far). That’s a bunch of tax dollars, and represents about 40 percent of GDP. I’m sure 95 percent of us will get a tax cut pretty soon, though.

NM

Responding to McCain’s sole zinger line in the final debate, “If you wanted to run against George Bush, you should have run for president four years ago,” Obama compared McCain’s voting record with the White House position and pointed out that McCain voted with the Bush White House 90 percent of the time. Then Obama repeated that old line “And if it walks like a duck….”

In a now well-known interview, Obama’s running mate, Joe Biden, laughed off a question about Obama being a socialist. Well, there are very few admitted socialists elected to office in this country. And to my knowledge, only one avowed socialist elected to any national office in the last 30 years, Bernie Sanders from the state of Vermont (see this article in the New York Times Magazine from January 21, 2007 by Mark Leibovich). Sanders calls himself a social democrat but has officially run as an Independent over the years.

I started to wonder how close Obama’s voting record was to Senator Sanders, since the closeness of McCain’s vote turned him into George W. So I went to the website of the U.S. Senate and found the Senate roll call votes here. Both Obama and Sanders are freshmen Senators in the 110^th Congress, so it makes their voting records easy to compare.

In one crucial respect, their voting records are quite different. Senator Sanders missed only 6 out of 655 votes held in the Senate in the 110^th Congress, voting over 99% of the time. Obama, on the other hand, had voted only 36% of the time in 2008 and slightly less than 54% of the time in the 110^th Congress (2007 and 2008 combined). Of course, Obama ran for president and Sanders did not. Still, by August 3, 2007, Obama had already missed more votes in the U.S. Senate than Sanders had by October of this year. And there weren’t any primaries to run for before that August date.

After excluding the many votes that Obama did not cast and the few that Sanders could not cast, there were 348 votes where both voted. Of these 348 votes, Obama voted with Sanders 320 times, or 92% of the time.

Certainly, Obama’s redistribution policies and his proposed takeover of the U.S. health care system, his agreement (like McCain and Bush) to take over banks and help out the auto industry, his plan to take away the secret ballot from workers for union representation elections and his proposal to lift the minimum wage to one that compares to what the French have (which has led to widespread minority youth unemployment and riots there), all show that

Obama has the socialist walk and quack down pat.

With a voting record that matches the voting record of an avowed socialist, how can Obama deny being a socialist? Bernie Sanders doesn’t.

-MC

In 1944, an Austrian economist, Frederick Hayek wrote the book, The Road to Serfdom. His book was later shortened and released by Reader’s Digest, and even came out in comic book format and distributed by General Motors. Hayek dedicated his book to socialists of all parties. The central idea of the book is that socialism or collectivism has the same result, whether it is the sort we see in the old Soviet Union and China, and now in North Korea and Cuba, or Fascism of the sort we have seen in Hitler’s Nazi Germany, Il Duce’s Fascist Italy. Hayek’s thesis was that collectivism leads down the same road to tyrannical dictatorships by tyrannical dictators, and he has a very intriguing chapter on “why the worst get on top” in socialism. That very same road, of socialism or collectivism, whether the communist or fascist variety, where people surrender their freedom for the good of the country or the good of the universe, and fall under the spell of the idea that somehow something can be good for the country without being good for any particular person in that country.

Hayek put Fascism and the Naziism in the same category of the Marxism of the Russians, incensing political leaders and academicians in the U.S. as well as with our allies.

Why? The Russians were our allies and the Nazis our enemies. Also, many academicians, even academic economists, were taken in by the ideas of the Marxists. Their societies could not possibly be two sides of the same coin. Or could they?

Well, as my title suggests, we are not only on a road to serfdom, but we are speeding down it as fast as we can go, with little to slow us down.

It is not just that we are about to elect a radical left progressive to the White House. It is also not that both houses of our legislature are also going to have heavy progressive majorities.

No, we are not about to get on the autobahn to serfdom, we have been traveling on it awhile. Certainly policies passed under FDR’s New Deal got us on that road. And that was about the time that the real Autobahn in Germany was being built. It was started before Hitler came to power, but much progress was made on the roads under Herr Hitler, and much of it, fittingly, with slave labor.

The lanes widened with LBJ’s “War on Poverty,” a war that we should all agree did nothing to alleviate poverty, but perhaps only entrenched it and made it more durable, more systemic.

The highway was then super-sized, going from four to eight lanes, and all headed in the same direction, with banking of the curves added to keep us from crashing, but only encouraging us to go faster still. This was accomplished this past month with Bush’s gigantic bailouts with equity positions taken in banks worldwide.

Here are a few signposts along this “Autobahn to Serfdom:”

1. Abolition of property in land and application of all rents of land to public purposes.
2. A heavy progressive or graduated income tax.
3. Abolition of all rights of inheritance.
4. Confiscation of the property of all emigrants and rebels.
5. Centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.
6. Centralization of the means of communication and transport in the hands of the state.

Notice that # 5 was pretty much taken care of in the U.S. and abroad with the giant bailouts. Both #2 and #3 seem to be well on their way with the next president and the next congress. You should note that these signposts are taken from Marx’s own Communist Manifesto.

Zoom, zoom, zoom!

-MC

In the now-famous incident where “Joe the Plumber” questioned presidential candidate, Barack Obama, over his intentions to raise taxes on individuals earning more than $250,000 per year, Obama said “when you spread the wealth around, it’s good for everybody.” So, what is wrong with that, what is wrong with taking from some to give to others? Let me count the ways that wholesale redistribution should be cause for concern:

1. If the government has the right and ability to take from the rich to give to the poor, or from someone you don’t favor to give to someone you do favor, it also can take from those you do like to give to those you do not.
2. Reducing the incomes of the rich in order to increase the incomes of the poor reduce incentives to save, to invest in further education and to work hard. Certainly, our forefathers saw this in Plymouth when the Pilgrims came to this land. Great harvests, for which our first Thanksgiving was celebrated, came on the heels of starvation. What made the difference? Private property in farm land that gave families an incentive to work on their own lands, and to feed their own families. When everyone shared equally in the harvests, incentives were so weakened that they barely were able to survive. See this 2006 post I penned with my student, Amanda Walker, on Thanksgiving.
3. The third way is one that people often do not see, which is that resources that could be very productive elsewhere suddenly get devoted to fighting to come out winners in redistributive efforts, while other resources fight to keep from becoming losers in the redistribution game. A good indication as to what awaits in the fight over funds to be redistributed can be seen now in the current lobbying competition for the bailout funds in Washington. This wasting of resources in non-productive fights over who gets what and who has to pay is what economists have termed “rent seeking,” the competition for goodies out of someone else’s pockets. Take a look at this article to get an idea of where we are headed. Lobbying is an expensive undertaking and is done by very talented individuals. These resources just tend to cancel each other out instead of producing anything of value. And when resources are diverted from productive activities to non-productive activities, our economy underperforms and grows at a slower rate.

Now both points 2 and 3 tell us that economic growth will be slower with substantial redistribution than without it. Now suppose that economic growth over the next 100 years would be 5% without redistribution, but a whole percentage point less, 4%, with it. Think of someone putting aside $1500 a year each of those years, say by making contributions to an IRA. Of course, somewhere in there money passes from generation to generation, but let us suppose that funds are added at the same amount year after year. At the slower rate, the sum grows to a whopping $1.93 million after those 100 years, but at just 1% faster rate of growth, the sum grows to $4.1 million in that same time period. That more than twice the wealth can support more than twice the annual income flow from that wealth. Even with a substantially wider distribution of wealth, the higher rate of growth allows much more to be done in the economy for those at the bottom.

But perhaps the best illustration of mass redistribution to equalize outcomes is from that master story teller, Kurt Vonnegut, in “Harrison Bergeron.”

Be sure to read these few pages by Vonnegut as he portrays a future society that has equalized society in the only way it can truly do this, by handicapping the very talented and the very bright, by bringing everyone down to the same low level. Notice that everyone is made worse off as a result, as even entertainment is reduced to a low level. Spreading wealth around not only fails to make everyone better off, it makes very many of us worse off.

-MC