Archive for the ‘economics’ Category

Electric Car Math   5 comments

These are Fairbanks, Alaska figures.

According to Plug In America, a quality electric car (a Tesla) uses 32 kwh to go 100 miles. For the record, 100 miles is less than one-third of the way to the nearest city in Alaska. I am so looking forward to stopping overnight on my way to Anchorage since the Tesla only has a 300 mile range.

Coincidentally, my car needs to be filled about every 300 miles. $2.38 a gallon for gasoline. I know, we produce the oil, so why is gasoline so expensive here. Nobody can give us an adequate answer. Economies of scale are the explanation given, but we produce the oil, so you’d think we’d get a break on reduced shipping, but apparently not.

Image result for image of tesla carElectricity is 27 cents a kilowatt hour in Fairbanks. So to travel 300 miles in a Tesla would cost me $26.00.

My car holds 18 gallons and can take me 300 miles. That’ll set me back $43. Oh, the cost is half, so get an electric car. But ….

BUT … I need a heater or I’ll die in Alaska’s frigid temperatures. Running a heater in a gasoline engine hardly reduces the gas mileage because it’s excess heat off the engine. Running a heater in a Tesla does reduce the range … by 50%. If I wanted to drive to Anchorage, 380 miles away, I’d have to stop for gasoline in Wasilla. That would take 15 minutes (half an hour if I decide to grab some food and use the facilities) and I’d be on the road again. I would not stop to sleep along the way as it only takes about seven hours to drive 380 miles.

Image result for image 2005 ford taurus covered in snowIf I was driving a Tesla in the winter, with only 150 mile range, I’d have to stop in Healey and Wasilla and sleep overnight – $120 per night for the hotel, $60 a day for meals, and two nights of my time since it takes a Tesla 9.5 hours to achieve a full charge (assuming it can do that when it’s -30 out). So what I save in gasoline over driving electric, I more than make up in other costs.

A $400 trip to Anchorage (round-trip – gasoline, meals and assuming a decent hotel) would become a $1300 trip in an electric car, plus add four days onto my trip.

So please stop telling me about how much money I would save with an electric car versus my gasoline car. Yes, commuting to and from work in a warm climate saves you money, but those savings evaporate in a cold climate and become a liability if you need to travel any distance.



Posted February 8, 2018 by aurorawatcherak in economics, Uncategorized

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RIP Sam’s Club   Leave a comment

Sam’s Clubs around the country are being closed, proof positive — according to some of my Democratic friends, that the economy is not doing as well as people think it is.

Image result for image of sam's club closingSam’s doesn’t mean that much to me. We used to be members, but when we stopped spending on credit, we went through a couple of years where we couldn’t afford Sam’s in our budget and by the time we could afford to budget for it again, we were out of the habit of using them. We’d started buying bulk at a local feed store and we’d discovered the Internet, so Sam’s was redundant.

I do acknowledge that it will be hard for some people to lose Sam’s. Small businesses who need bulk items – cups, coffee, etc. – will feel the pinch. Big families who buy bulk. A friend of ours who is a meat connoisseur who buys his meat in primals and does his own butchering. But for our family, it really wasn’t worth the membership. And 150 people lost their jobs here locally and in a community of only 100,000 people, that’s a hit.

But why did Sam’s close? According to our newspaper here, Sam’s nationwide is restructuring and that’s a complicated story. It belongs to the same corporation that Walmart and Walgreen’s belong to. Although Sam’s has not been unprofitable, it has not been growing as fast as Walmart and the fact that about 12 of the closed locations will be turned into e-commerce distribution centers, suggests Sam’s is looking into the future. These new centers will help Sam’s Club build out its e-commerce capabilities by giving it a wider fulfillment network, potentially helping it get online orders delivered to customers faster.

Increasing its commitment to e-commerce may help Sam’s Club compete with wholesale rivals like Cosco and Boxed. E-commerce is becoming more of a focus in wholesale retail, and if Sam’s Club doesn’t invest in it, the company may get left behind. Costco is a major competitor to Sam’s Club (and there’s one in Anchorage, but not in Fairbanks), and in its most recently reported quarter, its e-commerce comparable sales jumped nearly 44% year over year. Additionally, Boxed, an e-commerce only wholesale startup, is starting to establish itself. Sam’s Club’s e-commerce gross merchandise value (GMV) has been between 20% and 29% year over year in recent quarters, Sam’s Club told Business Insider Intelligence. These new fulfillment centers may help the company strengthen this growth, as it looks to better compete in wholesale online.

Turning physical stores into distribution centers is also way for Walmart to leverage its brick-and-mortar network. Walmart has a virtually unmatched brick-and-mortar network — its CEO has estimated that it has a brick-and-mortar location within 10 miles of 90% of the US population. The retailer has made efforts to entice consumers to pickup online orders in-store, but turning underperforming stores into full-blown e-commerce distribution centers as Sam’s Club is doing is another way to take advantage of its proximity to its consumers. If Walmart, and Sam’s Club, hope to thrive online, they’ll need to offer fast delivery times to rival Amazon, and having e-commerce distribution centers close to customers should help with that.

Just as the Piggly Wiggly’s ran the full-service grocery store out of business, online e-commerce is sucking away the business of physical locations. But Amazon isn’t a monopoly yet and it is struggling with its network (hence, it’s desire to build a second HQ). If Walmart moves into ecommerce in a big way, utilizing former Sam’s Club locations as fulfillment centers, it potentially becomes a major contender against Amazon.

It sucks for Alaska because we have to pay individual shipping rather than allowing Sam’s to spread that cost in bulk, but we can still use Cosco, which is in Anchorage and has been suggesting for years that it might move to Fairbanks. They no longer have any competition here, so they just might. And, if they don’t, a local trucking company is advertising that they will be doing twice-a-month 380-mile runs with people’s personalized shopping lists. Yeah, it’s the return to the full-service grocery store.

Ultimately, Sam’s Club is an example of creative destruction. By closing many of their locations, they allow their parent company to become healthier and better able to face the changing needs of a 21st Century society. In 10 years, people will wonder why we went through all the hassle of traveling to a big warehouse to pick up stuff, wandering by stuff we don’t need, but then decide to buy, then try to fit it into our cars when we can now just make our selections online and have it delivered to our door by freight drone.

Posted January 20, 2018 by aurorawatcherak in economics, Uncategorized

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Stealing From Your Neighbor Through Subsidies   Leave a comment

In 2017, the Montana Public Service Commission approved (4 to 1) the renewal of Commnet Wireless’s Eligible Telecommunications Carrier (ETC) certification, authorizing that company to receive a federal “Lifeline” subsidy of $34.25 for every customer on the Northern Cheyenne Reservation – an amount sufficient to render their service free to most users. Previously, this same company received $2.2 million in Universal Service Fund (USF) “high cost” subsidies to build their infrastructure in Rosebud County. This subsidy paid for all of their capital costs in establishing their business, debt-free, while producing for them a tidy annual profit of almost $1 million.

Image result for image of fiber optic cableIt seems that Commnet Wireless is “living the American Dream” – at everyone else’s expense. But that’s not a rare circumstance.


The Universal Service Fund was first created by Congress in 1934 then greatly expanded under the Telecommunications Act of 1996 (Clinton was President). It is funded by a dedicated federal tax on consumer phone bills. This, ironically, makes the very services Congress wishes to expand less affordable, especially to lower-income Americans. The program is premised on the belief that an ever-expanding set of telecommunications services are the “right” of all citizens, and should thus be made “universal” by the generosity of Washington’s re-distributional political class.

The program started with landlines, then expanded to wireless and is now being applied to broadband — and not just any broadband, but high-speed fiber-delivered broadband. The Lifeline program gives away free cell phones and subsidizes low-income and tribal households. The Connect America Fund and “High Cost” programs directly subsidize telephone companies, as well as schools, libraries and rural health care facilities to provide “free” Internet. USF’s total annual budget is currently $10.5 billion, or $84 per American household.

That’s a month of Internet at my home, where I can’t get high-speed broadband because the infrastructure doesn’t exist. We can get “high-speed” DSL that drops out 2-3 times a day because people are making phone calls or cable Internet which is slower than high-speed fiber. I’ve never lived anywhere that offered high-speed broadband because our local Internet providers just don’t see a profit in providing it and permitting laws don’t allow competition. So do I have a “right” to high-speed fiber-delivered broadband? I haven’t died without it up to this point and we’ll pursue that thought further down.

Like all federal programs, USF proceeds blindly with the assumption that shoveling federal dollars at something automatically produces the desired outcomes – outcomes that would not otherwise happen if people were left to spend more of their own money, and the marketplace was allowed to respond to human needs and desires absent government intervention. It’s not surprising to learn then, that the FCC has never reliably measured to what extent the subsidized telecommunications services would have expanded just as much – or more – into the targeted high-cost areas, without any subsidies needed – and done so at lower cost. Dollars spent are considered a successful outcome regardless of actual outcomes.

In Alaska, rural villages and the Native corporations that they own came to the conclusion that, since the cities don’t have fiber-based high-speed broadband yet, the villages would have to provide it for themselves. Internet is currently provided via satellite and it sucks. Several corporations made a decision to contract with Anchorage-based Quintillion for a land- and sea-based fiber-optic cable network with an overall capacity of 30 terabits per second. Each of the five communities in the network currently will have access to up to 200 gigabits of data per second. If demand increases, the capacity can be increased according to Quintillion. It went live December 13. Four other villages will be added this coming summer.

This is a side project to a planned Tokyo to London fiber cable. It’s being financied by Leonard Blavatnik, one of the world’s wealthiest individuals, through the Cooper Investment Fund, but there are also Alaska-based investors including subsidiaries of Native corporations Arctic Slope Regional Corp. and Calista Corp, two of the largest “private” companies in Alaska. Eventually, this cable is expected to provide fiber-delivered Internet to Fairbanks and Anchorage.

So what do we learn from that? The time has come to re-think wealth transfer schemes like the USF, that eliminate price signals, supplant the free market, and create the net effect of increased government dependency and a culture of entitlement. As with any other good or service in a free economy, consumer demand for rural high-speed broadband should be based on the willingness of consumers to pay for the full cost of that service – not based on political pandering that subsidizes one man at another’s expense. A shell game with predetermined winners and losers, lacking any credible metrics and amounting to little more than a glorified multi-billion dollar welfare program.

Saying we “want” something as long as somebody else pays for it is not “demand”. Currently, broadband build-out into high-cost areas is based almost entirely on artificial demand – created by subsidy – rather than on true demand, created by value-seeking consumers in the marketplace, responding to the price signals of true cost. If consumers in outlying areas value fiber-delivered high-speed internet enough to pay the full cost, then we have genuine demand and the market will see to it that these services are provided – without any government involvement.

If consumers are unwilling to pay the true cost, then demand does not exist, and presumably won’t exist until private enterprise finds ways of delivering better service at a lower price. But that incentive disappears when the government steps in. Saying we “want” something as long as somebody else pays for it is not demand. It is little more than theft dressed up by the agency and power of government. Personal responsibility – the foundational principle of a free society – is replaced with “but I want it, so you should pay for it.”

According to my research, you can get high-speed broadband for $30 a month in New York City. Here in Alaska’s second-largest city, I can get slower cable-based Internet for $100 a month — actually, I could get cable Internet for as low as $60 a month, but you can’t watch Netflix without going over the monthly limit. Of course, we don’t have high-speed broadband because the current cost for building broadband or wireless infrastructure into rural and low-population areas is obviously higher on a per-customer basis – perhaps 50 to 100 percent more. One of the fundamental principles of sound economics is the alignment of benefits with costs. When you subsidize a good or service, you can no longer know what people are actually willing to pay as consumers because the government has gotten somebody else to pay for them.

This arrangement tends to convince rural customers that the full price is “unjust” to those who have chosen to live in the country. At the same time, it obstructs the very progress that would bring lower prices about. The subsidized companies have a reduced incentive to economize and to innovate since their profit is all but guaranteed without it.

Public service commissioners everywhere need to understand that it is not the job of the state commissions to rubber stamp federal programs that evidence shows are harmful in the long run to the people they serve. Subsidies like USF produce obvious beneficiaries. Government giveaways always do. They are highly visible. The market-driven benefits produced by those same dollars, left in the hands of those who earned them, are always far greater, but cannot be specifically identified. They become the opportunities lost, the blessings of liberty that were aborted before their birth.

Thus, government creates an illusion of value and benefit, when in reality all it has done is substitute government spending for spending in the marketplace by the frugal, self-interested, wage-earning consumer. The fantasy of a net benefit is bestowed on the person who wasn’t involved in the working or the earning – convinced by politicians that he had it coming all along. Surely, high-speed broadband is in the Constitution somewhere.

Once established, climbing out of the Subsidy Entitlement Pit is never easy. The smoke and mirrors of perceived benefit are so effective, that it becomes very difficult for elected officeholders to do the right thing, by choosing freedom over political security. It is far easier to avoid criticism and “go with the flow.”

To be sure, doing the right thing and doing the easy thing are rarely companions that walk the same path. Doing the right thing requires an extra measure of principle, courage and integrity, something most politicians and government workers lack.

What this comes down to is not just an economic consideration, but also the need to educate people on just what is a “right”. I have no right to anyone else’s stuff. I only have a right to what I can produce myself or trade with others from what I can produce myself.

So, for example, I am a writer and administrator. I make money from both of these endeavors. I can take the money and buy stuff with it, stuff that someone else has produced. One-hundred dollars of my earnings go every month to my cable provider to provide Internet service. I don’t have cable television or this would be the biggest bill in my budget. I get what I get. From the perspective of someone with fiber-delivered high-speed broadband, my Internet service is clunky. But would I be willing to pay $200 a month for fiber? No way! I simply don’t have that sort of wriggle room in my budget. If it were available for that cost, I would continue with the service I have now because I make choices of what to do with my money.

My neighbor says he wants high-speed Internet, but he isn’t willing to pay $200 for it. So, he petitions the cable company and the city government to apply for ETC funds. Pretty soon, my cable bill increases because the company is trying to finance fiber. Also my telephone and cable bill taxes increase. Now, even though I have elected to stay with ordinary Internet service because I don’t want to pay for fiber, I am paying for my neighbor’s fiber.

That’s theft. And there is no scenario where you can say that you have a right to steal from someone else, even if you do it through a government program.


Taking the Long View   Leave a comment

So, I ran into my extremely liberal former coworker in the grocery store last night. She was all in a tizzy about corporate tax reform and how it was going to “harm” her financially. Wasn’t I worried about how much more I would pay? When I said my sister-in-law (a CPA with tax experience) had checked my math and assured me we would be saving money not losing it, Michelle asked if my husband’s business had finally taken off. No, Brad is still keeping it small and enjoying being able to take time off to go fishing and hiking when he wants. We’re not rich and current tax reform should save us at least $800 and maybe as much as $2000. And, no, Brad’s business is a sole-proprietorship, not a corporation.

Image result for image of tax cuts helping the economyMichelle is a social worker, not an economist, but that’s really no excuse for ignoring the inconvenient fact that voluntary economic arrangements benefit all participants … else individuals could refuse to participate. In the absence of fraud (government’s failure to protect citizens from criminals) or coercion (government’s invasion on citizens’ rights), self-interest will guarantee a benefit to all parties, regardless of what Congressional Democrats may say at the moment.

The progressive strategy going forward will be to ignore many clear mechanisms by which the rest of us gain from improved incentives for capitalists to use their resources for others.

Corporate tax reform improves after-tax rewards for capital investments, providing tools for increased worker productivity and earnings. It further stimulates innovation, advancing techniques and improving technology, risk-taking, and entrepreneurship. This doesn’t just help company owners, but benefits workers and consumers.

Of course, there is a commonsense caveat here. It takes time for owners of capital to fully respond to improved incentives, meaning the positive effects on workers’ circumstances will appear only with time. The whole strategy of tax-reform opponents will be to focus people’s attention on the short run, before the positive labor effects appear in the data. The hope is that voters will overlook these benefits, which may not be fully realized, in fall of 2018 when they go to the polls to elect Representatives and Senators.

It might be a useful strategy because the benefits to capitalists appear immediately in the data. By comparing the limited benefits to workers in the present to both the present and future benefits to capitalists, opponents of corporate tax rate reductions can cast tax reforms as essentially just “tax cuts for the rich,” even if the vast majority of benefits actually accrue to workers over time.

This is how it works. When the tax burden on a class of assets, say corporate stock, is reduced, it will lead to an immediate increase in those assets’ prices. The asset price increase will not only reflect current gains to their owners, but also capitalize the expected increased after-tax profits that can be expected in the foreseeable future. The more durable the improvements are likely to be, due to future effects, the greater the asset price surge will be.

Additionally, most financial resources are owned by people who have greater wealth and income. Often these are older middle-class households who have had more time to convert unmeasured earning capacity into measured financial wealth, but that still leaves their middle-aged offspring not quite certain they’re seeing a benefit in the first year of tax reform. So, by focusing only on the short run (fall 2018), the results can be made to appear as huge asset gains for “the rich,” with almost no effect on American workers’ financial well-being. That lag lets tax-reform opponents assert that their claim has been “proven”. Of course, the main benefit of these short-term results accrues to older households that have had more time to convert unmeasured earning capacity into measured financial wealth.

Unfortunately for opponents’ supposed “proof”, the improved incentives of higher after-tax returns are the mechanism which produces increased worker productivity and real earnings over time. Those cumulative effects are very large, even when their immediate effect is small. But unlike financial market assets, there is no marketplace in which the higher real earnings of workers in the future (economists call that “human capital”) get capitalized into an easily-observed wage and/or benefit increase.

January’s investor- and owner- class begin to benefit workers later in the year or in January of 2019, but by emphasizing the short-run, the opponents basically just ignore that economic fact.

Michelle insisted that they should have implemented the tax reform starting in 2019 to allow people to adjust. I was stunned at first that anyone would want to delay getting to keep more of their money, but then I remembered, there’s an election in November 2018. She was probably just parroting some talking points she’d heard and taken as gospel. By implementing tax reform staring in January, the GOP gives some hope for businesses to see the benefits of tax relief immediately and to begin to pass those benefits onto their workers and consumers by late summer. As proponents of “taxing the rich” see their prospects for a political win evaporate, they will focus attention on the short-run. “Your wages haven’t gone up spectacularly yet, have they?” Banging that drum throughout the year will make excellent electoral ammunition … unless workers see an increase in their paychecks in late summer.

By the way, we’ve been here before with the Reagan tax reform. There are still people (Michelle is one of them) who will insist that the Reagan reforms had no positive effect for ordinary people. It was just “a tax cut for the wealthy.” Unless you were a worker who say a benefit before the next election, you probably thought your own experience was “proof” that Reagan’s tax reform didn’t work. A short term focus is a massive misrepresentation which diverts attention from the fact that improved incentives reveal themselves in the economy and for workers and consumers over time. If we take a longer-term view of economics, we aren’t fooled by the sleight-of-hand, but most progressive have difficulty with the concept that it can take six to 18 months for a tax cut to be reflected in the growth of real wages. I think that’s the effect generated by a bailout mentality.

Now, here’s the thing – ultimately, tax reform is only part of the picture for a healthy economy. The US economy is burdened by many things in addition to a high corporate tax rate. Unacceptably high levels of debt, private and governmental, also drag on the economy. The evisceration of the manufacturing sector doesn’t help. President Trump is making great progress on the rollback of regulations that was encouraging manufacturers to move overseas and a better tax rate might also help to protect and improve manufacturing in the US, but tax reform alone is not a magic pill. It’s just part of a compound strategy that is essential if any other parts of the strategy are going to work. At some point, government is going to have to cut spending in order to eliminate deficits and address the debt, but that only works if the economy is growing.

Unfortunately, politicians tend to see things in 2-6-year cycles, so don’t often take a long-view approach to the economy. Which begs the question –

Why do we think they should be in charge of the economy?


Posted December 21, 2017 by aurorawatcherak in economics

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Why Fear Automation?   Leave a comment

Do we fear robots will take our jobs?

Automation is a scary thing. Machines can replace humans at some jobs and there’s even those who fear that machines can do all of our jobs.

I don’t know about that.

Consider Piggly Wiggly’s. I don’t actually recall the PW we had in Fairbanks when I was a kid, but my mother preferred it over the Safeway that ran it out of business. Why? I have no idea. Safeway was bigger. Mom had no sense of direction. Maybe she just preferred the tiny store to the block-sized one. I’m speculating. Maybe PWs had better service.

Image result for image of piggly wiggly killed the general storeWhen Piggly Wiggly opened its first “self-service” grocery store in 1916, consumers found the new model more convenient and time-saving compared to the old model. What was the old model? You came to the store with a prepared list and a store clerk filled it for you while you waited. I’m told by my parents that this was a slow way to shop and of course you couldn’t make choices on brands or whatever.

The old system did employ a lot of clerks and those clerks lost their jobs when the Piggly Wiggly concept swept the industry.

You can go back in history and see that people were not starving in the streets in the 1920s, so where did all those store clerks go?

They found jobs as clerks in other industries. There were many neophyte companies attempting to bring life-enhancing products and services to the market and they could now acquire the manpower to make those dreams a reality. They electrified the country (light switches were invented in 1918) and introduced the small appliance (the blender and the pop-up toaster were invented in 1919).

Today, people are worried that Amazon Go will eliminate the need for the store cashiers. If you’re not familiar with this new concept – you enter the store, it scans an app on your smart phone. It uses technology to figure out what you take from the shelf and put in your bag and it can even deduct items if you change your mind. When you leave the store, it deducts the total from your bank account. Done. No more standing in line.

Do I think that means my favorite cashier will lose her job? Well, technically, she did when Fred Meyers installed a self-service lane where I scan my own groceries. But they’ve since added a second bay of self-service scanners which now has four or five cashiers to aid confused shoppers, so her job didn’t go away, it just changed. She’s no longer getting carpal tunnel scanning groceries, but she gets paid more than she used to. And I still get to see her bright and shiny face when I shop.

But Fred Meyers has come up with its own reversion to the full-service grocery store. You can now shop for groceries online and have a store clerk fill the order for you so that you can pick it up at a speed lane.

So, do I think machines will replace our jobs?

I think machines will replace some jobs, but for the most part, it will merely transform the jobs we do currently and even those people who find themselves out of work because their industry went away … if they get some training and get off their butts, they’ll find jobs in industries that we can’t even foresee yet.


Regulatory Reducing Diet   Leave a comment

The last Western Union telegram was sent 11 years ago. Why? Because technology outstripped its usefulness a long time ago. But the FCC recently decided to end burdensome regulations that stifled telegraph technology. As Reuters reported:


AT&T Inc, originally known as the American Telephone and Telegraph Company, in 2013 lamented the FCC’s failure to formally stop enforcing some telegraph rules.

‘Regulations have a tendency to persist long after they outlived any usefulness and it takes real focus and effort to ultimately remove them from the books even when everyone agrees that it is the common sense thing to do,’ the company said.”

Related image

Regulations are far easier to create than they are to dismantle, yet there has been an undeniable trend of repealing these types of regulations lately. We haven’t seen anything like it since the Reagan administration. Who is responsible for this housecleaning? None other than President Donald Trump.


Ronald Reagan left many legacies during his duration in the White House. I could grumble out his contribution to the War on Drugs, but I’m going to focus on his deregulatory accomplishments.  During the Reagan administration, both the Federal Register and federal regulations decreased by more than one-third. That’s a pretty impressive record, considering most presidents increase regulation, but Donald Trump has already shattered that record.

Yes, he’s been in office less than a year and has already accomplished more on this front than Reagan did in eight years. Upon taking office, Donald Trump signed an executive order telling federal agencies that they must cut two existing regulations for each new regulation proposed. Contained within this executive order was the demand that each federal agency create a task force with the explicit purpose of finding regulations worth slashing. This act was intended to help the newly sworn-in president reach his promise of cutting 70% of all federal regulations.

Regulatory cuts are typical GOP rhetoric, but the left immediately set about to fight this executive order. A coalition of left-leaning organizations even joined together in February to sue Trump on the grounds that his executive order would potentially “block or force the repeal of regulations needed to protect health, safety, and the environment, across a broad range of topics – from automobile safety, to occupational health, to air pollution, to endangered species.”

Trump doesn’t scare easily. He’s an old hand at lawsuits. He’s continued forward with his objective.

The score speaks for itself. During the same point of time of their respective presidencies, Obama’s regulatory tally was at 1,737 while Trump’s is 1,241. And while Reagan’s own regulatory cuts were admirable, they still don’t compare with Trump’s if you judge them by the same time frame.

Earlier this October, Trump announced his plans to further cut taxes along with red tape that negatively impacts both businesses and consumers. According to CEI, the current level of federal regulatory burdens have amounted to nearly $2 trillion. Business owners pay the initial costs, but regulatory burden inevitably trickles down to the consumer. When overhead costs are raised on entrepreneurs, the cost must be made up somewhere. These hidden costs account for about $15,000 per household in any given year.

As the 2017 fiscal year came to a close this month, the White House also released its initiative to cut more red tape to jump start the economy. Obviously, the “do nothing” method is a far cry from Obama’s overbearing regulatory intervention. This is pleasing Trump supporters, the business sector and economics geeks like me who are fed up with a decade of economic stagnation, but recognize that Congress has yet to act on any substantial reform in either the House or the Senate. This is all being done by executive order. Regulations, by the way, are the one area where Presidents may act without the advise and consent of Congress. Regulations are an Executive Branch function.

The White House has continued its efforts to encourage regulatory relief by pushing for three specific reform efforts, listed by CEI’s Clyde Wayne Crews as follows:

  1. Trump’s January executive order requiring agencies to eliminate at least two rules for every new regulation adopted, and that they ensure net new regulatory costs of zero;
  2. A sweeping  Reorganization Executive Order that requires the Office of Management and Budget to submit a plan aimed at streamlining and reducing the size of the administrative state generally. This plan will set the tone for Trump’s budget proposal next year.
  3. memorandum from the new Office of Information and Regulatory Affairs (OIRA) administrator Neomi Rao directing agencies, for the first time as far as I can tell, to propose an overall incremental regulatory cost allowance for the agency in the new edition of their “Unified Agenda” on regulations. This report will appear in the fall. Prior editions, since the 1980s, would label rules as “economically significant,” but never has there been such a “regulatory budget.” Rao says, “OMB expects that each agency will propose a net reduction in total incremental regulatory costs for FY 2018.”

So, let me guess – you haven’t heard about this, right? That’s because the media have largely ignored it. Yeah, they never miss an opportunity to criticize President Trump, but somehow this massive rollback of regulation has escaped their notice.


Without economic liberty there can be no general freedom, which is why a decrease in the regulatory state is so important. There are many areas where I deeply disagree with President Trump, but increasing economic freedom is no small feat and it deserves a standing ovation. 


Income without Work   1 comment

We like to think that universal basic income is a new idea that has never been considered before, but that would be untrue. Henry Hazlitt (Economics in One Lesson) dealt with the concept in 1966 and his arguments against it are still valid 50 years later. I’ve provided some notes and organization to his arguments. You can read the original at this location.  Lela

Income without Work

Henry Hazlett


A group of social reformers, im­patient with the present “rag bag” of measures to combat poverty, propose to wipe it out in a sin­gle swoop. The government would simply guarantee to everybody, re­gardless of whether or not he worked, could work, or was will­ing to work, a minimum income. This guaranteed income would be sufficient for his needs, “enough to enable him to live with dig­nity.”

Image result for image income redistribution from workers to nonworkers by coercionThe reformers estimate that the guaranteed income ought to range somewhere between $3,000 ($22,776.60 today) and $6,000 ($45,553.21 today) a year for a family of four.

This is not merely the proposal of a few starry-eyed private in­dividuals. The National Commission on Technology, Automation, and Economic Progress, estab­lished by Congress in 1964, brought in a 115-page report to the President (Johnson) on February 4 of this year recommending guaran­teed incomes for all. And in Janu­ary the President’s Council of Economic Advisers indicated ap­proval of “uniformly determined payments to families based only on the amount by which their in­comes fall short of minimum sub­sistence levels.” This plan, they declared, “could be administered on a universal basis for all the poor and would be the most direct approach to reducing poverty.”

The plan is spelled out and ar­gued in detail in a book called The Guaranteed Income, a sym­posium of articles by ten contrib­utors, edited by Robert Theobald, who calls himself a “socio-econo­mist.” Mr. Theobald has contribu­ted three of the articles, including his preface.

Of the following three para­graphs, Mr. Theobald prints the first two entirely in italics:

“This book proposes the estab­lishment of new principles spe­cifically designed to break the link between jobs and income. Imple­mentation of these principles must necessarily be carried out by the government….

“We will need to adopt the con­cept of an absolute constitutional right to an income. This would guarantee to every citizen of the United States, and to every per­son who has resided within the United States for a period of five consecutive years, the right to an income from the federal govern­ment to enable him to live with dignity. No government agency, judicial body, or other organiza­tion whatsoever should have the power to suspend or limit any pay­ments assured by these guaran­tees….

“If the right to these incomes should be withdrawn under any circumstances, government would have the power to deprive the in­dividual not only of the pursuit of happiness, but also of liberty and even, in effect, of life itself. This absolute right to a due-in­come would be essentially a new principle of jurisprudence.” (emphasis Lela)

The contributors to this volume have arrived at these extraordin­ary conclusions not only because they share a number of strange ideas of jurisprudence, of “rights,” of government, and of the true meaning of liberty and tyranny, but because they share a number of major economic mis­conceptions.

Strange ideas about:

  • jurisprudence
  • “rights”
  • government
  • true meaning of liberty and tyranny
  • economic misconceptions

Nearly all of them seem to share the belief, for example, that the growth of automation and “cyber­nation” is eliminating jobs so fast (or soon will be) that there soon just won’t be jobs for even the most industrious. “The continu­ing impact of technical change will make it impossible to provide jobs for all who seek them.” The goal of “jobs for all” is “no longer valid.” And so on.

Ancient Fears of Automation

The fears of permanent unem­ployment as a result of technolog­ical progress are as old as the In­dustrial Revolution in the late eighteenth and early nineteenth century. They have been constant­ly reiterated in the last thirty-five years and as often completely refuted. (more than 80 years now). It is sufficient to point out here that not only has the average unemployment of slightly less than 5 per cent in the last twenty years not been growing, and that two-thirds of the jobless have usually remained so for periods of not more than ten weeks, but that the total volume of em­ployment in the United States has reached a new high record in near­ly every one of these years.

Even if it were true, as the authors of the guaranteed income proposal contend, that the Ameri­can free enterprise system will soon become so productive that more than anybody really wants can be produced in half the time as now, why would that mean the disappearance of jobs? And how could that justify half the popu­lation’s, say, being forced to work forty hours a week to support the other half in complete idleness? Why couldn’t everybody work only in the mornings? Or half in the mornings and the other half in the afternoons at the same ma­chines? Or why could not some people come in on Mondays, others on Tuesdays, and so on? It is dif­ficult to understand the logic or the sense of fairness of those who contend that as soon as there is less to be done some people must be supported in idleness by all the rest.

No historical evidence that increased productive eliminates jobs, but even if it did, people could work parttime. “It is difficult to understand the logic or … fairness of those who contend that … some people must be supported in idleness by all the rest.

“An Absolute Right”

But that is precisely the conten­tion of the advocates of the guar­anteed annual income. These hand­out incomes are to be given as “an absolute constitutional right,” and not to be withheld “under any circumstances.” (Theobald’s ital­ics.) This means that the recipi­ents are to continue to get this in­come not only if they absolutely re­fuse to seek or take a job, but if they throw the handout money away at the races, or spend it on prostitutes, on whiskey, cigarettes, marijuana, heroin, or what not. They are to be given “sufficient to live in dignity,” and it is appar­ently to be no business of the tax­payers if a recipient chooses none the less to live without dignity, and to devote his guaranteed leisure to gambling, dissipation, drunken­ness, debauchery, dope addiction, or a life of crime. “No government agency, judicial body, or other organization whatsoever should have the power to suspend or limit any payments assured by these guarantees.” This is surely a “new principle of jurisprudence.”

Unrealistic Cost Estimates

How much income do the guar­anteed-income advocates propose to guarantee? They differ regard­ing this, but practically all of them think the government should guarantee at least what they and government officials call the “min­imum maintenance level” or the “poverty-income line.” The Social Security Administration calculat­ed that the 1964 poverty-income line for nonfarm individuals was $1,540 a year. A nonfarm family of four was defined as poor if its money income was below $3,130. The Council of Economic Advisers has calculated that by this stand­ard 34 million out of our 190 mil­lion 1964 population, or 18 per cent, were living in poverty. This is in spite of the $40 billion total spent in welfare payments, of which it estimated that $20 billion (in the fiscal year 1965) went to persons who were, or would other­wise have been, below the poverty-income line.

How much would a guaranteed-income program cost the taxpay­ers? This would depend, of course, on how big an income was being guaranteed. Many of the income-guarantee advocates think that a guarantee merely of the poverty-line income would be totally in­adequate. They appeal to other “minimum” budgets put together by the Social Security Administra­tion or the Bureau of Labor Sta­tistics, some of which run up to nearly $6,000 ($45,553) for a family of four.

One of the contributors to the Theobald symposium makes the following estimates of the cost to the taxpayers of different guar­antees:

  • For a “minimum maintenance” level of $3,000 a year: total cost, $11 billion a year. ($835 Billion a year today)
  • For an “economy” level of $4,000: $23 billion a year. ($1.7 trillion annually)
  • For a “modest-but-adequate” level of $5,000: $38 billion a year. (almost $2.9 trillion annually)

These figures are huge, yet they are clearly an underestimate. For the calculations take it for granted that those who could get govern­ment checks of $3,000 to $5,000 a year, as an absolute guarantee, without conditions, would con­tinue to go on earning just as much as before. But as even one of the contributors to the Theo-bald symposium, William Vogt, re­marks: “Those who believe that men will want to work whether they have to or not seem to have lived sheltered lives.”

Who Would Do the Work?

He goes on to point out, with refreshing realism, how hard it is even today, before any guaran­teed income, to get people to shine shoes, wash cars, cut brush, mow lawns, act as porters at railroad or bus stations, or do any number of other necessary jobs. “Millions of service jobs are unfilled in the United States, and it is obvious that men and women will often prefer to exist on small welfare payments rather than take the jobs…. If this situation exists before the guaranteed income is made available, who is going to take care of services when every­one can live without working—as a right?”

Who is, in fact, going to take the smelly jobs, or any low-paid job, once the guaranteed income program is in effect? Suppose, as a married man with two children, your present income from some nasty and irregular work is $2,500 a year. Comes the income guaran­tee, and you get a check in the mail from the government for $630. This is accompanied by a letter telling you that you are en­titled as a matter of uncondition­al right to the poverty-line income of $3,130, and this $630 is for the difference between that and your earned income of $2,500. You are happy — for just a day. Then it occurs to you that you are a fool to go on working at your nasty job or series of odd jobs for $2,­500 when you can stop work en­tirely and get the full $3,130 from the government.

So the government would, in fact, have to pay out a tremendous sum. In addition, it would create idleness on a huge scale. To pre­dict this result is not to take a cynical view, but merely to rec­ognize realities. The beneficiaries of the guaranteed income would merely be acting sensibly from their own point of view. But the result would be that the fifth of the population now judged to be below the poverty line would stop producing even most of the neces­sary goods and services it is pro­ducing now. The unpleasant jobs would not get done. There would be less total production, or total real income, to be shared by every­body.

The Shifting “Poverty Line”

But so far we have been talking only about the effect of the guar­anteed income on the recipients whose previous incomes have been below the poverty line. What about the other four-fifths of the population, whose incomes have previously been above it? What would be the effect on their incen­tives and actions?

Suppose a married man with two children found at the end of a year that he had earned $3,500? And suppose he found that his neighbor, with the same-sized fam­ily, had simply watched television, hung around a bar, or gone fishing during the year and had got a guaranteed income from the gov­ernment of $3,130? Wouldn’t the worker begin to think that he had been something of a sap to work so hard for a mere $370 net, and that it would be much better to lead a pleasantly idle life for just that much less? And wouldn’t the same thing occur to all others whose earned incomes were only slightly above the guarantee?

It is not easy to say how far above the guarantee any man’s in­come would have to be for this consideration not to occur to him. But we would do well to remember the following figures: The median or “middle” income for all families in 1964 was $6,569. The median income for “unrelated” in­dividuals was $1,983. People with these incomes or less — i.e., half the population—would be near enough to the guarantee to won­der why they weren’t getting any of it.

Someone Must Pay

If “everybody should receive a guaranteed income as a matter of right” (and the italics are Mr. Theobald’s), who is to pay him that income? On this point the advocates of the guaranteed in­come are either beautifully vague or completely silent. The money, they tell us, will be paid by the “government” or by the “State.” “The State would acknowledge the duty to maintain the individual.”

[T]he gov­ernment has nothing to give to anybody that it doesn’t first take from someone else.

The state is a shadowy entity that apparently gets its money out of some fourth dimension. The truth is, of course, that the gov­ernment has nothing to give to anybody that it doesn’t first take from someone else. The whole guaranteed-income proposal is a perfect modern example of the shrewd observation of the French economist, Bastiat, more than a century ago: “The State is the great fiction by which everybody tries to live at the expense of everybody else.”

“The State is the great fiction by which everybody tries to live at the expense of everybody else.” Bastiat

Rights vs. Obligations

None of the guaranteed-income advocates explicitly recognizes that real “income” is not paper money that can be printed at will but goods and services, and that some­body has to produce these goods and services by hard work. The proposition of the guaranteed-in­come advocates, in plain words, is that the people who work must be taxed to support not only the peo­ple who can’t work but the people who won’t work. The workers are to be forced to give up part of the goods and services they have cre­ated and turn them over to the people who haven’t created them or flatly refuse to create them.

{T}he people who work must be taxed to support not only the peo­ple who can’t work but the people who won’t work.

Once this proposition is stated bluntly, the spuriousness in all the rhetoric about “the absolute con­stitutional ‘right’ to an income” becomes clear. A true legal or moral right of one man always im­plies an obligation on the part of others to do something or refrain from doing something to ensure that right. If a creditor has a right to a sum of money owed to him on a certain day, the debtor has an obligation to pay it. If I have a right to freedom of speech, to privacy, or to the ownership of a house, everyone else has an obligation to respect it. But when I claim a “right” to “an in­come sufficient to live in dignity,” whether I am willing to work for it or not, what I am really claim­ing is a right to part of somebody else’s earned income. What I am asserting is that he has a duty to earn more than he needs or wants to live on so that the surplus may be seized from him and turned over to me to live on.

[If] I claim a “right” to “an in­come sufficient to live in dignity,” … what I am really claim­ing is a right to part of somebody else’s earned income.

What the guaranteed-income advocates are really saying, be­hind all their high-sounding phrases and humanitarian rhet­oric, is something like this: “Look, we find ourselves with this wonder­ful apparatus of coercion, the gov­ernment and its police forces. Why not use it to force the workers to pay part of their earnings over to the nonworkers?”

Lack of Understanding

We can still believe in the sin­cerity and good intentions of these people, but only by assuming an appalling lack of understanding on their part of the most elementary economic principles. “This book,” writes Robert Theobald, “proposes the establishment of new princi­ples specifically designed to break the link between jobs and income.” But we cannot break the link be­tween jobs and income. True in­come is not money, but the goods and services that a money will buy. These goods and services have to be produced. They can only be produced by work, by jobs. We may, of course, break the link be­tween the job and the income of a particular person, say Paul, by giving him an income whether he consents to take a job or not. But we can do this only by seizing part of the income of some other per­son, say Peter, from his job. To believe we can break the link between jobs and income is to be­lieve we can break the link be­tween production and consump­tion. Goods have to be produced by somebody before they can be con­sumed by anybody.

Claimants to Be Trusted, Taxpayers to Be Examined

One reason for the agitation for an unconditionally guaranteed income is the dislike of some so­cial reformers for the “means test.” The means test is disliked on two grounds — that it is “humil­iating” or “degrading,” and that it is administratively troublesome — “a comprehensive examination of means and resources, applicant by applicant.” The guaranteed-income advocates think they can do away with all this by using the “simple” mechanism of having everybody fill out an income tax blank, whereupon the government would send a check to everybody for the amount that his income, so reported, fell below the govern­ment’s set “poverty-line” mini­mum.

The belief that this income-tax mechanism would be administra­tively simple is a delusion. Before the introduction of the withhold­ing mechanism, before the report­ing requirements for payments made to individuals in excess of $600 in any year, and the still more recent requirements for the reporting of even the smallest in­terest and dividend payments, the income tax was in large part a self-imposed tax. The government de­pended heavily on the taxpayer’s conscientiousness and honesty. To a substantial extent it still does.

The government can check the honesty of individual returns only by a random or arbitrary sam­pling process. It is altogether prob­able that more evasion and cheat­ing go on in the low income-tax returns than in the high ones—not because the big-income earn­ers are more honest, but simply because their chances of being ex­amined and caught are higher. The amount of concealment and falsification that would be prac­ticed by persons trying to get as high a guaranteed income as pos­sible would probably be enormous. To minimize the swindling, the government would have to resort to the same case-by-case and ap­plicant-by-applicant process as it does to administer current relief, unemployment insurance, and so­cial security programs.

Is a means test for relief necessarily any more humiliating than the ordeal that the taxpayer must go through when his income tax is being examined, and when every question he is asked and record he is required to provide implies that he is a potential crook? If the reply is that this inquisition is necessary to protect the govern­ment from fraud, then the same reply is valid as applied to appli­cants for relief or a guaranteed income. It would be a strange double standard to insist that those who were being forced to pay the guaranteed income to others should be subject to an in­vestigation from which those who applied for the guaranteed income would be exempt.

Is a means test for relief necessarily any more humiliating than the ordeal that the taxpayer must go through when his income tax is being examined, and when every question he is asked and record he is required to provide implies that he is a potential crook?

Finally, the income-tax mechan­ism would be irrelevant to the real problem with which the guaran­teed-income advocates profess to be concerned. For the applicants would presumably be reporting last year’s income, which would have no necessary relation to their present need. An applicant’s in­come in the previous year or other previous period might be either much higher or much lower than it is today. The process would not meet present emergencies, such as illness or temporary loss of em­ployment. The guaranteed-income payment might either come too late or prove unneeded or exces­sive.

Old Subsidies Never Die

One of the main selling argu­ments of the guaranteed-income advocates is that its net cost to the taxpayers would not be as great as might appear at first sight because it would be a substi­tute for the present “mosaic” or “rag bag” of measures designed to meet the same goal — social secur­ity, unemployment compensation, medicare, direct relief, free school lunches, stamp plans, farm subsi­dies, housing subsidies, rent sub­sidies, and all the rest.

Neither the record of the past nor a knowledge of political reali­ties supports such an expectation. One of the main selling arguments in the middle 1930′s, first for un­employment insurance and later for social security, was that these programs would take the place and eliminate the need for the various relief programs and pay­ments then in existence. But in the last thirty years these pro­grams have continued to grow year by year with only minor in­terruptions. The result is that public assistance payments (in­cluding old age assistance, aid to dependent children, general assist­ance, etc.) have risen from a total of $657 million in 1936 to $4,736 million in 1963, an increase of 620 per cent. And this cost is in addi­tion to the present $30 billion or more that the Federal government now spends annually on social security and other welfare pro­grams.

So not only may we expect that the guaranteed-income would be thrown on top of all existing wel­fare payments (we can expect a tremendous outcry against dis­continuing any of them), but that demands would arise for constant enlargement of the guaranteed amount. If the average payment were merely the difference be­tween an assumed “poverty-line” income of, say, $3,000 and what the family had earned itself, all heads of families earning less than $3,000 would either quit work or threaten to do so unless they were given the full $3,000, and so allowed to “keep” whatever they earned themselves. And once this demand was granted (in an effort to avoid the wholesale idle­ness and pauperization that would otherwise occur), the people whose earnings were just above the gov­ernment minimum, or less than twice as much, would point out how unjustly they were being treated. And the only “logical” and “fair” stopping place, it would be argued, would be to give every­body the full minimum of $3,000 no matter how much he was earn­ing or getting from other sources.

Anyone who thinks such a pre­diction farfetched need merely re­call how we got into the present system of paying everybody over 72 social security benefits regard­less of his current earnings from other sources, and paying benefits to every retired person over 65 re­gardless of the size of his un­earned income from other sources. By the same logic, the British government pays comprehensive unemployment, sickness, matern­ity, widowhood, funeral and other benefits, and retirement pensions, regardless of need or the size of the recipient’s income.

Incentives Undermined

We have seen how the guaran­teed-income plan, if adopted in the form that its advocates propose, would lead to wholesale idleness and pauperization among nearly all those earning less than the minimum guarantee, and among many earning just a little more. But it would also undermine the incentives of those much further up in the income scale. For they would not only be deprived of the benefits that they saw millions of others getting. It is they who would be expected to pay these benefits, through the imposition upon them of far more burden­some income taxes than they were already paying. If these taxes were steeply progressive in pro­portion to income, as is probable, they would discourage long hours and unusual effort.

It is difficult to make any pre­cise estimate of the effect of a given income-tax rate in discour­aging or reducing work and pro­duction. Different individuals will, of course, be differently affected. The activities of a man whose whole income comes in the form of a single salary from a single job will be differently affected than those of a surgeon, a doctor, a writer, an actor, an architect, or anyone whose income varies with the number of assignments he is willing to undertake or clients he is willing to serve.

What we do know is that the higher income-tax rates, contrary to popular belief, just don’t raise revenue. In the current 1966 fiscal year, individual income taxes are estimated to be raising $51.4 bil­lion (out of total revenues of $128 billion). Yet the tax rates in ex­cess of 50 per cent have been bringing in only about $250 mil­lion a year — less than 1 per cent of total income tax revenues and not enough to run even the present government for a full day. (In other words, if all the personal income-tax rates above 50 per cent were reduced to that level, the loss in revenue would be only about $250 million.) If these rates above 50 per cent were raised fur­ther, it is more probable that they would raise less revenue than more. Therefore, it is the income‑tax rates on the lower and middle incomes that would have to be raised most, for the simple reason that 75 per cent of the personal income of the country is earned by people with less than $15,000 gross incomes.

Poverty for All

It is certain that high income tax rates discourage and reduce the earning of income, and there­fore the total production of wealth, to some extent. Suppose, for illustration, we begin with the extreme proposal that we equalize everybody’s income by taxing away all income in excess of the average in order to pay it over to those with incomes below the average. (The guaranteed income proposal isn’t too far away from that!)

Let us say that the present per capita average yearly income is about $2,800. Then everybody who was getting less than that (and would get just that whether he worked or not) would, of course, as with the guaranteed-income proposal, not need to work produc­tively at all. And no one who was earning more than $2,800 would find it worth while to continue to earn the excess, because it would be seized from him in any case. More, it would soon occur to him that it wasn’t worth while earning even the $2,800, for it would be given to him in any case; and his income would be that whether he worked or not. So if everybody acted under an income equalization program merely in the way that seemed most rational in his own isolated interest, none of us would work and all of us would starve. We might each get $2,800 cash (if someone could be found to con­tinue to run the printing machines just for the fun of it), but there would be nothing to buy with it.

A less extreme equalization pro­gram would, of course, have less extreme results. If only 90 per cent of all incomes over $2,800 were seized and people could keep 10 cents of every “excess” dollar they earned, there would of course still be a little incentive to earn a little more. And if everyone could keep 25 cents out of every dollar he earned above the $2,800, the in­centive would be slightly higher.

But every tax or expropriation must reduce incentives to a cer­tain extent. The effect of the guar­anteed-income proposal would be practically to wipe out incentives for those earning (or even want­ing) no more than the guarantee, and greatly to reduce incentives for all those earning or capable of earning more than the guaran­tee. Therefore the guaranteed-income would reduce effort and earning and production. It would violently reduce the national income (measured in real terms). And it would reduce the standard of living for four-fifths of the population. The government might be able to pay out the specified amount of guaranteed dollar “in­come,” but the purchasing power of the dollars would appallingly shrink.

The Negative Income Tax

Recognizing the calamitous ero­sion of incentives that would be brought about by a straight guar­anteed income plan, other reform­ers have advocated what they call a “negative income tax.” This pro­posal was put forward by the prominent economist, Professor Milton Friedman of the Univer­sity of Chicago, in his book Capi­talism and Freedom, which ap­peared in 1962. The system he pro­posed would be administered along with the current income tax system.

Suppose that the poverty-line income were set at $3,000 per “consumer unit” (families or in­dividuals), and suppose that the negative income tax (which is really a subsidy), were a flat rate of 50 per cent. Then every “con­sumer unit” (this is the statisti­cians’ technical term) whose in­come fell below $3,000 would be paid a subsidy of, say, 50 per cent of the difference. If its earned in­come were $2,000, for example, it would receive $500; if its earned income were $1,000 it would re­ceive $1,000; if its earned income were zero it would receive $1,500.

Professor Friedman freely con­cedes that his proposal, “like any other measure to relieve poverty… reduces the incentives of those helped to help themselves.” But he argues that “it does not eliminate that incentive entirely, as a sys­tem of supplementing incomes up to some fixed minimum would. An extra dollar earned always means more money available for expend­iture.”

It is true that the “negative in­come tax” would not have quite the destructive effect on incentives that the guaranteed income would. Nevertheless, once the principle of the negative income tax were accepted, the demand would im­mediately arise that the minimum subsidy to be paid should be at least “adequate” to provide a min­imum income to support a family “in decency and dignity.” So we would be back to the minimum guaranteed income, plus supple­mental subsidies for those who al­ready had some earned or private income of their own. If this mini­mum were set at $3,130 for a married man with two children (to return to the Social Security Administration’s “poverty-line” figure), this subsidy would be re­duced, say, by 50 cents for every dollar earned, and therefore would not stop entirely until the family’s own earned income had reached $6,240.

Not Enough Rich to Soak

How many billions of dollars in subsidies this would involve, and what rate of income tax would be required on all families with in­comes above $6,240 to raise the revenue necessary to pay these subsidies, if any rate could, I leave to the professional statisti­cians to calculate.

But it is obvious that this pro­gram could not be paid for by “the rich.” If we were to subsi­dize all family incomes below $6,240 it would be hardly consis­tent to tax them. Yet net incomes below $6,000 (after exemptions and deductions) are now taxed at rates up to 22 per cent, beginning with 14 per cent even on the first $500 of net income. In fact, all personal net income of $6,000 or less is now the source of nearly 80 per cent of all personal income tax revenue. Yet, as I have al­ready pointed out, the Census Bureau calculates that the median income for all families in 1964 was only $6,569; and taxpayers with adjusted gross incomes of $15,000 or less receive three-quarters of the total personal income there is to be taxed.

Neither a “negative income tax” nor a guaranteed income plan of the dimensions being suggested could possibly be put into effect with dollars of present purchas­ing power.

It may be added that the nega­tive income tax would have all the administrative problems that would afflict the guaranteed in­come proposal — fraud, corruption, necessary applicant-by-applicant investigation, and irrelevance of payment to present need.

And once the main principle of either proposal were accepted, the minimum subsidy or guarantee de­manded would be bound constant­ly to increase. Anyone who doubts this need merely consult the his­tory of unemployment insurance and social security benefits since the plans were initiated in the 1930′s. It is significant that sev­eral of the advocates of the guar­anteed income acknowledge that their idea originated with the more modest negative income tax proposal of Milton Friedman. They just expanded it.

So knowing what we do of polit­ical pressures, and of the past history of relief, “social insur­ance,” and other “antipoverty” measures, we are forced to con­clude that once the principle of either the negative income tax or the guaranteed income were ac­cepted, it would be made an addi­tion to and not a substitute for the present conglomeration of re­lief and “antipoverty” programs. And even alone it would drastical­ly reduce the productive incentives of those earning less than the guaranteed amount and seriously reduce the incentives of those earning more, because of the op­pressive taxation it would neces­sarily involve. Its over-all effect would be to level real incomes down, not up.

Even at present our large and overlapping assortment of relief and antipoverty measures is seri­ously reducing incentives to the production that would otherwise be possible. Our social reformers have been everywhere overlooking the two-sided nature of the prob­lem of reducing poverty. The ob­stinate two-sided problem we face is this: How can we mitigate the penalties of misfortune and fail­ure without undermining the in­centives to effort and success?

The Poor Laws of England

Our social reformers — who sometimes talk as if no govern­ment ever did anything to relieve the plight of the jobless and the poor until the New Deal came along in 1933 — are constantly de­ploring the alleged indifference, callousness, or niggardliness of our forefathers in dealing with the poor. But wholly apart from pri­vate charity, previous generations in their governmental capacity were sharply aware of the prob­lem of poverty and made some effort to alleviate it almost as far back as the records go. There were “poor laws” in England even before the days of Queen Eliza­beth. A statute of 1536 provided for the collection of voluntary funds for the relief of those un­able to work. Eleven years later the City of London decided that these voluntary collections were insufficient, and imposed a com­pulsory tax to support the poor. In 1572 a compulsory tax for this purpose was imposed on a national scale.

But the problem soon proved a very serious one for the people of that age. The upper class was very small numerically and pro­portionately. The middle class it­self was always very close to what we would today call the poverty line. The workhouse and other conditions imposed on those on relief seem very cruel to us to­day. But our ancestors were in constant fear that if they in­creased relief or relaxed the stern conditions for it they would pau­perize increasing numbers of the population and create an insoluble problem.

At the beginning of the nine­teenth century, indeed, the cost of poor relief began to get out of hand. The total cost of the poor law administration increased four­fold in the thirty-two years be­tween 1785 and 1817, and reached a sixth of the total public expen­diture. One Buckinghamshire vil­lage reported in 1832 that its ex­penditure on poor relief was eight times what it had been in 1795, and more than the rental of the whole parish had been in that year.

In face of statistics of this kind, England’s Whig government decided to intervene. It appointed a royal commission, and in 1834 a new and more severe poor law was passed in accordance with the commission’s recommenda­tions.

The guiding principle of the new law was that poor relief should be granted to able-bodied poor and their dependents only in well-regulated workhouses under conditions inferior to those of the humblest laborers outside. This seemed harsh, but the com­missioners had argued that “every penny bestowed that tends to rend­er the condition of the pauper more eligible than that of the in­dependent laborer is a bounty on indolence and vice.”

If the pendulum swung too far in the direction of severity and niggardliness in the middle nine­teenth century, it may be swing­ing too far in the direction of lax­ity and prodigality today. As weeping subsidization of idleness, such as is proposed by the guar­anteed income, would only weaken or destroy all incentive to effort, not only on the part of those who were subsidized and supported, but on the part of those who would be forced to support them out of their own earnings. There could be no faster way to impoverish the nation.

The Cure Is Production

One of the worst features of all the plans for sharing the wealth and equalizing or guaran­teeing incomes is that they lose sight of the conditions and insti­tutions that are necessary to cre­ate wealth and income in the first place. They take for granted the existing size of the economic pie; and in their impatient effort to see that it is sliced more equally they overlook the forces that have not only created the pie in the first place but have been baking a larger one year by year. Eco­nomic progress and justice do not consist in beautifully equalized destitution, but in the constant creation of more and more goods and services, of more and more wealth and income to be shared.

The only real cure for poverty is production.

The way to maximize production is to maximize the incentives to production. And the way to do that, as the modern world has dis­covered, is through the system known as capitalism — the system of private property, free markets, and free enterprise. This system maximizes production because it allows a man freedom in the choice of his occupation, freedom in his choice of those for whom he works or who work for him, freedom in the choice of those with whom he associates and cooperates, and, above all, freedom to earn and to keep the fruits of his labor. In the capitalist system each of us, with whatever exceptions, tends in the long run to get what he creates or helps to create. When each of us recognizes that his reward de­pends on his own efforts and out­put, and tends to be proportionate to his output, then each has the maximum incentive to maximize his effort and output.

No Effective Poverty Programs for Underdeveloped Countries

Capitalism brought the Indus­trial Revolution, and the enormous increase in productivity which this has made possible. Capitalism has enormously raised the economic level of the masses. It has wiped out whole areas of poverty, and continues to wipe out more. The so-called “pockets of poverty” con­stantly get smaller and fewer.

The condition of poverty, more­over, is relative rather than ab­solute. What we call poverty in the United States would be re­garded as affluence in most parts of Africa, Asia, or Latin Amer­ica. If an income sufficient to en­able a man “to live with dignity” ought to be “guaranteed” as a matter of “absolute right,” why don’t the advocates of a guaran­teed income insist that this right be enforced first of all in the poor countries, such as India and China, where the need is most widespread and glaring? The rea­son is simply that even the better-off groups in these nations have not produced enough wealth and income to be expropriated and distributed to others.

What we call poverty in the United States would be re­garded as affluence in most parts of Africa, Asia, or Latin Amer­ica.

One of the guaranteed-income advocates, in a footnote, admits naively: “We must also recognize that we still have no strategy for the elimination of poverty in the underdeveloped countries.” Of course they haven’t. The “strat­egy” would be the introduction of free enterprise, and of incentives to work, to save, to accumulate capital, better tools, and equip­ment, and to produce.

But would-be income guarantors ignore or despise the capitalistic system that makes their dreams dreamable and gives their redis­tribute-the-income proposals what­ever plausibility they have. The capitalist system has made this country the most productive and richest in the world. It has con­tinued to achieve its miracles even in the last generation, and to increase them year by year. It has raised the average weekly factory wage from less than $17 in 1933 to $110 today. Even after the rise in prices is allowed for, it has more than doubled our real per capita disposable income — from $893 in 1933 to $2,200 in 1965.

Allowed to continue to operate with even the relative freedom that it has enjoyed in recent years, the capitalist system will continue to produce these miracles. It will continue to make progress against poverty by a general increase in income and wealth. But short­sighted and impatient efforts to wipe out poverty by severing the connection between effort and re­ward can only lead to the growth of a totalitarian state, and destroy the economic progress that this country has so dearly bought.


Posted October 27, 2017 by aurorawatcherak in economics

Tagged with , ,


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