Valuing government spending

The Warsaw Enterprise Institute, a Polish think tank, makes the attempt.

Whenever the government acquires goods on behalf of and for its citizens, it acts as an agent in someone else’s cause. A good agent will make a good purchase, a bad agent – a bad one. The concept that was present from the very beginning when preparing the WNI was to apply already existing criteria of effectiveness to public expenditure. In the absence of an independent decision of the consumer, who would decide on the allocation of resources in the economy with his or her own wallet, the evaluation of the government’s decisions must be undertaken by an external body. Therefore, we take into account public expenditures in the WNI not by adding up their values, but according to the qualitative criterion. In other words, the higher the deterrent potential of a country’s armed forces, the greater the value of military spending. The better universities place in international rankings, the more expenditure on higher education is worth. The better the reputation of healthcare in a country, the higher the value of government activity in this regard – and so on.

GDP measures the value of government purchases at cost. It’s as if you cannot get more or less value than what you pay for. This sounds like a creative alternative.

Banana Republic watch

ABC news reports,

[National economic council director] Deese’s wealth has also multiplied dramatically since 2009, when he took his first White House job as Obama’s special assistant for economic policy. In 2015, just a few months into his role as deputy director of the Office of Management and Budget, Deese reported owning between $81,000 and $215,000 in assets — but now, as a member of the Biden administration, he’s reported between $2 million and $7.2 million in assets. Prior to joining the Biden administration, Deese made $2.3 million in salary from the investment firm BlackRock as the Global Head of Sustainable Investing, compared to the $175,000 in salary he received during his last year as Obama’s deputy OMB director.

Blackrock is the firm that handles the Fed’s investments in private securities. Blackrock also is known for pushing progressive values onto corporations. If your goal is to get rich, there is no need to produce something of value, as long as your ideology and connections work for you.

Oren Cass vs. me

Schematically, our exchange went like this:

1 (Cass). Masonomics sucks!

2 (Kling). Here is an outline of Masonomics.

3 (Cass). You have no idea what my article was saying!

4 (Kling). I am afraid that makes two of us.

The first three pieces appeared in print in the Claremont Review of Books, with (1) an article in the fall issue and (2) and (3) appearing in the correspondence section of the winter issue. All are presumably behind a paywall, but the link to (2) -(3) is here.

The full version of (2) is below. Continue reading

Smug and stupid

The Biden Administration wants to replace the three major consumer credit reporting agencies with a public agency.

The proposal is still just that—a proposal—and it faces fierce opposition from industry lobbyists. The Consumer Data Industry Association, for example, a trade group that represents the credit bureaus, wrote in a September article that a new credit bureau was “a dangerous idea” and that “a government-owned credit bureau would create a volatile and unstable lending environment, riddled with inconsistent policies, swing back and forth from election to election, leaving consumers with higher prices and limited options for credit” among other criticisms.

That is the least of it. Here are just a few other objections.

1. The credit reporting process works really well. It would cost the taxpayers billions of dollars to set up a government-run system, and then it might be faulty (Obamacare web site rollout? vaccination appointment systems?).

2. The objections of the “consumer credit justice advocates” have more to do with how the credit data is evaluated than with how the data is reported and stored. To get the change that they want, they could have the government develop its own credit scoring system, which would be less risky and much less costly.

3. In fact, those advocates are wrong about credit scoring. Yes, credit scores tend to be lower for disadvantaged populations. But a low credit score is just as predictive of default for a black person as for a white person. You cannot make someone with a low credit score a good risk any more than you can make a person who is under 6 feet tall an NBA superstar.

4. The “consumer credit justice advocates,” if they get there way, will set up more disadvantaged people to fail by taking on too much debt. Then when these loans go bad, these same advocates will blame the banks for “predatory lending.”

5. It’s a darn shame that the money going to these advocacy groups and that is going to pay lobbyists to fend them off could not instead be given to charities that really do help people in need.

Happy Valentine’s Day.

A simple theory of elasticity assumptions

Tyler Cowen writes,

Do you right now favor both a lot of stimulus and a big minimum wage hike? What are your assumptions about elasticities?

Start from a policy preference to subsidize demand and restrict supply. You want to say that subsidizing demand will increase output and that restricting supply will not decrease output. Your elasticity assumptions have to be consistent with those policy preferences, not with one another.

The proposals of a free-market economist

Ed Glaeser writes,

Charter schools sadly remain a niche product, so pushing for their expansion—and for greater school-choice options more broadly—is necessary. Another alternative that could open up new education opportunities would be vocational training that bypasses the school system entirely. Washington could pay for programs inculcating marketable skills—from plumbing to computer programming. These programs could be competitively sourced, meaning that labor unions and community colleges and for-profit entrepreneurs could compete to offer them. But providers would get paid only if students learned real skills.

…The Social Security system should also be made friendlier to the young. The payroll taxes that fund Social Security could be eliminated for those under 30 and phased in later in life. Younger workers and their employers would initially pay nothing into the system. That shift would eliminate a large tax-related barrier to hiring the young and make it more financially attractive for young people to work. That reform would reduce revenues, true; but raising the age of retirement could offset the lost funds.

. . .The best way to preserve our vital small-business ecosystem is not to throw money at every struggling business but instead to make it as easy as possible for new businesses to open after the pandemic has passed.

If a state isn’t allowing any construction in high-demand areas, shouldn’t the federal government reduce its infrastructure support? Use money to nudge states—and let states nudge communities.

Yes, we know that these are all non-starters politically. But if we’re going to indulge in fantasies, they may as well be good ones.

Virus policy and inflation

Subsidize demand, restrict supply.

In Specialization and Trade, I make the claim that most government intervention does not conform to the textbook model of dealing with market failure. In that model, when the market produces too little of something (use of masks in a pandemic), the government is supposed to subsidize either supply or demand. When the market produces too much of something (air pollution from automobiles), the government should penalize either supply or demand.

In practice, politicians don’t follow the textbooks. They obey interest groups. Every interest group once to see its supply restricted and its demand subsidized. So the national government subsidizes home purchases, but then at a local level it restricts housing construction. The government subsidizes the demand for health care and higher education, but it uses licensing and accreditation rules to restrict supply.

It occurs to me that virus policy is “subsidize demand, restrict supply” writ large. Lockdown-type rules restrict supply. And “stimulus” subsidizes demand.

What do you get when you subsidize demand and restrict supply? Higher prices. Eventually.

The Higgsian moment

Donald Boudreaux agrees with me that this is the right time to dust off Crisis and Leviathan.

Typically, the quantum of additional powers granted to – or seized by – government during each crisis shrinks somewhat when the crisis passes. Normal times, after all, aren’t crisis times. But never do such additions to state power fully disappear. Government’s exercise of these powers is perceived as having been key to escaping the crisis – so such powers become more widely regarded as being beneficial. Fear of such powers is lessened.

The fact that this happy perception of the consequences of such powers is, at least to some degree, always an illusion conjured by the propaganda that government officials inevitably deploy to justify their exercise of their new powers is irrelevant. If people believe that this new grant of power and that new expansion of authority as used by government officials were both effective and necessary to the nation’s escape from Armageddon, people naturally lose some of the skepticism they had, pre-crisis, about such power and authority.

A sad possibility is that the process consists of government becoming stronger, people becoming more sheep-like, government becoming stronger, etc.

Local development, bootleggers, and baptists

Daniel Herriges writes,

The biggest problem with “Make developers give something back to the public” is that a city’s efforts to do so end up ramping up the cost and complexity of development until the game is even more stacked in favor of the biggest projects and the deepest pockets. And that, in turn, even more dramatically raises the incentive to shout “Make them give something back!”

Let the community be heard in the abstract about what its zoning and development vision ought to be—let them hash it out in the zoning code and the comprehensive plan. But let’s not let each individual project become an existential battle. When we do, Goliath tends to stomp all over David.

Pointer from Scott Sumner.

I noticed the same phenomenon in Montgomery County. The county nominally has a “master plan” that governs development. But in practice the County Council gets involved in approving every project. We have the rule of men (and women), not the rule of law.

The net result is that we get none of the “livability” that supposedly comes from planning. All we get is a de facto requirement that to do real estate development around here you have to be a big-time Democratic donor. In the bootleggers-and-baptists model, the baptists are all the anti-development Progressives, who end up not really getting what they want, and the bootleggers are the big crony developers, who do.

Approving development processes by having elected officials decide on a case-by-case basis is unfair and harmful.
But as Glenn Reynolds would say, it does create opportunities for corruption and graft.

And of course requiring developers to add “affordable housing” manages to subsidize demand and restrict supply at the same time.