Tuesday, July 27, 2010

Student1776 on "No Closing Time for Income Taxes" and Response

Corrections deeply appreciates the opportunity to engage in subjects on a more substantial level than newspapers often warrant. To this end, we enjoy commentary. In this case, a comment from Student1776 on "No Closing Time for Income Taxes" (June 15th, 2010) offers just such an opportunity.
Government, particularly for the Democrats, is all about expropriating wealth created by some in order to give it to their own constituents using whatever rationale they can fashion for the purpose. Like the continuation of bridge and causeway tolls long after the bridge or causeway is long since paid off and monies for its maintenance in perpetuity are put away the toll continues. Any route for the draining of economic blood from any population susceptible to the draining is kept open. Plan on it. Some things never change. Parasitism is one of them.

Corrections largely agrees. It was perhaps Rothbard who said it best. Paralleling Plato's note that a city was man writ large, Rothbard stated: "Government is a band of thieves writ large." However, while we agree that parasitism will always be present and proportional to government size, it does shift in degrees, and may have multiple equilibria.

Let us imagine, in the vein of Murphy, Schleifer, and Vishy's 1993 paper "Why is Rent-Seeking So Costly to Growth?" (that there are two types of individuals: predators, and producers. Predators might represent all individuals who are net recipients of government benefits beyond their marginal product. Producers are the opposite--individuals who are producing more than they consume. Further, for the sake of simplicity, let us imagine all individuals are equal (our results hold without this). They will become either Predators or Producers depending on which pays better (therefore, unless everyone is a Predator or Producer, both roles must pay the same amount). Then we might draw the following diagram, also found in David Romer's Advanced Macroeconomics textbook (click to enlarge):

However, and our main point in this article, is that there may be multiple equilbria.  While obviously Predator income must be zero when 100% of a society is Predators, and that both slopes must be negative, the functional form on both functions is unknown.  Below, we display a curve with two stable equilbria (denoted by circles with green centers) as well as an unstable equilibria (denoted by a circle with a red center) (click to enlarge).

With this sort of analysis in mind, we might note that Student1776 is correct: predation, most significantly in the form of government, is not a stable equilibrium.  However, we should further note that there are multiple stable equilbria--one with low predation and one with high.  Absent the destruction of Predators and predation, a society should strive to move to the most efficient equilibrium (low predation).   

Corrections might tangentially mention that it is with the idea of multiple equilibria in mind that we should think of economists like Paul Romer and his push for Charter Cities.  The idea is that self-selecting experimentation on a large scale may help societies change the rules under which individuals interact, just as charter schools allow us to discover best practices in education.  For example, Shenzen's special economic area helped provide the evidence to begin to economically liberate China--it is yet to be seen whether or not men like Milton Friedman or Francis Fukuyama are correct in their suggestions that liberty follows prosperity.   Charter Cities are one means to an end of moving from the high-predation, low-efficiency rules third world countries have now, to low-predation, efficient rules.  

1 comment:

  1. When one looks at the Index of Economic Freedom of the various world economies, the relationship between economic freedom versus prosperity is quite clearcut in Chart 1, Page 2 of the 2010 data (http://www.heritage.org/index/pdf/2010/Index2010_ExecutiveHighlights.pdf). Longitudinally one might note that increasing a country's Index of Economic Freedom is associated with subsequently higher rates of economic growth - China and India being recent examples but there are many others. Sadly the Index of Economic Freeding ranking of the US is declining - with predictable economic results (Chart 2).

    To some degree one might note that the 50 states, each with differential levels of taxation and other restrictions on economic freedom (albeit superimposed on a constant general level of federal predation) constitute an example, like the Charter Cities, to illustrate the results of increased or decreased economic freedom and provide somewhat of a laboratory to assess the effects of state predation on wealth generation. It is unsurprising that the states ranked at the bottom of a similar U.S. Economic Freedom Index in 2004 - before the current economic decline - including New York, California, Connecticut, Rhode Island and Illinois have experienced subsequent notable economic decline. In contrast the states with top rankings have been more robust. Also interesting is the net emigration of Americans from low economic freedom states to high economic freedom states. Not unlike the immigrant population who came to the US seeking relief from predation in more collectivist statist societies.

    Human beings are smart. Producers do not like being the victim of parasites. They flee when they can. Given that there are not a lot of places for Americans who wish to be free from predation to flee to, it makes sense that tens of millions of American producers are publicly demonstrating and rising against the tide of predation coming out of Washington. The old equilibrium of predation has been violated by the rather radical attitudes of the incoming administration and this has engendered a massive political response to defend American economic liberty. Further, the perceived radical new rules have engendered obvious protective actions by producers facing an uncertain future - actions like conserving resources and increasing capital stores, reducing domestic investment and additional caution in hiring noting that current policies are heavily weighted to increase the costs of domestic labor. It seems likely that should the political efforts to resist and reverse the new tide of redistributionist, anti-business policies, increased taxation and regulation fail and the current environment persist, the inevitable result will be economic stagnation as far as the eye can see.