Voice For Liberty

Tag: Economics

State employment visualizations
There’s been dueling claims and controversy over employment figures in Kansas and our state’s performance relative to others. I present the actual data in interactive visualizations that you can use to make up your own mind.
(Let’s keep in mind that jobs are not necessarily the best measure of economic growth and prosperity. Russell Roberts relates an anecdote: “The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren’t there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman’s response: ‘Then why not use spoons instead of shovels?’”)
It’s important to note there are two series of employment data provided by the U.S. Bureau of Labor Statistics, which is part of the U.S. Department of Labor. The two series don’t measure exactly the same thing. Nearby is an example of just how different the two series can appear.
A document from BLS titled Employment from the BLS household and payroll surveys: summary of recent trends explains in brief: “The Bureau of Labor Statistics (BLS) has two monthly surveys that measure employment levels and trends: the Current Population Survey (CPS), also known as the household survey, and the Current Employment Statistics (CES) survey, also known as the payroll or establishment survey. … These estimates differ because the surveys have distinct definitions of employment and distinct survey and estimation methods.”
State employment based on Current Employment Statistics (CES) survey, also known as the payroll or establishment survey.
Another BLS document explains in detail the differences between the CPS and CES data. For example: CES: “Designed to measure employment, hours, and earnings with significant industrial and geographic detail” CPS: “Designed to measure employment and unemployment with significant demographic detail.”
Another difference: CES: “Self-employed persons are excluded.” CPS: “Self-employed persons are included.” (See Understanding the employment measures from the CPS and CES survey.)
State employment based on Current Population Survey (CPS), also known as the household survey.
I’ve gathered data from BLS and made it available in two interactive visualizations. One presents CPS data; the other holds CES data. You can compare states, select a range of dates, and choose seasonally-adjusted or not seasonally-adjusted data. I’ve create a set that allows you to easily choose Kansas and our nearby states, since that seems to be relevant to some people. (I included Texas in this set, as we often compare ourselves to that state.) The visualizations are indexed, meaning that each shows the percentage change in values from the first data shown.
Using the visualization.
Here is the visualization for CES data, and here is visualization for CPS data.
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March 17, 2014
Recommended reading: Foundations of a Free Society
Described as “An introduction to the core principles that define a free society,” I highly recommend this short book. It’s written by Eamonn Butler and published by Institute of Economic Affairs, a British think tank whose mission is to “improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.” (Being written in British English, a few words are spelled wrongly now and then.)
The book may be purchased or downloaded at no charge at Foundations of a Free Society. Here is the summary of the book, as provided by the author:
- Freedom creates prosperity. It unleashes human talent, invention and innovation, creating wealth where none existed before. Societies that have embraced freedom have made themselves rich. Those that have not have remained poor.
- People in a free society do not become rich by exploiting others, as the elites of less-free countries do. They cannot become rich by making others poorer. They become rich only by providing others with what they want and making other people’s lives better.
- The chief beneficiaries of the economic dynamism of free societies are the poor. Free societies are economically more equal than non-free societies. The poor in the most-free societies enjoy luxuries that were undreamed of just a few years ago, luxuries available only to the ruling elites of non- free countries.
- International trade gives entrepreneurs new market opportunities and has helped lift more than a billion people out of abject poverty in the last twenty years. Freedom is truly one of the most benign and productive forces in human history.
- Attempts by governments to equalise wealth or income are counter-productive. They destroy the incentives for hard work and enterprise and discourage people from building up the capital that boosts the productivity of the whole society.
- A free society is a spontaneous society. It builds up from the actions of individuals, following the rules that promote peaceful cooperation. It is not imposed from above by political authorities.
- Government has a very limited role in a free society. It exists to prevent harm being done to its citizens by maintaining and enforcing justice. It does not try to impose material equality and it does not prohibit activities just because some people consider them disagreeable or offensive. Leaders cannot plunder citizens for their own benefit, grant favours to their friends, or use their power against their enemies.
- The government of a free society is constrained by the rule of law. Its laws apply to everyone equally. There must be?due process of law in all cases, with fair trials and no lengthy detention without trial. People accused of offences must be treated as innocent until proved guilty, and individuals must not be harassed by being prosecuted several times for the same offence.
- Tolerating other people’s ideas and lifestyles benefits society. Truth is not always obvious; it emerges in the battle of ideas. We cannot trust censors to suppress only wrong ideas. They may mistakenly suppress ideas and ways of acting that would greatly benefit society in the future.
- Communications technology is making it more difficult for authoritarian governments to hide their actions from the rest of the world. As a result, more and more countries are opening up to trade and tourism, and new ideas are spreading. More people see the benefits of economic and social freedom, and are demanding them.
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March 16, 2014
Alternative measures of unemployment
Besides the official unemployment rate that is the topic of news each month, the Bureau of Labor Statistics (part of the U.S. Department of Labor) tracks and publishes five other series. These are called alternative measures of labor underutilization.
BLS defines the six measures as follows, along with the seasonally adjusted value for February 2014:
- U-1, persons unemployed 15 weeks or longer, as a percent of the civilian labor force, 3.5%
- U-2, job losers and persons who completed temporary jobs, as a percent of the civilian labor force, 3.5%
- U-3, total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate), 6.7%
- U-4, total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers, 7.2%
- U-5, total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers, 8.1%
- U-6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers, 12.6%
As the above definitions indicate, U-3 is the “official” or most often mentioned unemployment rate. Those who fit the profile of U-4, U-5, or U-6 are called “discouraged workers.” In particular, those in category U-6 are called “involuntary part-time workers.” The rate for this category, 12.6 percent, is 1.88 times the level of U-3, the official unemployment rate.
Alternative measures of unemployment in the United States, from Bureau of Labor Statistics
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March 13, 2014
Special interests defend wind subsidies at taxpayer cost
The spurious arguments made in support of the wind production tax credit shows just how difficult it is to replace cronyism with economic freedom. From October, 2012.
We often see criticism of politicians for sensing “which way the wind blows,” that is, shifting their policies to pander to the prevailing interests of important special interest groups. The associated negative connotation is that politicians do this without regard to whether these policies are wise and beneficial for everyone.
So when a Member of Congress takes a position that is literally going against the wind in the home district and state, we ought to take notice. Someone has some strong convictions.
This is the case with U.S. Representative Mike Pompeo, a Republican representing the Kansas fourth district (Wichita metropolitan area and surrounding counties.)
The issue is the production tax credit (PTC) paid to wind power companies. For each kilowatt-hour of electricity produced, the United States government pays 2.2 cents. Wind power advocates contend the PTC is necessary for wind to compete with other forms of electricity generation. Without the PTC, it is said that no new wind farms would be built.
The PTC is an important issue in Kansas not only because of the many wind farms located there, but also because of wind power equipment manufacturers that have located in Kansas. An example is Siemens. That company, lured by millions in local incentives, built a plant in Hutchinson. Employment was around 400. But now the PTC is set to expire on December 31, and it’s uncertain whether Congress will extend the program. As a result, Siemens has laid off employees. Soon only 152 will be at work in Hutchinson, and similar reductions in employment have happened at other Siemens wind power equipment plants.
Rep. Pompeo is opposed to all tax credits for energy production, and has authored legislation to eliminate them. As the wind PTC is the largest energy tax credit program, Pompeo and others have written extensively of the market distortions and resultant economic harm caused by the PTC. A recent example is Puff, the Magic Drag on the Economy: Time to let the pernicious production tax credit for wind power blow away, which appeared in the Wall Street Journal.
The special interests that benefit from the PTC are striking back. An example comes from Dave Kerr, who as former president of the Hutchinson/Reno County Chamber of Commerce played a role in luring Siemens to Hutchinson. Kerr’s recent op-ed in the Hutchinson News is notable not only for its several attempts to deflect attention away from the true nature of the PTC, but for its personal attacks on Pompeo.
There’s no doubt that the Hutchinson economy was dealt a setback with the announcement of layoffs at the Siemens plant that manufactures wind power equipment. Considered in a vacuum, these jobs were good for Hutchinson. But we shouldn’t make our nation’s policy in a vacuum, that is, bowing to the needs of special interest groups — sensing “which way the wind blows.” When considering everything and everyone, the PTC paid to producers of power generated from wind is a bad policy. We ought to respect Pompeo for taking a principled stand on this issue, instead of pandering to the folks back home.
Kerr is right about one claim made in his op-ed: The PTC for wind power is not quite like the Solyndra debacle. Solyndra received a loan from the Federal Financing Bank, part of the Treasury Department. Had Solyndra been successful as a company, it would likely have paid back the government loan. This is not to say that these loans are a good thing, but there was the possibility that the money would have been repaid.
But with the PTC, taxpayers spend with nothing to show in return except for expensive electricity. And spend taxpayers do.
Kerr, in an attempt to distinguish the PTC from wasteful government spending programs, writes the PTC is “actually an income tax credit.” The use of the adverb “actually” is supposed to alert readers that they’re about to be told the truth. But truth is not forthcoming from Kerr — there’s no difference. Tax credits are government spending. They have the same economic effect as “regular” government spending. To the company that receives them, they can be used — just like cash — to pay their tax bill. Or, the company can sell them to others for cash, although usually at a discounted value.
From government’s perspective, tax credits reduce revenue by the amount of credits issued. Instead of receiving tax payments in cash, government receives payments in the form of tax credits — which are slips of paper it created at no cost and which have no value to government. Created, by the way, outside the usual appropriations process. That’s the beauty of tax credits for big-government spenders: Once the program is created, money is spent without the burden of passing legislation.
If we needed any more evidence that PTC payments are just like cash grants: As part of Obama’s ARRA stimulus bill, for tax years 2009 and 2010, there was in effect a temporary option to take the federal PTC as a cash grant. The paper PTC, ITC, or Cash Grant? An Analysis of the Choice Facing Renewable Power Projects in the United States explains.
Astonishingly, the wind PTC is so valuable that wind power companies actually pay customers to take their electricity. It’s called “negative pricing,” as explained in Negative Electricity Prices and the Production Tax Credit:
As a matter of both economics and public policy, no government production tax subsidy should ever be so large that it creates an incentive for a business to actually pay customers to take its product. Yet, the federal Production Tax Credit (“PTC”) for wind generation is doing just that with increasing frequency in electricity markets across the United States. In some “wind-rich” regions of the country, wind producers are paying grid operators to take their generation during periods of surplus supply. But wind producers more than make up the cost of the “negative price” payment, because they receive a $22/MWH federal production tax credit for every MWH generated.
In western Texas since 2008, wind power generators paid the electrical grid to take their electricity ten percent of the hours of each day.
Once we recognize that tax credits are the same as government spending, we can see the error in Kerr’s argument that if the PTC is ended, it is the same as “a tax increase on utilities, which, because they are regulated, will pass on to consumers.” Well, government passes along the cost of the PTC to taxpayers, illustrating that there really is no free lunch.
Kerr attacks Pompeo for failing to “crusade” against two subsidies that some oil companies receive: Intangible Drilling Costs and the Percentage Depletion Allowance. These programs are deductions, not credits. They do provide an economic benefit to the oil companies that can use them (“big oil” can’t use percentage depletion at all), but not to the extent that tax credits do.
Regarding these deductions, last year Pompeo introduced H. Res 267, titled “Expressing the sense of the House of Representatives that the United States should end all subsidies aimed at specific energy technologies or fuels.”
In the resolution, Pompeo recognized the difference between deductions and credits, the latter, as we’ve seen, being direct subsidies: “Whereas deductions and cost-recovery mechanisms available to all energy sectors are different than credits, loans and grants, and are therefore not taxpayer subsidies; [and] Whereas a deduction of costs and cost recovery with respect to timing is not a subsidy.”
Part of what the resolution calls for is to “begin tax simplification and reform by eliminating energy tax credits and deductions and reducing income tax rates.”
Kerr wants to deflect attention away from the cost and harm of the PTC. Haranguing Pompeo for failing to attack percentage depletion and IDC with the same fervor as tax credits is only an attempt to muddy the waters so we can’t see what’s happening right in front of us. It’s not, as Kerr alleges, “playing Clintonesque games of semantics with us.” As we’ve seen, Pompeo has called for the end of these two tax deductions.
If we want to criticize anyone for inconsistency, try this: Kerr criticizes Pompeo for ignoring the oil and gas deductions, “which creates a glut in natural gas that drives down the price to the lowest levels in a decade.” These low energy prices should be a blessing to our economy. Kerr, however, demands taxpayers pay to subsidize expensive wind power so that it can compete with inexpensive gas. In the end, the benefit of inexpensive gas is canceled. Who benefits from that, except for the wind power industry? The oil and gas targeted deductions also create market distortions, and therefore should be eliminated. But at least they work to reduce prices, not increase them.
By the way, Pompeo has been busy with legislation targeted at ending other harmful subsidies: H.R. 3090: EDA Elimination Act of 2011, H.R. 3994: Grant Return for Deficit Reduction Act, H.R. 3308: Energy Freedom and Economic Prosperity Act, and the above-mentioned resolution.
I did notice, however, that Pompeo hasn’t called for the end to the mohair subsidy. Will Kerr attack him for this oversight?
Finally, Kerr invokes the usual argument of government spenders: Cut the budget somewhere else. That’s what everyone says.
Creating entire industries that exist only by being propped up by government subsidy means that we all pay more to support special interest groups. A prosperous future is best built by relying on free enterprise and free markets in energy, not on programs motivated by the wants of politicians and special interests. Kerr’s attacks on Pompeo illustrate how difficult it is to replace cronyism with economic freedom.
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March 12, 2014
The relevance of income tax rates
Jim Pinkerton, the journalist, Fox News contributor, and co-founder of the RATE (Reforming America’s Taxes Equitably) Coalition told an audience this: “The purpose of high taxes on the rich is not to get the rich to pay money, it’s to get the middle class to feel better about paying high taxes.”
Pinkerton was speaking last week at a conference titled “The Tax & Regulatory Impact on Industry, Jobs & The Economy, and Consumers” produced by the Franklin Center for Government and Public Integrity. His remarks, as he told the conference attendees, were based on the work of economist F.A. Hayek. Others have also noted that changes to marginal tax rates often have little impact on the amount of taxes actually paid. The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent.
The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich. They often cite the rising prosperity of the 1950s as caused by the high marginal tax rate in effect at the time.
A common mistake is equating tax rates with the tax actually paid. For many taxpayers, there is a direct relationship. For those who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more. But rich people can use these (and other) strategies to reduce the taxes they pay.
Click image for larger version.
In The purpose of high tax rates on the rich I showed that despite wide fluctuations in the top marginal tax rate, the tax revenue collected since World War II is remarkably constant, when measured as a percent of gross domestic product.
This is not the only way to consider the effect of tax rates. Using data from the Internal Revenue Service and Congressional Budget Office, I developed two charts. One shows the share of total federal taxes paid by top income earners, in this case the top five percent and the top one percent. For the range of years for which CBO provides data, the top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen slightly.
Click image for larger version.
A second chart shows the average federal tax rate for these two groups of top earners. The average federal tax rates paid by top earners has varied much less than the variation in tax rates.
As Pinkerton told the Franklin Center conference attendees, high tax rates make the middle class feel better about paying their own taxes. They may take comfort in the fact that someone else is worse off — that rich people are paying higher tax rates. But as the data shows, it’s a misconception that high tax rates mean rich people actually pay taxes at correspondingly higher rates.
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February 25, 2014
American economy is more competitive and carbon-efficient, says economist
Stephen Moore. Credit: Willis Bretz/Heritage Foundation
The oil and gas boom in America boosts our competitiveness in the world economy while at the same time reducing carbon emissions, says economist Stephen Moore.
Moore recently left the Wall Street Journal to accept a position at Heritage Foundation as chief economist. He presented to an audience at a conference titled “The Tax & Regulatory Impact on Industry, Jobs & The Economy, and Consumers” produced by the Franklin Center for Government and Public Integrity.
A large portion of his presentation was on energy and its important role in the economy, and how radical environmentalists — the “green” movement — are harming our economy and people. An irony, he said, is that while President Barack Obama is in the “hip pocket” of radical environmentalists, he is presiding over the greatest oil and gas boom in American history. This boom is proceeding in spite of government, not because of it.
Moore emphasized the importance of energy costs to low-income people. Rising energy costs are like taxes on them, he said, while the wealthy can more easily absorb higher energy costs. “To be green is to be against capitalism, against progress, against poor people, against jobs.”
The boom in oil and gas production in America, made possible by horizontal drilling and fracking, is ahead of the rest of the world. While European countries have in the past embraced green energy technologies, these policies have failed, and the countries are retreating from them. Now, European countries want to use American drilling technologies, he said.
The lower electricity prices in America are a competitive advantage over Europe and China. German auto manufacturers are shutting plants in Europe and moving them to the United States, he said.
Of radical environmentalist groups. Moore said: “They don’t even care about global warming. If they really cared about global warming, they would be cheerleading fracking. Because fracking is making natural gas the new fuel for America. And guess what? Natural gas emits less carbon. It’s a great antidote to global warming.”
(According to the U.S. Energy information Administration, when generating electricity, coal emits from 2.08 to 2.18 pounds of carbon dioxide per kilowatt-hour electricity generated. Natural gas emits 1.22 pounds, or about 43 percent less carbon dioxide.)
Moore went on to tell the attendees that it is the United States that has reduced its carbon emissions the greatest amount in the last five years. He said this is remarkable in light of the fact that the U.S. didn’t sign the Kyoto Treaty, the U.S. didn’t implement cap-and-trade, and didn’t implement a carbon tax. “You would think these environmental groups would be applauding natural gas. Now these environmentalist groups have a new campaign called ‘beyond natural gas,’” he said.
Moore explained that at first, environmentalists said they could accept natural gas as a “bridge fuel” to solar power and wind. They were in favor of natural gas, he said, up until the time it became cheap and plentiful. Now, they are against gas. “My point is, the left and environmentalists are against any energy source that works.”
Over the past six years the U.S. has spent $100 billion promoting wind and solar power, but these two sources together account for just 2.2 percent of electricity generation. Even if the country were to quadruple the portion of electricity generated by these two renewable sources over the next 10 to 20 years, the nation would still need to get 90 percent of its electricity from other sources. Moore was doubtful that the country could quadruple the output from wind and solar.
Trends in carbon emissions
To further investigate the topics Moore raised, I gathered data from Global Carbon Atlas and prepared interactive visualizations using Tableau Public. You may access and use the visualizations by clicking here. Following are static excerpts from the visualizations. Click on each image for a larger version.
Click image for larger version.
Looking at the amount of total carbon emissions, we see two important facts. First, after rising slowly, carbon emissions by the United States have declined in recent years. Second, carbon emissions by China are soaring. China surpassed the U.S. around 2005, and the gap between the two countries is increasing.
Click image for larger version.
Note also that carbon emissions in India are rising. Emissions in most advanced economies are steady or falling. These trends are emphasized in the chart that shows carbon emissions for each country indexed from a common starting point. Emissions from China and India are rapidly rising, while emissions from countries with advanced economies have risen slowly or have declined.
Click image for larger version.
A chart that shows the carbon emissions efficiency of countries, that is, the carbon emitted per unit of GDP, shows that in general, countries are becoming more efficient. Advanced economies such as the U.S., Japan, and Germany have an advantage in this metric. These countries emit about one-fourth as much carbon per unit GDP as does China.
Click image for larger version.
The chart of carbon emissions per person in each country show that the United States leads in this measure. In 2011, the U.S. emitted about 17 tons of carbon dioxide per person. China was at 6.6, and India at 1.7. But, the trend in the U.S. is downward, that is, less carbon emitted per person. In China and India, the trend is up, and rising rapidly in China.
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February 25, 2014
The purpose of high tax rates on the rich
“The purpose of high taxes on the rich is not to get the rich to pay money, it’s to get the middle class to feel better about paying high taxes.”
This is what Jim Pinkerton, the journalist, Fox News contributor, and co-founder of the RATE (Reforming America’s Taxes Equitably) Coalition told an audience at a conference titled “The Tax & Regulatory Impact on Industry, Jobs & The Economy, and Consumers” produced by the Franklin Center for Government and Public Integrity.
Pinkerton was referring to the economist F.A. Hayek. Others have also noted that changes to marginal tax rates often have little impact on the amount of taxes actually paid. The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent.
The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich. They often cite the rising prosperity of the 1950s as caused by the high marginal tax rate in effect at the time.
The mistake the progressives make is equating tax rates with the tax actually paid. For many people, there is a direct relationship. For workers who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more. But rich people can use these and other strategies to reduce the taxes they pay.
But as Pinkerton told the conference attendees, the high tax rates make the middle class feel better about paying their own taxes. They may take comfort in the fact that someone else is worse off, at least based on the misconception that high tax rates mean rich people actually pay correspondingly higher tax.
In 2010 W. Kurt Hauser explained in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”
Incentives matter, economists tell us. People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income. A common strategy is to make investments in economically unproductive tax shelters. There is less incentive to work, to save and build up capital stocks, and invest. These are some of the reasons why tax rate hikes usually don’t generate the promised revenue.
Click image for larger version
The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.” The nearby chart illustrates. The top line, the top marginal tax rate in effect for year year, varies widely. The other two lines show total taxes and federal income taxes as a percent of gross domestic product. Since World War II, these lines are fairly constant, even as the top marginal tax rate varies.
Data is from Bureau of Economic Analysis (part of the U.S. Department of Commerce) along with my calculations.
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February 24, 2014
Economic development in Wichita, steps one and two
Critics of the economic development policies in use by the City of Wichita are often portrayed as not being able to see and appreciate the good things these policies are producing, even though they are unfolding right before our very eyes. The difference is that some look beyond the immediate — what is seen — and ask “And then what will happen?” — looking for the unseen.
Thomas Sowell explains the problem in a passage from the first chapter of Applied economics: thinking beyond stage one:
When we are talking about applied economic policies, we are no longer talking about pure economic principles, but about the interactions of politics and economics. The principles of economics remain the same, but the likelihood of those principles being applied unchanged is considerably reduced, because politics has its own principles and imperatives. It is not just that politicians’ top priority is getting elected and re-elected, or that their time horizon seldom extends beyond the next election. The general public as well behaves differently when making political decisions rather than economic decisions. Virtually no one puts as much time and close attention into deciding whether to vote for one candidate rather than another as is usually put into deciding whether to buy one house rather than another — or perhaps even one car rather than another.
The voter’s political decisions involve having a minute influence on policies which affect many other people, while economic decision-making is about having a major effect on one’s own personal well-being. It should not be surprising that the quantity and quality of thinking going into these very different kinds of decisions differ correspondingly. One of the ways in which these decisions differ is in not thinking through political decisions beyond the immediate consequences. When most voters do not think beyond stage one, many elected officials have no incentive to weigh what the consequences will be in later stages — and considerable incentives to avoid getting beyond what their constituents think and understand, for fear that rival politicians can drive a wedge between them and their constituents by catering to public misconceptions.
The economic decisions made by governing bodies like the Wichita City Council have a large impact on the lives of Wichitans. But as Sowell explains, these decisions are made by politicians for political reasons.
Sowell goes on to explain the danger of stopping the thinking process at stage one:
When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated.
“And then what will happen?” he asked.
The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out.
“And what will happen after that?” Professor Smithies asked.
As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable than those at the first stage, and I began to waver somewhat.
“And then what will happen?” Smithies persisted.
By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous — and, in fact, much worse than the initial situation that it was designed to improve.
Simple as this little exercise may sound, it goes further than most economic discussions about policies on a wide range of issues. Most thinking stops at stage one.
We see stage one thinking all the time when looking at government. In Wichita, for example, a favorite question of city council members seeking to justify their support for government intervention such as a tax increment financing (TIF) district or some other form of subsidy is “How much more tax does the building pay now?” Or perhaps “How many jobs will (or did) the project create?”
These questions, and the answers to them, are examples of stage one thinking. The answers are easily obtained and cited as evidence of the success of the government program.
But driving by a store or hotel in a TIF district and noticing a building or people working at jobs does not tell the entire story. Using the existence of a building, or the payment of taxes, or jobs created, is stage one thinking, and no more than that.
Fortunately, there are people who have thought beyond stage one, and some concerning local economic development and TIF districts. And what they’ve found should spur politicians and bureaucrats to find ways to move beyond stage one in their thinking.
An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:
TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.
So TIFs are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:
If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.
We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.
In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.”
Here we have an example of thinking beyond stage one. The results are opposite of what one-stage thinking produces.
Some city council members are concerned about creating jobs, and are swayed by the promises of developers that their establishments will employ a certain number of workers. Again, this thinking stops at stage one. But others have looked farther, as has Paul F. Byrne of Washburn University. The title of his recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:
Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.
While this research might be used to support a TIF district for industrial development, TIF in Wichita is primarily used for retail development. And, when thinking beyond stage one, the effect on employment — considering the entire city — is negative.
It’s hard to think beyond stage one. It requires considering not only the seen, but also the unseen, as Frederic Bastiat taught us in his famous parable of the broken window. But over and over we see how politicians at all levels of government stop thinking at stage one. This is one of the many reasons why we need to return as much decision-making as possible to the private sector, and drastically limit the powers of politicians and governments.
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February 14, 2014
Viewing the seen and unseen
The lesson of the book “Economics in One Lesson” by Henry Hazlitt is this: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
(The Ludwig von Mises Institute has published an edition of this book which is available at no cost at its website; click here. Amanda BillyRock has illustrated most of the chapters in video. Click here for the playlist.)
Looking beyond what we see at first glance, that’s important. And considering everyone, not just some small group, is important too. You may be familiar with the term “special interest group.” A local example might be the Wichita Area Builders Association, which represents homebuilders. The purpose of groups like this — and I’m sorry to have to single out this group — is to represent their members, and them alone. So last year the Builders Association was able to persuade the Wichita City Council to pass a program that rebates Wichita property taxes on new homes for a few years. This makes it easier to sell these new homes. Homes which are built, of course, by members of the Wichita Area Builders Association.
Did the city council consider the long term effects of this policy, such as the effect on tax revenue in future years? Did the council consider the “Cash for Clunkers” effect, in which incentive programs induce people to buy now, only to depress sales in later years after the program ends? The answer is either a) No, the council did not consider these effects, or b) The council decided to ignore these effects.
Then, what about the effect on other groups besides the builders? Did the council consider that by offering savings when buying these select new homes, it likely reduced the appeal and value of all other homes across the city? Did the council consider that these new homes will require services like police and fire protection, but since they don’t contribute property tax, other taxpayers have to pay to provide these services?
And what about setting another precedent, that when business is not doing well, a special interest group appeals to government for special favors?
This is an example of the city council considering only the immediate effects of a policy, and also the effects on only a single group — the self-interested homebuilders. Things like this happen all the time.
Remember how Hazllitt said these groups will argue “plausibly and persistently?” That happened. As an example, Wichita State University economists prepared an analysis showing that this rebate program benefited the city. Did that analysis consider the long-term effects or only the immediate effects of the policy? Did that analysis consider the effects on all groups? I’m afraid that if we could look under the hood of these models, we’d find that they suffer from the problems Hazlitt warns about.
And the president of the Builders Association argued persuasively before the council. That’s an example of when Hazlitt wrote about a special interest group: “It will hire the best buyable minds to devote their whole time to presenting its case.”
Hazlitt told us what we need to do in these cases, writing: “In these cases the answer consists in showing that the proposed policy would also have longer and less desirable effects, or that it could benefit one group only at the expense of all other groups.”
Special interest groups expend lot of effort to get government to look at the seen and skip the unseen. That’s a reference to the famous parable of the broken window from chapter two of “Economics in One Lesson.” Ahe child who threw a rock through the window of the bakery. The crowd that gathered around the broken window: Someone suggested that the damage is actually a good thing, because the windowmaker now has work to do and earns money. And the windowmaker in turn will spend his new income somewhere else, and so forth. Economic development professionals who make arguments for subsidies to business call this the multiplier effect. It creates what they call indirect impacts.
A few years ago in an effort to drum up taxpayer subsidies for arts, a national organization — a special interest group — made this argument:
A theater company purchases a gallon of paint from the local hardware store for $20, generating the direct economic impact of the expenditure. The hardware store then uses a portion of the aforementioned $20 to pay the sales clerk’s salary; the sales clerk respends some of the money for groceries; the grocery store uses some of the money to pay its cashier; the cashier then spends some for the utility bill; and so on. The subsequent rounds of spending are the indirect economic impacts.
Thus, the initial expenditure by the theater company was followed by four additional rounds of spending (by the hardware store, sales clerk, grocery store, and the cashier). The effect of the theater company’s initial expenditure is the direct economic impact. The subsequent rounds of spending are all of the indirect impacts. The total impact is the sum of the direct and indirect impacts.
That is the same argument made to excuse the destruction of the broken window in the bakery. Doesn’t this sound plausible? But Hazlitt, echoing Bastiat before him, notes this: The baker was going to buy a suit of clothes, and buying that suit would set off its own chain of economic activity.
But now he must spend that money on fixing the broken window. The new window is what is seen. The unbought suit of clothes is more difficult to see. It is the unseen.
If the window was not broken, the baker has a functional window and a new suit of clothes. After the window is broken, however, all the baker has is a replacement window. No new suit of clothes is purchased.
As Hazlitt summarized: “The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new ’employment’ has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.”
In the case I cited above, it’s easy to see the benefit granted to the homebuilders. But the economic activity that does not take place because of the diversion of resources to the homebuilders? Where is that? It is unseen.
When the theater company spends $20 of taxpayer-provided money to buy paint: Where did that $20 come from? Isn’t it possible that a homeowner might have bought the same gallon of paint, but now is not able to because he must pay taxes to support the theater company? It’s easy to see the theater production with its taxpayer-funded painted set. It’s not easy to see the house that sits unpainted for a year to pay for the theater company’s paint. That is the seen and unseen.
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February 14, 2014