The problem with such programs that give something away is that people come to depend on the program, and then, more and more become attracted to the giveaway.  With increasing numbers of people depending on the program, spending goes up and up and the taxpayers are asked to assume a heavier and heavier burden.  The ranks of the dependent swell while the number of those providing the payments shrinks. 

Now it looks as if a similar problem is occurring.  Take a look at this recent report from Andrew Breitbart about the reported gasoline shortages in Egypt.  Prices of gasoline have been held down through the Egyptian government’s subsidies, but such subsidies look to be unaffordable, leaving the government but little choice to end them, meaning prices will rise.  How do you think the Egyptians will respond to a government that causes gasoline prices to double?  The new leaders of Egypt have not yet solidified their power.  Just like Mubarak, they may soon be out of a job.

As you can read in the Breitbart article, the authorities blame speculators and smugglers.  Hmm? Maybe.  What needs to be asked is “why is smuggling going on in the first place?  Could it be that the policy that keeps prices of gasoline at half of the price in a neighboring country CREATES the opportunity for someone clever to buy in one market at a low price and sells in another at a higher price?  Here is an excellent analysis of what is going on with subsidized oil in Indonesia Price differences create profit opportunities for smugglers.  They create even larger opportunities for thieves. 

So, are the smugglers causing the shortages, or are they just taking advantage of a situation that politicians set up to build and maintain support?

What we will see this term is that when it takes government edicts to keep prices low, the amount buyers want becomes high compared to the amount that sellers want to sell—the textbook definition of a shortage.

-MC

Well, amid Congressional disaster over the dealing (or not dealing) with the deficit problem, Louisiana Senator Mary Landrieu is doing something about these baggage fees.  You can see a news story about her proposal here.  To keep travelers from getting nickeled and dimed with baggage fees, she is proposing legislation to ban charges for the first checked bag.  While this may sound good, especially good to those who waited patiently behind me while I fought with my luggage, it really represents the rather typical lack of critical thinking by those in power in our nation’s capital. 

It does not look as if either Senator Landrieu or any member of her staff stopped to consider the consequences of her proposed bag fee ban legislation.   It should be obvious as to the reaction of the airlines.  They will just charge higher fares, and travelers, whether they checked baggage or not, will pay for checked bags, and more bags will be checked than now.  I certainly would have checked my luggage, and probably would have brought a larger bag if I could check it with no additionaly cost. 

Notice what happens with charges for checked bags–travelers packing lighter, airlines carrying less luggage, fewer baggage handlers per plane, and less lost luggage problems.  And these are just the obvious savings to the airlines from the behavioral consequences of baggage fees.  I am sure there are probably some that have not occured to me.  Some of these savings are passed on to travelers who carry their own luggage with them.   

With first bag checked for “free,” airlines will not be able to make these savings and instead of a separate charge, the fares will rise as a result.  They probably would not rise by the baggage fee, but now, travelers would not be able to save those fees.  They would not be given the option of saving some money by carrying their own luggage.  The airlines would raise fares because they would be carrying heavier loads and paying more to handle the extra luggage. 

It looks as if our costliest baggage is the lack of thinking that takes place in Washington, thinking that has given us heavy tax and debt burdens and promises that we cannot financially sustain.  

-MC

-MC

MC

A recent study   released by the Tax Foundation and reported by the Pelican Institute (here) states that extended unemployment benefits, which has been part of the stimulus programs passed by Congress, have increased the unemployment rate and slowed our recovery.

Under ordinary conditions, an unemployed individual is eligible for up to 26 weeks of unemployment benefits.  Through several federal extensions, supposedly for stimulus purposes, eligibility for unemployment benefits has been extended to 99 weeks.  President Obama’s “American Jobs Act of 2011” would extend the date for starting their 99 weeks of eligibility.  Notice that these extensions have lengthened eligibility for collecting assistance from half a year to slightly less than two years.  Under three recently passed free trade agreements with South Korea, Panama and Columbia, Democrats added extra weeks of eligibility for unemployment benefits under the guise of “trade adjustment assistance” for those losing jobs because imports from these countries.

What is pointed out in the Tax Foundation’s study, is that the supposed countercyclical nature of unemployment benefits, that benefits rise in bad times and fall during good times, is destroyed by the way that states have financed their portion of the funds to pay these benefits, raising unemployment insurance taxes when their unemployment funds get depleted during sharp recessions and lowering them in better times.

The Pelican Institute’s story includes discussion of what economists have long known, when you increase payment for certain behavior or reduce the costs to individuals for living in certain conditions, that behavior or condition increases.  Dr. Walter Block at Loyola University New Orleans is quoted in the Pelican Institute piece saying “The more you subsidize something, the more of it you get. If the government wanted the unemployment rate to fall, it would find a way to tax unemployment.”

Even Obama’s former economic advisor, Larry Summers, states in the Concise Encyclopedia of Economics:

Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways.

First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not…

The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment  insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.

Many people while unemployed get job offers or could get, but often at wage rates far less than what they have been accustomed to.  Their “reservation wage,” while falling over time, is sometimes not low enough to accept a low-paying job.

Another way to understand the point is to see these benefits as the opportunity costs of taking a job while still eligible for benefits.  Once one runs out of eligibility, the opportunity costs of taking a job fall considerably and job offers are more likely to be accepted.

The economics Nobel laureate and liberal columnist, Paul Krugman, in his college economics textbook co-authored with his wife, Robin Wells, states

[P]ublic policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. Most economically advanced countries provide benefits to laid-off workers as a way to tide them over until they find a new job. In the United States, these benefits typically replace only a small fraction of a worker’s income and expire after 26 weeks. In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.

Michael Elsby, Bart Hobijn and Aysegul Sahin report in the spring 2010 Brookings Papers on Economic Activity that the extensions in unemployment benefits we have seen from various stimulus programs that have increased the length of eligibility “correspond to between 0.7 and 1.8 percentage points of the 5.5 percentage point increase in the unemployment rate witnessed in the current recession.”  In other words, almost a fourth of the increase in the unemployment rate we have witnessed from the recession and lagging recovery is due to the extensions of unemployment benefits.

We need to be careful in how we structure these benefits and what we do to extend them.  While these benefits to ease the pain of unemployment, such pain killers lead to dependency and make it harder to get “afford” to take a job.

-MC

It is misguided to think that the government can do a better job in investing in businesses than those in the private sector.  The White House has come under increased scrutiny in its loan decision regarding this company, both because it ignored advisors who pointed to the company’s likely failure because its costs were not competitive and also because one of the company’s key investors was a major financier of the President’s election campaign, who had repeatedly visited the White House while the company’s loan was being considered.

The problem with the Solyndra fiasco is not that the deal involved  corruption, with heavy political donors receiving taxpayer loans that never get repaid because of the company’s failure (here, I am reminded of Mel Brooks’ great comedic film “The Producers,” a film remade in 2005), nor even the appearance of corruption or even the potential for corruption, though we should make notes about this in our memories.  The problem is that the bureaucrats approving such loans have very little to gain if the companies they invest in succeed and nothing to lose if the companies fail.  Instead of being careful stewards of taxpayer funds, the bureaucrats tend to use taxpayer funds for projects that are supported by their ideology, whether that ideology be radical or conservative.

While GE’s CEO, Jeff Immelt defends the role of the government in providing as venture capital, even if some of them fail, there is a great argument against this activity provided in a classic discussion by Milton Friedman, one of the greatest economists of the 20^th century, about why people are more careful with their own money than the government is with taxpayer or “other people’s” money in this video on doing good with other people’s money, noting that people are seldom as careful spending other people’s money than they are in spending their own.

-MC

an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

And, as the SEC page for “frequently asked questions” on Ponzi schemes points out, such schemes tend to collapse because

With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

Recently, Republican frontrunner and Texas governor, Rick Perry, has come under attack for calling our Social Security system a “Ponzi Scheme.”   While no fan of the governor, I am not sure he is as far off the mark in his criticism of the program as his critics claim.

On one of the New York Times’ blogs, The Caucus, there was this item:

Social Security, by contrast, is a pay-as-you-go retirement system by design. Current workers and employers pay taxes that are used to pay benefits to current retirees. For many years, the program took in more money than it paid out, and invested the surplus — the “Social Security trust fund” — in treasuries. In 2010, Social Security began paying out more in benefits than it received in taxes. As more baby boomers retire, and there is a shortage of new workers, that shortfall is expected to grow.

The Social Security Administration issued a briefing paper in 2009 noting the differences between Social Security and a Ponzi scheme. “There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go programs in that in both money from later participants goes to pay the benefits of earlier participants,’’ it wrote. “But that is where the similarity ends.”

The paper noted that a program with 40 million people receiving benefits, and 40 million people paying taxes, could be sustained forever. “It does not require a doubling of participants every time a payment is made to a current beneficiary, or a geometric increase in the number of participants,’’ it found.

Well, I guess such a retirement system could theoretically be sustained, but consider this, the average social security payment received at the beginning of 2011 was $1,177, so for 40 million workers to support 40 million social security recipients, the average worker would have to pay $1,177 into the system every month of their work life. They would have to continue to do this knowing that they are paying into the system for about 40 years, but with the confidence that they will receive payments themselves for about 15-20 years, given no change in benefits or retirement ages.    But if we assume that the person will live until he or she is 90 years old, then that  monthly payment of $1177, if invested at only a rate of 2%, would amount to about $864,430 by the time they reach 65.  If the person were to retire at 65, they could receive $3663 for every month until they reach 90, which would be a much better deal than the social security promise of only getting back $1177 per month.  How politically viable would such a social security system be?   Imagine having to pay over $1000 a month just for social security taxes.

Whoops, I forgot that there is the overhead of the social security administration to pay as well.  So let’s make that $1200 a month for each worker to pay.  Realistically, though, there is projected to be a sustained 2 workers for each retiree, so we can figure that the social security tax would “only” amount to $600 per month.  Still, while social security is popular now among those receiving payments, a large part of that popularity may have to do with the fact that current recipients get far more in benefits than they could have earned on the amounts they paid in.

But what about the social security trust fund?  Won’t that help keep so much from being paid for by current workers?  The answer there is no.  That trust fund gets spent every year by congress.  Or should I say, they have wisely invested it in safe government securities.  Ask those holding Greek government debt how safe they feel with those investments.  Government securities, instruments of our government debt, require taxpayers to pay the debt.  The system is still “pay as you go” even when taking into account the amounts that have been invested in government securities.  While I feel rather confident that we will continue to pay our debt, and that we will continue to fund social security payments, we have to get realistic about what we can expect our younger generations to pay us.

Actually, the long term problem has been discussed over the years.  In 1998 I penned an article for the Bayou Business Review that expressed some hope for the future of Social Security.

Now back then, quite a bit was done to improve funding for Social Security.  It just was not enough to keep it funded.  Already, part of Social Security funding is coming from the general fund.  Social Security may be a promise, but is it one we can really keep any more than Bernie could keep his?

-MC

Economists recognize a limit on government spending due to the sources for the spending for those dollars to be spent.  Economists call this limitation the “government budget constraint.”  We recognize that there is a tax to be paid one way or the other, different ways of raising the funds implies different taxes.  Some of these are up front taxes, where we know we are being taxed, while others are hidden taxes that we pay, nonetheless.

Indulge me to some simple math.  Let’s use “G” for Government Spending, ”T” for Taxes, and “D” for Deficit.  The Deficit, D, is, of course, just G-T, so D = G-T.  That part is obvious:  the part of government spending that exceeds the taxes raised to pay for that spending is the deficit (government debt on the other hand, is the deficit accumulated over the years minus the few surpluses we have had).

So, the excess of government spending over above the taxes to pay for that spending is the deficit.  A hallmark of Keynesian economics has been the idea that deficits are ok, that they are even a good thing during recessionary periods.  This approval of deficit spending by the federal government removed the moral constraint to not run deficits that had been in play for years.

Borrowing to pay deficits and taxes on capital and labor

The next question is “how do we pay for this deficit?” Well, of course, we borrow the money–we choose to increase our debt by borrowing from anyone who thinks that we are credit worthy, better risks than others at the interest rate we are paying.   We simply put IOUs (or treasury bills) up for sale. Some of the creditors or buyers of these IOUs are our own citizens, and some are not.

If we only sell our IOUs only to our own citizens, we soon have to lower the price of our IOUs in order to sell more, as there will be a point where the our citizens will start to have to take their funds from investment projects in which they are willing to invest and keep those funds in treasuries, or government IOUs.  While I will not go into the explanation in this post, interest rates and the prices of IOUs go in opposite directions, but here is a sufficient explanation from About.com.

As we drop our price to sell more, our interest expense increases.   So, as we increase the size of our debt with deficits year after year, we also drive up interest expenses for most of the debt we owe, as much of it is in short-term securities.  Since interest payments amount to part of our G, government spending, the deficit goes up at an even faster rate.

Of course, we sell our IOUs not only to our own citizens, but to all those around the world.   By selling them to those outside our borders we are able to raise more funds at the same interest rate as compared to only selling them domestically.  Still, as our debt creeps upward, we have a larger proportion of our spending going to pay the interest on this debt.  Since so much of our current debt obligations are in short-term obligations, new debt from additional deficit spending raises our interest expense on most of our debt.   As more borrowing to finance new deficits begin to push interest rates up as the default risk on these funds increases (just like a lender runs a higher risk of not getting his funds back from someone who owes ten times what they make in a year compared to someone who is now debt free, but once had a mortgage), and so, lenders must get higher rates to take the risk of making the loan.

Interest rates start to edge upward as it becomes more difficult to sell our IOUs.  Higher interest rates mean fewer business investments in machinery, equipment, factories, etc. will be worth making and less of these tools will be available for workers to use.  Less capital per worker means lower productivity for workers and less pay, as workers are ultimately paid because they are productive.  If the worker does not produce as much, the worker cannot be paid as much.

So, increased borrowing is a tax on workers and owners alike, as lower wages for workers and less capital held by owners harms both of these producer groups.  This tax is hidden from immediate view, as it is not obvious that excessive government spending is immediately coming out of their pockets.  The tag line for our blog, “what is seen and what is unseen” becomes important here, as people usually perceive taxes that they get a bill for as a tax, but they don’t see deficits as taxing them.  As Louisiana Sen. Russell Long was noted for saying, voters really mean “Don’t tax me and don’t tax thee, tax the man behind the tree.”  We are the men behind the tree.  Or, when it comes to taxation, as Walt Kelly’s Pogo said “We have met the enemy and he is us.”

Printing money to pay the deficit and the inflation tax

Now one of the tricks that governments have used in the past is to have its central bank (our Federal Reserve) become one of the creditors and buy up these IOUs.  In an earlier day, we would simply have some institution print or coin money.  Increases in the supply of money in an economy usually or eventually results in raising prices, in inflation.  If the increased money supply causes people to reduce their acceptance of the money involve as they expect the money to have a declining value,

The unstable Weimar Republic, the post-WWI German government, did exactly that, resulting in inflation rates that boggle the mind, reaching a rate of 100% every 2 days.  In other words, prices were doubling every two days for a while.

Another way of thinking about that is that a person’s savings in money fell in half every two days.  There is an often-repeated story of someone choosing between a huge prize and a penny payment that doubled every day for a month (30 days—we won’t get greedy here).  Imagine getting a million dollars in 30 days or the penny payment doubling every 30 days.  Here is a little article on that choice.   The doubling penny ends up being $5,368,709.12 in just 30 days.

Now imagine the reverse, where you start off with cash holdings of $5,368,709.12, and you face inflation of 100% every two days.  In only 60 days the buying power of your cash holdings is reduced to a single penny.  In those short 60 days, the government’s inflation policy, turning its debt into money, has taxed away over $5 million of your savings.  “My father was a lawyer,” says Walter Levy, a German-born oil consultant in New York, “and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread.” (From the PBS series, Commanding Heights )

While everyone may try to rid their portfolios of money assets, it cannot be done for the whole economy, and so, wealth held in dollar assets falls, making us all poorer, but also making the inflation tax even higher.   As people try to protect their portfolios by buying real assets (not money or dollar denominated IOUs), we end up in a game of “who gets stuck with the worthless money.”  We spend that money at a faster and faster rate.  For instance, the German hyperinflation mentioned above led to retailers raising their prices several times a day.  Workers and their spouses soon started demanding to get paid several times a day so that the same marks were going around the economy at faster and faster rates.  A very old and well known relationship in economics is that the price level (think CPI) times the output of real goods and services produced (think real GDP) equals the Money in the system times the speed at which money circulates (something called Velocity).  Or, put another way, the growth rate in the Money Supply times the growth in Velocity divided by the growth in the economy is the growth in prices better known as inflation.  Either more money or faster circulating money will drive up prices if we don’t increase our output.

We see store owners and farmers raising prices and seldom think that it is really the government and the central bank behind these price increases, making inflation amount to an invisible tax eroding away at the cash savings we worked years to build up.

I should point out that economists recognition of a government budget constraint, that we are taxed one way or the other for all of our spending is noted in the acronym “TANSTAAFL,” standing for “There Ain’t No Such Thing as a Free Lunch,” coined by Robert Heinlein in his science fiction book, “The Moon is a Harsh Mistress.” Still earlier, David Ricardo noted the equivalence of taxing and borrowing in his 1820 “Essay on the Funding System.”

Why Do Deficits Matter?

If we are taxed one way or the other as has been shown, why do deficits matter, why should we care about deficits and running up big national debts?

Well, just as Ricardo noted the monetary equivalence between borrowing and taxing to pay for some large government expense, such as a war (Ricardo’s example), Ricardo also suggested ways that these were not the same, noting that people often fail to perceive the full costs of government spending when it is financed by borrowing, noting what has been called by one of my professors, James Buchanan, “Fiscal Illusion.”  The problem is that the taxpayer-voter seldom notices the perpetual interest payment the government must make as the same as the immediate tax increase to avoid a deficit.

Another way of putting this is that not all taxes are seen as such.  People seldom connect the inflation that they face because of government services that they receive while refusing to pay higher taxes.   People also do not notice that they have less equipment and tools at work and fewer sellers in each industry because investments were not made at some earlier time because interest rates were too high.

Taxes out of their own pockets are seen and kept to a minimum, while government benefits they get are seen and kept to a maximum.  On the other hand, stealth taxes on capital and on money holdings are not seen as payments for their government benefits or the reductions in taxes for which they themselves are liable.

So, voters ask for lower taxes and higher benefits, more spending, and their representatives oblige.  The cost of government is perceived as being very low.  When we do not see the full cost of something, we usually ask for more, just as the consumer who does not pay for the environmental costs of the products they consumer want more to be produced.

Deficits matter because they misrepresent the true costs of decisions to voters.  Voters who benefit from the spending vote for it, as it is clear that they benefit.  Voters who pay the inflation tax or the capital tax (higher interest rates) do not perceive their liabilities and do not try to block passage.  The most popular legislation, then, raises deficits.  Fiscal Illusion that plagues us, especially when we employ deficit financing of government spending, makes continued deficits more likely, as voters, more than Twist, find it easy to ask for “More, please.”

-MC

A good example of a tax is the driveway fee, a flat tax for households in Mission, Kansas, which also charges churches a fee based on the seats in their sanctuary and the number of parking places at Lowes, that is a tax.  http://www.foxnews.com/us/2011/02/10/taking-liberties-taxing-church-attendance/

But wait a minute, the federal, state or local government is not supposed to tax a church.  The good folks in Mission say that this is not a tax, but a fee.  Sorry, folks, but an elephant is still an elephant even if you call it a monkey.  Calling it by another name does not change things.  What the folks in Mission, Kansas have is a tax and a clearly unconstitutional one.  And our state college’s tuitions are fees for direct services, not taxes.

Of course, here in Louisiana, where state sponsored gambling is unconstitutional, we are getting away with our state lotteries, horse race betting and state casinos by calling it gaming instead of gambling.  Yes, I see the difference.  Not really.

-MC

This and all posts on this site are the ideas and opinions of the writers and not necessarily the position of Nicholls State University.

That is a question I will take.  The answer is a resounding NO!

In the article, Rep. Dee Richard, as a sitting member of the Louisiana House Ways and Means Committee, the committee charged with reviewing taxes in the state, stated that “it’s a tax increase, because it’s a cost being passed onto a consumer though a government directive.” (quote is from the article, not a direct quote from Richard).  Richard should note that according to his definition, almost any regulation would then be a tax.  Also, though rare, there can be taxes where costs are not passed on to consumers.

Taxes are coerced payments, payments that do not involve a direct quid quo pro, a direct exchange.  Whether you as an individual pay your taxes or not, the services you get from government do not change.  You pay your property taxes and the city can light the streets you drive along.  If you (just you) fail to pay your taxes, the street lights still go on.  Whether you drive through the streets at night or not, you still owe those property taxes.  The tax bill does not depend on your use of the service and your service does not depend on you paying your taxes.

On the other hand, user fees are what governments charge as a price for a good or service that the government can sell.  Water and sewerage bills are examples of user fees, as are rates paid for campground sites and park visitation at state and national parks.  Tuition paid to colleges is another example.  If you want to enjoy the park by camping there, you can expect to pay for that privilege.  If you wish to go to a state community college or a state university, you pay for that privilege.  Certainly, when Tulane and Centenary raise their tuitions, these increases are not deemed taxes.  Should you choose not to go to college, you do not have to pay tuition.

Do I like tuition hikes?  With 2 of my children at a state-run university, I am not thrilled with the prospect of having to pay more.  However, my children and I both think that their education is important enough to pay something for it.  While the state as a whole may benefit from having more college-educated citizens, my children certainly expect to benefit from their studies.

By calling something a “tax,” certain opponents of the tuition increases distort the language for their political ends, hoping to taint the tuition increases with despised term, tax. Words are meant to communicate ideas that are shared and understood both by those using the words and those they mean to affect.  Tuition is a payment for something received, part of a voluntary exchange.  There is nothing voluntary about taxes.

-MC

This and all posts on this site are the ideas and opinions of the writers and not necessarily the position of Nicholls State University.