It is distressing to see that Bruce Bartlett is waving the white flag on taxes and spending. That is his rationale favoring a value added tax.
They just don’t get it. Why do they think “the siren song of collectivist solutions” is going to make things better? There is no empirical evidence either specifically (for example, here or here) or generally to support them. Their wandingerous arguments mainly consist of flippant remarks and personal insults.
I think Milton Friedman best sums up John’s points (subscription) in Capitalism and Freedom:
“…conditions have changed. We now have several decades of experience with government intervention. It is no longer necessary to compare the market as it actually operates and government intervention as it ideally might operate. We can compare the actual to the actual. If we do so, it is clear that the difference between the actual operation of the market and its ideal operation – great though it undoubtedly is – is as nothing compared to the difference between the actual effects of government intervention and their intended effects.”
—Milton Friedman, 1962
Whether it be light rail, pre-K or all the other past and current interventions of government, why do they think the actual effects are going to be anywhere near their indended effects. Aren’t they just engaging in wishful thinking?
New Mexico cannot get over its anti-market mind set. Now big Bill wants to impose price controls in the form of caps on payday loans (subscription):
“Gov. Bill Richardson says he’ll introduce a measure to the Legislature this week that will cap interest rates on payday and car title loans.
‘I’m going to enter the fray and propose a bill of my own that sets a reasonable cap,’ Richardson said Sunday in a telephone interview.”
I have seen only a little skepticism on this bad proposal. Why is it bad? Let’s answer the question by asking some questions.
1. Since there are so many payday lenders, how can it possibly be that they are charging too much for their loans? Wouldn’t an exorbitant rate of profit lead to even more lenders, driving down the charges for payday loans?
2. Similarly, why don’t those who say that payday lenders charge too much enter the market themselves and charge something more “reasonable.”
3. Undoubtedly there are a few borrowers who are misled by these loans. But with all the overbearing regulations now existing, why isn’t our government catching those who commit fraud? Isn’t detecting and prosecuting fraud one of the main reasons we have a government? Why do we want to drive this market underground where fraud will be even more difficult to detect and prosecute?
4. What is so hard to understand about the terms of these short-term payday loans? Example: Lender lends $200 for two weeks with a charge to borrower of $30. Even a borrower educated in NM should be able to understand that.
5. Why do we want to penalize borrowers who act responsibly and will get shut out of the market as a result of this bad proposal? They will suffer more when financial emergencies occur than they would with a payday loan – otherwise they wouldn’t be seeking the loan.
6. Proponents of this bad law are making a big deal out of converting the payday loan charges to an annual rate of interest. But they don’t include the value to the borrower of being able to obtain the loan hassle-free. Why not?
One thing we economists know is that price controls always make matters worse. This bad law will too.
The State Investment Council has just agreed to lend $7.5 million at zero interest for three years to finance the production of a movie to be filmed in New Mexico. The film will tell the inspiring story of a man and his grandson who drift into Mexico and both fall in love with the same prostitute.
The opportunity cost of making such a loan is around $1 million, that being the returns that could be had by investing the money elsewhere. There is also an element of risk to be considered: presumably the loan is unsecured by property, and who knows how the production company figures its profits and hence its ability to repay the loan.
It’s said that 97 film jobs will be brought into the state, but only for the duration of shooting. That figures out to about $10,000 per job, some or perhaps most of which will go to movie makers brought in from Hollywood.
Is this a good deal for New Mexican taxpayers? Probably not. But as usual, we aren’t given enough information by the state to make a reliable calculation.
But one thing is for sure: No one will ever make a film in New Mexico without first paying a visit to Santa Fe to pick up some free money.
Have you ever wondered what New Mexico might be like had its state government not grown so fast? We can get some idea by looking to our neighbor to the north. Colorado has imposed tax and spending limitations by rule since 1992. These limitations are known by the acronym TABOR (Taxpayers’ Bill of Rights). State spending is limited by TABOR to the rate of inflation plus the rate of population growth. In essence TABOR holds real state spending per capita constant.
Suppose New Mexico had implemented a TABOR in 1992. What would now be the size of its general fund budget as constrained by the rates of growth of population and the price level? Population has grown by an annual average of 1.6 percent in the period from July 1992 to July 2003. The price level has grown by an annual average of 2.6 percent from February 1992 (index of 138.6) until February 2004 (index of 186.2) as measured by the consumer price index. A New Mexico TABOR would have limited general fund average annual growth to 4.1 percent (1.6% population growth plus 2.6% inflation).
Since the New Mexico general fund budget was $2,044.9 million in FY 1992, TABOR would have limited it to $3,447.8 million for FY05 (beginning July 1 2004). Contrast that with the actual FY05 budget of $4,380.6 million! TABOR would have saved the taxpayers $932.8 million. That works out to be $491 for every man, woman and child in New Mexico. According to our estimates such a saving would have permitted a gross receipts tax rate reduction of some two and one-half percent! The gross receipts tax we pay would be more in the neighborhood of four and three-quarters percent rather than six and one-quarter percent. Now that would promote economic development!
Some other observations based on the general fund budget over time: The budget has grown at a rate of 6.0 percent annually since 1992 (rather than at a TABOR constrained 4.1 percent). The Medicaid portion of the budget has grown at an annual average rate of 13.3 percent and it increased 16.3 percent for FY05. We predicted the Medicaid budget would be out of control without real reform. Governor Johnson was able to hold general fund spending to an average annual rate increase of 5.0 percent during his eight years in office (nice going, Governor J). He was able to hold Medicaid’s average annual increase to 11.2 percent.
When Gregory Mankiw, President Bush’s Chairman of the Council of Economic Advisors recently noted the benefits of outsourcing jobs, politicians crawled over one another to be the first to denounce his idiocy. Senators Clinton, Kennedy and Schumer, for example, wrote “[we are] troubled by the astonishing statement of…Gregory Mankiw, that ‘outsourcing is just a new way of doing international trade’.” Read the story here.
I must give the press some credit. The media have not let the senators get away with their blithe dismissal of Mr. Mankiw. After all, Mr. Mankiw is hardly some right wing nut (Look at what he named his dog!). What’s more, the Chairman is in rather good company. On his side are the vast majority of Ph.D. economists (for evidence on the extent of the profession’s faith in free trade see the Survey of Americans and Economists on the Economy, 1996). Luckily, the press has actually picked up on this. See, for example, this story by the AP, and this one in our own Albuquerque Journal.
The basic economic story is not terribly complicated: barriers to trade do two things: they raise profits for a select few (steel workers, farmers, etc.) and they raise prices for consumers at large. What is more, it can be shown with minimal recourse to graphing paper that when we add up all the price increases and compare them with the profit increases, the price increases outweigh the profit increases.
Unfortunately, most economists want to stop the story there, assuming they have won over the skeptic. They should not assume so. I suspect that when he or she hears this story, the average America says “So what? If we remove the trade barrier, someone will loose their job. I’d rather have 50,000 consumers pay one extra dollar for a product, than have one worker loose a $30,000 job. I don’t care that the barrier is more expensive, the benefits are everything to the worker.” This is actually a good point.
But there is a better counter point. The economy is constantly changing. Ninety percent of Americans were once farmers. Now a tiny fraction of Americans work on the farm. Thousands were once blacksmiths. Now almost no one is. These changes had to come. And they will have to come for other industries too. But every year we leave steel tariffs and farm subsidies in place is another year that we encourage 18 year olds to go into the steel and farm industries. We are lulling millions of workers into industries that cannot support them.
The inevitable result will be too many steel workers and too many farmers. When those industries collapse, millions will lose their jobs at once. Is that compassion?
My compliments to Anthony J. Evans of The Filter for pointing out Mankiw’s Animal Spirit.
Last week I visited an eye clinic in Albuquerque. As I was completing the paperwork prior to my exam, a young woman entered the office. She was visibly upset because she had been unable to obtain new glasses under her old prescription. She was informed that opticians in New Mexico are prohibited from filling eyeglass prescriptions that are more than one year old. It turns out that her prescription was about 13 months old.
Isn’t it wonderful that we have the all-knowing state to decide her trade-off between the expense of another eye exam, fulfilling her old prescription or going without? The optometrist’s administrative assistant explained to me that some states are much less efficient than New Mexico, allowing as much as two years before mandated expiration of a prescription!
Who do you think benefits from this restriction on free choice in the marketplace? Who loses? If the overall losses are greater than the benefits, how could such a restriction be passed by our legislature?
Economic Freedom Promotes Prosperity
The Rio Grande Foundation’s research and educational activities are based on the principle that:
Increased individual liberty leads to increased prosperity, individually and collectively, so long as voluntary contracts are enforced and well-defined property rights exist.
This principle is derived from a sound empirical foundation and examination of incentives. When societies are ranked by an index of economic freedom over the long run, we find their ranking of prosperity to be in nearly one-to-one correspondence with their degree of economic freedom. The more economic freedom there is, the better-off people are. That fact deserves notice in New Mexico!
The link between freedom and prosperity is not surprising when we compare incentives that guide individual behavior. Behavior is quite different for different degrees of economic freedom. But those differences are usually overlooked by decision makers, so the freedom-prosperity link also is usually overlooked. Lacking a careful examination of incentives, it often seems plausible that increased taxation and/or regulation will achieve a worthy goal (such as improved safety, environment, or transportation; or increased economic development; or helping the poor). On the contrary, economic freedom usually guides people to coordinate their activities in ways that better achieve these worthy goals.
The following graph depicts the empirical relationship between economic freedom and peoples’ well-being for states in the region. As the size of government increases, economic freedom decreases. And the greater is the size of government the less prosperous are the state’s people. New Mexico needs to reduce the size of government and move up the hill toward prosperity.
We should be aiming for G* if we are going to maximize well-being. Unfortunately, however, we are sliding down the slippery slope toward serfdom. For more on the link between economic freedom and prosperity go to Economic Freedom of North America, New Mexico 2000, or Economic Freedom of the World.