Wednesday, April 22, 2009

Jumping frogs 

Brian Wesbury and Robert Stein write:
The good news is that economists can take a more dispassionate view. And the way economists contribute to the debate is with public choice theory, an idea fathered by Duncan Black, Gordon Tulluck [sic] and the Nobel Prize-winner James Buchanan. While the theory of public choice can be broadly applied, it is the ideas of "special interests" and "rational ignorance" that are useful in understanding last week's tea parties.

Here's an example of public choice at work. Let's say teachers could benefit by $2,000 each per year (in higher pay or benefits, smaller classes, etc.) from a piece of legislation currently under debate. But the cost per taxpayer averages just $15 per year.

The "special interests" (teachers and politicians) have substantial personal incentive to see that the bill is passed. Teachers, who benefit directly, will use time and money to lobby for the bill. And lawmakers will expect campaign contributions, votes or both, in exchange for their support.

But the taxpayer will remain "rationally ignorant" of the whole process. Why spend time even thinking about an issue when the cost is only $15 per year?

...This is why government will tend to grow in excess of what a true democracy really wants. At least, it will grow until those $15 hits accumulate to such a level that people have finally had enough, and in a seemingly spontaneous eruption, the average voter finds the energy to fight back.
Let me interject that I don't think that's exactly right, though in spirit I agree with Wesbury and Stein. Once you've accepted a $15 hit it becomes irrelevant to your future decision-making: It's a sunk cost. What gets you is a huge wallop, like $787 billion, then you get people's attention to that piece. Tea parties will attack that one bill, but a relatively smaller number will try to get back all the previous $15's. Going after the $15's means activating all the platoons of special interest groups that rent-seeked their fortunes in Congresses past.

The story is akin to the myth of the frog in the pot of boiling water, that if you put it in hot water it jumps out, but if you put it in cold water and gradually raise the heat it dies from the hot water. (I've heard it ascribed to both Mark Twain and Ian Fleming, and Wikipedia says it's not true, but the metaphor persists.) Our descent into European government spending levels hasn't just started with Obama. It may just be that he's going faster towards it than we are prepared to accept. If government took a few more $15's each year, you might get to Europe, just more slowly. Such a plan, I suppose, lacks audacity.

Wesbury and Stein also note:
Here is an interesting set of facts. If the government increased the top tax rate from the current rate of 35% to 100% (yes, that's right 100%), it would only collect an extra $400 billion this year. In other words, confiscating all the income that is currently taxed at 35% would not raise enough revenue to cover any of the annual deficits projected in the next 10 years. There is no way that tax hikes on the rich alone can pay for proposed spending in the current budget.
That is assuming that those people taxed at 35% will produce as much as they will when taxed at 100%. When you tax any activity at 100%, how much of that activity do you get? You don't need to be a supply-sider to answer 'zero'.

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