Tag Archives: James Buchanan

The Public Choice of Sustainable Tax Reform

Comprehensive tax reform has gotten a jump-start from Senators Max Baucus (D-MT) and Orrin Hatch (R-UT), the chairman and ranking Republican on the Senate Finance Committee.  The Senate’s two top tax writers announced a new “blank slate” approach to tax reform in a “Dear Colleague” letter issued last week.

The Senators describe their new, blank slate approach as follows:

In order to make sure that we end up with a simpler, more efficient and fairer tax code, we believe it is important to start with a “blank slate”—that is, a tax code without all of the special provisions in the form of exclusions, deductions and credits and other preferences…

However, under their framework, every current tax privilege has a chance to survive.  The Senators explain:

We plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.

This plan has drawn both praise and criticism, and rightly so.  Yes, this is a step in the right direction; however, this is unlikely to lead to any sustainable reforms for two reasons.

First, forcing Congress to defend tax privileges won’t be hard.  To become law, each privilege had a sponsor, and each sponsor had a rationale to defend it.  Each tax privilege was passed by Congress, and each was then signed into law.  It is difficult to see how privileges that have already survived this process won’t once again find a congressman willing to defend them.  So long as Congress has the power to create and protect tax privileges, it will be nearly impossible to simply wipe such privileges away.

Second, even if a blank slate were achieved, it is unlikely that a privilege-free tax code would last long under the current institutional framework.  This is best demonstrated by what happened in the aftermath of the Tax Reform Act of 1986 (TRA86).

James Buchanan, writing after the passage of TRA86, predicted that very little its reforms would remain intact.  Buchanan noted that “[t]o the extent that [political] agents do possess discretionary authority, the tax structure established in 1986 will not be left substantially in place for decades or even years.”

Buchanan was spot on.  From 1986 through 2005, the tax reform of 1986 suffered a death of 15,000 tweaks.  As reported by the President’s Advisory Panel on Federal Tax Reform in 2005, in the two decades after the 1986 tax reform bill was passed, nearly 15,000 changes were made to the tax code – equal to more than two changes per day for 19 years straight.

What insight did Buchanan have that allowed him to so aptly predict the demise of the Tax Reform Act of 1986?  Buchanan understood that institutions matter.  That is, he understood that no matter how many times the tax code was reformed, so long as the same institutions remain unchanged, political actors will continue to respond in predictable ways, and the result would be tax privileges creeping their way back into the code.  Buchanan explained:

The 1986 broadening of the tax base by closing several established loopholes and shelters offers potential rents to those agents who can promise to renegotiate the package, piecemeal, in subsequent rounds of the tax game. The special interest lobbyists, whose clients suffered capital value losses in the 1986 exercise, may find their personal opportunities widened after 1986, as legislators seek out personal and private rents by offering to narrow the tax base again. In one fell swoop, the political agents may have created for themselves the potential for substantially increased rents. This rent-seeking hypothesis will clearly be tested by the fiscal politics of the post-1986 years.

Going forward, if any sort of reforms are achieved in the tax code, this rent-seeking hypothesis will be tested again.

Senators Baucus and Hatch admit that a blank state “is not, of course, the end product, nor the end of the discussion.”  If Buchanan’s predictions remain true today, as they most certainly are, then the Senators are quite right in admitting that a blank slate is not, and will never be, an end product.  That is, of course, unless any reform in the tax code is paired with institutional reforms to ensure that special tax privileges do not creep back into the code.

The political economy of state and local public pensions

Edward Glaeser of Harvard and Giacomo Ponzetto of Centre de Recerca en Economia Internacional have a new paper on fiscal illusion in state and local public pensions (and they don’t cite James Buchanan?!):

Why are public-sector workers so heavily compensated with pensions and other non-pecuniary benefits? In this paper, we present a political economy model of shrouded compensation in which politicians compete for taxpayers’ and public employees’ votes by promising compensation packages, but some voters cannot evaluate every aspect of compensation. If pension packages are “shrouded,” meaning that public-sector workers better understand their value than ordinary taxpayers, then compensation will be inefficiently back-loaded. In equilibrium, the welfare of public-sector workers could be improved, holding total public sector costs constant, if they received higher wages and lower pensions. Central control over dispersed municipal pensions has two offsetting effects on pension generosity: more state-level media attention helps taxpayers better understand pension costs, which reduces pension generosity; but a larger share of public sector workers will live within the jurisdiction, which increases pension generosity. We discuss pension arrangements in two decentralized states (California and Pennsylvania) and two centralized states (Massachusetts and Ohio) and find that in these cases, centralization appears to have modestly reduced pension arrangements; but, as the model suggests, this finding is unlikely to be universal.

Gated versions here and here.

James M. Buchanan: Realistic Optimist

This week we mourn the passing and celebrate the achievements of James M. Buchanan. There have already been many moving and informative tributes. Alex Tabarrok offers a nice summary here. I was fortunate to take one of the last classes Buchanan taught. Even though he was well into his eighties, I found him to be sharp, enthusiastic, and more than a little intimidating to this graduate student.

I’m sure people will be debating Buchanan’s contributions and legacy for quite some time. One aspect that seems unsettled is the degree to which Buchanan’s legacy is optimistic or fatalistic. An old exchange I had with Matt Yglesias highlights the optimism I found in Buchanan’s work:

Back in 2011, in a post titled “Against Public Choice, For Public Virtue,” Matt declared: “I don’t really “get” public choice and think I never will.” He argued:

The observation that malgovernment is a major source of human ills is quite correct, but embracing fatalism about it only exacerbates the problem. What’s needed are efforts to push societies in the direction of taking honor and civic obligation more seriously, not less so.

In a post responding to Matt, I made the case that public choice is no more fatalistic about government failure than other branches of econ are fatalistic about market failure:

Consider a problem from normal economics: the tragedy of the commons. Armed with empirical and theoretical reasons to expect that fishermen will over-fish a common pool, we should plan accordingly. We should examine the incentives of fishermen and think of ways to improve or alter these incentives (e.g., assign property rights over the pool, or impose a Pigouvian tax). To my knowledge, few if any economists would council that we ought to spend our time begging fisherman to pretty please stop overfishing. That is likely to be a fool’s errand.

The idea is much the same with public choice. Armed with empirical and theoretical reasons to think that politicians might do bad things, we should plan accordingly by placing some things—such as the establishment of religion—beyond the reach of politicians. I suppose we could ask Congress to pretty please not establish a religion but in my view it is better to make it illegal for them to do so.

James Buchanan, Gordon Tullock, and the other founders of Public Choice and its close-cousin Constitutional Political Economy didn’t stop their analysis after they found that politicians sometimes behave badly. Like James Madison before them, they thought of constructive ways to make political actors behave better, sometimes by placing certain decisions beyond their reach.

There is nothing fatalistic about that.

 

The Bush Tax Cuts

This episode should have advocates of limited government asking themselves an important question: are tax cuts without spending cuts good for the cause of limited government? Decades ago, Milton Friedman answered this question with a resounding yes. Cut taxes, he counseled, and starve the beast. With less revenue, spending will fall too. Tax cutters from Ronald Reagan to George W. Bush have been convinced of “starve the beast” ever since.

But there is another Nobel laureate with free market bona fides who begs to differ. James Buchanan, a founding father of public choice economics—which uses the tools of economics to shed light on the incentives of policy makers—has long questioned “starve the beast.” When politicians are legally and politically permitted to run deficits, he warned, they will simply fund government by borrowing. In this case, tax cuts give voters the illusion that government spending is cheap. And with government seeming less-costly, voters will be happy to have more of it.

That’s me, writing on the Bush Tax Cuts in the latest issue of Reason. It was part of broader piece, edited by Peter Suderman on the fiscal cliff and it includes great essays by Charles Blahous, James Pethokoukis, Veronique de Rugy, Tad DeHaven, Susan Dudley, Maya MacGuineas, and Marc Goldwein. The whole piece can be found here.

Also this week, I did a podcast with the Heartland Institute on the Bush Tax Cuts, based on my research with Andrea Castillo.

Finally, Lars Christensen has some insightful comments on our paper here.

On behalf of all of us at Mercatus and Neighborhood Effects, Happy Holidays to all.

 

The Real Public Choice Economics of Big Bird

In an informative post last week, Matt Yglesias pointed out that the few hundred million dollars a year that go to the Corporation for Public Broadcasting are in many ways the “least important” of Big Bird’s government-granted privileges. A far more important privilege is the spectrum on which Big Bird is broadcast. Public TV stations:

don’t have to bid at auction for access to the broadcast spectrum they use. It’s just been given away for free. The decision to allocate some of that spectrum to public TV stations is, at a fundamental level, why they exist.

Matt also points out that another important privilege—one which Tyler Cowen highlights in his book Good and Plenty—is the tax deduction for charitable contributions from viewers like you.

Matt’s post was titled “The Real Economics of Big Bird,” but I’d point out that it also provides a lesson in the real public choice economics of big bird. The President has eagerly mocked his rival’s interest in Big Bird, correctly pointing out that our trillion dollar deficit is not going to be solved by cutting a few hundred million dollars from Sesame Street. But this line of argument misses the public choice lesson.

First, Sesame Street is able to obtain so many government-granted privileges in part because these privileges are inconspicuous. This is known as “fiscal illusion,” and it is an idea which pervades James Buchanan’s research: when people are not clearly presented with the bill for government intervention, they will gladly accept more intervention.

In my research on government-granted privilege, I’ve noticed that the least-conspicuous forms of privilege are often the most popular among politicians. Farm subsidies are the exception, not the rule. Typically, privileges don’t appear as line items in the budget. More often, they are hidden. Think of the Export-Import bank which doesn’t subsidize Boeing, but instead subsidizes firms that buy planes from Boeing. Loan guarantees, tax credits, and favorable regulatory treatment are more-common still and each of these privileges is rather difficult to see.

Second, Sesame Street’s privileges are an illustration of the problem of concentrated benefits and diffused costs. Sesame Street’s direct (and even indirect) subsidy is tiny, especially when it is spread out among 311 million Americans. But it is precisely this characteristic of government spending which has allowed it to get out of hand. Too many government programs concentrate benefits on a comparatively small section of society and disperse the costs over the multitude of taxpayers and consumers. This means that those who benefit from a particular program have a strong incentive to get organized and lobby on its behalf. It is big money for them. But it also means that the millions who pay for the program have little incentive to get organized to oppose it. It’s just pennies to them.

This wouldn’t be so bad if the Corporation for Public Broadcasting were the only government program. But it’s not. Stealth bombers, bridges to nowhere, sugar subsidies, ethanol mandates, light bulb regulations, etc. all have this characteristic. They impose costs on multitudes and confer benefits on a handful. Add it all up and you have a government that spends $7 million every minute.

As the late Everett Dirksen put it, “A billion here, a billion there, and pretty soon you’re talking real money.”

Want Money Out of Politics? Eliminate Government Discrimination

In my work on government-granted privilege, I have repeatedly emphasized the surprising degree of harmony between left and right on this issue. Both abhor the tawdry nexus between corporate power, money, and politics.

(As evidence that I am not the only one who sees such agreement, note that Occupy.com recently reprinted an article highlighting the Mercatus project).

In an article from Friday, progressive blogger Ezra Klein seems to bolster this point:

According to Harvard law professor Lawrence Lessig, only 0.26 percent of Americans give more than $200 to congressional campaigns. Only 0.05 percent give the maximum amount to any congressional candidate. Only 0.01 percent — 1 percent of 1 percent — give more than $10,000 in an election cycle. And in the current presidential election, 0.000063 percent of Americans — fewer than 200 of the country’s 310 million residents — have contributed 80 percent of all super-PAC donations.

“This, senators, is corruption,” Lessig said Tuesday, in testimony before the Judiciary Committee. “Not ‘corruption’ in the criminal sense. I am not talking about bribery or quid pro quo influence peddling. It is instead ‘corruption’ in a sense that our Framers would certainly and easily have recognized: They architected a government that in this branch at least was to be, as Federalist 52 puts it, ‘dependent upon the People alone.’ You have evolved a government that is not dependent upon the People alone, but that is also dependent upon the Funders.”

There is much in here with which I agree. Campaign spending begets access. Access begets privilege. And privilege, in my view, “misdirects resources, impedes genuine economic progress, breeds corruption, and undermines the legitimacy of both the government and the private sector.”

The same article, however, also highlights the ways in which progressives and libertarians disagree about money, politics, and power. Klein quotes and quickly dismisses Cato scholar Ilya Shapiro. In his own testimony, Shapiro argues:

To the extent that ‘money in politics’ is a problem, the solution isn’t to try to reduce the money — that’s a utopian goal — but to reduce the scope of political activity the money tries to influence. Shrink the size of government and its intrusions in people’s lives and you’ll shrink the amount people will spend trying to get their piece of the pie or, more likely, trying to avert ruinous public policies.

This, Klein argues, is impractical. Moreover, he says, “between the dismantling of the social safety net and the destruction of our military might, the cure might be worse than the disease.” Instead, Klein’s preferred solution is campaign finance reform, perhaps necessitating a Constitutional Amendment to get around First Amendment concerns.

I’ll admit I favor Shapiro’s solution. If we shrink the size—and more importantly, the scope—of the government, the wealthy and well-connected will have nothing to gain from playing politics. I also happen to think that Klein’s solution—controlling political speech—is, in fact, “worse than the disease.” (I think Madison would agree…he even used similar language). Moreover, I think that there are plenty of programs to shrink or eliminate before we get to cuts that eviscerate the safety net or threaten our security. To pretend otherwise is to “shoot the cocker spaniel.”

But in the interest of finding common ground with my progressive friends, let me suggest a modest compromise: the abolition of favoritism in government policy. In an interview with James Buchanan, F.A. Hayek once remarked:

[The First Amendment] ought to read, ‘Congress shall make no law authorizing government to take any discriminatory measures of coercion.’ I think that would make all the other rights unnecessary.

This quotation appears in the beginning of an excellent—but often overlooked—book by Buchanan and Roger Congleton called Politics by Principle, Not Interest: Toward Nondiscriminatory Democracy.

Buchanan and Congleton brilliantly trace the political and economic consequences of forgoing favoritism. What happens when government adheres to a sort of “generality” principle by which all policies are required to apply to all equally? What if there are no carve-outs in the tax code? No special favors in the appropriation process? Notice that this need not be the sort of libertarian paradise that Shapiro and I favor. Government might still spend a lot of money and it might still tax a great deal. But it would be constrained by the generality principle to tax and spend in a nondiscriminatory way (Buchanan and Congleton make an allowance for a safety net by proposing “a flat rate of tax on all income combined with a set of equal-per-head demogrants,” p. 161).

Generality would require both sides to give up their own pet projects which favor particular segments of society. No more “targeted investments” in particular green technologies. No more tax credits for people who have kids. No more subsidies for farmers. No more favors for manufacturing. No more bailouts of some firms and not others. Under such a constraint, a majority of Congress could elect to subsidize industry A, but it would also have to subsidize industries B-Z.

The proposal has an intuitive moral appeal. Government, after all, is constituted to promote the general welfare of the entire population, not the specific welfare of certain segments of society. But as Buchanan and Congleton show, it also has economic appeal. For under a generality rule, “no participant has an incentive to invest resources in efforts to secure differential or discriminatory advantage at the expense of others in the collective enterprise.” (p. 44). And that can make the difference between a society that prospers and one that stagnates.

We all—right, left, libertarian, and progressive—seem to agree that something is wrong when wealthy individuals donate to politicians and politicians hand out privileges to these donors. Klein and Lessig think the answer is to regulate donations. Shapiro and I think the answer is to limit the scope of government.

We can continue to talk past one another while the nation slips deeper and deeper into the grips of the pathology of privilege. Or, we can roll up our sleeves and think of alternative solution that might be acceptable to both the left and the right. How about the abolition of favoritism in government policy?

How Receptive is the “Left” to Public Choice Arguments About Cronyism?

Arnold Kling writes about our new project on cronyism:

You can think of the project as having two goals. One goal would be to clarify for conservatives the distinction between being pro-market and being pro-business. I think that some progress toward this goal is possible.

The other goal would be to persuade liberals that deregulation can be a way to reduce the power of big business. On that goal, I am much less optimistic. You can talk all day about regulatory capture and how big government serves entrenched interests. And what the liberals will come back to you with is, “Yes, that is why we need campaign finance reform and to elect politicians who believe in stronger regulation.”….

I picture liberals as having an unshakable belief in the power of moral authority. That is, if you exert enough moral authority, you can overcome any problem. Or, to put it in negative terms, if any problem exists, it is because not enough moral authority has been exerted to try and solve it.

A post by Matt Yglesias from last October would seem to support Arnold’s claim that liberals are unlikely to be persuaded:

The observation that malgovernment is a major source of human ills is quite correct, but embracing fatalism about it only exacerbates the problem. What’s needed are efforts to push societies in the direction of taking honor and civic obligation more seriously, not less so. You want politicians and civil servants to feel worse, not better about behaving cynically.

Call me naive, but I still think that some liberals are open-minded enough to be receptive to the public choice view. Why? Because many liberals don’t apply moral-authority arguments when they talk about conventional economic problems. There, like others, they think about incentives.

When a liberal (or at least a liberal economist) sees a tragedy of the commons, he doesn’t waste his time begging fishermen to pretty please stop overfishing. Instead, he plans accordingly. He thinks about the incentives that these fishermen face and comes up with solutions (for example, Pigouvian taxes or the assignment of property rights). As I wrote back in October:

The idea is much the same with public choice. Armed with empirical and theoretical reasons to think that politicians might do bad things, we should plan accordingly by placing some things—such as the establishment of religion—beyond the reach of politicians. I suppose we could ask Congress to pretty please not establish a religion but in my view it is better to make it illegal for them to do so.

James Buchanan, Gordon Tullock, and the other founders of Public Choice and its close-cousin Constitutional Political Economy didn’t stop their analysis after they found that politicians sometimes behave badly. Like James Madison before them, they thought of constructive ways to make political actors behave better, sometimes by placing certain decisions beyond their reach.

There is nothing fatalistic about that.

When it comes to government-granted privileges to entrenched interests, we shouldn’t wring our hands and beg governments to pretty-please stop pandering to the wealthy and well-connected.  We should plan accordingly. We should think of the incentives of politicians and come up with institutional solutions (for example, by forbidding politicians from handing out particular favors to particular firms or industries). If there are liberals who understand the power of incentives when it comes to microeconomics, I believe there are liberals who will understand the power of incentives when it comes to special interest politics.

There’s one more reason to be optimistic. My colleague Adam Thierer has assembled an interesting compendium of expert opinions on regulatory capture. The quotes show experts interested in grappling with incentives, not lecturing on the basis of moral authority. It is telling how many of the experts are more-naturally categorized as left-of-center than right-of-center.

———————

Update: Arnold Kling responds here.

The Economy as an Ecosystem

On Wednesday I testified before the Senate Committee on Small Business and Entrepreneurship. The title of the hearing was “Perspectives from the Entrepreneurial Ecosystem: Creating Jobs and Growing Businesses through Entrepreneurship.”

It was a less-formal type of hearing than I have done before. There were lots of witnesses, no formal oral statements, and we could more or less raise our placards whenever we wanted to talk.

In my one-minute introduction, I noted that George Mason University came to national prominence in 1986 when James Buchanan won the Nobel Prize here for his pioneering work in public choice. (Vernon Smith, another active researcher in the field of public choice, would become Mason’s second Nobel laureate in 2002). I then said:

Public choice focuses on the ways in which government policies are actually determined and carried out. And I think this weighs on entrepreneurship, in particular. I, too, appreciate the ecological metaphor. I think it is a really appropriate metaphor. Recently, I’ve been looking at the public choice ways in which the ecology of entrepreneurship can sometimes be interfered with. Just like a natural ecology, entrepreneurial ecologies need to be a bottom-up process. And quite often can be subject to interference from governments.

I was pleased that the Committee’s chairwoman, Senator Landrieu (D-LA) largely agreed with me. Channeling her inner-Hayek, she replied:

That is an excellent point and I hope that we’ll have a little bit more of thought provoking comments about that. Just like governments can ruin physical infrastructure—I mean physical and natural environments—governments can also, with the wrong policies, disrupt the… I don’t know if you’d call it ‘natural,’…but the strength, the dormant strength or natural strength of a people to grow jobs and produce wealth.

Unfortunately, not all of her comments were so Hayekian. Another of the witnesses was tech-entrepreneur-turned-academic, Vivek Wadhwa. Today he wrote about the hearing in the Washington Post:

Government leaders — at least some of those present — actually seemed to believe they could, through legislation and spending, increase entrepreneurship and innovation. They asked questions such as: What legislation can we enact to build innovation ecosystems, facilitate mentorship, and teach entrepreneurship? They didn’t seem to understand that these are things entrepreneurs do—not governments.

I couldn’t agree more.

Matt Yglesias Should ‘Get’ Public Choice

Matt Yglesias says he doesn’t ‘get’ public choice and thinks he “never will.” He writes:

The observation that malgovernment is a major source of human ills is quite correct, but embracing fatalism about it only exacerbates the problem. What’s needed are efforts to push societies in the direction of taking honor and civic obligation more seriously, not less so. You want politicians and civil servants to feel worse, not better about behaving cynically.

Unlike Matt, I think he is sufficiently open-minded to update his prior beliefs, so here is my attempt to help him ‘get’ it. In my view, public choice does not exhort politicians to feel better about behaving badly. It just exhorts us to expect them to behave badly in certain circumstances and to plan accordingly (often by changing their incentives). In this regard it really isn’t all that different from normal economics (a point raised by one of Matt’s commenters, my friend Michael Makowsky).

Consider a problem from normal economics: the tragedy of the commons. Armed with empirical and theoretical reasons to expect that fishermen will over-fish a common pool, we should plan accordingly. We should examine the incentives of fishermen and think of ways to improve or alter these incentives (e.g., assign property rights over the pool, or impose a Pigouvian tax). To my knowledge, few if any economists would council that we ought to spend our time begging fisherman to pretty please stop overfishing. That is likely to be a fool’s errand.

The idea is much the same with public choice. Armed with empirical and theoretical reasons to think that politicians might do bad things, we should plan accordingly by placing some things—such as the establishment of religion—beyond the reach of politicians. I suppose we could ask Congress to pretty please not establish a religion but in my view it is better to make it illegal for them to do so.

James Buchanan, Gordon Tullock, and the other founders of Public Choice and its close-cousin Constitutional Political Economy didn’t stop their analysis after they found that politicians sometimes behave badly. Like James Madison before them, they thought of constructive ways to make political actors behave better, sometimes by placing certain decisions beyond their reach.

There is nothing fatalistic about that.

Politics Without Romance

Commenter James Devine writes:

I am tired of people saying Americans & their government cannot do anything right.

This brings to mind the opening sentence of Thomas Paine’s Common Sense:

Some writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins.

I think individuals, in this country and elsewhere, do a lot of things spectacularly well. But good people don’t always produce good outcomes when they interact through political institutions. And good political economy, in my view, is about analyzing political outcomes as they actually are, not as we wish them to be.

The Nobel Laureate, James Buchanan, called this “politics without romance.”