Thursday, March 29, 2012

My Money and Success (Ch. 8 and 9)

Frank states that Libertarians believe in the Lockean right to our efforts (i.e., I worked for it, so it's mine) and that taxes are equated with theft. I do like Bastiat's quote, "But how is legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong." His (Frank's) criticism of this logic) is that the wealth I was able to make was only possible because of the infracture and institutions of the country where I live, and those institutions and infrastructure was made possible by taxes.

I concede that some taxes are necessary (defense, courts, institutions protecting property rights...I don't think it's government's responsibility to provide public education). And I agree with his statement, "Taxes on useful activities, such as those on savings or job creation, make the economic pie smaller." I also was happy to see that he concedes that CEO or pay for private college presidents is based on their scarce talent (granted he believes that is not the sole explanation). My point is simple: I don't care what PRIVATE firms pay their executives. It's their money, not mine! If a private firm is stupid enough to pay a person a high salary that is unmerited, they will suffer. The bottom line is that the money the firm is paying to their executives isn't mine! I don't understand the moral outrage. Yes, I understand the liberal argument that it is unfair for the top-level management to make so much more than the line-level worker. But to me that is arrogance. It is not a right to work for a firm! So, if a worker voluntarily chooses to work for his or her particular wage, obviously it's a benefit to them--their revealed preference proves that. Of course, I am opposed to government subsidies to private firms or "bailouts."

I also want to point out his Bill Gates example. He proudly writes that Bill and Melinda Gates have donated over $30 billion for their foundation. That is great but I will be blunt and say they did not owe anybody else their money. So, if they get utility for doing that, then fine. But I would not consider them evil if they did not. Bill Gates has helped far more people by providing them jobs and providing products that allow others to make income and make them more productive. And as for Bill's father being for the estate tax, that smells of some type of "rich guilt." Well, Mr. Gates, as a teacher who does not live in luxury I absolve you of your guilt. Your son helped make the pie bigger. It's not as if there is a fixed pie and when Bill got a larger piece, I got a smaller piece!

In conclusion, taxes are forced redistribution. We can argue that some taxes are legitimate and necessary. Where we get into trouble is when we decide that it is "fair" for those with a lot to have to give up their income to those who have less. Is that the role of government or of private charities? Some in politics believe it is the Christian thing to give to those who are less fortunate. I can support that if it is I who is doing the giving, not Washington giving on my behalf. ze
n at the expense of another by doing what the citizen himself cannot do without  commiting a crime.

Tuesday, March 27, 2012

When the economic pie grows. . .

I hear this concept of the economic pie, an arbitrary concept of the agregated wealth of a certain economy. But the Idea that if the pie grows you retain your percentage of the pie and your slice increases in pure ludacris. The notion that if wealth it created, it instantly distributes itself over the entire system evenly or even at all i think is bogus.

Many economic thinkers have used this idea that what is good for the economy is good for all, because growing the economic pie is good right? Wrong.
Where the economic pie growing is undoubtedly beneficial to some people , the fact is that all over the world when the pie grows only a select few reap any significant benefits.According to the U.S Census, In my life time alone the wealth of the wealthy (top 10% of the income distrobution) has increased by over 400%, whereas after inflation adjustements the wealth of the other 90% has DECLINED a little over 5%. I don't care what kind of justification one may have, the rich people of the united states have not been producing 400% more that is for sure. Check It

The reason for all of this is pretty evident. Blatant and repetitive tax cuts on the wealthy over the last 40 years. In the mid- late 70's there have been consistent tax cuts, from every single presidency EXCEPT the Clinton administration. That is right. Where these tax cuts have reduced the tax rates of lower income families a small amount, the majority of these tax breaks and incentives were focused primarily on the top 10% of the income distrobution. These consistent tax cuts accounts for two things, the growing income disparity and the outrageous budget deficits we have had over the last 40 years. Check it.
Anyone with a basic understanding of cash flow can tell you that if you have a menial amount of cash on hand, and you have debts that already outweigh your accounts receivables, then you must increase revenue to balance your equation. So why then , if we have consistently been in debt since the first world war, are we consistently reducing taxes (revenue) when our nations debt is already higher than our current revenue? this makes no sense.

Some say reducing taxes is an economical incentive, and that the benefit of reducing taxes is in fact higher than taxing in the first place. I agree that this may be true in some cases, but when these tax cuts are mainly focused on the richest in the country I call bullshit. Many lower income families are already taxed just about nothing, and richer people are usually taxed at a higher rate than that, but the richer people who are benefiting from business with thousands of people or more aren't taking into account that they in turn are using exponentially more public resources than someone who is not doing such massive business. Without our nations infrastructure, its system of laws, its law enforcement, it's national defence, and its international treaties, all business would be moot. Your property rights would not exist if the United States did not defend them, that is they are only self evident because if people try and ignore our basic property rights (Life, Liberty, And the Pursuit of Happiness) we have an awesome government willing to deter/arrest/kill them. Also without our fiat currency, the last 200 years of economic development would be nigh impossible. The investments of tax payers for the last 200 years is what allows your business to even take place, it protects your life blood ( the customer) and allows you to keep what you have without fear of someone taking it from you. Since it is the collective trade of the products of thousands of people that makes the rich so wealthy, they should pay an appropriate coinciding price for the benefits they receive,and since it is exponentially more than the average bear, then their taxes should be exponentially more.

Yet staunch supporters of tax cuts mostly have the same argument, " Its your money, you should have the right to dictate its use, and to take it by law is systematic theft"
Now , this would be true in an anarchist society with no government and no government benefits. But in the united States at least this is not the case. Just being here you receive basic rights that are not free. Any soldier from any war in history can tell you freedom is not free. Our rights to life, liberty and the pursuit of happiness are bought with taxes. The bottom 90% that able to buy products are what gives these people their wealth, it doesn't come out of the ground. These people are able to do so because their rights and prosperity just happens to be a priority of our government, that is why if you are a citizen taxes are mandatory, other wise you would get free riders like GE, Warren Buffet, and Boeing who enjoy billions in profits from millions of customers yet pay lower taxes than a middle class family that only uses the government benefits of a few people (<10 household members).

When the economic pie grows, only the ones slicing it get bigger pieces. The rest of the 90% , the foundation of the economic pie, is getting upset and hungry with the meager slivers that aren't getting any bigger. This is a problem, and it needs to change.

Monday, March 26, 2012

Paper in our Pockets

Up until this point, Frank has addressed a wide variety of different issues and has attempted to defend his perspective through various arguments. In Chapters 8 and 9, Frank comes to one of the key concepts of any economy: money and the way individuals feel about their incomes. I was intrigued by Frank’s perspectives and also found myself agreeing with him in many ways, mostly in the way he addressed common beliefs.
Beginning in Chapter 8, Franks addresses the idea of an, “It’s my money…” mentality. He presents the argument that this common sentiment among individuals often does little good since it is in fact the infrastructure paid for by taxes which allows individuals to prosper as much as they do. For without tax structure, Frank argues, the very fabric of the system is stunted because nothing is maintained, allowing entropy to ensue.

In many aspects, I understand where Frank is coming from, and I think his logic is valid in many ways. The whole idea behind taxes is that citizens who consume basic services like road usage, postal services, and military protection (among other things) must pay for those services since obviously, nothing in life is free.

There is the other option of privatization which for many instances would make sense, but personally, I think there has to be a healthy balance in both scenarios simply for the reason that not every prescription will result in accurately remedying the situation. Balance again is tricky if not impossible to be decided by one entity alone, but it is also helpful to remember that current systems exist for reasons, not because they are the most efficient but because they were believed at one time to be the best compromise in an attempt to establish equilibrium.

 I personally, have no desire to fund my own army or attempt to manage my own highway which makes me grateful that the government has taken the initiative to recognize that this is indeed the case. I can only imagine the chaos which would ensue if in fact American citizens were responsible for national security. There are many situations where privatization could potentially work but there is also the distinct possibility of minor civil wars breaking out which really would do little to keep a country united in my mind. Nevertheless, national security still comes at a price. As it is consumed, it must be paid for.

 It is noteworthy to remember that those green paper bills we carry around aren’t really “money” but currency. There is no intrinsic worth in those bills because we use a fiat currency (which personally I find really ironic!). So why do we still trade worthless paper? …Probably because its’ primary function at this point is to serve as a measure of potential consumption later on and also because no one wants to carry around bulky objects to barter anymore. It’s just not practical. The promise is that consumption is really what individuals work for, not the tangibility of the bills themselves. After all, most measures of currency only exist as numbers in a bank account which is constantly fluctuating, never to be seen in its entirety by the individual who actually owns the currency. Therefore, the concept of currency is in fact a creation of the government, and while this creation obviously doesn’t give the government power to absolutely control the objects which the currency purchases, investing in the government as long as they do provide the services they do, makes sense to some extent as long as we as consumers indulge in those services.

Understandably, there will always remain the argument that the government is simply inefficient and therefore doesn't  deserve to have money poured into it, especially if the collective believes it may concoct a more efficient way to spend that money. While this may be true, life unfortunately does not always derive the most efficient ways of living, and as long as the government is in control of certain commodities, those commodities must be paid for.

In all reality, living in a privatized world could be interesting, but just as a totalitarian society is a little over-kill on government, anarchy isn't necessarily the best solution to solving tax woes either. Franks touches on various issues in both chapters and is really in the process of building a vocabulary, vocalizing common mentalities, and establishing a bridge to his audience in hopes that they may better understand the reasons certain structures are in place. There is obviously more to the issue than just the amount of little green pieces of paper in our pockets, but of the additional responsibilities which accompany wealth, in our the desire to understand how it may best be spent.

Rank as an Asset

In Chapters 8 & 9 Frank is explaining his rationale for why progressive taxation is justified. Chapter eight outlines: the role historical taxation has played in contemporary individual success, and the justifications for and implications of viewing rank as an asset. Chapter nine gives a brief summary of Gladwell's 'Outliers' and why personal income is a result of more than an individual's 'hard-work'.

Intrinsically, the possessor of superior rank is afforded exclusive advantages that impose limitations and restrictions on those of lesser status. These advantages are not necessarily oppressive, rather displacive in nature. In a word, superior rank is akin to superior power. But because rank is a relative social construct, power, in the context of society, is a relative social construct. Therefore a rise in rank by one individual is associated with an equal decent by another individual (or a relatively small incremental decent of the remainder of the society as a whole). This means that an individual of rising rank is acquiring an associated increase in power, relatively.

I'm simply saying that rank is an asset, the asset is power. The power to impose the possessors' motivations, desires, beliefs, and decisions on those of lessor rank. This is why I agree with Frank. Those of higher relative status impose restrictions and limitations on those of lessor status. The advantages afforded to the possessor of high relative rank is the same mechanism by which those of lessor relative rank are encumbered, through, not only displacement, but through the imposition of the higher rank's will on the decision-set of the lesser.

Superior rank is acquired not only through the exercise of our own disposition during the ordinary course of our experiences, but through the intimate relationship between those experiences and the societal fabric constructed before us. This societal fabric should be supported by a federal government through taxation on the backs of those who have gained most from it.

I simply wish the government was not a bureaucracy, and I don't find the necessity of such a form outside tradition and caution.

Chapter 8

This chapter seemed to touch more on the idea of people being free to choose for themselves where they want to fall within the society, rather than a centrally planned society that would assign them a rank or standing. This idea is reminiscent of the reverse auction idea that he discussed in chapter 7 with the airlines.
Beginning at early stages in life, we have to weigh pros and cons of our actions and how they will affect our future; we (and our parents) have to train ourselves to realize what we are really getting the highest utility from. Is it going to class, keeping up with homework and projects, resulting in a higher grade, or is forgoing these obligations for other short term, recreational pleasures. The subsequent outcomes of these actions let us know that (in most cases) hard work will have a higher pay out. Hopefully as we reach adulthood we can manage ourselves and recognize what actions will have the most positive affect on what we picture as our ideal future. Frank is right that there needs to be people on all rungs of the social and economic ladder for the society to best function.
The street sweeper did not find a high utility in pursuing a high rank in society, or maybe they did, but there was too much competition and they were pushed out by others more qualified for those niches. Some people may prefer a job with a meager salary, yet affords them plenty of free time, while others who put a higher value on material items, rather than time, would go after the more time intensive, higher paying jobs.
In these situations no one is being coerced, they are acting on their own preferences. Even the street sweeper knows that if they take certain steps, they can advance their position in society, depending on whatever restraints they are dealing with, but no one is saying "You must forever be a street sweeper".

He didn't seem to talk much about taxation in this chapter, except in his example of the neighborhoods with higher property taxes having better schools. I can see how this definitely makes sense in a way, but if property taxes keep getting higher, there is less incentive for people to become property owners. It translates as a sort of punishment for being successful. I think that a sales tax would be the fairest way to collect tax revenue; people from all income brackets will simply spend what ever they are comfortable with, people who buy more with therefore end up contributing more to the tax pool, but it is by their own actions. I feel like giving people this choice is much less coercive, and lets them be responsible for their own spending.

Thursday, March 22, 2012

Chapters 6 and 7

First, if you have not read Coase, I highly recommend that you do. Okay, now for the moral arguments. For example, Frank writes on page 96, "In such cases, the Coase framework says that the law should place the burden of adjusting to the externality on the party for whom it would be less costly." So, what about smoking in restaurants? One can argue that smoking laws are justified because it is more costly for nonsmokers to have to breathe in smoke-filled air than for a smoker to "suck it up" (no pun intended) and refrain from smoking for an hour or two. Of course with this example, who we forget about is the property owner and his or her right to determine his own policy and we forget that nobody is forced to eat anywhere.

Responding to an earlier post about discrimination, while I agree it is not nice or moral to be mean-spirited to people who share other views or have a different set of morals, if we really believe in property rights then a businessowner should have to right to discriminate against whomever he or she wishes based on whatever criteria they decide. See two of my essays on if you are interested in this topic:

In chapter 7, I agree with Frank's statement, "The underlying principle is that when the economic pie grows larger, everyone can have a larger slice." And I agree with the willingness to pay principle for the clock; however, not for his reasons. Bottom line: the lawyer is doing something more productive than the woman and that is why he is getting paid more (rewarded) by the market. Therefore, if he buys the clock, it's a reward due to that fact. Any objections to this? Just curious about your thoughts...

Wednesday, March 21, 2012

Perpetrators Rules

Frank touches on two major topics in Chapters 6 & 7, the role of government in negotiating disputes and in the mitigation of income inequality. In both cases government's goal is to increase efficiency by balancing costs and benefits through measures that utilize a 'willingness-to-pay' doctrine. I agree with these two responsibilities of government laid out by Frank.

There are many, if not a large percentage, of situations where disputes between private entities with economic interests cannot be solved, let alone efficiently. These include situations with excessive transaction costs (i.e. one party is composed of a large number of independent entities, such as when a power plant pollutes a river), the involvement of a monopoly, the offering of public goods, or a vast inequality between absolute capitals relative to willingness to pay (i.e. grandfather clock scenario). The government plays the role of an arbitrator in these situations by providing a cost-benefit analysis and a judgement. In these situations simply the assignment and enforcement of property rights will not suffice. But why shouldn't we just let these situations remain inefficient? Harm imposed on a party by another party within a society is an action that should be dealt with by the society as a whole. It is, however, unfortunate we live in an inefficient form of representative government that incentives corruption.

Income inequality is a dimension of a society that should be monitored by the society itself. Like most things in life, an economy, at least in our current state, runs most efficiently when income inequality is not to vast or minuscule. The more that wealth becomes concentrated the less efficiently capital is allocated. The more that wealth is distributed evenly the less efficiently capital is allocated as well but for different reasons.

As wealth becomes highly concentrated, it becomes less valuable on the margin to those that possess the large quantity. To those that do not possess the large quantity, wealth becomes increasingly valuable because each expenditure contributes towards a greater percentage of their total worth. Income inequality skews the willingness-to-pay mechanism because willingness-to-pay is relative, based on absolute income. Therefore, for goods and services to be efficiently allocated, income inequality cannot be so great as to dramatically skew the willingness-to-pay mechanism to the point of... slavery (which is the result of both extreme income inequality and equality, perhaps). Without a government to monitor income inequality, capitalism will concentrate wealth to a point of severe detriment for the society as a whole.

Apologies for the sloppiness and delay, though I know it doesn't matter.

Chapters 6&7

*Sorry, I had forgotten that I left this in draft form

Cost benefit and willingness to pay; surely this seems to work out fine in the private market, money goes a lot farther than sentiment. In Frank's example of the Grandfather Clock, I agree that the most favorable outcome is for Malcolm to buy the clock for more money.Just because Susan would've maybe appreciated the clock more, all parties seemed to be better off with Malcolm getting the clock and Susan not spending beyond her means. However, I don't that this translates to the public sector. Things like noise ordinances are put in place to be fair to everyone, not cater to the party with the most money who has an opinion about it. In public matters, willingness to pay shouldn't determine the outcome, which he points out later in the chapter. I think my favorite example was the overbooked flight, the auction method definitely seems the fairest to me; nobody is having to pay (except their time and inconvenience because the flight was overbooked in the first place) and they end up being compensated for their troubles. This method I'm sure leaves all parties feeling more well represented than a situation where the highest bidder, or first person to arrive is ruled in favor of.

I think he is right about the inefficiency of distributing money to the poor, other methods are more costly and can create price controls. These programs also provide a way for the government to monitor this spending, to justify the spending, and giving tax payers someone to blame, ("it's my money anyways").

Overall, I feel that he has the right idea as far as willingness to pay in the private sector. I'm intrigued by the way  the chapter ended, I think chapter eight is going to be a good one.

Tuesday, March 20, 2012

What in the world

For the most part, Frank seems to be going off on a lot of tangents. I will give him credit with his example on the antique clock. Although one person might have a passion for a hobby, money always buys everything in today's economy. Although Susan was willing to spend a large portion of her money to buy the clock, Malcolm's income and willingness to spend an even larger amount for no reason will most likely out weigh Susan's amount. 

As for the rest of the chapter, Frank still continues along this vague line of what he wants done in government. So far he has given examples and has contradicted a huge amount of what he says he wants done. However, in whose best interest is he looking at? The poor? The rich? I don't feel like I will ever know what side he is on. This isn't about proving Adam Smith's Wealth of Nations wrong this is more about putting his point in and saying everything else is wrong if no one agrees with him.

The Prophet of Alaska

Garrett, the Sage of Fairbanks, has recently posed a few thought provoking questions about the role of government. Here and here. SoF's questions concern instances when one person's liberties infringe on another person's liberties. What should be the role of government in such situations? One example was a mother's freedom to choose to drink while pregnant which would harm the newborn. I already addressed this example in the comments of his first post so I won't go into it here. The gist was that laws against pregnant mothers drinking wouldn't be very effective because of the difficulty to implement. It would be easy to get around such a law. If a mother or anyone really wants to have a drink, it isn't difficult despite any form of prohibition.

Over break I went to Anchorage with my girlfriend Erin. We were having dinner with my mom and naturally I steered the conversation toward economics and politics. My mom brought up voting and asked me to vote on Proposition 5 in the upcoming local election. Neither my mom nor I had the full details on Prop 5 but my mom explained it as a law prohibiting discrimination in the workplace against an individual based on their sexual orientation. While I agree with the sentiment of this legislation I ultimately decided that I was against it. First off let me state that I would like to live in a society that is tolerant of all peaceful actions. The decision of who to love certainly falls under that criteria. I feel the problem with this legislation is similar to the one proposed in Garrett's thought question. Just because it might be against the law to drink at a certain age or while pregnant doesn't necessarily mean people won't find ways to get around the implementation of such legislation. Similarly, just because there is a law against prejudice doesn't make it go away. If an individual hates gay people, legislation won't change that. I asked my mom why a LBGT person would even want to work for someone who didn't like them. No one wants to work in a hostile environment if they can help it. Additionally, laws against discrimination seem a little silly to me. We discriminate all the time based on countless criteria.  Discrimination is the essence of decision making. Anti discrimination laws essentially discriminate between different forms of discrimination. Such legislation acts to draw lines in the sand, not erase them. Besides, there might be, albeit morally questionable, legitimate business reasons why an employer might not want to employ a LBGT person. Perhaps a business deals with very socially conservative clients. Naturally it would not be a smart business decision to hire a flamboyantly gay person as the receptionist. Employers make these types of decisions all the time and nobody flinches i.e. an employer is faced with multiple candidates who all look equally good on paper and so they choose the one who they get along with or who fits in with the other workers the best. Moreover, anti-discrimination legislation seems to me like it would hurt more than help. If passed, employers might  be cautious in hiring a person from the LBGT community because of the increased chance of a discrimination lawsuit. Instead they might find some other reason not to hire that individual rather than dealing with that risk.

But I am totally digressing. I have to agree with Garrett on this:

"First, because government policy is ineffective at doing some things does not make all government policy ineffective. Judging an effective policy is a subjective exercise but I would point to fisheries regulation and pollution mitigation efforts as examples of excellent policy."

I see a distinct difference between legislation like Prop 5 or a law against pregnant drinking and laws like fishing regulation. Fishing regulation essentially creates property rights in order to prevent over fishing. Using the utilitarian analysis I think it is pretty clear that overfishing which leads to not enough fish to go around is much worse than the red tape such legislation creates.

This makes me think a little bit about property rights. In our western culture we take property rights for granted. No one would challenge the assertion that an individual can own something, after all we own our own bodies don't we? But it is helpful to recognize that these are assumptions not facts. They are very helpful assumptions when talking about economics but they are not inherently true. From my perspective, property rights exist because we believe in them. It is pretty clear to everyone around you that you own the clothes you wear. No one would challenge that. And when you park your car and walk away from it you lock it to protect it from opportunists but you aren't really worried that someone will come along and dispute your ownership of the car. If they do you have a little piece of paper that we all have been taught to respect that states that you own your car. Same with land. But we weren't born with the car keys in our hand and there isn't some natural law that assigns and protects property rights for everybody. We assign our own property rights as a society.

These break down when we talk about a common resource. Really, when we talk about collective property we just mean some communal thing that is open to everybody to use. We aren't talking about a community where each individual feels a real sense of shared ownership and takes care of the property (this can happen and works beautifully, think of a family sharing a dinner. No one feels bashful about eating their share but individuals generally try not to waste the food, they take what they think they can eat). So when government comes in and assigns property rights to fishermen this really shouldn't be too foreign an idea to us. We keep the deed to our home. Thats a piece of government legislation. The difference is that in the absence of government or a society that respects your piece of paper, if you are occupying a piece of land and can defend it, you effectively own it. That is much harder to do with a percentage of the fish in the ocean. While it often seems I spew a good talk about the evils of government I have to agree with Garrett that government isn't inherently bad.

So if you can show me that a government policy helps better allocate a resource through assigning property rights or helps natural rights better than the current situation AND if you can show me that the implementation of the law is feasible. I might concede that the law can do some good. But I'm pretty hard to convince.

Government isn't inherently bad, it just scares me. At its best government gives well intentioned individuals the power to exact some change in the world. Sometimes it works out as planned and sometimes (I would argue more often) it doesn't work out exactly as planned. At its worst, government favors those who are best at lobbying government and creates an illusion of giving everyone a voice and then it puts people in cages, steals people's money and kills brown people. (okay a little bit of my  anti government sentiment slipped out). So I'm super skeptical of government and I wish more people were too. If we as a society watched it carefully and had a stronger sense of individual sovereignty we might be able to better keep our government in check. But there's no guarantee that would even work and it's just wishful thinking anyway in the same vein of "why can't we all just get along." The unfortunate truth of the matter is that the incentive structure created by the existence of a powerful government is such that it leads to rent seeking and other abuses.

Monday, March 19, 2012

I am a Bit Surprised

I am a bit surprised. An economics professor preaching about the public policy efficiencies of the Jimmy Carter presidency, I may have seen it all. But, on the other hand, his liberal jibber jabber did make a lot of sense, I find it hard to think economically and not see how willingness to pay greatly disenfranchises the poor. Since having a lower income relative to others means your ability to pay is limited compared to them, then you by default have less power over the situation than those of higher incomes. Furthermore in a pure willingness to pay system, everything goes to the highest bidder, thus those with the most get the most.

Now then, he proposed a situation where using income transfers both rich and the poor can go through a sort of reverse auction scenario and achieve a more economically efficient outcome. If it is who is willing to accept the least compensation for damages, I.e. who is willing to accept a free ticket or cash for missing their flight, then you give everyone a level playing field. The rich and poor could both wait equally, and even though the rewards may be more enticing to people of lower income, its ok because they are being even more thoroughly compensated then their rich counterparts because they accepted that the reward was worth the damages.

For a guy who likes to compromise this seems to be an excellent way to do so. By being able to quantify your own utility, and being able to auction off damages for compensation, you can achieve much more efficient outcomes than having it be randomly decided.

It’s not a perfect system, but it is most certainly a more efficient one.

To me this poses several questions,

· Are people not the most able to determine their own utility?

· If so, wouldn’t giving them the ability to determine their utility be more optimal than deciding at random?

· And, If so, Why haven’t we applied this to every fiscal problem in the world?

Robin Hood to the Rescue?

In reading Chapters 6 and 7, Frank is beginning to consider in greater depth the implications which accompany a cost-benefit analysis and how personal troubles or desires may most efficiently be considered.
I found myself accepting most of Frank’s arguments in the beginning of both chapters but was always a bit disappointed when he consistently resorted to his most classic views. Be that as it may, he did bring up some interesting questions as to the idea of who may be considered the real perpetrator vs. the victum and also the efficiency of a cost-benefit analysis, which I think ultimately, helped him earn back some much needed credibility.

Ronald Coase’s arguments of transaction cost is said to explain how, since it is often difficult to differentiate between a perpetrator and a victum, a situation which causes undue harm may be negotiated by involved individuals without governmental regulation if “sold to the highest bidder” as Coase suggests. Yet, Coase recognizes that often times there will be barriers to individuals taking full control of a situation simply because the transaction costs are too great. Coase’s ideas as to the nature of these liabilities challenge previous beliefs that the perpetators must always be punished. Oftentimes, defining the perpetrator is not so black and white which leads Coase to the conclusion that, if this be the case, the government should assign responsibility to whomever the burden may be least costly. Coase then seems to come to the conclusion that if an individual fails to resolve the issues, then the government must take up the parental role of making sure the problem is dealt with the most efficient way possible. The point is for the government to mimic as closely as possible what the individual would have ultimately resorted to in the end.

I can’t help but make the comparison to two kindergarteners fighting over crayons. If they cannot resolve their issues, then the teacher will be forced to intervene for the sake of “keeping-the-peace,” deciding who may use the crayons, probably depending on who had them first etc… Essentially, we come in contact with this sort of problem every day, and while we most certainly aren’t kindergarteners, according to Coase, sometimes our “parent” (the government!) is going to have to intervene. I for one would like to think that as practical intelligent adults we are capable of forming some type of compromise without needing to be babysat. Sadly enough, due to barriers and a bunch of other missed-matched reasons, this is often not the case. In a perfect world, doctors would think before moving their practice next to a noisy, dirty factory, and factories would consider the surrounding area before planting themselves next to a silence-loving community. Yet, in a world of self-interested people…a little bit of forethought to avoid the situation altogether is often thrown by the way side.

Yet, even if a reasonable solution is achieved, either by an individual or governmental means, the truth of the matter is that money as a measure can act more as a isolator of interest rather than an equalizer. Someone will always has some value attached to anything whether it be silence, a job opportunity, or a new car. In each circumstance, a person has an idea of what those items mean to them, but as Frank points out, to value those possibilities in real monetary value will often skew the measure of personal desire. Those who have more money may care less yet will be willing to pay more because they have more to give toward any one item versus another who makes a much lower income. The phenomenon of the wealthy paying more for less interest may be considered as a type of accumulated wealth inflation: the more you have the less the individual amount means to you. Therefore, money suddenly becomes relative because no set of two people own the same amount.

Frank acknowledges this and does a fairly satisfactory job in also pointing out in the “grandfather clock example” that although this may be the case, the lack of money will often be effective in deterring those who truly need that money to spend on other things. So while, yes, the rich may pay more, they also can afford it versus the school teacher who really needs to use that $5,000 on supplies and groceries, despite her deep desire to own that antique grandfather clock. In this way, a more optimal level, closer to an equilibrium, is attained as those who would spend $5,000 on a grandfather clock are forced to reevaluate how relatively valuable that money really is to them rather than just considering the object being purchased.

Personally, I appreciated Frank’s illustrations and explanations, especially for the first part of chapter seven. He explained many different sides to costs and benefits in different circumstances, and there also seemed to be less libertarian-bashing which was nice. What I was most thankful to see in this chapter was Frank beginning to use analogies that apply the concept of incentives. Franks example of the overbooked airline flights illustrates quite well that individuals will actively participate if given an incentive to do so. If they should value time over money, then they will chose to forgo the one because of the opportunity to obtain the other, but ultimately it will be the consumer’s choice. It makes sense to give people viable options that allow them to choose what they value most rather than just being turned away. For this reason, I found Franks final hoorah in chapter seven to be…frankly, ironic.

The reason many doubt the effectiveness of the tax system is because our current tax system often fails to appeal to basic human incentives. After all, where does your tax money actually go anyway? On the other hand, while I am personally glad I don’t have to fund my own army, incentives are what really matter in the game of economics, and the government acting as some type of robinhood figure by redistributing income strikes me as kind of humorous.

After all, in the case of farm subsidies, how much good is the government really doing by pumping money into an industry that is slowly trying to die-off anyway? If anything, these subsidies stunt a farmer’s ability to really function within the market at their maximum level in a prosperous industry, even if that industry is different than agriculture. Providing those individuals with incentives to invest in a different part of the market not only benefits the market but provides farmers with the ability to more feasibly endure the transition and not get left in the dust growing subsidized corn which the market won’t be able to absorb anyways!

Another problem with a Robin Hood type government, who supposedly takes from the rich to feed the poor, is that it takes from those who’ve honestly worked for their income, under the rational that those good intentions permit the government to redistribute existing wealth. Yet, Frank seems to believe this is an optimal solution… the perfect way to help make money less relative. Just because we as Americans prefer to let the government control certain aspects of our lives doesn’t mean that we want them to control others.

 Frank makes his observations of instances when personal income transfers are successful because of the benefit of encouraged incentives which is partly why I’m confused as to why he desires to use taxes to level-off incomes. Currently, our tax system does little to foster personal incentive to aid the government, which I think is a loss for both the government and American citizens alike. Frank’s ending conclusions in Chapter 7 would probably only work in a perfect world and represent a utopian perspective hinting ever so slightly at a socialistic type of community.

In a nation whose very fabric is built on the concept of “by the people, for the people,” it only makes sense to harness the willful intelligence of consumers through encouraging incentives which will make the market stronger in the long run. While there are plenty of irrational people in this world, I’d like to think that most individuals are not naive kindergarteners but may help resolve conflict in meaningful ways without being babysat and most certainly without any form of Robin Hood coming to the rescue.

Chapters 6 and 7

I was pleasantly suprised to find myself largely in agreement with Robert Frank throughout chapters 6 and 7 of The Darwin Economy. For the better part of both chapters, Frank endorsed the Coase Theorem and discussed it's impliciations on regulatory and social policy. Here, he showed his pragmatic side, which was a refreshing shift from the dogmatism of the first five chapters. After arguing effectively for favoring efficiency as a value in public policy, he concluded that the case for wealth redistribution follows from that argument. Here, I disagreed with him. But I will withhold any further criticism of redistribution untill he makes his case more fully in the next few chapters. I was also partly subdued because the acknowledged the Earned Income Tax Credit to be a less-bad method of redistribution. The Negative Income Tax, which it was designed after, would be the least-bad policy because it deliberately seeks to minimise the higher marginal tax rates that are imposed on workers when welfare is means-tested. In essense, it makes sure that by earning two dollars of extra income, a worker forgoes no more than a dollar of welfare payments. The sound incentive structure of such a scheme is the reason it was favored by Milton Friedman in place of current welfare policies. Robert Frank is wise to recognise the value of such a policy.

Ch7 Efficiencies

In the beginning of this chapter again I think Frank puts down some ideas, most already understood, and lastly begins to discuss the issues with efficient policies going through any sort of law. The story regarding the flights was interesting, or at least I found it interesting, and was actually pleased that he tied it towards the end regarding policies that have failed in congress due to these efficient notions labeled as an income transfer and being considered unfair. My philosophy teacher back in high school gave the suggestion, on the topic of what to do with lobbyists, that rather than setting up picket lines, and other older ways of protesting, it would be more efficient and quite simple to outbid the lobbyists. All you have to do though is get the entire community or majority of nation to give you money (let's say an organization approved by the government to reduce fraud) and use that money to lobby against the other lobbyists.
The first thing that came to my mind was: Why do we need these lobbyists when the congressmen and women were put there to determine the best possible outcome for the entire nation/state when regarding policies. But after reading this chapter it seems to me that this idea may have to be enacted to keep certain laws tied to what Americans really want. Considering the cost benefit analysis, if the people really want a law to remain the same while a few corporations believe it's in their best interest to amend it; under the cost benefit analysis I believe a few dollars from a few million can overextend a corporations contribution margin.
Although past this thought the chapter to me seemed kind of bland in the sense that cost benefit analysis is already used quite often enough to understand. He did focus a little on how that has influenced public policy but it was short lived.

Thursday, March 8, 2012


It was a pleasure meeting you all and you were all very welcoming and kind to me and my GMU grad school buddy. I enjoyed the talks over dinner and for the time you gave up to spend with me at dinner. I hope to see you again in Alaska and perhaps see you at a conference. I had an incredible experience in Alaska!

Check out groups like Foundation for Economic Education, Mises Institute, and Institute for Humane Studies. Also, the Association of Private Enterprise Education has student scholarships to their annual conference (and the locations are fun too!). And if you are thinking PhD someday, think George Mason!

Again, thank you and it was a pleasure. I hope my talks made economics more interesting to the students and that my "in your face" approach was ok! :) 

Chapter 5

Hello my new friends in Alaska..apologies for the later than usual response. First, a few links for further reading:

My main issue with Frank is his argument (like on p. 67  and 72) that the rules or prohibitions of private association are viewed by Libertarians as violation of indvidual rights. No! If I choose to join a group and the  group rules are clear and upfront and I choose to join, then my revealed preference proves I am not being violated.

I understand his military arms race is wasteful argument; however, some would argue that Reagan (President when I was a kid) did the right thing by increasing defense spending because it eventually broke the Soviet Union.

In addition, he again makes value judgments as to what "wasteful spending" is and I don't know how he can do that. If I choose to spend money on my future teenager's birthday party, then I am not harming anyone else. In fact, am I not "stimulating" the economy? If I want to add an addition to my home and employ an architect and construction workers, again, who am I hurting?

As for the benefits of his tax plan and counterarguments, see the links above. I understand the main macroeconomic argument for this type of tax is that it doesn't punish work and productivity. What I don't like is his moralistic wasteful spending arguments.

Tuesday, March 6, 2012

If you picked World A, you are not an actual person

It seems to me that Frank is placing a value judgement on individuals decisions to sacrifice risk for income. I didn't see how he could say that more people would choose World A in the first example. That didn't make sense to me. Frank breaks down how people make decisions on the margin and then says that they have been misled into making a bad decision. He says that as more people make these decisions they will be driven toward taking riskier and riskier jobs to buy some positional good. Because everyone is seeking this positional good, the price goes up and thus the extra pay ends up not meaning much. I challenge the very premise that people behave this way. At a certain point an individual decide something is too much risk. Since this is an inherently personal decision. How can any outside individual say that it is right or wrong, too much or not enough? That goes against one of my first premises which is to not make value statements about another individual's utility function. In other words, don't judge other people for their personal and peaceful decisions. So I'm just rubbed the wrong way by this entire chapter.

Regulations as Data
Not everything is like an arms race, Frank. If we didn't have that federal regulation for kids to start kindergarden at a given age I'm more than positive that local districts or schools would have rules about it. You don't want 8 year olds with 5 year olds. It wouldn't be allowed.

He brings up the no cash on the table again. (pg 76) But once again, what is the appropriate amount of workplace safety? Apparently Frank knows.

Progressive Consumption Tax

Colleen wrote about this pretty thoroughly but I'll just reiterate and add a few points. So Frank wants people to save more. But I thought he wanted the economy to be stimulated? No matter. I'm not concerned with stimulating the economy. What I am concerned with though, are rationale choices based on bad information.
What is the appropriate amount a person should save? It is different for everyone. Each person has different time preferences. So individuals, right or wrong, make plans, good or bad, for the future, near or far, and then implement those plans. But not everyone wants or needs to save. Some people want to improve their quality of life now not later. So they buy goods and services. They consume.

But what happens when we incentivize people to either save or spend? If we reward a behavior, we'll get more of it. I'll ignore the hypocrisy of taking someone's money in order to get them to save it. How will individuals make rational decisions in the market, (what to buy, when to buy, how much to buy, when to save, how much to save, etc.) when the signals in the market keep changing or are wrong. When government steps in to try to 'fix' the economy they deny the nature of prices. There is a reason we are in a recession. The housing prices didn't match the real value. That's a bubble. Those prices, being unrealistic and therefore unsustainable, came back down. That is vital information. Let's ignore why they got so high and stayed so high for so long. How could attempts to restore prices to those levels be a good idea if they clearly didn't represent the market?

This thinking can be applied to any discussion where price is involved. What do prices tell us? They give individuals all the information needed to decide how to behave in the market. This includes savings. When we try to incentivize people to save, they save more. But is that really good? It isn't good for the individual being coercively taxed. It results in less spending in the market. That won't be good for the economy as a whole.

We shouldn't incentivize people to spend or save. The government shouldn't incentivize anything. If we want sustainable economic growth we need individuals making 'good' decisions in the market place. For people to make 'good' decisions, they need 'good' information. Prices are that information. Let's not distort them like Frank suggests.

Frivolous Factors

Up to this point, Frank has been setting-up his argument in anticipation of presenting his first proposal of what he believes as the solution to the prospective problems he has presented in the last four chapters. He's sporadically elaborated on the reoccurring themes of how individual interests often diverge with the group, concepts of relative vs. absolute consumption, positional goods, and his assumptions regarding waste. In each respect, I’ve had mixed feelings in regard to the applicability of his proposals because of their simplistic nature in a clearly more complex system. Nevertheless, Frank connects some of the logic behind his points presented in chapters past by proposing the implementation of a progressive consumption tax which could be a viable idea for the future if, and only if, it functions as successfully as Frank’s confidence seems to imply.
Firstly, something worth noting is that risk and income don't always relate in tandem as Frank represents in his examples. There are plenty of high-paying low-risk jobs in both absolute and relative terms, and while I understand Frank is merely using selected situations for analytical purposes, not every individual sacrifices safety to achieve the desired goals allowed by a larger income. Granted, a CEO's marginal physical product is difficult to measure. In those respects, their pay is bound to become more relative simply because of how difficult it is to measure physical output. Therefore, the combined possibilities an individual is presented with also manipulate their circumstance which are obviously influenced by more than just two consistent factors.

Secondly, Frank's views on waste seem rather controversial. In his mind, waste seems to be considered by many as frivolousness. Yes, consumption by social standards may seem wasteful, but in an economic context, the idea of entering a type of social arms races does little, in my opinion, to justify what may be deemed as undeniably wasteful habits. It is not uncommon for millionaires to own multiple homes. While Frank would consider this reality wasteful, the quantity of homes one possesses doesn't really say anything objectively about anyone’s personal score on any "wastefulness scale." Similarly, to assume that certain spending trends are harmful to the collective under the assumption that humans always desire to sustain a type of social arms race is purely speculative, because there are many current cases of individuals defying the upward trend of profligate luxury.

For example, consider the fact that many tourists pay large sums of money to tour Alaska. They don't come to live the life of the elite or wealthy but to encounter a classic form of simplicity which Alaska alone has uniquely been able to offer. Log cabins, Denali and the enticement of the northern lights are enough to sustain their desire to encounter the quiet beauty of Alaska. Tourists are awestruck at these timeless Alaskan classics, yet they still venture to the great north in search of solitude because of selected natural beauties. Individuals are not always pushed to accept higher or more expensive forms of existence but may in fact value simplicity simply because of how scarce it has become in Western culture. Simplicity is still valued by many even in a culture that seems to be overrun by massive spending trends.

Just because Americans have more comfortable living condition than in the past does not necessarily mean their spending is wasteful and that likewise the habit of functioning out of self-interest to "out do" their neighbor must be curbed, as Frank implies with his progressive consumption tax. Sales taxes, luxury taxes, and salary caps are nothing new as they tax individuals for their consumption which have been deemed unneeded. To my knowledge, luxury taxes were never extraordinarily successful because the idea of a luxury is yet again, a fluctuating concept. In Norway for instance, cars and chocolate used to be consider luxuries, but today they are considered a common commodity even though the tax remains intact. Therefore, the relativity of the situation really may only insure that certain objects are taxed more than others because of the past standing.

Similarly, my greatest worry with Frank's consumption tax is firstly, that he assumes instigating some form of tax will help solve governmental deficiencies. After all, how does two million tax dollars actually reduce the national deficit by an equal amount? Secondly, he assumes that promoting saving is more beneficial than spending since apparently mass spending is now considered "wasteful" even though that is hardly the case.

Ultimately, I view Frank's consumption tax as a way, yet again, to manipulate the market in ways that might sound extraordinary on paper but may ultimately stunt economic growth in the long run. Whereas before, individuals were taxed on the opportunity that they had to earn money, a consumption tax exists on the notion that they must be taxed for using resources even though they already possess the potential of their incomes to acquire those resources. But attempting to identify supposedly negative human tendencies, Frank has tried to prove that humans need government regulation because of their seemingly irrational decisions and that specifically, a consumption tax would not only be beneficial for the public but solve a myriad of the government’s problems as well. Yet again, tax dollars are money that could’ve been spent by individuals to naturally fertilize the economy, so the idea of initiating a tax to curb a digressive human nature through governmental influence seems like rather sketchy logic. Therefore, I’m leery of the implementation of a tax to stimulate a predestined economic response as there are surely to be variety of unintended consequences to accompany that assumption. To some extent, a consumption tax might be a viable option in the future, but as of now, Frank’s rather vague representations make it a little early to tell.

The very foundations of human progression through decision-making, whether those decisions be based off of simplistic or frivolous desires, relative or absolute options, suggests that pushing the whole towards one decided action, may in fact cause more unintentional consequences than Frank has yet to admit.

Monday, March 5, 2012

Steep Taxes and Shallow Thinking

Robert Frank distills the faith he has in a steeply progressive system of consumption taxes with single sentence in chapter five of The Darwin Economy. In regard to a dearth of disposable income for upper-income Americans, "By all available evidence," he claims, "this would be a good thing." His implicit claim to have read every shred of evidence aside, his explicit claim that there are no downsides to his proposal is quite interesting and, by it's very nature, wrong.
Frank's plan to put the positional comsumption beast (Frank's description of the economic phenomena where individuals seek to maximize their conspicuous consumption, i.e. "keeping up with the Joneses") on a diet is based primarily on his plan for a progressive consumption tax with a top marginal rate of 100 or more. The tax, which exempts savings and investments entirely, would induce individuals, especially those of high income, to save more and consume less. Because, according to Frank, there would be no discincentive to earning additional money as long as it could be saved tax free, Art Laffer's prediction that reported income will drop as tax rates increase would not apply. I beg to differ.
The desired end of any earnings is consumption in some form. Money, as we all know, is worthless paper if it can't be spent. Even my savings would me no good if they were subject to confiscatory tax rates as soon as I made a withdrawal. Tax rates of 100%, where a check of $100 must be cut to the Federal government every time I make a $100 withdrawal from my bank account, would devistate the incentive to work and thus reduce the available capital to save and invest. Thus, the tax would not only reduce short run consumption but also long-run earnings. Say, for example, that I'm a department manager at a paper company making $150k a year. I consume $100k and save $50k, I also have no uncertainty about my job security. Every dollar of consumption over $100k is taxed at 100%. Because my savings are already so high, I will be able to retain my current consumption levels through retirement. If, in retirement, I make the mistake of consuming more than $100K annually, then making a withdrawal from my bank account will reduce the size of my savings by double the original amount. Thus, I currently have little incentive to earn any additional money for the pupose of savings, as it will be to costly to withdraw later on.
Likewise, I could spend the money that I opted against saving, but it would also cost me a great deal. If, by spending 33% more hours at work this year than last, I earn a year-end bonus that makes my new pre-tax income $200k dollars, I may want to consume the entirety of the additional 50k. This is rational since my 33% savings rate is already extremely high. To do this would cost me the sum of my $50k bonus plus a tax payment equal to my entire year's savings. Of course, I could also just spend half of the bonus and pay uncle sam the other half. Instead of spending the money or saving it for later, option three is that I leave it to my children. Assuming that the inheritance tax, which Frank supports, exists at a similar rate, the dillema here is similar to that in parts one and two, my money would be of little use at the margins.
Knowing that, after a certain point, my additional effort is only going to reap minimal benefits for me and my family, I probably would not have opted to work harder for additional income. Maybe that's fine, after all, life isn't only about work. But it's still a trade-off that flies in the face of Frank's claim that his plan wouldn't be a disincentive to work. I hope Frank and others keep using the term progressive consumption tax. It is a term that describes itself accurately without attempting to fit into a slogan or catch-phrase. By it's name I can imagine it having all of the advantages of a consumption tax (neutral towards investment, simple) and all of the problems of a progressive tax (strong incentives against working). This view seems to be correct. A tax is a tax, and we should work on finding one that is the least bad, not making claims that one is all good.

Chapter 5

Well, he started off discussing arms races but quickly went back to some of his favorite metaphors. It's obviously true that spending the majority of a countries resources on destructive forces that would only be needed in the most dire of circumstances takes away from other worthy institutions, but it has always been the case that the country with the biggest Army/Naval force has the power to take what they want. Any country that would be a true threat isn't just going to willingly show their hand honestly. It would be wonderful if a countrie was measured in the quality of the education or healthcare, but pouring all resources into those areas could leave a hole in other areas, like defense and leave a country vulnerable.
I liked his comparison to George Steinbrenner and the Yankees. It's certainly true that without some sort of a "cap" being enforced, those who have the most money or power will end up with the best resources that can be attained. But, even though there is no salary cap in baseball, they are all playing by the same rules, and this is just part of the game. In the case of arms races, limits can be set, but what can really enforce this? Isn't that silly anyways? A country with fewer weapons of mass destruction, still has weapons of mass destruction. And by making it a priority to have them shows that the country is willing to use them under the proper circumstances, but all parties are suppose to trust that the proper circumstance will never arise? If some countries freely allow inspections for WMD's while others refuse, then they are clearly not playing by the same rules, which breeds distrust, paranoia, and the urge to 'be prepared' to deal with them when the time comes.

I'm not sure if I fully understood his general tax idea, he said that people should pay taxes on the difference between what they make and what they save? Meaning that the more you save, the less you spend on taxes? I'll just have to assume that would apply to a higher than average income bracket. I don't think very many people are in a position to save a substantial amount of money, and if they are either being forced to save money, or pay that money in taxes, when does it get spent in the market? Please correct me if I missed some key element, but it just sounds like a terrible idea that would make the poor ever poorer.
And even if it does only apply to very high income individuals, by creating that ultimatum to either save or be taxed, is still keeping that money out of the market. I guess if they are investing that isn't as bad, but owning the big mansion is still using resources and creating jobs, just like the extravagant birthday party. If an individual has the means to pay for these frivolous actions,  then let them! Living in the moment, what could be more Darwinian?

But, what about China?

Even though I agree that a progressive consumption tax is more favorable than an income tax or payroll tax, I believe Frank is excessively confident in his speculations about the consequences. All public policy has unanticipated effects; and these effects contribute a significant portion to the total impact of policy, and often times contravene what is originally intended.

Frank acknowledges that the spending boom that would precede the implementation (but following the approval) of the tax would stimulate the economy. In this particular situation he is thankful because "it would clearly be better than standing idly by while total spending remains far too low to support full employment." (pg 83) Yet, after implementation and given full employment, wouldn't a progressive consumption tax reduce household spending and in turn drop prices, wages, and employment? Wouldn't the affluent attempt to reach previous levels of consumption by levering up significantly, taking on debt at low interest rates due to the influx of capital to the banks? Or would spending truly drop, resulting in higher unemployed supported by the consumption tax?

A progressive consumption tax may increase the disparity between social classes. Low income workers will spend their money at current levels because they pay no-to-little taxes while the affluent will save their money, becoming richer in the process. The little they do spend will go towards supporting the large unemployed population laid off by the highly productive corporations that just don't need them anymore.

The point I'm trying to make is that simplistic conclusions need to be scrutinized, not that a progressive consumption tax is the wrong direction. Besides, can basing the awesomeness of our society on GDP growth be sustainable in a closed system? To the moon!


Asking for an ideal form of taxation is like asking for an ideal form of cancer. Though a cancer of the prostate or breast (more common and treatable) could be viewed as more desirable than leukemia, what is ignored is that no cancer is preferable. Although an individual does not consent to cancer perhaps they may consent to taxation.
Initially let us assume the status quot of consent. The question is what type of taxation is desirable? Frank's assertion that a consumption tax is best seems to be in line with contemporary ideology. A consumption tax is an attractive one to any that (like myself) believe we are a wasteful society. On it's surface a consumption tax is fair; cost is incurred proportionally to consumption. But, a consumption tax is bloody difficult to enact. The bureaucratic body required to squeeze revenue from the populous' consumption would be massive. And at what point is consumption to be taxed? Final use? Value added? Final use will mean low revenue and value added will limit innovation and specialization. Of course this question is silly. As a nation we already have a consumption tax. A tax is an increase in price when measured by the consumer. So when applied across the board, as in an increase in the general level of prices, we see a massive consumption tax. When the state needs money all it must do is spend it. When the money supply is inflated and prices increase a tax is levied upon consumers and savers.
It does not matter what type of tax code the state enacts, as long as there is fiat currency there will be the most pervasive tax of all, the inflation tax. Taxation is a cancer, should we ask which cancer we want or whether we should have cancer at all?

Ch5 perhaps missing law of Demand?

I don't necessarily agree with Frank's latest arguments in this chapter. However I think there is a stance I might need to take before moving in to this post any further. No one can really deny the law of demand, and with that in mind I think he may be viewing arms races in the wrong way. The invisible hand was never mentioned to be all perfectly good for society when businesses compete, that is clearly understood as any theory could have its issues. But comparing the arms races of products to armaments I believe is a little bit more involved than Frank is putting off.
Let's say you have a neighbor in a anarchist society. The homes in this area are built not just for comfort but protection as well. But you notice that your neighbor recently bought some disturbing things such as weaponry of some sort. Since there is no official police or anything to keep the protection and law in hand, there is no absolute way for you to ensure your safety, than to buy your own weaponry (clearly for defense). Yet using Frank's example of suddenly you have the weaponry and your neighbor has less than you but he/she has toasters. And for some reason your demand for his/her toasters sky rocket. Even though you already have a toaster.
My point i'm trying to make is that the first example I believe is more plausible than the second. For the same reason why I don't buy more groceries than my roomates because i'm trying to flaunt my grocery spending in food. I do it because I would like my grocery inventory to last substantially longer so I don't have to visit wal-mart more often. Although there is one more part in this chapter that I would like to quickly discuss as well. That is the topic of Unions.
Frank states in the last bit of another example that the reason why we need government is to impose regulations to companies making the work place safer while libertarians and other invisible hand enthusiasts prefer it to be an open market and letting the risk be involved with the pay. I think he may be skipping over the fact that many Unions pop up in workplaces that especially need safety and those Unions don't run to their legislators but picket for those fringe benefits. So we don't need government to regulate every job we do because we would prefer to it be riskier for a higher wage, many Unions already achieved higher wages and the fringe benefits they need/want.

Thursday, March 1, 2012

Quick Thought

This is from my former professor and dissertation chairman, Don Boudreaux

Yes, Starve DC!

I am writing this from Alaska! I am glad to be here in this extremely warm weather :)

Frank refers to Ketchikan and the "Bridge to Nowhere" as an example of government waste (agreed). Basic public choice economics teaches us about concentrated benefits, diffused costs; rational ignornance; and rent-seeking. Moreover, just as we assume individuals maximize utility and firms maximize profit, public choice analysis assumes politicians are rational as well and want to maximize votes. All of this comes to play when people ask, "Why is there so much wasteful government spending?" Of course, if I am a House member representing a district in Napa County, I will be in favor of tariffs on foreign wine in order to "save American jobs." Now, most of you I bet do not know wine tariff policy because you are rationally ignorant. But even if you did find out that because of government intervention you are paying an additional $5 dollars for that bottle of wine, you are not going to take the next flight to DC and talk to that representative. But, of course, it is in the self-interest of special interest groups to "wine and dine" politicians and politicians in turn will respond because they know they can get campaign contributions and they know that most voters are ignorant.

 Frank is correct in pointing out that information is much more available today at a low cost so many government actions are brought to light; however, because there is so much information to digest, people will still be rationally ignorant of many policies. And, to be blunt, many voters have no clue about basic economics. This is an empirical fact (see GMU professor Bryan Caplan's work).

As for Keynesian prescriptions for the economy, I will say study some Austrian perspectives of what really caused the Depression and what really causes the boom and bust cycle (business cycle). I will also say please remember the broken window fallacy when people argue that government spending "stimulates" the economy. If you have not read Henry Hazlitt's Economics in One Lesson, do so immediately!

My main complaint in this chapter is his comparison between government waste and private waste. Government gets money by taking it from me (some would argue when government takes money it's called taxation; when a person takes money from another person, it's called theft). In the private sector, I get money by earning it doing something of value for someone else. While I might think it ridiculous to spend thousands of dollars for a birthday party, that spending isn't taking money from other people! And if I want to build a larger mansion, I am not hurting anyone else! Finally, Frank seems to be implying that he knows or can measure the utility people get when adding on to their mansions. I am not sure how he does this.