Government taxation is not government spending

Suppose the federal budget is balanced at $1 trillion. Now suppose Congress reduces taxes by $200 billion without reducing spending. One result is a $200 billion deficit. Another result is that voters pay for only 80 percent of what government actually costs. This of this as a 20 percent discount on government. As everyone knows, when you put something on sale, people buy more of it. Logically, then, tax cuts might increase the demand for government instead of reducing the supply of it. Stoking the beast, Jonathan Rauch, 'Atlantic Monthly', June 2006

Rauch goes on to cite research showing that there is no sign that deficits have ever constrained government spending. To the contrary; the evidence shows that a tax cut of 1 per cent of GDP increases the rate of spending growth by about .15 per cent of GDP per annum. The same research shows that taxation above 19 per cent tends to shrink government and taxation below it makes government grow.

Thanks to the Bush tax cuts, revenues have been well below 19 percent since 2002…. Perhaps not surprisingly, government spending has risen under Bush.

There are several policy implications arising from this. The critical one is that reducing government income does not necessarily reduce government spending. The two are not synonymous. This sounds obvious, but it’s the sort of fact that is rarely made accessible to the electorate. It means that reducing taxation does not mean small government – it can mean quite the opposite. This means that we, the public, should (ideally) vote for meaningful outcomes; not slogans. If a political party is advocating small government as an end in itself, then it should come right out and say so. If, on the other hand, it really wants tax cuts, regardless of whether (as in the US) they increase government spending, then it should admit that that is its objective.

Politicians currently get away with this sort of shell game, because we, the voters, are not used to distinguishing between policy ends and means. Small government, except to ideologues, is not an end itself. It may be a means to various ends, but in my view it would be more efficient to target those ends explicitly, rather than the alleged means of achieving them. We should demand and respond to greater transparency from the politicians as to their true intents. We should, indeed, be voting for explicit outcomes that are meaningful to citizens; rather than vague promises and slippery slogans. Such outcomes would be at the very core of a Social Policy Bond regime. People would know exactly what they were voting for. A revolutionary concept, no doubt, but one that would hold politicians accountable and bring greater public participation into the policymaking process – at the expense of the spin doctors and ideologues.

Insuring against catastrophe

In retrospect most of us probably wish more resources had been devoted to stopping the spread of nuclear weapons. Many of the things we most value are difficult to define precisely, and so require some effort to incorporate into a Social Policy Bond regime. 'Peace' for instance is perhaps the most valued outcome of all. It would probably need to be expressed in terms of an array of outcomes and indicators. Nuclear proliferation, again, would need to be defined quite technically before it could be made the object of Social Policy Bonds aimed at preventing it. Nevertheless I believe such targeting could be done and should be attempted as a complement to existing efforts to solve these problems.

More readily definable is the detonation of nuclear device in anger. This would be a catastrophe in itself, and would represent a discontinuity in human history that could precipitate untold further suffering. The policymakers, as with nuclear proliferation, seem to be failing. This is where Social Policy Bonds targeting such an explosion could score heavily over the current approach. Their objective would be simple to define - the sustained avoidance of a nuclear explosion - and easy to verify. It's an objective that almost everyone would support, and one that, in my view, requires more imagination and brainpower than is currently being channelled in that direction. It's also an ideal goal for Social Policy Bonds in that it's not at all clear from where the most obvious threat to its achievement is likely to originate. Helen Caldicott, for instance, points to the fact that Russia and the US together own 96 per cent of the world's 30000 nuclear weapons. With current efforts at keeping the nuclear peace apparently faltering; with an easily expressed, easily verified goal that is highly correlated with human well being, and with a real need for imaginative solutions and rewards beyond those available to bureaucrats, maybe Nuclear Peace Bonds would be the way forward.

Monetising public goods

The case of Wal-Mart makes us realise just how badly we lack a way of talking about the public good that is not framed purely in terms of economics. The huge fortunes made at the end of the 19th and start of the 20th centuries were broken up by anti-monopoly and anti-cartel legislation , because they had been accumulated at the expense of the public good. That is a useful idea, and one that needs to be revived and used as a yardstick. John Lanchester, The Price of Pickles (reviewing books about Wal-Mart).

I agree. Corporate power has grown immensely and politicians are increasingly in its thrall. Our physical and social environments are more and more determined by corporate wishes than by any idea of the public good. The government policies I know best are perverse subsidies. Their effects have been disastrous: they help denude and destroy our countryside and cities; the protect large, global concerns at the expense of small, local businesses, and they represent a massive waste of scarce resources. I say 'have been' but these policies persist - and that's even more shameful. If you look carefully amongst the news stories, (skipping the serious stuff about Princess Margaret's alleged illegitimate son, the skateboarding rhinoceros etc) you will see reports of the WWF's study saying that humanity's use of resources is unsustainable. The evidence does seem to be piling up, but what is disheartening is the widening gap between where we are headed, and what most people presumably want.

Many of those in power, if they think at all about the public good, probably identify it with the financial health of corporations. A Social Policy Bond regime puts off some well-meaning people, because it offers cash rewards to those who would supply public goods. I understand their apprehension: a bond regime would use markets to solve classic problems of market failure. Unfortunately we live in a monetised world. Without financial incentives there's little hope of reining back the corporations and their puppets in government. It's paradoxical and perhaps regrettable but also, in my view, necessary, to pay people to do the right thing. After all, we'd not be rushing headlong into planetary collapse if it were not for the monetary incentives and taxpayer-funded corporate welfare programmes that currently reward the destruction of public goods.

Target outcomes, not alleged means of achieving them

We assume that if we raise pollution prices, pollution will come down. But not even the smartest economist can know how quickly it will come down, or by how much. We can only proceed by trial and error. Much of the tax-setters’ time will be spent debating how much of a price hike will produce how much of a reduction in pollution, when in fact what we should be debating is how quickly we want pollution to drop. Once that debate is settled, we should be able to set a value at the agreed-upon level. We can’t do that with pollution taxes. Pollution taxes, in short, though better than nothing, are far from an ideal way to protect nature.

An excerpt from the excellent Capitalism 3.0: a guide to reclaiming the commons, by Peter Barnes. Economists love pollution taxes, which are beguilingly elegant. Unfortunately, as Mr Barnes points out, their apparent sophistication has over-ridden their value: a common failing of policy that is driven by anything - except outcomes that are meaningful to natural persons. The elegance is often seen as an end in itself. No doubt I shall have more to say about this book when I have finished reading it. Meanwhile, another excerpt, quoting Kevin Phillips, a former (US) Republican party strategist:

“The timber industry spent $8 million in campaign contributions to preserve a logging road subsidyworth $458 million—the return on their investment was 5,725 percent. Glaxo Wellcome invested $1.2 million in campaign contributions to get a 19-month patent extension on Zantac worth $1 billion—their net return: 83,333 percent. The tobacco industry spent$30 million for a tax break worth $50 billion—the return on their investment: 167,000 percent. For a paltry $5 million in campaign contributions, the broadcasting industry was able to secure free digital TV licenses, a giveaway of public property worth $70 billion—that’s an incredible 1,400,000 percent return on their investment.” The reason our political system works this way isn’t that our politicians are particularly venal. Rather, the cause is structural.

What drives immigration policy?

We happily delegate many decisions to government because politicians and officials are specialists; they have deeper understanding of most of the issues, and we trust them to act on our behalf. Sometimes our trust is misplaced. But even more often, I think, government drifts into policies that have major impacts on citizens' lives, without realising what it is doing. Some of these policies can be self-reinforcing, acquiring an intertia of their own, which makes them very difficult to stop. Much of the western world is, in my view, experiencing this with immigration policy. Immigration has undoubted benefits, but my beef today is about its effects on house prices. I am thinking of New Zealand and the UK, and what I see in those countries is that ordinary working couples who cannot rely on family help are struggling to buy houses. I also think that governments in these countries are now in a position where they feel compelled to keep house prices high, or risk (1) offending middle-class property owners and (2)
a house price crash, leading to a slump in consumption, unemployment and electoral unpopularity. It is in these governments' interest, at least in the short run, to keep immigrants coming to buttress the housing market.

The purpose of this post is merely to point out that this immigration has much wider effects on society than this, and that maintaining house prices is hardly a legitimate policy outcome. Certainly it's on nobody's election manifestoes. Yet it does seem to have become an implicit policy goal; one that's been reached by default, and will be very difficult to reverse, even if some far-sighted politicians see and care about the long-term effects it has on the social fabric of New Zealand or the UK - or the societies that migrants leave behind. Like farm subsidies or a drug habit, policies to support the housing market are far more difficult to end than to start.

More transparency at the outset is essential. If governments want to subsidise wealthy landowners and agribusiness (as most rich countries do) then they should come out openly and say that that is their policy. And if they see high house prices as an end itself, then they should openly admit it, and we could vote accordingly.

I am not of course objecting to immigration. I am though objecting to policies that have huge effects on people being made by default and without any sort of consultation. A Social Policy Bond regime would from its very outset specify explicit policy goals. People would vote for the outcomes they favoured, not for the least unappealing party leader or phatic statements of intent. Greater informed public participation in the political process would not only be an end in itself: it would be a way of securing more 'buy in' to crucial policies, like immigration policy. Immigrants would felt and actually been more welcome and more willing to integrate if the host population had first been consulted about whether they were to be admitted.

Measuring government performance

The contribution of government to the economies of the rich world exceeds that of Communist China or the Soviet Union in many regions. (In Wales, for example, the public sector accounts for 66 per cent of the economy.)

One problem arising from this is that governments have to use numerical indicators to measure the success or otherwise of their policies (if they attempt that sort of monitoring at all) and that these indicators, as in the former USSR, may have very little correlation with anything meaningful to people - other than the bureaucrats whose careers rise or fall on how well they can make those figures look.

The problem becomes more serious as government crowds out our non-numerical ways of doing things. In many areas of life, and for most but not all of us, these ways are more efficient, adaptive and responsive than government approaches. They are also more obviously sensible, though more resistant to codification, systemisation and other bureaucratic processes. What areas of life am I talking about? Things like child rearing, personal health, and the arts. Well-meaning government programmes, initially developed to deal with extreme cases, expand to dominate more and more of our routine activity: like the private sector, but without its disciplines, growth is the public sector’s imperative.

Etc. The one thing for which neither you nor anyone under your management will be held responsible are outcomes for young people. It would be the same if the issue were crime, or health care, or education…. Plausible reasons for poor outcomes can always be found outside the performance of your agency, and many of them will be perfectly valid. There are just too many variables for your performance to count for much.

All this should imply a certain humility on the part of government. If it works in areas where it cannot think of measurable outcomes that are inextricably linked to social welfare or environmental benefits it probably should not be involved in that field of activity. In those areas government is very likely to be crowding out less formal, but more efficient ways of doing things. Government should stop its subsidies to its corporate friends, which it currently gets away with because they allegedly benefit 'domestic industry' or 'the family farm' or 'transport links'. Instead it should concentrate on the most extreme cases of social and environmental deprivation, where its help is unquestionably needed and where the numbers do correlate with social and environmental well being.

What we have now, and are increasingly suffering from, is in some ways the worst of both worlds: big, intrusive and growing government working hand-in-with big business the expense of everyone else. Tragically this co-exists with expanding pockets of social deprivation, and in many areas, a deteriorating social and physical environment.

Ignorance all round

At a fringe meeting at the Conservative Party Conference the head of the EU Commission's representation in the UK, Finnish national Reijo Kemppinen, argued that the general rise in 'euroscepticism' polled across the EU recently is "fuelled by ignorance, and a lack of knowledge." He said, "People don't know much about the EU and the benefits it can bring," arguing that the Commission has a job to do in explaining the EU and its policies to people. When questioned about his remarks by members of the audience, Kemppinen later denied having used the word "ignorance". He then went on to concede that he didn't know as much of the detail of many EU policies as some eurosceptics. Open Europe Bulletin, 13 October

Commissioner Kemppinen is probably correct, but there's plenty of ignorance too about the costs the EU imposes on its citizens. Not just the regulatory costs, which the EU's own 'Enterprise Commissioner' reports as being around 600 billion Euros every year (about 5.5% of total EU GDP!); but the costs of subsidies, and protectionism, the latter of which does not appear on the EU budget. It's ignorance about these costs that, in my view, that is the more scandalous.

There is such a thing as society

The right therefore has an affinity for market economies, both because people will always be more motivated to work for themselves and their families than for something called "society," and because no planner has the wisdom, information, and disinterest to run an economy from the top down...And since we are always teetering on the brink of barbarism, social traditions in a functioning society should be respected as time-tested workarounds for the shortcomings of an unchanging human nature, as applicable today as when they developed, even if no one can explain their rationale. ... The idea that people have a right to paid vacations, central heating, and a college education, for example, would have been unthinkable throughout most of human history...my freedom to have my teeth fixed impinges on my dentist's freedom to sit at home and read the paper. Steven Pinker, quoted in EconLog

While I agree with the comment, I cannot dismiss 'society' as readily as Dr Pinker appears to, and as many policymakers definitely do. There is such a thing as society, and its loss or erosion means a lot to people who aren't lucky enough to fufil all their social needs in their daily lives. We are not just adjuncts to an economic system, and perhaps we think we have rights to housing and holidays because we regard these things as a quid pro quo for our society's being systematically dismantled by government policies - of all parties - that favour their large, global buddies (via subsidies to big business, infrastructure; the externalising of social and environmental costs; and a biassed regulatory system) at the expense of the small and local.

Roads are for the rich

Aucklanders should oppose tolling every step of the way. Tell Transit we do not want to spend $14 every time we drive between Manukau and Albany. We don’t want fast roads for the rich and slow roads for the poor. It is the government that should be funding roads, not the people of Auckland – they have already paid their taxes.” Auckland City Councillor, Cathy Casey, saying why she opposes Transit NZ’s tolling solution for the funding of State Highway 20

Does Councillor Casey think that toll-free roads benefit the poor? Ok, maybe in Auckland even very poor families have one vehicle of their own - otherwise they'd be unable even to shop for groceries. But it's a mistake to think, that just because they pay nothing for access to almost all roads like rich people, they benefit as much as the well off from lavish provision of roads. They don't. They have fewer vehicles per household, less money to spend to keep them running, and less leisure time for driving. They also suffer disproportionately from noise and air pollution. The big beneficiaries of roading programmes are construction companies and the wealthy.

The limits of quantification, continued

When numerical indicators are strongly correlated with what we as societies want to achieve, then they are invaluable. In setting up the basic health, education and welfare programmes of large societies, quantification is indispensable. We need the numbers to measure where we are, and where we are going. But my question, raised in the previous post, is whether we are in danger of applying numbers where they don't actually measure anything meaningful. GDP per capita, for instance, was, and for many countries still is, an easily measured and occasionally useful indicator of a country's well being. But at higher levels of wealth, the relationship between it and well being breaks down. Nevertheless, maximizing GDP per capita appears to be one of the main de facto priorities for governments of countries at every level of development.

The limits of quantification become more important as government expands its role. They help make the case against that expansion. on efficiency grounds at least, because once we have the basics, the things that really matter to us cannot be quantified. In some ways we in the rich countries are getting the worst of both worlds. We have under-provision of programmes that eradicate poverty and provide a tightly-woven safety net to the most disadvantaged members of society. Here numbers, such as basic health and literacy indicators are meaningful and strongly correlated with welfare. At the same time, government funds its corporate buddies with massive funding of the construction, agribusiness and other sectors, through perverse subsidies, which, as well as representing a transfer from the poor to the rich, impose deadweight losses on the entire economy and devastate the natural environment.

Perverse subsidies and other forms of corporate welfare invariably rely on vague, qualitative arguments, or they use numbers where there is no correlation between the numbers and societal well being. The case for universal safe water and literacy education for children, for instance, is solid; that for exacting funds from taxpayers for post-graduate programmes, or lining rivers with concrete (as in Japan) needs to be made explicit and subject to challenge. A Social Policy Bond regime would achieve this level of transparency; right at the outset it would specify its targets in objective terms. By subordinating policy to outcomes, instead of to obscure, misleading or mutually conflicting objectives, it would impose some rigour on the function of government.