Tuesday, January 15, 2013

A Global Free-trade Agreement for Public Goods

People sometimes ask me how, in a tax choice system, we'd determine which organizations would qualify to receive tax payments.  My usual quick response is that, very generally speaking, voters would decide what's on the "menu" and taxpayers would order the "dishes" that most closely match their preferences.

An idea that was interesting enough to blog about just crossed my mind as I was browsing Inge Kaul's book...Providing Global Public Goods.  Now, I'm not saying it's a good idea...or a bad idea...and I'm not quite sure if I'd support it...but it's definitely thought provoking enough for me to throw out there.    

Continuing with the restaurant analogy...rather than limiting taxpayers to only dining at their own country's restaurant...why not allow them to dine at any country's restaurant?  Taxpayers would have to eat (pay their taxes) but they would be able to select the dishes from any country's menu.

Let's take Sarah for example.  She's a young American taxpayer whose number one priority is the environment.  At anytime throughout the year she could make a tax payment directly to the Brazilian equivalent of the EPA.  Sarah would receive a receipt...which, along with all her other receipts, she would submit to the IRS by April 15.

Markets allow resources to flow where they create the most value.  A tax choice system would create a market in our public sector...but the flow would generally be restricted to within our country.  Completely removing that restriction would allow for the global free-trade of public goods.  In theory this would create far more value.

Can you predict which country would receive the greatest inflow of public funding?  What impact would it have on the Israeli-Palestine conflict?

Clearly this public goods free-trade agreement would facilitate global convergence.  But how much would it help developing countries catch up with the rest of the world?  Well...that would depend on the rate of outflow.  As I argued in my response to John Holbo's critique of libertarianism...we can gain far more from global innovation than the world can gain from American innovation.  The more we help developing countries catch up...the more we'll benefit from their innovation contributions.

Speaking of my favorite Crooked Timber Liberal...I'll conclude this brainstorm with this comment that I posted on John Holbo's blog entry on selling votes (the discussion on my blog)...

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Peter T…oh man…never thought of that! It’s an extremely fascinating point though.

Let’s say Brazil was going to vote on whether it should develop or conserve the Amazon rain forest. Given that I’m not a citizen of Brazil I wouldn’t be able to directly vote on the proposal…but nothing would stop me from sending money to any Brazilian who was on my side of the issue. So I’d send $100 to a Brazilian conservation organization that would be responsible for buying votes for the pro-conservation side.

Everybody in the world would benefit from saving the rain forest…so how much money would everybody in the world send to the conservation organization? Then we can imagine all that money being exchanged for votes…in essence all that money would be transferred to Brazilian citizens that were willing to sell their votes in favor of conservation.

That’s some really heavy stuff. People in country A wouldn't send money to country B unless they cared about the outcome of elections in Country B. Imagine there was an Islamic fundamentalist party running against a pro-Western party in some Middle Eastern country…how much money would the world send to the organization responsible for purchasing votes for the pro-Western party? Then we can imagine all that money being transferred to people willing to sell their votes to the organization responsible for buying votes for the pro-Western party.

Thursday, January 10, 2013

Pre-tributes to James M. Buchanan

The Nobel laureate economist James M. Buchanan passed away yesterday.  Two days before he passed away, my favorite Crooked Timber Liberal, John Holbo, posted an unintentional pre-tribute in his blog entry...Shirky, Udacity and the University...
Here’s a slightly more concrete way to cash out ‘story’: we tend to operate with notions of the proper form and function of the university that are too closely tied to pictures of the ideal college experience that are, really, too atypical to function as paradigms. ‘We’ meaning pretty much everyone still: academics, our students, their parents. Shirky’s idea is that MOOCs are going to unbundle a lot of stuff. You don’t have to buy the 4-year package to get some learning. It’s pretty obvious there’s more unbundling to come – it’s gonna make buying individual tracks on iTunes seem a minor innovation – and it will put pressure on current higher education’s strong tendency to bundle a lot of functions together to the point of indistinguishability (teaching, research, socialization, credentialing).
The prediction that "there’s more unbundling to come" is one that Buchanan, more than any other economist, would have appreciated.  Here's what he wrote in 1967...
General-fund financing is analogous to a market situation where the individual is forced to purchase a bundle of goods, with the mix among the various components determined independently of his own preferences. The specific tie-in sale is similar to general-fund financing, that is, nonearmarking. - James Buchanan, Earmarking Versus General-Fund Financing
Don't get bundled!  Your preferences really do matter!
If the individual can make separate fiscal choices for each public-goods program, which a structure of earmarked taxes conceptually allows him to do, directly or indirectly, he is informed as to the alternatives that he confronts, at least to the extent that the payment institutions allow, and subject, of course, to all of the qualifications noted in previous analysis. The uncertainty that he faces is clearly less than that which is present in the comparable decision on a “bundle” of public goods or services, with the mix among the separate components in the bundle to be determined in a separate decision process or through the auspices of a delegated budget-making authority. If this mix is not announced in advance to the voter-taxpayer, he must try to predict the outcome of another decision process, in which he may or may not participate, a process that need not exist at all in the more straightforward earmarking model where all revenue sources are specifically dedicated. - James Buchanan, Earmarking Versus General-Fund Financing
Three days before Buchanan passed away...I offered my own pre-tribute by creating Wikipedia entries for the benefit principleclub theory and the preference revelation problem.  Yesterday, over at the Ron Paul Forums, I posted an overview of these concepts...Voluntary Exchange Theory...and today I posted this comment over at Daniel Kuehn's blog.

Like I said in my comment...James Buchanan was far closer to the actual problem and the actual solution than any other economist.

I'll leave you with a few of my favorite passages by Buchanan...

Before taxes could be levied on the people, representative bodies were given the right to grant their approval. No consideration was given to the spending side of the account because public expenses were assumed to benefit primarily the royal court, at least in the early days of constitutional monarchy. Taxes were viewed as necessary charges on the people, but they were not really conceived as any part of an “exchange” process from which the people secured public benefits. It was out of this conception of the fiscal process that both the modern institutions and the modern theory of public finance developed. - James M. Buchanan

This greater complexity of political choice is compounded by an inability to gain from any investment in knowledge. In a market setting, a person can gain by storing food during the boom periods; it is a simple task to profit directly from knowledge. In a political setting, however, even if a person has acquired knowledge about the more complex question of "why," there is no way that he can profit from his knowledge because a change in policy will take place only after a majority of people have come to the same conclusion. Consequently, it is rational to be considerably more ignorant about general policy matters than about matters of market choice. - James M. Buchanan

Good things come at a cost, whether they be provided by the government or the grocery store. - James M. Buchanan

The introduction of the debt alternative to taxation makes the bridge between cost and benefit more difficult for the individual to construct. - James M. Buchanan

Over time, any individual in the community will expect this rule to produce unfavorable results in particular instances, results that run counter to his own preferences. Public-goods projects which he urgently desires may not be undertaken because a majority of his fellow citizens does not agree with his evaluation. Or, conversely, he may be required to contribute to the costs of projects that he considers to be worthless. - James M. Buchanan

The motivation for individuals to engage in trade, the source of the propensity, is surely that of "efficiency," defined in the personal sense of moving from less preferred to more preferred positions, and doing so under mutually acceptable terms. - James M. Buchanan

The answer to the whole highway problem lies in “pricing” the highway correctly. The existence of congestion on our streets and highways is solely due to the fact that we do not charge high enough “prices” for their use. This is one of the main functions of price in our free enterprise economy... [p]rice relieves potential congestion around our meat counters, our motels, and our models. Why do we shun its usage in the case of highway services? - James M. Buchanan

The state did, indeed, become God. - James M. Buchanan

The entry and exit options provided by the market serve as the omnipresent frontier open to all participants. And economists could well have done more to exploit the familiar frontier experience by instancing the analogue here. Their failure to do so illustrates the point made above, that adherents of classical liberalism, and especially economists, have not been sufficiently concerned with preaching the gospel of independence. Classical liberalism, properly understood, demonstrates that persons can stand alone, that they need neither God nor the state to serve as surrogate parents. But this lesson has not been learned. - James M. Buchanan

But what if Nietzsche is right? What if God is dead? What happens to the person who is forced to recognize that the ordering presence of God is no longer real? What if God cannot be depended on to clean up the mess, even in some last resort sense? Who and/or what can fulfill the surrogate parent role? Who and what is there beyond the individual that can meet the yearning for family-like protectiveness? Who and what will pick us up when and if we fall? Who and what can provide the predictability that God and his agency structures seemed to offer? - James M. Buchanan

In short, persons are afraid to be free. As subsequent discussion will suggest, socialism, as a coherent ideology, has lost most of its appeal. But in a broader and more comprehensive historical perspective, during the course of two centuries, the state has replaced God as the father-mother of last resort, and persons will demand that this protectorate role be satisfied and amplified. - James M. Buchanan