Transcript Ten Elements of Clear Thinking About Economic Progress and

Ten Elements of Clear Thinking
About Economic Progress and the
Role of Government
Common Sense Economics
James Gwartney, Richard L. Stroup,
and Dwight R. Lee
CommonSenseEconomics.com
1
Some Questions to Consider:
• How does a democratic government
really work?
• Is it a corrective device? Does it
sometimes thwart economic progress?
• Will a policy supported by a voting
majority be productive?
• What are the unintended
consequences of well-intended
governmental policies and programs?
• What is needed to reduce waste and
direct governments toward productive
activities?
2
What Role for Government?
“A wise and frugal government, which shall
restrain men from injuring one another,
which shall leave them otherwise free to
regulate their own pursuits of industry and
improvements, and shall not take from the
mouth of labor the bread it has earned. This
is the sum of good government.”
-Thomas Jefferson
3
Clear Thinking Proposition #1
Government promotes
economic progress by:
1. protecting the private
rights of individuals and
2. supplying goods that
cannot be provided
through markets.
4
Government’s Protective
Function
Government’s protective
function includes the
maintenance of a framework
for security and order.
• Protect people and their property
against aggressors through force if
necessary.
• Enforce contracts.
• Help avoid restrictions, regulations
and discriminatory taxes.
5
"If men were angels, no
government would be
necessary.”
James Madison
Federalist Paper No. 51
1788
6
Life, Liberty and the Pursuit of Happiness
Government promotes economic
progress by protecting individuals
rights to life, liberty, and the pursuit
of happiness. It can use force to
protect against loss of life, threat to
liberty, and damage of property.
Individuals will use resources
efficiently, invest and innovate if
their rights to benefit from doing
so are protected. Economic progress
ensues.
7
Government’s Productive Function
• Government’s productive function
includes the provision of public
goods – goods that cannot be
provided easily in private markets.
• Public goods
– Are available to others once provided to
an individual.
– Are difficult to provide only to paying
customers.
* National defense
* Flood control
projects
8
The Case for Public Goods
The legitimate object of
government is to do for a
community of people whatever
they need to have done, but
cannot do, at all, or cannot, so
well do, in their separate and
individual capacities.”
~ Abraham Lincoln
9
Clear Thinking Proposition
#2
Government is not a
corrective device. It can and
does fail!!!!
10
A Democratic Government
A method of social organization
where individuals make and carry
out choices collectively.
11
In a Democratic Government
• Decisions are made at the margin.
Voters, elected officials and lobbyists
support those proposals from which
they expect to derive net benefits.
• Too often the secondary effects of
political actions are ignored and/or
pushed into the future when the elected
officials are out of office.
• So there is no assurance that
governmental actions will be
productive.
12
CSE Table 3. Benefits and Costs of a Hypothetical Government Project
Building a Road or Civic Center
Voter
Benefits Received
Tax Payment
Plan A
Plan B
Equal Tax
Taxed Proportionate to
Benefits
Adams
$15.00 (30% of $50)
$12.00
$18.00 (30% of $50)
Brown
$15.00 (30% of $50)
$12.00
$18.00 (30% of $50)
Green
$15.00 (30% of $50)
$12.00
$18.00 (30% of $50)
Jones
$ 3.00
$12.00
$ 3.60 (6% of $50)
Smith
$ 2.00 (4% of $50)
$12.00
$ 2.40 (4% of $50)
TOTAL
$50.00 in total benefits
$60.00
$60.00
(6% of $50)
13
A Democratic Government:
Some Important Points
•
•
•
Policies proposed by
the government may or
may not be productive.
Policies favored by the
voting majority do not
necessarily promote
economic progress.
The benefits and costs
faced by voters
belonging to different
interest groups are
often disproportionate.
14
Unlike Democratic Governments,
When Markets Are Competitive
• Producers can not force
consumers to buy their
products.
• They have incentives to
undertake only productive
activities.
15
Let’s Compare Democratic
Governments and Markets
1.
2.
3.
The government can use coercion to tax
and subsidize. Markets can not.
Markets can charge high prices but can not
force people to pay. Governments “can”
and “do”.
Unconstrained political democracy is a
system of majority rule, while market
allocation is based on proportional
representation. In markets, consumers
buying one commodity will not interfere
with the ability of others to buy a different
one.*
16
What Is Needed to Encourage
Democratic Governments To Be
Productive?
• To reduce the likelihood that people
can participate in government
projects without paying, it is
important to link benefits
proportionately to costs.
• A democratic majority vote does not
guarantee the passage of productive
proposals.
• Supermajority support (75% of the
voters) will increase the likelihood
of passing productive projects.
17
Clear Thinking
Proposition #3
The costs of
government are not
only taxes.
18
Which of the following is true
of taxes?
a.
Taxes increase the volume of mutually
advantageous exchanges.
b. Tax increases are the primary cause of
inflation.
c. Business taxes generate government
revenue without imposing a burden
on consumers and households.
d. Taxes drive a wedge between what
buyers pay and what sellers receive.
19
3 Types of Costs Incurred
1. The loss of private sector
output that could
otherwise be produced
2. The cost of resources
expended in tax
collection and
enforcement of
government mandates
3. The cost of price
distortions caused by
taxes and borrowing
20
Costs of Collection & Enforcement
• Preparation, monitoring and enforcement
of tax law and regulatory legislation require
time, talent and money.
• These resources could be used elsewhere.
• People will use resources to avoid taxes.
• Government
expenditures plus
compliance costs and
mandated private
spending represent
more than 1/2 of GDP.
21
Let’s Review How To Measure
Government’s Share of Total Output
• Government expenditure’s
share of total U.S. spending on
goods and services produced
represents approximately 35%
of total GDP.
• When the costs of regulations
are added, this share rises to
over 50% of GDP.
• Government is big in the U.S.!
22
Government Can Distort Prices
• Taxes alter consumption and production
incentives.
• Consider supply and demand. Taxes
increase what consumers pay and reduce
what sellers receive. They reduce the
volume of exchanges and squeeze out some
of the gains from trade.
• Some exchanges will not occur because the
tax wedge makes them disadvantageous.
• Deadweight loss of taxation adds 9-16%
above the costs of compliance and
regulation.
23
Taxes in a Nutshell
• Taxes distort prices.
• Taxes transfer income from
individuals to the government.
– Businesses do not pay taxes. Instead,
they collect taxes from customers,
employees and shareholders.
• Politicians want to conceal the tax
costs of their programs and make
you “think” businesses are paying!
24
Do you agree or disagree?
Explain.
“Taxing is much like plucking a
goose. It is the art of getting
the greatest number of feathers
with the least amount of
hissing.”
~ Senator Bob Dole
Wall Street Journal
December 16, 1983
25
Clear Thinking Proposition #4
Unless restrained by
constitutional rules,
special-interest groups
will use the democratic
process to fleece taxpayers
and consumers.
26
A Democratic Government
• Can contribute to economic progress
when it fills its protective and
productive roles.
• However, more than a majority rule
and popular vote is needed to
assure that it restricts itself to those
roles.
• Why? Incentives matter! Consider
the following three examples.
27
1. Democratic Government Incentives
“Government regulators and
legislators may be heavily
influenced by lobbyists and
the possibility of securing
highly paid jobs after leaving
government, and so they may
focus on the interests of the
regulated party rather than
citizens.”*
28
The Power of Special
Interests
•
•
•
Special interest groups
will help politicians get
elected through
donations and getting
workers to vote.
While the majority of
unorganized voters is
harmed, there is little
incentive to act in
opposition.
In varying degrees, all
politicians cater to
special interests.
29
2. Democratic Government Incentives
“If a small but organized group
cares a great deal about a
certain government policy,
while the majority is
unorganized and apathetic,
then the special interest often
prevail.”*
30
Consider This “Sweet” Example
• In 2000, the sugar lobby contributed
$13 million to politicians.
• The government restricts sugar
imports into the U.S. through quotas.
• The average U.S. consumer pays $20
per year in higher sugar prices while
sugar growers gain about $1.9
billion.
• IS THIS A SOUND
GOVERNMENT PROGRAM?
DISCUSS.
31
3. Democratic Government Incentives
• Log-rolling: implicit vote trading
among legislators
• They vote for programs that benefit the
districts of other legislators in
exchange for votes for their pet
projects.
• Federally funded dams, highways,
housing projects, Veterans
Administration hospitals, and jobtraining centers are often reflective of
logrolling.
32
Question: Restrictions that limit sugar
imports, subsidies for the construction of
sports stadiums, and federal spending on
programs like the construction of an indoor
rain forest in Iowa all provide examples of
government programs that,
a. Are based on careful analysis of
benefits relative to costs.
b. Are designed to redistribute
income from the rich to the
poor.
c. Reflect the political
attractiveness of special-interest
issues.
d. Promote the general welfare.
33
Clear Thinking Proposition #5
Unless restrained by
constitutional rules,
legislators will run
budget deficits and
spend excessively.
34
The Attractiveness of Deficit
Spending to Legislators
• Budget Deficit: Government
spending that exceeds revenues.
Deficits are financed by borrowing.
• Spending is attractive to legislators
because it allows them to take credit
for programs that benefit voters.
• Taxes are unattractive because they
impose visible costs on voters.
• Thus, legislators tend to spend more
than they are willing to tax.
35
The National Debt
• The cumulative effect of all past
budget deficits and surpluses of the
federal government.
• Check out the U.S. Debt.
• The U.S. Treasury borrows funds
by selling securities like U.S.
Treasury Bills, Notes, and Bonds.
• Borrowing makes the current cost
of running the government less
visible.
36
Deficit Spending and National
Debt
• Borrowing pushes the visible cost of
running the government and
policies into the future.
• Bottom line. Immediate benefits
with deferred costs are politically
attractive!
• Deficit spending and public debt
appear to transfer costs into the
future when current politicians are
no longer office.
37
Constitutional Changes That
May Restrain Legislators
• Require the federal government to
balance its budget like most states.
• Require a 2/3 or ¾ majority vote in
both branches of Congress to fund
deficit spending or increase its
borrowing power.
• Require that Congress only spends
an amount equal to last year’s tax
revenue.
38
Clear Thinking Proposition #6
Government slows
economic progress when
it becomes heavily
involved in trying to help
some people at the
expense of others.
39
Production or Plunder?
•
•
A neutral government can help make the economic
“production” pie bigger when it protects property
rights and provides public goods!
It shrinks the economic pie when it “plunders” the
income of one group to satisfy the interests of
another.
“Counterproductive, favor-seeking activities are a natural
outgrowth of unrestrained democracy.” CSE, p97
40
Clear Thinking Proposition #7
The costs of government
income transfers are far
greater than the net
gain to intended
beneficiaries.
41
Income Transfers
•
•
It is difficult to improve people’s wellbeing through income transfers when
benefits are not attached to costs.
The unintended consequences of
secondary effects can get in the way.
42
The Unintended Consequences of Income
Transfers
1. Reduce incentives of both taxpayer and
transfer recipient to earn income
• “Free” income reduces work effort and
innovation among transfer beneficiaries.
• Increased tax burdens stifle incentives to
produce and earn more among persons
earning income and paying taxes.
2. Competition for transfers erodes most of
the long-term gain of the targeted
beneficiaries.
• When qualification requirements must be met,
resources and potential production are wasted
as individuals seek to qualify for the transfers.
43
Income Transfers (cont.)
3. Protection from adversity arising from
imprudent decisions makes people
more likely to increase the likelihood of
that adversity.
• Consequences of adversity become less
severe.
• Potential recipients have less incentive to
avoid adversity.
4. If you subsidize something, you get
more of it.
• Transfers directed toward the poor
unintentionally encourage high-risk
lifestyles.
• Charitable efforts are crowded out.
44
The “War on Poverty” Illustrates
These Points
35%
30%
25%
“War”
20%
15%
10%
5%
0%
1947 1959 1965 1975 1985 1995 2005
45
Clear Thinking Proposition #8
Central planning
replaces markets with
politics, which wastes
resources and retards
economic progress.
46
The “Man of System”
“The man of system is apt to be very wise to his own
conceit. He seems to imagine that he can arrange
the different members of a great society with as
much ease as the hand arranges the different
pieces upon a chess-board.”
-Adam Smith
47
The “Fatal Conceit” of Central Planning
1. Central planning merely
substitutes politics for market
outcomes.
a. Subsidies and investment funds
disbursed by planners are influenced
by political considerations.
b. “Old” firms tend to be favored over
“new”, growth-oriented firms.
c. “Pork barrel” projects are still
pursued.
48
The “Fatal Conceit” of Central Planning
2. The incentive of governmentoperated firms to keep costs
low, be innovative, and supply
goods efficiently is weak.
a. Boosting efficiency or lowering
costs generate little political gain.
b. Per-unit costs rise as increased
inefficiencies get built into the
political allocation.
49
The “Fatal Conceit” of Central Planning
3.
Investors risking their own money will
make better investment choices than
central planners spending the money of
taxpayers.
a.
Private investors bear the consequences of
poor decisions directly but central planners
do not.
b. Private investors have a strong incentive to
increase productivity and keep costs low. In
contrast, political rather economic
considerations are more important for
central planners.
50
The “Fatal Conceit” of Central Planning
4. There is no way that central
planners can acquire enough
information to create, maintain,
and constantly update a plan that
makes sense.
a.
Market prices generally channel
information quickly and accurately to
both producers and consumers. On
the other hand a political process,
particularly one with checks and
balances like those found in the U.S.,
will respond slowly and often in a
contradictory manner.
51
Clear Thinking Proposition #9
Competition is just as
important in
government as in
markets.
52
Government & Competition
1. Leaders of public sector firms have little
incentive to cut costs or boost performance
when there is little competition.
a. Inefficient programs are permitted to
linger.
b. Failure to achieve goals is often
rewarded by increased funding.
Consider increased funding in police
departments with higher crime rates.
2. In the market economy, profits and losses
register performance. Inefficient producers
are weeded out and efficient ones are
rewarded. There is no parallel in the
centralized government.
53
Government & Competition
3. Increased competition among
decentralized government units or
between the government and
private sector creates incentives for
government officials to work
productively, seek efficiency, cut
costs and innovate.
4. Citizens with differing preferences
and views about government
activities can vote with their feet in
a decentralized system; a
centralized system does not permit
this.
54
Clear Thinking Proposition #10
Constitutional rules that
bring the political
process and sound
economics into
harmony will promote
economic progress.
55
Constitutional Checks
• The scope of
government must be
limited.
• An unrestrained
government results in
the fleecing of citizens.
• Constitutional checks:
– 10th Amendment
– 5th Amendment
56
A Positive Program for
Prosperity
• List the seven constitutional
constraints presented by the
authors.
• Explain the purpose of each
constraint.
• Indicate why you think it will
be either effective or
ineffective.
57
A Positive Program for
Prosperity:
7 Constitutional Suggestions
1. No government shall use its
regulatory powers to take private
property, either partially or in its
entirety, for public use without
paying the owner the full market
value of the property taken.
58
A Positive Program for
Prosperity:
7 Constitutional Suggestions
2. The right of individuals to
compete in a business or
profession and/or buy and sell
legally tradable goods and
services at mutually acceptable
terms shall not be infringed by
Congress or any of the States.[i]
59
A Positive Program for
Prosperity:
7 Constitutional Suggestions
3. Congress shall not levy taxes or impose
quotas on either imports or exports.
4. A three-fourths approval of both Houses
of Congress shall be required for all
expenditure programs of the federal
government. At least two-thirds
approval of the legislative branches of
state government shall be required for
the approval of expenditures by state
governments.
60
A Positive Program for
Prosperity:
7 Constitutional Suggestions
5. A three-fourths approval of both
Houses of Congress shall be
required before the federal
government is permitted to
borrow any funds to finance a
deficit in its annual budget.
61
A Positive Program for
Prosperity:
7 Constitutional Suggestions
6. A three-fourths approval of both
Houses of Congress shall be
required for the federal
government to mandate any
expenditures by either state
governments or private business
firms.
62
A Positive Program for
Prosperity:
7 Constitutional Suggestions
7. The function of the Federal Reserve
System (Fed) is to maintain the value of
the currency and establish a stable price
level. If the price level either increases or
decreases by more than 4 percent
annually during two consecutive years,
all Governors of the Federal Reserve
System shall be required to submit their
resignations.
63