Making Work NOT Pay

Usually the title of a government bill is a pretty good description of what the bill is not about (e.g.  The Affordable Health Care Act). A few years ago the Federal Government, offered a temporary tax credit that was labelled "Making Work Pay". But does it?

The State of Pennsylvania recently illustrated how a single mother there with two children would be better off with a part-time job and a host of welfare benefits than she would be taking a job that paid her $69,000, but that required her to pay income taxes and give up her generous array of handouts. 

What possible incentive would this woman have to get off welfare? Would you work more if the government effectively imposed a 100% tax on your efforts?

In any case, the message from your government is loud and clear: Work DOESN'T Pay! (at least not when government is involved).

James Buchanan 1919 – 2013

"The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that "water runs uphill," no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores."

~James M. Buchanan, 1986 Nobel laureate in economics, writing in the Wall Street Journal on April 25, 1996

[Obviously that last sentence was written prior to Paul Krugman becoming a columnist for the NY Times]

The Rent Seeking Drag

Rent Seeking is sort of an arcane economic term for those who seek to obtain benefits for themselves through the political arena. 

It is, of course, not news to anyone that people lobby the government for privileges that the marketplace doesn't afford them. But why is this so bad economically? Beyond the fairly obvious fact that it diverts resources from the most productive uses to ones of lesser value (else why would you need to lobby government in the first place?), there is also an insidious dead weight cost.

Let's say, for example, a steel firm spends ten million dollars lobbying for restrictions on steel imports. Whatever money it gains by succeeding (presumably more than ten million), is not a net gain. From this gain must be subtracted the $10MM cost of seeking the restrictions. Although such an expenditure is still rational from the viewpoint of the firm that spends it, it represents a use of real resources to get a transfer from others and is therefore a pure loss to the economy as a whole.

As more and more economic decisions are made in the political arena rather than the economic marketplace, more and more money will be spent on influencing the decision makers. This dead loss starts to add up to a significant drag on economic growth. It's as if every time you went to the supermarket you had to spend an hour lobbying the store manager to put on sale the particular things that you want to buy. And others did as well. What would that do to the overall efficiencies of the retail food system?

Only The Rich Will Pay More Tax in 2013? Think Again.

For the last five years President Obama repeatedly told Americans earning less than $250,000 a year that their taxes wouldn’t go up — “not one cent.” Only “millionaires and billionaires” would see their taxes increase. So you think you're not the target of  "Fiscal Cliff" agreement? Think again.

The Tax Policy Center of the Brookings Institute provides a simple Do-It-Yourself calculator to compare what you would have paid if Congress had simply kept 2012 taxes as they were to what you will pay in 2013

A family of 4 with a salary income of $150,000 (certainly not officially one of The Rich)  plus some minor dividends, interest and capital gains, would pay nearly $5000 more in Federal income tax in 2013 on exactly the same taxable income as they had in 2012.

Let's halve that income to $75,000 (what would certainly qualify as the Middle Class that the President promises to protect). That family would pay almost $2000 more this year.

On top of that the $75,000 earning family is going to be paying another $1500 in federal payroll tax this year. So $3500 more -- or nearly 5% of their gross income. Think that will have any effect on economic activity in the future?  Of course, not. The President has told us it won't. Just like he told you that you will pay “not one cent” more.

Clinton Era Growth. Taxes or Spending?

Democrats often proffer the following logic:

The economy during the Clinton administration was strong.
Marginal tax rates were generally higher during the Clinton administration than they are now.
Ergo, raising tax rates would be a positive economic move.

There is another part of the story that receives almost no attention (because, of course, it  doesn't support the liberal narrative). Government spending was also a declining as a burden on the economy through the Clinton years.

Now, which do you think had the bigger positive impact on economic growth? Higher taxes? Or restrained government spending? Is it possible that it is the unrestrained Federal spending of the last six years that keeps us from achieving growth rates we experienced in the 90s?

Smoking Bad. Fatherless Families Good.

Amidst all the whining about inequality of income distribution, a huge inequality goes virtually unmentioned. In fact, it's actually endorsed by our cultural and government leaders.

Married couples with children have an average income of $80,000. The average income for mothers with children, but no husband is $24,000.

The inverse relationship between poverty and two parent households could not be more striking. It's almost as obvious as the relationship between smoking and disease.

Hmmm. Let's look at how our country reacted to the realization that smoking was injurious. Initially, government threw it's weight -- banning cigarette advertising and printing on-pack warnings. As usual, such efforts to change ingrained human behavior were relatively ineffectual. Then we started to get smarter. We made it much more expensive to smoke (average price of a pack in the 1960s? 35 cents. Today? $5.50). The entertainment industry stopped portraying smoking as glamorous. On-camera smoking was effectively banned (Johnny Carson still tapped his cigarette box nervously, but never used it on air). PSA campaigns -- like "Smoking is Glamorous" -- became quite visible. Smokers became pariahs, targets of the righteous wrath of the non-smoker. They were banished to the sidewalks outside office buildings. What about the personal freedom to choose behaviors that might be harmful to you? Bah!

Result: Smoking incidence dropped from near 50% in the 1960s to under 20% today.

Let's contrast that with how we react to the fact that fatherless households are severely injurious to the well being of children.

Have single-parent households been removed from the TV? Hardly. They are everywhere. They are portrayed as the norm (just like smoking was in the 1950s). They are glamorized. Single mothers are portrayed as noble and heroic. Have we imposed punitive taxes on single parents? Just the opposite. If the typical single mom were married, she would lose many of her government welfare payments. Have celebrities run PSAs against single parenthood? No, they grace every tabloid cover and Entertainment Tonight show with testimonies as to how wonderful it is to raise a child without a father (and if you earn a million dollars a year, it might very well be). Have we banished single mothers to the sidewalks? No, we set up subsidized daycare centers at work to make it easier for them to remain fatherless. Are they ridiculed? No, we make up cute names for them like Baby Mama. What about the wrath of two-parent families? They are mocked as "the religious right". Bad behavior? No, just exercising my freedom to choose a lifestyle. Who are you to judge?

Result:  Over just the last decade the number of two-parent households decreased by 1.2 million. Fifteen million U.S. children live without a father. In St.Louis only 40 percent of families have two parents. In Baltimore it is 38%.

There's certainly no lack of concern.  Every day the media makes us look at children in poverty or those who fail in school and asks "how can we help?" But they seldom point out why such children need help in the first place. We pretty quickly got past contemplating why people smoke (Was it fun? Was it hard-wired human behavior? If your parents smoked weren't you doomed to smoke also?) and moved on to changing deleterious behavior. We stopped promoting smoking, we made it more costly, and we started socially ostracizing smokers. We didn't say "don't be so judgmental" or "just exercising my freedom of choice."

Anti-smoking efforts worked. We changed the behavior from the norm to the exception. We took it from a sign of sophistication and glamour and made it unsophisticated and dirty. We saved people's lives. We could do the same thing about fatherless families, but we haven't. Is that because the consequences are less costly? Are they?

OF COURSE We Can Afford It!

Years ago I got some valuable insight into consumer credit behavior while doing marketing programs for the credit card industry. What I learned was that when consumers are faced with a decision as to whether to buy something on credit, they don't look at their level of indebtedness. They usually ask only one question: Can I afford the payments? This is why you see so many offers for no interest or deferred payment financing. If your monthly payment doesn't increase, OF COURSE you can afford to buy it!

Now let's consider the US government's behavior. In 1995 the national debt was about $5 trillion and annual interest payments were about $230 billion. In 2011 the national debt had risen to $15 trillion and interest payments were about ... $230 billion. Because the Federal Reserve was creating astronomical sums of money to keep Treasury interest rates down, we tripled the national debt without paying a penny more in annual interest. OF COURSE we can afford to increase Federal spending! We can afford the payments.

But then an odd thing eventually happens. Your monthly payments DO start to increase. Maybe market rates rise. Maybe you've finally reached the point where lenders consider you a high risk and raise the rate at which they are willing to lend you more. Suddenly you CAN'T afford those monthly payments. What do you do? If you're someone of integrity and personal responsibility, you cut back your household spending and start paying down the loan. If you're not, you keep spending as much as possible and then declare bankruptcy.

What will the US Government do when its monthly payments eventually rise**? If those running our government and those who elect them have integrity, they drastically reduce government spending (I'll pause here for the reader to finish laughing). If they're not, they do what governments usually do. They debase the currency and renege on their debts. When this happens in Argentina (every 20 years or so), the worldwide consequences are manageable. When this happens to a nation that produces 25% of world GDP, the consequences are catastrophic. But remember. It's all George Bush's fault. We bear no responsibility. FORWARD!

** Today the Federal Reserve buys more than two-thirds of all US treasury debt issued. What does that mean? Its means that there are few buyers for those bonds at the offered interest rate.

The Price of Milk

Nolan Finley, in his Detroit News column, wonders what would happen if milk were priced on the same basis as the federal government uses to structure income taxes.

The average price of milk is $2.49/gallon, so everyone (ignoring for a moment the 47 million people on Food Stamps) now pays $2.49. But if the government applied it's unique way of thinking here, 40 percent of the public wouldn't pay a dime for it. In fact, the government would actually PAY them $1 for every gallon of milk they took home. At the other extreme, 1 percent of the public would be charged $109.81 per gallon for milk. Of course, these people would buy a lot less milk at that price, and most of the scheme would need to be financed by issuing milk bonds to China.

The current tax system is, indeed, unfair, but not because the wealthy don't pay enough.The Rich are paying more for their government milk than it's worth so that most others can pay less. Instead of saying thank you, we're trying to milk them dry.