Friday, January 1, 2016

Redistribution: Seen Vs Unseen

Reply to: Why Taxes are Bad by Miles Kimball

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I’m struggling with this! Let’s see if I’m getting the first part right…
  1. According to Noah, there isn’t a correlation between taxes and work.
  2. According to Noah, you argue that higher taxes make people feel poorer… which encourages them to work more. Therefore there is a correlation between taxes and work. 
  3. According to Karl, you argue that when higher taxes provide more benefits… people are encouraged to work less. Therefore there is a correlation between taxes and work. 
So whether or not there is a correlation between taxes and work depends on 1. their size and 2. on how they are spent. When taxes are wasted (no benefit)… people feel poorer and work more. When taxes aren’t wasted (benefit)… people feel richer and work less. 

What about the statistics though? What does it mean that people work the same amount whether taxes are low (2000s) or high (1960s)? When taxes were high… people should have felt poorer… especially if the taxes were wasted. Therefore, people should have worked more (= 9 hours/day). If the high taxes weren’t wasted… then people wouldn’t have felt as poor… and they wouldn’t have worked as much…. (= 8 1/2 hours/day). However, people worked the same amount as when taxes were low. Therefore… uhhhhh… ouch, my brain. LOL… this reminds me of why I didn’t pursue econ at UCLA. 

Let me try and get back to more solid ground. You point out that GDP would drop if parents did something beneficial like spending more time raising their kids rather than working more. Doesn’t it matter though when the GDP is measured? Shouldn’t we see an increase in the next generation’s GDP as a result of all the extra tender loving care (TLC) that they received while growing up? If so, then the issue isn’t with the GDP… but when it’s measured. And if we don’t expect to see a future bump in GDP… then how could it really be argued that the extra TLC is truly beneficial? To be clear, my objective here really isn’t to defend GDP as a tool…. but to highlight Bastiat’s point
In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.
Here’s what you wrote in What is a Supply-Side Liberal?
In calling myself a liberal, I am saying that in addition to an attachment to the liberty, limited government, constitutionalism, and rule of law emphasized by Classical Liberalism, I hold to a view based on both classic Utilitarianism and contested elements of modern economic theory that, generally speaking, a dollar is much more valuable to a poor person than to a rich person, and that therefore, there is a serious benefit to redistribution that must be weighed against the serious distortions caused by the usual methods of redistribution.
I wholeheartedly agree that a dollar is much more valuable to a poor person than to a rich person. So it’s a given that redistribution would increase total utility. Yet, I’m entirely against redistribution.

With GDP I argued that the issue is when it’s measured… and it’s entirely the same thing with utility. I’m extremely confident that we’d see a sharp increase in total utility if we measured it immediately after redistribution. This is the first effect… which is seen and favorable. But what about the unseen? What about the subsequent effects? The subsequent effects would be disastrous because productivity would plummet. 

Imagine if, rather than redistributing money from rich to poor… we redistributed money from smart to stupid. Would you oppose or support such a redistribution? Would it make a difference if you knew, for a fact, that it would immediately result in a massive spike in total utility? Personally, I would strongly oppose such a redistribution even if the first effect was favorable. This is because the second effect would be a huge decrease in productivity… which would lead to an even greater decrease in utility.

Putting society’s scarce resources into the wrong hands could certainly result in an immediate increase in total utility (first effect = seen)… but it would most certainly decrease productivity (second effect = unseen)… which would soon result in a greater decrease in total utility. We’d suffer a net loss of utility. 

Let’s say that you and I are stranded on an island. Food is scarce. You have one packet of eggplant seeds. Is redistribution of those seeds a good thing? Should we focus entirely on who would be happier to have the seeds? Should we focus entirely on fairness and divide the seeds equally? Or should we focus entirely on productivity and determine who has a greener thumb? If your thumb was greener, then redistribution would decrease productivity. If my thumb was greener, then redistribution would increase productivity. Given that our goal is for food to be far more abundant… then clearly we should focus entirely on productivity.

Markets work because the focus isn’t on utility/fairness/equality… the focus is entirely on productivity (results/abundance). And because the focus is entirely on productivity… the outcome is a greater total amount of utility. 

Markets place scarce resources in the most capable hands. Taxes are bad when, and only when, they result in the redistribution of money/resources/influence from more capable hands to less capable hands. Unfortunately, this is guaranteed to occur with our current system. 

Right now we don’t have a market in the public sector. We have socialism in the public sector. Socialism fails because government planners fail to place scarce resources in the most capable hands. This is why I’m entirely against redistribution. If we created a market in the public sector by allowing people to choose where their taxes go (pragmatarianism FAQ)… then taxes would cease to be bad. Society’s scarce resources would no longer be placed in less capable hands. 

I should probably rewind a bit and emphasize that I’m definitely not saying that poor people are stupid. I’m saying that if you know people who are smart but poor… then you probably have a theory as to why they are poor… and your tax allocation decisions would communicate your theory to the rest of society. If your theory is that they were failed by the education system… or by a lack of employment opportunities… or by closed borders… then you’d allocate your taxes accordingly. Creating a market in the public sector would allow for a multitude of theories to be simultaneously tested… which would greatly decrease the time it takes to uncover the truth. 

The truth regarding markets is that people don’t choose to place their hard-earned money into random hands. If we’re going to make the effort and take the time to earn money… then we really don’t want to see our limited time/effort/money/life flushed down the toilet. This fundamentally basic concern gives consumers the maximum incentive to place their hard-earned cash in the most capable/productive hands. So it’s the biggest problem when the results of this powerfully productive process are overridden by government planners who have infinitely less incentive and information than society as a whole does. Massive amounts of money/resources/influence will be placed in less capable hands, productivity will plummet, and everybody will suffer as a result. Redistribution subverts the true will of the people and greatly diminishes their welfare. 

It’s true that I don’t have a very strong grasp on the distortionary aspects of how taxes are collected… but I’d be very surprised if this possible problem is anywhere as harmful as the problem of having socialism in the public sector. I’m pretty sure that socialism is just as defective for public goods as it is for private goods. Therefore the spending, rather than the taxing, should be our greatest concern. 

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