Bureaucratism

On Facebook, a friend says he’s tired of hearing conservatives claim the country is heading toward socialism and will ask the next person who makes the claim to support it with a dissertation.

This chart shows government spending as a percent of the economy has long been trending up to less than 10% in the early 1900’s to between 35% and 40% now.

But, even with the growing percent of the economy in the government sector, I may still not call that necessarily ‘moving toward socialism.’ I think a more appropriate term is bureaucratism.

Reinhart and Rogoff: Lesson in statistical terms

Advocates of government spending are enjoying the recent news that errors were discovered in an often quoted 2010 analysis by economists Reinhart and Rogoff that showed countries with debt at levels (resulting from high spending) greater than 90% of GDP had an average GDP growth rate of -0.2%, which was statistically lower than countries with lower debt levels.

Recent corrections show that these countries actually had averaged 2.2% growth, not -0.2%, which is not statistically different from countries with lower debt levels.

Critics have accused R&R’s analysis of spurring irresponsible austerity in government spending and may have prevented more beneficial government stimulus spending around the world.

But, wait. The corrected analysis shows that countries with lower debt had higher GDP growth rates ranging from 3.1% to 4.2%. Yep. In this data set, apparently 2.2% is not statistically different from 4.2%.

That doesn’t mean that the data shows that government spending helps (or hurts) GDP. It also doesn’t mean that ‘austerity’ hurts or helps.

To be clear…it means nothing. Government spending advocates are not wise to use the the corrected stats bolster their case.

Not statistically different means that from the size and sample of this set of data, it cannot be concluded with high confidence that the differences in GDP growth rates are caused by the differences in debt levels.  But, it doesn’t rule it out either.

If anything, the analysis still provides directional support that debt may hurt, rather than help.

Personally, I’m not a fan of GDP. I explain why herehere and here. Basically, it’s because GDP treats an expense like an income.

If tax cuts are spending, shouldn’t liberals want more tax cuts?

According to her comments, Nancy Pelosi considers tax cuts to be spending.

If Pelosi really believed this, shouldn’t she be as supportive of tax cuts as she is of real spending increases?

What’s the difference? Does she think tax cuts are irresponsible spending? If so, are there any other types of government spending she considers irresponsible?

My guess, the only stuff she finds irresponsible are changes that put more in the hands of citizens and less in the hands of government.

To seek rent or not?

Rent-seeking has been a popular topic on this blog over the past week. In the comments of this post, Mike M asked if a company seeking to sell its products to government is rent-seeking.

I replied, yes and asked him what he thought.

Here are excerpts from Mike M’s well-thought out follow-up:

 I think there is a difference between “selling” your product (goods or services) to the government (just like an other consumer) and convincing them to buy your product (as opposed to others) and seeking to have the government (as a third party biased referee rather than as a consumer of your product) afford you some privilege that gives you an advantage (such as subsidizing your product or taxing or regulating the competitor’s product).

 In the first case, as long as the government representative is truly acting for the benefit of the government, he should be seeking to make a trade at FMV.

I agree.

A “rent” is essentially an excess return above the “normal” return in a competitive economic market.

Typically, we use the term to imply that one has lobbied the government to obtain some special privilege – something that’s been going on since governments and economies have existed and is not a unique occurrence in any economic system (although that does not mean that it is meant to be a part of that system). Rent-seeking differs from profit-seeking, in which two parties seek to extract value by engaging in mutually beneficial transactions.

What is important for us to realize is that the costs spent on lobbying for these privilege eliminates some of the beneficiary’s gains for the privileges and results in an economic inefficiency, i.e. less output results from the same inputs. The cost of obtaining the rent represents a use of real resources and is a loss to the economy as a whole.

I agree. Also, I think it’s worth highlighting that the cost of obtaining the rent is the rent-seeking.

The next excerpt, however, starts to get at one reason — after going through a similar thought process as Mike — I erred on the side of yes.

Of course, this goes out the window if he’s your cousin or you’ve offered him a bribe and he buys your product at an inflated price, but I think that’s a different “crime” than rent-seeking.

Unfortunately, so much of government spending, even if it initially starts out on the up-and-up, devolves into rent-seeking. That’s how we end up with $800 government hammers and toilet seats. That’s how education spending per student triples in a few decades with nothing but shiny buildings (and wealthy builders) to show for it.

While the bribe is a different crime than rent-seeking, it is also rent-seeking, because it is spending resources to gain something without creating value.

Next, government spending comes from taxes. Taxes are not value creating transactions. Rather, they are redistributive. So, government vendors are ultimately lobbying government officials for a slice of their redistributive taxing power.

How is that different from lobbying government for its other powers like enacting a tariff on sugar or restricting competition in a market?

One objection I can imagine to my case is that some of the money spent by government does create wealth.

This is true. But, to say these things create value isn’t enough. They have to create net value relative to opportunity costs.

Roads are great, for example. I’m eagerly awaiting a new road being built near my home. It will be profitable for me, because it will shave many minutes on my commutes.

When I think of that new road creating value for me, I think only of the benefit — how much time I will save. But, I never know the cost.  If the local, state and Federal government (all are pitching in) said I could have that road or $100,000, I might decide to take the $100,000 and continue to put up with the extra minutes on my commute.

So, even when I see government spending that appears to have created some wealth for society, I don’t really know if it did relative to the alternative that could have been if someone had spent the resources more carefully.

What do you think, Mike?  What am I missing?

“I think we should…”

On Twitter, Jeff Brown asks:

If democrats/liberals like the idea of taxing everyone, do they themselves take any exemptions?

Of course they do.

I’ve had this discussion with folks who always think taxing more is a good idea.

My first frustration with them: They rarely acknowledge that government spending is a problem.

My second: They aren’t willing to voluntarily give more money to government and lead by example, which I take to be a revealed preference. It reveals that they don’t truly believe the government is the best place to put their marginal dollars. But, it cost them nothing to demand that others pay more to gain adoration.

I have heard a few claim that they aren’t “as aggressive as they could be” when it comes to claiming deductions. Bless their hearts. It’s for the greater good that they don’t bend the tax laws.

My third: They don’t think ahead. What do they think happens if tax rates are raised and that actually results in more tax revenue (which is a big if, at least over multiple years)?  Do they believe government, with its long history of irresponsible spending, is going to put that extra revenue toward cutting the deficit?

Government will find a way to spend that, too, and continue to run deficits.

Which, gets us back to my first frustration and demonstrates to me that these folks really don’t think much. Rather, they only parrot what sounds good.

It’s easy to spot these folks. They liberally use the phrase “I think we should…” to lead off the edicts they feel they are entitled to impose on the rest of us without ever giving due consideration to chance that they may just be wrong.

Getting cause and effect backwards

This post at The Pretense of Knowledge about the cognitive dissonance anti-consumerist supporters of Keynesian stimulus (i.e. college hippies), reminds me of an often misunderstood cause and effect in our economy.

The underlying belief of government stimulus spending is that spending itself is wealth.

But, the cause and effect go the other way. Spending does not cause wealth, wealth causes spending. 

Before my early ancestor, Unk, initiated the first trade with your early ancestor Puhg, Unk had to first create something that Puhg wanted. Likewise for Pugh.

So, while Unk got really good at gathering apples (investing), enough so that he had more than he needed at the moment (savings), Pugh was honing his skills catching fish (investing again), more than he needed. Unk trade a few of his extra apples, that he valued less, with Pugh for some fish, which he valued a bit more.  Likewise for Pugh.

In the trade value was created for both Unk and Pugh.

Now supporters of Keynesian stimulus will tell me that government stimulus “spending” is really “investment”, just like the investment Unk made in improving his apple gathering productivity. The government “investment” improves “our” productivity.

And, in some cases, that may be true. However, I noticed on a recent trip through several states that many of the shiniest and most architecturally adventurous new buildings, many adorned with art, happened to be government buildings.

I noticed some new private buildings, too. They were more conventional, less flashy. Maybe government knows something the private building owners don’t. Perhaps they know that groundbreaking architecture and public art adds to productivity. Certainly there are some private buildings like that as well.  But, I wondered how “we’ve” become more productive with such an elaborate edifice for a public works building, in one case.

Red Herring Alert

Last week, I heard a local liberal radio talk show host repeat, with gusto, the claim that President Obama has the lowest spending growth since Eisenhower.

Several places have addressed this claim. Here’s one and another. They raise some good points.

But I think spending growth is a red herring. The issue is actual government spending, not spending growth.

As Arthur Laffer and Steve Moore pointed out in the Wall Street Journal, President Obama took over after the grandest public spending binges of all times, one that was supposed to be temporary.

Claiming that locking that temporary spending binge into the budget going forward is a sign of conservative fiscal management is spin.

Consider a CEO who gives himself a $300 million bonus and draws the ire of the Occupy Wall Street types. He gets fired and the next CEO gives himself a $301 million bonus and tells Occupy friends not to worry because the growth in his salary is the lowest in recent history. I don’t think many people would fall for that.

And what of the big government experiments that have led to the disasters?

In the past few days, Russ Roberts, of Cafe Hayek has posted on his blog asking John Cassidy and Paul Krugman to back up their claims that European governments have cut spending. Both claim that “cuts” in government spending are making these economies worse.  For example, Cassidy wrote:

Republicans say they want to slash government spending and focus on the deficit regardless of the immediate economic situation. The Europeans have carried out that experiment, and, to say the least, it hasn’t turned out very well.

Roberts asks a good question. If you want to claim that government spending has been cut, show your work so we can know what meaning of ‘cut’ you are using. Is that cut in absolute amounts? Cuts in growth rates of spending? Cut as a percent of GDP? Or just talks about cuts?

I’d also like to ask Cassidy why he focuses only on what he believes to be the spending “cut” experiments, while completely ignoring the big government experiments that have led these European countries to the brink of financial disaster.

Let’s assume the spending cuts are real. Saying they’re not working while ignoring all that came before is a bit like observing a drug addict going into withdrawal and concluding that quitting the drugs is causing the problem and everything would be fine if he were just to resume taking drugs and, maybe, up his dose.

Headlines that make you go, hmmm….

#1: A local NBC affiliate reports: Zuckerberg Joins Buffett, Asks for Higher Taxes

#2: Forbes magazine reports: How Facebook Billionaires Dodge Mega-Millions In Taxes

From the Forbes article:

Facebook billionaire cofounders Mark Zuckerberg and Dustin Moskovitz are both 27, unmarried and have no children we know of. Yet back in 2008 they both set up grantor retained annuity trusts (GRATs) that we estimate will allow them to transfer a total of at least $185 million of wealth to future offspring or others, gift tax free. That compares to a supposed gift-tax exemption of just $1 million in 2008 and $5.12 million today.

Granted, Zuckerberg may not have had his tax epiphany yet in 2008. I’m assuming he’s moving swiftly now to dissolve this tax dodge trust.

#3: Buffett writes: Stop Coddling the Super Rich in the New York Times about how the super wealthy should pay more in taxes, inspiring Obama’s Buffett rule proposal.

#4: Reuters reports: Government sues Buffett’s NetJets Unit for Unpaid Taxes

I have no problem with folks legally minimizing their tax bill.

I do have a problem when these same folks get the positive glow from voicing their opinion that their tax bill should be higher, without putting their money where their mouths are.

Of course, what really annoys me about this thread is that the whole thing is a giant red herring that misses the key issue: government spending.

Let’s say we do raise taxes on the super rich or that Buffett and Zuckerberg stop talking out of both sides of their mouths and decide to voluntarily pay more in taxes. Let’s go even further and assume that either of these efforts actually increase government revenue.

Which result do you think is likely?

A. Government maintains spending, so the extra revenue reduces the deficit.

B. Government increases spending, so the extra revenue leads to more government spending and does not reduce the deficit.

I would appreciate anyone who believes (A) is likely to provide evidence. Do we have any experience where higher government revenues were not accompanied by higher spending over a 2 – 5 year period?

I’d like to know which Buffett and Zuckerberg thinks is likely or if they’ve even given it much thought. If not, then they could do all us all a favor by 1) thinking about it and 2) using their voices to shine light on the real issue: government spending.