Power & Market
It seems like every Democrat in the country plans to run against Trump in 2020 and presumably all of them will feel compelled to issue manifestos outlining their policy agendas.
Today, let’s review the two big ideas that have been unveiled by Kamala Harris, the Senator from California who just announced her bid for the White House.
We’ll start with her idea to create a federal subsidy for rent payments. I wrote about this new handout last year, and warned that it would enrich landlords (much as tuition subsidies enrich colleges and health subsidies enrich providers).
Here’s some of what Professor Tyler Cowen wrote for Bloomberg about the proposal.
One of the worst tendencies in American politics is to restrict supply and subsidize demand. …The likely result of such policies is high and rising prices, restricted access and often poor quality. If you limit the number of homes and apartments, for example, but give buyers subsidies, that is a formula for exorbitant prices. That is what makes early accounts of Senator Kamala Harris’s economic plans so disappointing. …Consider Harris’s embrace of subsidies for renters, as reflected by her recent sponsorship of the Rent Relief Act of 2018. Given the high price of housing in many parts of the U.S., it is easy to see why the idea might have appeal. But the best and most sustainable way of producing cheaper housing is to build more homes and apartments. The resulting increase in supply will cause prices to fall… That is basic supply and demand, with supply doing the active work. The Harris bill, in contrast, calls for tax credits to renters. …There is an obvious problem with this approach. If you subsidize renters, that will push up the price of apartments. Furthermore, economic logic suggests that big rent increases are most likely in those cases where the supply of apartments is relatively fixed, a basic principle of what is called “tax incidence theory.” In sum, most of the gains from this policy would go to landlords, not renters.
In other words, this is a perfect plan for a politician who understands “public choice” theory.
Ordinary voters think they’re getting a freebie, but the benefits actually go to those with political influence and power.
Now let’s look at her $2.7 trillion tax cut. I believe that people should be allowed to keep the lion’s share of any money they earn, so my gut instinct is to cheer.
But it’s always good to be skeptical when a politician is offering something that sounds too good to be true.
Kyle Pomerlau of the Tax Foundation has done the heavy lifting and looked closely at the details. He has a thorough explanation of her plan and its likely impact.
The “LIFT the Middle-Class Act” (LIFT) would create a new refundable tax credit available to low- and middle-income taxpayers. …LIFT would provide a refundable credit that would match a maximum of $3,000 in earned income ($6,000 for married couples filing jointly). …The credit would begin to phase out for single taxpayers starting at $30,000 of adjusted gross income (AGI) and $80,000 for single taxpayers with children, and begin phasing out for married taxpayers at $60,000 of AGI. The phaseout rate for all taxpayers would be 15 percent. …LIFT’s impact on the economy is primarily through its effect on the labor force. LIFT phases in from the first dollar of earned income to the maximum credit of $3,000 per tax filer. It then phases out starting at different levels of income, depending on a tax filer’s marital status and whether they have children. These phase-ins and phaseouts create implicit marginal subsidies and tax rates that impact individuals’ incentive to work.
At the risk of oversimplifying, Harris is proposing a new version of the earned income credit.
And that means some taxpayers get subsidized for working and some taxpayers get penalized.
For taxpayers in the credit phaseout range, tax liability would increase by 15 cents for each additional dollar earned. This means that these taxpayers would face an additional implicit marginal tax rate of 15 percent, which would reduce these taxpayers’ incentive to work additional hours. In contrast, taxpayers in the phase-in range of the credit would get $1 for each additional $1 of income they earn. As such, these taxpayers would benefit from an effective marginal subsidy rate, or negative marginal tax rate, of 100 percent. A negative tax rate of 100 percent would increase the incentive for these taxpayers to work additional hours.
Kyle crunches the numbers to determine the overall economic impact.
While the positive labor force effects of the phase-in of the credit could offset the negative effect of the phaseout, we find that, on net, the size of the total labor force would shrink under this policy. This is primarily due to the large number of taxpayers that would fall in the phaseout range of the credit relative to the number of individuals that would benefit from the phase-in. …We estimate that the credit…would reduce economic output by 0.7 percent and result in about 825,906 fewer full-time equivalent jobs.
Here’s the relevant table from the Tax Foundation’s report.
This is remarkable. It would seem impossible to design a $2.7 trillion tax cut that actually hurts the economy, but Sen. Harris has succeeded in that dubious achievement.
For all intents and purposes, she has figured out how to have an anti-supply-side tax cut.
And there are two other problems that deserve attention.
- First, as noted in Kyle’s paper, the tax cut is “refundable.” This means that money goes to people who don’t pay taxes. In other words, it is government spending being laundered through the tax code. So Harris claims to be cutting taxes, but part of what she’s doing is expanding redistribution and making government bigger (and encouraging more fraud).
- Second, Harris is very cagey about how the numbers work in her proposal. Does she want the tax cuts (and new spending) financed by more borrowing? By printing money? By offsetting class-warfare tax increases? Some combination of the three? Whatever the answer, the negative economic damage will be substantially higher if financing costs are included.
Considering the poor design and upside-down economics of the rent subsidy scheme and the new tax credit, the bottom line is rather obvious: Kamala Harris wants to buy votes, and she has decided that it is okay to hurt the economy in hopes of achieving her political ambitions.
No wonder she fits in so well in Washington!
Originally published at International Liberty
[Editors note: Mr. Luddy will be giving the Henry Hazlitt lecture at this year's Austrian Economics Research Conference. Click here to learn more.]
The most important issue facing America today is the national debt and increasing federal deficits. Our national debt now exceeds yearly gross domestic product (GDP).
The U.S is the wealthiest country in the world, but our government has the largest spending deficits and national debt in recorded history.
The budget deficit in FY 2018 was $800 billion, but the debt increased by $1,300 trillion, and is now $21,500 trillion dollars. Government accounting (oxymoron) allows for spending and loans outside of the budget. The practice of underreporting deficits is fraud and is not legal in the private market.
Note the US Debt Clock (here).
In simple terms, the national debt consistently increases more than the federal deficit, which will cause a devaluation of the dollar and eventually, a major financial crisis.
In FY 2019, the federal budget projects the following:
- Total revenue $3,422 trillion or 17% of GDP
- Total spending $4,407 trillion or 21% of GDP
In the best of times, regardless of tax rates, the federal revenue rarely exceeds 18% of GDP. This means based on projected spending, we cannot grow or tax our way out of the deficit because spending is projected at 22% of GDP.
To balance the federal budget in FY 2019, it would be necessary to cut all spending by 22%.
Read the full article at The American Spectator
President Trump’s frustration with the Federal Reserve’s (minuscule) interest rate increases that he blames for the downturn in the stock market has reportedly led him to inquire if he has the authority to remove Fed Chairman Jerome Powell. Chairman Powell has stated that he would not comply with a presidential request for his resignation, meaning President Trump would have to fire Powell if Trump was serious about removing him.
The law creating the Federal Reserve gives the president power to remove members of the Federal Reserve Board — including the chairman — “for cause.” The law is silent on what does, and does not, constitute a justifiable cause for removal. So, President Trump may be able to fire Powell for not tailoring monetary policy to the president’s liking.
By firing Powell, President Trump would once and for all dispel the myth that the Federal Reserve is free from political interference. All modern presidents have tried to influence the Federal Reserve’s policies. Is Trump’s threatening to fire Powell worse than President Lyndon Johnson shoving a Fed chairman against a wall after the Federal Reserve increased interest rates? Or worse than President Carter “promoting” an uncooperative Fed chairman to Treasury secretary?
Yet, until President Trump began attacking the Fed on Twitter, the only individuals expressing concerns about political interference with the Federal Reserve in recent years were those claiming the Audit the Fed bill politicizes monetary policy. The truth is that the audit bill, which was recently reintroduced in the House of Representatives by Rep. Thomas Massie (R-KY) and will soon be reintroduced in the Senate by Sen. Rand Paul (R-KY), does not in any way expand Congress’ authority over the Fed. The bill simply authorizes the General Accountability Office to perform a full audit of the Fed’s conduct of monetary policy, including the Fed’s dealings with Wall Street and foreign central banks and governments.
Many Audit he Fed supporters have no desire to give Congress or the president authority over any aspect of monetary policy, including the ability to set interest rates. Interest rates are the price of money. Like all prices, interest rates should be set by the market, not by central planners. It is amazing that even many economists who generally support free markets and oppose central planning support allowing a government-created central bank to influence something as fundamental as the price of money.
Those who claim that auditing the Fed will jeopardize the economy are implicitly saying that the current system is flawed. After all, how stable can a system be if it is threatened by transparency?
Auditing the Fed is supported by nearly 75 percent of Americans. In Congress, the bill has been supported not just by conservatives and libertarians, but by progressives in Congress like Dennis Kucinich, Bernie Sanders, and Peter DeFazio. President Trump championed auditing the Federal Reserve during his 2016 campaign. But, despite his recent criticism of the Fed, he has not promoted the legislation since his election.
As the US economy falls into another Federal Reserve-caused economic downturn, support for auditing the Fed will grow among Americans of all political ideologies. Congress and the president can and must come together to tear down the wall of secrecy around the central bank. Auditing the Fed is the first step in changing the monetary policy that has created a debt-and-bubble-based economy; facilitated the rise of the welfare-warfare state; and burdened Americans with a hidden, constantly increasing, and regressive inflation tax.
For decades, Americans have been burdened with historic expansions in government control, including in areas earlier generations could not even imagine as possible. Such dictates violate Americans’ inalienable self-ownership.
That is why Lysander Spooner, born January 19, deserves renewed attention. Spooner laid out why our natural right of self-ownership, combined with its implied right to enter voluntary arrangements, made government coercion of peaceful people illegitimate. Since we have moved far away from that moral standard, we need to rediscover Spooner’s vision. In particular, his 1870 No Treason illuminates our situation:
- That men may rightfully be compelled to submit to, and support, a government that they do not want…[is] self-evidently false…a man, thus subjected to a government that he does not want, is a slave. And there is no difference, in principle…between political and chattel slavery. [Each] denies a man’s ownership of himself and the products of his labor; and asserts that other men may own him, and dispose of him and his property, for their uses, and at their pleasure.
- A man’s natural rights are his own…any infringement of them is equally a crime…whether committed by one man, calling himself a robber or by millions, calling themselves a government.
- To say that majorities, as such, have a right to rule minorities, is equivalent to saying that minorities have, and ought to have, no rights, except such as majorities please to allow them.
- The principle that the majority have a right to rule the minority, practically resolves all government into a mere contest between two bodies of men, as to which of them shall be masters, and which of them slaves.
- How does [a man] become subjected to the control of men like himself, who, by nature, had no authority over him…as if their wills and their interests were the only standards of his duties and his rights…force, or fraud, or both.
- A man finds himself environed by a government that…forces him to pay money, render service, and forego the exercise of many of his natural rights, under peril of weighty punishments.
- Governments…[are] tyrannies to that portion of the people…compelled to support them against their will.
- Getting the actual consent of only so many as may be necessary to keep the rest in subjection by force…is a mere conspiracy of the strong against the weak...a presumption that the weaker party consent to be slaves.
- Government, like a highwayman, says to a man: “Your money, or your life.” [But] The highwayman...does not pretend that he has any rightful claim to your money, or that he intends to use it for your own benefit.
- No government…can reasonably be trusted for a moment, or reasonably be supposed to have honest purposes in view, any longer than it depends wholly upon voluntary support.
- If [governments] own us as property, they are our masters, and their will is our law. If they do not own us as property, they are not our masters, and their will, as such, is of no authority over us.
- On what ground can those who pretend to administer [The Constitution] claim the right to seize men’s property, to restrain them of their natural liberty of action, industry, and trade…at their pleasure or discretion?
- A tacit understanding between A, B, and C, that they will, by ballot, depute D as their agent, to deprive me of my property, liberty, or life, cannot at all authorize D to do so. He is…a robber.
In an era where what remains of our self-ownership is under continuous threat of further evisceration, Spooner’s clear-eyed understanding of it and its consequences provides an invaluable premise for our thinking. Being allowed to make our own choices and live our lives is no treason to any defensible idea of a government intended to advance the well-being of its citizens.
The online magazine Aeon currently features an outstanding article from our scholars Peter Klein and Nicolai Foss on the trend toward "bossless" business structures. Far from being redundant middlemen, they argue, good managers are needed more than ever even in firms that aspire to flat, decentralized, and democratic organization.
Klein and Foss challenge the idea that managers will become obsolete, replaced by self-directed and super connected knowledge workers:
This movement is gaining steam for a couple of reasons. First, the bossless-company model arguably captures some tendencies, however inaccurately. Second, it is very much part of the 21st-century Zeitgeist in its emphasis on personal development, resilience and fulfilment through empowering employees, and decentralised and democratic decision processes. There is also a strong moralistic and political undertone to the narrative; in Private Government (2017), the philosopher Elizabeth Anderson argues that firms are effectively totalitarian states, enjoying rights and privileges that would be unconstitutional for ordinary states to impose on their citizens. The historian Caitlin Rosenthal has argued that the factory system, hierarchy and managerial authority are partly derived from the slave system. What can be more morally defensible than getting rid of the remnants of slavery?
Unfortunately, the bossless-company narrative is dead wrong. It misunderstands the nature of management, which isn’t going away, and it is based on questionable evidence. Given these fundamental defects, this narrative is potentially harmful to managers, students and policymakers.
Are the benefits of technology in assembling and organizing modern firms oversold?
While technological miracles such as the internet, cheap and reliable wireless communication, Moore’s law, miniaturisation and information markets have induced sweeping changes in manufacturing, retail, transportation and communication, the laws of economics are still the laws of economics. And human nature hasn’t changed. The basic problem of management and business – how to assemble, organise and motivate groups of people and resources to produce goods and services that consumers want – is still the same. Since the industrial revolution, entrepreneurs have been organising extremely complex activities in firms that are neither completely centralised nor completely flat. Imagine the complexity involved in operating a national railroad, a steel mill or an automobile assembly plant in the 19th and early 20th centuries. These were all ‘knowledge-based activities’ and were conducted in teams organised in various structures. Are things so different today?
In short, today’s business landscape features exciting developments in information technology, networking and collaboration that have led to new forms of organisation, production and distribution. Far from making management obsolete, however, these changes make good management more important than ever. The shift from management as direction to management as making and enforcing the rules is slowly entering the management literature and the business-school curriculum. That’s a paradigm shift worth embracing.
This is a must-read article for anyone interested in the very hot topic of business management in the 21st century.
It is now commonly recognized that the majority of the economics profession for about four decades held an erroneous view of the nature of the “socialist calculation debate.” In particular, the nature of the arguments put forward by Mises and Hayek were misconstrued.
Revisionism took off in the mid 1980s with the work of Peter Murrell (e.g., here) and Don Lavoie (e.g., here). From a mainstream perspective, Murrell argued that the Austrians had developed sophisticated insights in property rights economics and the agency problem and had applied these insights to the problem of socialist calculation. Lavoie highlighted the distintive Austrian knowledge argument in the calculation debate, in particular emphasizing Hayek’s contribution. A bit later, Salerno and others emphasized the distinctiveness of Mises’ contribution. Thus, whereas Mises stressed the need for a distributed process of entrepreneurial judgment in the context of a private ownership economy characterized by uncertainty, Hayek put more of an emphasis on the impossibility under socialism of harnessing and processing massive amounts of knowledge, particularly under dynamic conditions.
Between the 2nd Wold War and these works, there are four decades in which the dominant opinion held that the Austrians had been thoroughly defeated by the formal demonstration, particularly in Oskar Lange’s work, of the possibility of combining socialism and efficient allocation. A pertinent question is whether there were (non-Austrian) dissenters from this dominant view. To those well steeped in libertarian social theory, names such as Trygve Hoff and G. Warren Nutter come to mind. But apart from these, it would appear that it is not until the mid 1980s that the distinctiveness of the Austrian arguments in the calculation debate concerning knowledge becomes recognized.
However, an early contribution, unknown to most economists, that fully recognized the distinctiveness of the Austrian arguments, is the 1958 book Organizations by James G. March and Herbert A Simon, a book that many would regard as the seminal contribution to organizational theory and a milestone in the evolution of organizational theory (I have heard organization theory scholars remark that all org theory in the last five decades is just variations over March & Simon themes).
The discussion of the socialist calculation debate takes place in the final chapter, “Planning and Innovation in Organizations,” the main purpose of which is to “… contrast the concept of rationality that has been employed in economics and statistics with a theory of rationality that takes account of the limits on the power, speed, and capacity of human cognitive faculties” (1958: 172) — in other words, bounded rationality.
This theme is taken through a number of variations, one of which is the theory of planning, understood as both “national planning and intrafirm planning” (p. 200). March and Simon (1958: 201) argue that even if motivational problems can be solved, there are still planning (coordination) problems remaining. They note, echoing Hayek (1945), that if one person or group of persons possessed “… all the relevant information connecting possible courses of action with the utilities resulting therefrom, he or they could discover which course of action was best for the organization” (p. 201). An alternative is to make use of the price mechanism, for example, through the Barone/Lange idea of consistent marginal cost pricing throughout the organization. March and Simon note a number of difficulties with this proposal, such as the requirement that externalities be absent. More seriously, perhaps, they note that it is not clear how to make a choice between the alternatives of central planning and pricing, since modern welfare economics, including the Lange/Barone proposal, does not give any positive reason for preferring the one to the other.
This is where the Austrian arguments in the socialist calculation debate enter the scene. These are placed under the heading “The principle of bounded rationality” (p. 203), and, accordingly, March and Simon note that the “… argument of von Mises and Hayek (we will use the latter’s version) depends crucially on the limits of information available to humans and their abilities to use information in their computations.” In other words, Hayek argues that “given realistic limits on human planning capacity” (italics removed) a decentralized system will work better than a centralized one.
Thus, March and Simon present a sympathetic reading of the Austrian — mainly Hayekian — positions in the socialist calculation debate. In the context of Organizations, March and Simon also criticize the “Robbinsian” characterization of decision-making in mainstream economics (to use Kirzner’s terms) – that is, the given’ness of means and ends — and they stress that the understanding of behavior should be broadened to include the process of discovering choice alternatives. These two observations are related, for it is arguably exactly because March and Simon are critical of the conceptualization of behavior in mainstream theory that they are so appreciative of the Austrian positions in the calculation debate.
[Reprinted from Organization and Markets.]
On the Lions of Liberty podcast, Marc Clair and Ryan McMaken discuss the government shutdown and the need to decentralize the national parks: