Tag Archives: TV

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.”

Undermining Competition is No Way to Compete

Money is tight for state and local governments, and that’s never more obvious than when lawmakers work to finalize budgets before the new fiscal year starts on July 1. A common priority for lawmakers, particularly in the revenue department, is to bring new business to the state. That’s why various state economic development websites claim to offer would-be-entrepreneurs the perfect set of enticements to start or expand one’s businesses.

Even on the national stage, President Obama frequently cites the need to compete with India and China in calling for more spending (or, to use his preferred phrase, “more investment”). Unfortunately, politicians often believe that the way to out-compete other governments is to undermine genuine competition at home by offering some firms and industries an uncompetitive edge.

This week, for example, the D.C. Council unanimously voted to give the daily deal company, LivingSocial, a $32,500,000 get-out-of-tax free card. Two years ago, the state of Illinois offered LivingSocial rival, Groupon, a similar though less-lucrative deal: $3,500,000 in state funds to hire 250 employees. In some industries, these types of special deals are business as usual. Film production companies, for example, can get special tax treatment in 40 out of 50 states. In Virginia, film production companies pay no sales tax on production-related products and are allowed refundable individual and corporate income tax credits. Needless to say, Virginia companies in other lines of work aren’t so lucky.

Interestingly, these types of deals are as likely to be opposed by progressives as they are to be opposed by market-oriented economists. In 2010, the left-leaning Center on Budget and Policy Priorities released a report that was critical of film subsidies. The author argued:

Like a Hollywood fantasy, claims that tax subsidies for film and TV productions — which nearly every state has adopted in recent years — are cost-effective tools of job and income creation are more fiction than fact. In the harsh light of reality, film subsidies offer little bang for the buck.

I couldn’t agree more. Back in March, I also found myself largely agreeing with the left-of-center D.C. Fiscal Policy Institute’s Ed Lazere, as we both lambasted government business incentives on the Kojo Nnamdi Show.

Though special deals for particular firms or industries are often sold in the name of competition, they are exceedingly anti-competitive. When one firm or one industry obtains a privilege from government, it obtains a measure of monopoly power. While the profits of the firm go up, so do the prices that consumers pay. And while it is harder to quantify, would-be competitors who aren’t so lucky to have government’s favor also lose. But that’s not all. Privileged firms tend to offer lower-quality products and they tend to be less-attentive to cost-cutting. Then there is the social waste associated with obtaining privileges: each year, firms expend millions of dollars on lobbying and other political activity in an attempt to obtain privilege. At the societal level, privileges undermine long-run growth and may even lead to short-term macroeconomic instability. Government-granted privileges are often dispensed on the basis of personal connection rather than merit. This, in turn, can undermine the legitimacy of both the public and the private sector. In a new paper, out soon, I document these and other problems with government-granted privilege.

There is nothing wrong with a government and its leaders attempting to compete with other governments. But the best way to compete is to offer a sound, economically free, environment in which any firm that creates value for its customers is free to prosper. It is a good indication that a government has failed to create such an environment if it feels the need to suspend or otherwise alter the rules of the game for certain favored firms and industries.

The Appearance of Fiscal Prudence in Maryland discussed on WBAL-TV

Yesterday I did an interview with David Collins of  WBAL-Baltimore on my recently published paper co-authored with Benjamin VanMetre in Maryland Journal on Maryland’s Spending and Affordability Committee (SAC). Set up in 1983, the SAC was put in place to help legislators control the growth of spending. Over the interim, spending has grown beyond the capacity of annual revenues to keep pace. Thus, the SAC, created to ensure spending discipline, has presided over the creation and continuation of a structural deficit in Maryland. In 2010, the effectiveness of the SAC was called into question by the SAC itself. In this TV report the reasons for the SAC’s poor performance are discussed as well as what a rule to control spending might look like.

You can check out the video here.

 

 

 

Puerto Rico: What real reform looks like

As the Republican primary drags on, the candidates will face primaries in the U.S. island territories in the coming weeks. In Puerto Rico, 23 delegates are at stake. While Puerto Rico often doesn’t receive much coverage in U.S. news outlets, the case of government reform there provides a valuable case study that American governors seeking to reduce the size of state governments should note. Since taking office in 2009, Governor Luis Fortuño has led the territory in reducing the number of employees by nearly 16 percent.

Source: Bureau of Labor Statistics

While Puerto Rico has been hit hard by the economic recession and struggles with a current unemployment rate of 16 percent, Fortuño has made the difficult decisions necessary to preserve the territory’s ability to borrow money and to resume on-time payments to government suppliers and employees. In this Reason TV video, he explains that he had to borrow to meet payroll his first month in office, but succeeded in bringing its bond rating back from the brink of junk status.

In his work with government streamlining efforts in Puerto Rico, Mercatus’ Maurice McTigue stressed the importance of of shrinking the size of government relative to the economy. Any elected official can attest that the process of achieving these changing growth rates is painful, but Fortuño is in the process of leading just that sort of change:

Source: Government Development Bank of Puerto Rico

The lesson to draw from Puerto Rico is that an important reason to avoid unsustainable levels of government spending is to avoid the pain of cutbacks once a government gets to a point where spending cuts are no longer an option. In March, 2011, Standard & Poor’s raised Puerto Rico’s bond rating for the first time in 28 years, marking an objective change in confidence regarding the island’s economic prospects.

New Jersey Network (NJN) to be operated by NYC public broadcaster

New Jersey Network, known to New Jerseyans as NJN is now NJTV and is to operated by WNET the New York public broadcasting station. Governor Christie made the announcement today saying, “no one elected me to be programmer in chief.”

The sale saves the state about $11 million a year. The state of New Jersey will retain the TV license and will sell nine public radio licenses to Philadelphia (WHYY) and New York City (WNYC and WQXR).

New Jerseyans essentially have two out-of-state markets for their news: New York City and Philadelphia, a void NJN was to fill when it began in 1968.  According to reports the new non-profit will be required to dedicate 20 hours per week to New Jersey programming and will be made up of a board of New Jersey residents.

The legislature has 15 days to veto, otherwise the deal goes into effect on July 1.

 

Is it Possible that the President thinks Economists Agree That Spending is the Answer?

[W]ith respect to aggregate demand, I don’t know any economist — including, I think, Martin — who would argue that we are more likely to get a bump in aggregate demand from $700 billion of borrowed money going to people like those of us around this table who I suspect if we want a flat-screen TV can afford one right now and are going out and buying one.

If we were going to spend $700 billion, it seems that we’d be wiser having that $700 billion going to folks who would spend that money right away if we were going to boost aggregate demand.

That is President Obama, responding to a question from Martin Feldstein about extending the Bush tax cuts. Note, first of all, that though the president is talking about whether or not we will allow taxes on high-income Americans to rise, he easily slips into the language of spending. In his vernacular, we are “spending $700 billion” when we choose not to raise taxes by $700 billion.

More to the point, however, the quote suggests that the president is under the impression that economists unanimously believe spending increases are wiser than tax cuts. It would be a shame if the president’s advisors gave him this impression.

In 2009, the University of Chicago’s Harold Uhlig reviewed the most-recent literature on this question. By Uhlig’s count, the following studies conclude that, in terms of boosting GDP, tax cuts have a larger impact than spending increases:

Shortly after Uhilg wrote this, Alesina and Ardagna (2009) also found that stimuli based on tax cuts tend to be more effective than stimuli based on spending increases.   

Aside from the spending boost vs. tax cut debate is the question of magnitude. On this score, the Administration’s assumptions are well-outside of the range found in the most-recent studies. According to Uhlig:

With the exception of Gali [,Lopez-Salido, and Valles] (2007), the fiscal multipliers for government spending also typically seem to be considerably more modest than the [Administration assumes].

To this list, I would add Barro and Redlick (2010).

This is not to mention work such as the recent IMF study by Freedman, Kumhof, Laxton, Muir, and Mursula (2010) that finds short-run positive effects from stimuli, but medium-term deleterious effects.

It would be one thing to know about this evidence and to dismiss it. The president, however, seems not to have heard of it.

Razzle Dazzle in a Recession

New York faces one of the largest state budget shortfalls in the country, but so far legislators are not looking to TV and film tax incentives as a place to cut spending.

Business Week explains:

As television and film studios line up for a 20-percent boost in their tax credit — one of the few windfalls proposed during New York’s fiscal crisis — the return on what is now a $350 million tax credit remains out of focus.

State Comptroller Thomas DiNapoli issued a report Tuesday showing the film and TV industry, which includes production of television’s “Gossip Girl” and “Law & Order” and several films, paid a total of $3.3 billion in wages to 36,000 people in 2008, the latest data available.

[…]

The proposed increase comes as the state faces a current deficit now estimated at $2.1 billion, and a $9.2 billion gap projected in the budget due April 1.

But Matt Anderson, Paterson’s budget spokesman, said the film industry supports billions of dollars in economic activity and tens of thousands of jobs. He said the tax credit sustains long-term investments, permanent production facilities and jobs.

The trend of such subsidies from states is growing, but a Tax Foundation report explains that these tax incentives are not an answer to state budget problems or to economic growth. Unlike competition between firms, this competition between states to attract TV and film is unproductive. While billed to create jobs, such policies actually increase citizens’ tax burden and favor film and television over businesses that could be productive without subsidization.

Policymakers who support film and television tax breaks miss the unseen in these rules. Subsidizing specific industries through tax incentives distorts the states’ economies and diverts resources from their most productive uses.