“I like freedom…as long as everyone makes the right [my] choice”

From Walter Williams recent column:

Negative freedom or rights refers to the absence of constraint or coercion when people engage in peaceable, voluntary exchange. Some of these negative freedoms are enumerated in our Constitution’s Bill of Rights. More generally, at least in its standard historical usage, a right is something that exists simultaneously among people. As such, a right imposes no obligation on another.

Positive rights is a view that people should have certain material things — such as medical care, decent housing and food — whether they can pay for them or not. 

What the positive rights tyrants want but won’t articulate is the power to forcibly use one person to serve the purposes of another.

There is an important distinction to be made between “rights” that do and do not force obligations on others.

Recognizing this distinction was a critical step on my path away from neo-liberal. It sounded good to say things like, “Everybody has a right to food or medical care”, while never fully considering the invisible clause attached to that, “so that means that someone be forced to provide it.”

But, sometimes I did say it. In discussions some folks asked, “Can’t we handle that through charity?”

I made the invisible clause visible, “Charity isn’t good enough.” But, I still hadn’t made the connection that I was saying that others be forced to provide my priority. Government provides a shroud for that.

I heard an example of this on a radio talk show this week. The Host and a Caller were discussing the differences in their values. The Caller said he agreed with Obamacare, but claimed that his values were shared with the Host’s (who did not support Obamacare).

The Host said that the Caller’s values requires everyone do what the Caller says, whether they want to or not. The Host’s values do not. He was talking about positive and negative liberty.

It was obvious the Caller had not considered that before, because he immediately tried to change the subject.

I recall the feeling I had the first time I pulled back the shroud of government and realized that my support for positive rights meant trampling the freedom of others. It dawned on me, what right do I have to force everyone to do it my way?

Like many others, I viewed politics as the place to earn that right. It seemed like a sport where winning earned your team the right to force everyone to do it your way.

But several things made me consider differently.

1. Double standard. There are times when I disagreed with what others were forcing on me through government and I thought my reasons for disagreement were more than valid. These weren’t situations of necessarily being ‘right or wrong’, but just seeing things differently.

It seemed inconsistent for me to want to force my priorities on others who may see things differently than I did.

Perhaps it wouldn’t result in as many dollars for my priority, but I realized that persuading others to join forces could work and didn’t require the double standard of wanting to force things on others, while resisting that they force things on me.

2. Bad rationale. No matter how good the rationale to force sounds, it could be wrong, and often is. It could have unintended consequences that more than offset the intended benefits. It may never even come close to achieving the intended benefit.

3. Bad feedbacks of government. Markets are results-based. People reward things that actually produce value. Those that don’t go away.

Politics is more intention-based, rather than results-based.  Politicians are rewarded if their nice-sounding legislation gets signed into law. They are rarely punished when it fails or causes more damage. We hear people excuse the failure, “but, at least it was the right thought.” And, rather than getting rid of the failed legislation, other politicians try to fix it, with even more legislation and money.

When you combine 2 & 3, you get a recipe for growth disasters, while in markets you have a recipe for growth.

Driving blind

Here’s another good Seth Godin blog post (in its entirety):

Confusing loyalty with silence

Some organizations demand total fealty, and often that means never questioning those in authority.

Those organizations are ultimately doomed.

Respectfully challenging the status quo, combined with relentlessly iterating new ideas is the hallmark of the vibrant tribe.

I’ve worked with leaders who claim they wanted you to challenge them, but beware. While I believe many of them meant it when they said it, when they were actually challenged it was a different story and typically a career-limiting move for the challenger.

I would also add that my experience lines up with Seth’s observation. Those who demanded fealty were doomed.

This is not surprising. As I’ve mentioned before, all problems can be traced to a problem in feedback. Leaders who are not genuinely open to challenge are not open to feedback. It’s like they are driving a bus without the feedback of the seeing the road. Of course, they will eventually drive into the ditch.

Learned Helplessness

Recent discussion in the comments of this blog about poverty reminded me of a caller I heard on a local radio show I heard within the last year.  The caller was a teacher and he shared the results of an assignment he has always done with students in his 30 years of teaching in an urban school district.

He said that he has always done this assignment to encourage his students to think about their futures and how they will earn their keep.

The first part of the exercise is to think about and write down the things they may want to have someday — homes, cars, jewelry, boats, etc.  In the second part of the assignment, they think about what they’ll do to afford those things — like earn money as a nurse, or firefighter or start a business.

He then commented on how he has seen the responses to that exercise change over the years.

In his early years, his students would want to become nurses, firefighters and teachers to be able to earn money to buy what they want.

But, now he’s more likely to get these types of responses: I’ll just use the check or card that comes from the government to buy it, like Mom does.

I doubt much has changed. My guess is that the students normally say they’ll do whatever it is they see their parents or aunts and uncles doing.  The future nurses of 20 years ago probably had a Mom who was a nurse.

Which reminds me of this post where I linked to and quoted from a Wall Street Journal piece by Arthur Brooks about earned success and learned helplessness.

It also reminds me of the story Dr. Carson told in his speech about how his Mom would not allow Dr. Carson or his brother to accept excuses for their failures or their lot in life.

 

Profits and Ballot Boxes

In the comments of this post, commenter Wally and I discuss the business feedback of profit and government feedback of votes.

W. E. Heasley, of The Last Embassy blog, recently posted an excellent short video from Learn Liberty that helps explain why voting isn’t a very effective feedback mechanism:

 

Most of us make purchasing and voting decisions. Sometimes they are a little of both, like when you vote with your family on what’s for dinner.

The following are links to and excerpts from previous posts I’ve made quoting economists Thomas Sowell and Walter Williams, who do an excellent job of explaining why purchase decisions are a more effective feedback mechanism than voting.

1. From this post in 2010, I quoted from Thomas Sowell’s book, Intellectuals and Society.  He explains the difference in these feedbacks well:

The fundamental difference between decision-makers in the market and decision-makers in government is that the former are subject to continuous and consequential feedback which can force them to adjust to what others prefer and are willing to pay for, while those who make decisions in the political arena face no such inescapable feedback to force them to adjust to the reality of other people’s desires and preferences.

A business with red ink on the bottom line knows that this cannot continue indefinitely, and that they have no choice but to change whatever they are doing that produces that red ink, for which there is little tolerance even in the short run, and which will be fatal to the whole enterprise in the long run.  In short, financial losses are not merely informational feedback but consequential feedback which cannot be ignored, dismissed or spun rhetorically through verbal virtuosity.

In the political arena, however, only the most immediate and most attention-getting disasters — so obvious and unmistakable to the voting public that there is no problem of “connecting the dots” — are comparably consequential for the political decision-makers.  But laws and policies whose consequences take time to unfold are by no means as consequential for those who created those laws and policies, especially if the consequences emerge after the next election.  Moreover, there are few things in politics as unmistakable in its implications as red ink on the bottom line is in business.  In politics, no matter how disastrous a policy may turn out to be, if the causes of the disaster are not understood by the voting public, those officials responsible for the disaster may escape accountability, and of course, they have every incentive to deny having made mistakes, since admitting mistakes can jeopardize a whole career.

2. In three paragraphs that I quoted from Thomas Sowell’s book, Applied Economics, he explains the differences in our buying and voting decisions. Here are those three paragraphs:

Politics and the markets are both ways of getting people to respond to other people’s desires.  Consumers deciding which goods to spend their money on have often been analogized to voters deciding which candidates to elect to public office.  However the two processes are profoundly different.  Not only do individuals invest very different amounts of time and thought in making economic vs. political decisions, those are inherently different in themselves.  Voters decide whether to vote for one candidate or another but they decide how much of what kinds of food, clothing, shelter, etc. to purchase.  In short, political decisions tend to be categorical, while economic decisions tend to be incremental.

Incremental decisions can be more fine-tuned than deciding which candidate’s whole package of principles and practices comes closest to meeting your own desires.  Incremental decision-making also means that not every increment of even very desirable things is likewise necessarily desirable, given that there are other things that the money could be spent on after having acquired a given amount of a particular good or service. For example, although it might be worthwhile spending considerable money to live in a nice home, buying a second home in the country may or may not be worth spending money that could be used for sending a child to college or for recreational travel overseas.  One consequence of incremental decision-making is that increments of many desirable things remain unpurchased because they are almost–but not quite–worth the sacrifices required to get them.

From a political standpoint, this means that there are always numerous desirable things that government officials can offer to provide to voters who want them–either free of charge or at reduced, government-subsidized prices–even when the voters do not want these increments enough to sacrifice their own money to pay for them.  The real winners in this process are politicians whose apparent generosity and compassion gain them political support.

3. In his classic column, Conflict or Cooperation, which I linked to in this post, Walter Williams explains how to pit beer drinkers against wine drinkers. Here’s a taste:

Different Americans have different and often intense preferences for all kinds of goods and services. Some of us have strong preferences for beer and distaste for wine while others have the opposite preference — strong preferences for wine and distaste for beer. Some of us hate three-piece suits and love blue jeans while others love three-piece suits and hate blue jeans. When’s the last time you heard of beer drinkers in conflict with wine drinkers, or three-piece suit lovers in conflict with lovers of blue jeans? It seldom if ever happens because beer and blue jean lovers get what they want. Wine and three-piece suit lovers get what they want and they all can live in peace with one another.

It would be easy to create conflict among these people. Instead of free choice and private decision-making, clothing and beverage decisions could be made in the political arena. In other words, have a democratic majority-rule process to decide what drinks and clothing that would be allowed. Then we would see wine lovers organized against beer lovers, and blue jean lovers organized against three-piece suit lovers. Conflict would emerge solely because the decision was made in the political arena. Why? The prime feature of political decision-making is that it’s a zero-sum game. One person’s gain is of necessity another person’s loss. That is if wine lovers won, beer lovers lose.

The differences in political and private decisions has spawned a branch of economics study called public choice economics. Here’s more.

 

Teaching someone to fish vs. Giving them a fish — Foreign Aid Style

Mark Perry (another economist is not pathetic, and not only because he bought me a beer)    posted on his blog, Carpe Diem, a Kenyan economist who points to foreign aid as part of the problem in Africa, rather than the solution.

Here’s a snippet of what James Shikwati had to say:

Huge bureaucracies are financed (with the aid money), corruption and complacency are promoted, Africans are taught to be beggars and not to be independent. In addition, development aid weakens the local markets everywhere and dampens the spirit of entrepreneurship that we so desperately need. As absurd as it may sound: Development aid is one of the reasons for Africa’s problems. If the West were to cancel these payments, normal Africans wouldn’t even notice. Only the functionaries would be hard hit. Which is why they maintain that the world would stop turning without this development aid.

Even pop singer Bono seems to be coming around on this point.

Consequences

In the Further Thought of this post, I advocated making it clear to folks what their share of government costs and how much of their share is paid by others.

In this post, I suggested that Republicans get out-of-the-way of Democrats and let them push through their fiscal cliff fixes, but make it clear that they are only doing so because that appears to be what the American people want based on the election results. If the American people want a different result, they need to vote for different people.

Mario Rizzo appears to agree with my sentiments, as he writes on his blog in this post why he supports increasing taxes on the middle class:

Because the only way to curb spending in the long run is to make as large a number of Americans as possible truly feel the consequences of the expenditures they appear to desire.

Thoughts on taxes III: Social Engineering

In my original Thoughts on taxes post, I listed this as the second reason I prefer a simple tax system:

  • We don’t get the social engineering benefits that we think we do from the cleverly designed tax code that we have. We may only get bad outcomes.

I would prefer that we only think of taxes as a way to fund government, but many folks can’t resist the temptation to make the tax code serve double duty by also trying to use it for social engineering. That is, to encourage more behavior that we think of as good (like owning homes, earning income and going to college) and less behavior we think of as bad (like earning high income and making short-term investments:)).

Well, it’s not that we think earning a high income is bad. It’s that many people believe income inequality is bad and they think tax rates can balance that out, but as we’ll see shortly, progressive tax rates may contribute to income inequality.

I believe this desire to use the tax code for social engineering has two problems. First, and most important, we don’t actually realize the social engineering benefits. Those just get pushed to other margins through by distorting natural incentives. More on that in bit.

Second, it stands to reason that the natural rewards for good behavior (like buying homes, going to college and long-term investing) should be enough to encourage that behavior without any special tax treatment.

To think about how trying to reward good behavior in the tax code pushes the supposed benefits to other margins, consider the home mortgage interest deduction. We’ve been brainwashed to believe this is good because it encourages home ownership.

We’ve also been brainwashed to believe that home ownership is a good thing.

But, why exactly is home ownership something that we should encourage? Arnold Kling wonders this as well. What’s wrong with renting?

Home ownership isn’t for everyone. Home ownership doesn’t necessarily make one wealthier, wiser or more responsible, despite that conventional wisdom that fed the housing bubble.

Have you heard how much ownership the mortgage interest deduction has encouraged? I haven’t. If there is research on this topic, I haven’t seen it and a couple (admittedly quick) Google searches didn’t immediately turn up anything. If you can point me to any research on the topic, please do so in the comments.

But, even if there is research, I’m skeptical that it would thoroughly consider all the possible distortions to natural incentives the mortgage interest deduction could be causing and how those distortions have moved the benefits of home ownership to other margins.

Even I can’t know all the distortions caused by this part of the tax code, but I am willing to bet that the my following list of possibilities is something most folks haven’t ever considered. I know this because I bring it up to folks all the time and the response so far has always been “Wow, I never thought of that.”

I think, perhaps, the biggest distortion that may offset most of the social benefit of the deduction is higher home prices. Believe it or not, the value of the mortgage interest deduction benefit is accounted for in higher home prices.

Some folks I’ve discussed this with have a hard time believing it. They tell me that they didn’t explicitly consider that when making an offer on their home.

How market prices work is hard to understand. While my friends may not have explicitly considered it, the folks they were bidding against may have and they had to beat those bids to get the house. So, they did not have to explicitly consider this benefit for it to be built into the price.

If you still don’t believe me, you should also consider why the real estate brokers and home lenders actively lobby to keep the mortgage interest deduction. Do you think they are just looking after our best interests? No. Higher home prices means high transaction prices for real estate agents (7% commission x a higher number is a higher number).s.

The mortgage interest deduction also encourages folks to take out larger loans, keep that debt out longer and have less equity in their home than they might have otherwise.

These can weaken someone’s financial position and gives less incentive to be responsible home owners. As we found out in the housing bust, owners with no equity are no more responsible than renters who do not have to pay rent.

If I had not considered how taxes distort natural incentives before, this list of four possible distortions of the mortgage interest deduction would at least make me think more about the topic and possibly consider distortions driven by other socially engineered pieces of the tax code.

Could the most progressive income tax code of all developed countries actually be contributing to income inequality? In other words, does the higher marginal rates on higher income lead high income folks to seek higher rates of gross income to offset those higher tax rates?

Like home prices, this isn’t intuitive, but is the same thing. Labor is price, just like a home price is a price. If home prices adjust to include tax benefits, labor prices can adjust to cover tax costs.

Don’t think so? Imagine one of your favorite Hollywood stars. Even better if he happens to be vocal advocate for increasing taxes on the wealthy (e.g. Matt Damon).

Now, also consider the clout of your highly paid actor. Does he sell tickets? If so, he has some good earnings leverage over the studios that sign him to their projects.

Next, think about what happens in his next movie negotiation if he gets his wish and tax rates on high incomes are increased. Let’s say before he was banking $10 million per movie, or $6 million after tax.

If tax rates increase from 40% to 60%, for example, do you think he’ll settle for taking home $4 million on his next project? Probably not. Why should he? Do you think he would recognize the $2 million hit as a consequence of his advocacy? No.

His agent will ask for $15 million so his client can take home the same $6 million as he did before. And the actor will never connect the dots on how the tax rate actually made his gross income even more “inequal” ($15 million vs. $10 million) to the folks who didn’t see a 50% increase in tax rates.

But, we don’t need to guess how tax rates can distort a rich actor’s incentives. What if a neighbor, who you don’t know well, is planning an extended vacation next summer and offers to pay you to mow his lawn while he’s gone. He tells you it takes an hour to mow.

What price would get you to agree to his offer? $20? $40? $50? $100?

Which price raised your interest level?  I’d have tepid interest for $50 and be much more interested for $100. But, everyone is different because we all have different opportunity costs.

You agree to the offer at your desired price, but then find out that one of the Homeowner Association covenants, that you never read, states that the HOA gets 50% of any such neighbor-to-neighbor dealings. Now we’ve cut the fee your attention-getting-fee in half.

Are you still interested in mowing his lawn? No. Your opportunity costs are higher than that amount, else you would have picked that number the first time.

What would make it all better? If your neighbor doubled the fee to offset the HOA’s 50% tax.

See, our own behavior and incentive distortions are not much different from the rich Hollywood actor and it’s plausible that distortions caused by unequal tax rates winds up being priced into labor, which contributes to the ‘income inequality’ that so many folks get bellyaches over.

Writing this post has made me think about a new game to play on this blog: Guess the incentive distortions. Periodically, I’ll pick a policy and see if I can name a few possible distortions that might make the policy less desirable than it sounds.

Incentive distortions caused by tax rates are rarely discussed. When they are, they are often too quickly discounted. 

“I hope that works out for you”

Subtitle: Ideas are cheap; results matter

I’ve worked in many places that have an unhealthy incentive problem where ideas are rewarded and results are not.

People with fresh, new ideas were the movers and shakers. They could do even better if they could argue in hostile forums why their ideas would work  (folks who gain success at this are also called bullies).

The problem was that nobody asked these folks to prove their ideas with actual results.   Ideas won and lost by how passionately their champions fought for them and how good they sounded, not whether they worked or not. Often, ideas won out because the champions essentially repeated over and over, “I just know it will work! We have to try it.”

If your idea was selected by management, you were golden. If the idea later failed, there were plenty of excuses used. It was executed poorly. The messaging wasn’t right. It just wasn’t the right time. Rarely did the idea champions or the management who green lighted the idea ever just come out and say, maybe this just isn’t something customers value.

This environment generated lots of ideas and lots of infighting to get ideas selected, but not a lot of results.

I was never in charge, but I had the ear of some of the folks that were, once or twice removed, and I started a subtle campaign to curb this toxic, non-results driven, environment.

I suggested that the folks who had the ideas be responsible for proving them out with real world results and, since they usually felt with such passion that their ideas would work, I suggested they carry out their ideas within their own budgets. Why not? You are so sure it’ll work, put your money where your mouth is. If this will work so well, this should help you achieve your targets.

I coined a phrase, “You should give it a try. I hope that works out for you.”

The folks with the ideas use to win when someone in management would say, “Okay, we’ll try your idea.”  Now they started hearing, “You should give it a try. Let us know how it goes. I hope that works out for you.”

Suddenly, the folks with the great ideas were more open to criticism of their ideas and shooting holes in them before they got started proving them out, because they were more concerned whether the idea would actually work and less concerned if a few decision-makers in management would pick it.

I was reminded of this when I read a recent blog post on Arnold Kling’s askblog, The Left’s Post-Election Self Examination, where he comments on a leftist’s suddenly (post-election) more critical examination of Obamacare.

When Obamacare passed, it was easy for Democrats to claim victory that they had “fixed” health care. The actual results of their great idea wouldn’t be known until after the next election cycle, since that’s when it would start kicking in. They were like the folks at my work who got their idea selected by management.

One positive to this year’s election outcome is that many of the people in the Senate and the person in the White House responsible for passing Obamacare will still be here when the Obamacare realities begin to materialize and they may be held to account for the results of their great idea.

I wasn’t surprised to hear talk of Nancy Pelosi considering stepping-down as House minority leader shortly have the election. She’s probably thinking it would be good to get out of the spotlight before the Obamacare stuff starts to hit the fan.

Not surprising either that the leftist that Kling commented on is becoming more critical of Obamacare. This is what I saw happen to the idea-folks when they were faced with answering to the results of their ideas.

So, perhaps one unintended positive outcome of this election is that the American people are told the folks responsible for Obamacare, “Let’s give this a try. I hope that works out for you.”

Good intentions vs. Scams

Politicians use ‘jobs programs’ to get elected. Jobs programs sound good. They help people find jobs, after all, right?

Not always.

As with many government programs, the actual outcome doesn’t always mesh with the well intended, campaign sound bite.

We need more investigative journalists like John Stossel who recently sent his interns to these supposed jobs programs. Here’s a link on Dan Mitchell’s blog about their findings. This is what one intern reported and it sums up the problem well:

“First I went to the Manhattan Jobs Center and asked, “Can I get help finding a job?” They told me they don’t do that. ‘We sign people up for food stamps.’ I tried another jobs center. They told me to enroll for unemployment benefits.”

How can this be?

As I write about often on this blog, it’s all about feedbacks and incentives. I imagine that when these jobs centers were originally funded by a legislative stroke of a pen authorizing the expenditure of taxpayer funds, they did intend to help folks find jobs.

But that same authorization gave birth to a bureaucracy which would become staffed by self-interested (not greedy) folks just like you and I. Over time, the good intention of helping folks find jobs gets subtly replaced with the bureaucracy’s intention of preserving itself.  As Stossel states elsewhere in his piece:

The private market for jobs works better than government “job centers.”

So the staffers at jobs centers look for other ways to be useful to the politicians who fund them. Soon, jobs centers become the front offices for other government programs.

Feedback is the reason I prefer private activities over government activities.

It’s not that I think government activities are inherently evil or bad. I even believe that sometimes government activities can produce value and innovation.

The weakness I see in government activities is that the failure feedback loop is indirect and weak, and sometimes the opposite of what it needs to be.

That means that when the activity does not produce the intended benefits, it can persist, even grow. Sometimes the failure of a government program can attract even more political and taxpayer support to try to fix the failure. That usually leads to an even bigger failure.

The failure feedback loop happens to be more direct and stronger in private activities. Monster.com is a private ‘jobs center’ that works well. Companies with job openings pay to post their jobs on Monster.com because they like the pool of candidates it brings.

If something else does a better job, Monster.com will either have to adapt or it will go out of business. The failure feedback loop is direct and strong.