Tag: Subsidies

The following article originally appeared in Grand Junction’s Free Press.

April 28, 2008

Fruita rec center another zero-sum game

by Linn and Ari Armstrong

In our last article, we discussed Barack Obama’s confusion about zero-sum games, situations in which one person’s gain comes at another’s loss. Michelle Obama perfectly summarizes the zero-sum mentality (as reported by Neal Boortz[via Myrhaf):

“The truth is, in order to get things like universal health care and a revamped education system, then someone is going to have to give up a piece of their pie so that someone else can have more.”

We don’t think that people’s pies, or their pay checks, belong to national politicians. Or to local politicians, for that matter.

A defining characteristic of a free market is that people are able to make mutually-beneficial transactions. One person’s gain is the other person’s gain.

A fun place to view the workings of the free market is Down Town Grand Junction during Farmers Market. But even here the invisible hand that Adam Smith talked about can go unnoticed. We do not see the thousands of exchanges of goods and services that came before a single apple could be sold at the Farmers Market. Breeding, planting, irrigation, fertilizer, tractors, haulers — the list goes on and on — made possible the apples we buy at market.

The free market system is beautiful to see, so why would anyone want to upset the apple cart?

Farmer John’s apple cart competes with other apple carts and also, to an extent, with many other businesses. If we buy apples, we have less money to spend elsewhere. Yet if Farmer John offers quality apples at a good price, he’ll make sales.

Now imagine that, one day, Farmer John notices a new apple cart across the street, one run by the government. The latest freeze was less frightening. These apples are subsidized by taxpayers, whether they eat the apples or not. Because the government forces people to subsidize its apples, Farmer John suddenly faces lost sales and, perhaps, bankruptcy.

Moreover, because people lose more money to taxation, they have less to spend with the lemonade stand, the dance teacher, and so on, who in turn have less money to spend for goods and services that they want.

The government’s apples are seen, as Henry Hazlitt would say, whereas all the goods that are not produced, and all the services that are not offered, are unseen.

Subsidized apples are an example of a zero-sum game. Some people’s gain — the employees and customers of the government’s subsidized apple cart — imposes a loss on others — Farmer John and everyone else who loses business.

True, there are winners and losers in a free market, but the difference is that, in a free market, exchanges are voluntary, so the losers are those who fail to satisfy their customers; the system remains one of positive gains. In zero-sum politics, the resources of some are forcibly transfered to others, creating a net loss.

Substitute a recreation center for an apple cart and we arrive in Fruita, notably a town that did not get its name from government-run fruit production.

Recently the people of Fruita voted on a measure to use tax dollars to build a city-owned recreation center. The measure failed on a tie vote.

This issue has divided the community of Fruita, and this is not surprising. Half of the community is willing to use governmental force, ultimately at the point of a gun, on their neighbors to build the center. (If our claim strikes you as overly dramatic, try writing a letter explaining that you choose not to pay your taxes, and see what happens to you.)

Is a recreation center a good idea for Fruita? We don’t know. If it is, then it will be profitable on a free market. Those who want the center can raise the capital, build the facility, offer the services, and pay for it all by charging their customers (or collecting voluntary donations). Just like any other business.

But if the recreation center cannot be built without government force, it shouldn’t be built at all. The government has no more business offering recreational services than it does selling fruit. The government should not subsidize some people’s pet recreational activities at the expense of movie theaters, dance instructors, ski slopes, Boy and Girl Scouts, restaurants, 4H, tour guides, outdoors stores, rafting companies, and so on.

Even a small tax can have large effects when spread out over a city’s population. Moreover, a government that can forcibly transfer a little wealth can forcibly transfer a lot of wealth. A few dollars here, a few dollars there, and suddenly the total tax burden approaches half our income. Families that would rather spend their money on an ice cream cone or put it toward the college fund, rather than toward a recreation center, have that right.

Zero-sum politics diminishes neighborly trust because it harms some to benefit others. The alternative is the positive-sum, voluntary free market.

While politicians are busy making up euphemisms for corporate welfare, journalists are busy covering for them.

Joanne Kelley wrote an article for the January 30 Rocky Mountain News titled, “$10 million bill aims to lure Hollywood to Colorado.” Kelley describes a “$10 million cash rebate program” that “would boost the fledgling incentive budget from its current $600,000 a year in an attempt to help the state compete with others that have attracted far more Hollywood film productions after spending heavily on enticements.” Not surprisingly, a Republican, Representative Tom Massey, co-sponsored the bill. Because Republicans love welfare, even if it’s for Hollywood.

Kelley continues, “Producers with motion picture budgets of at least $250,000 would be able to collect a cash rebate of up to 15 percent of the money they spend while shooting a movie in Colorado.”

Let’s stop right there. This is not a “rebate.” It is a forced wealth transfer, a subsidy. It is corporate welfare. The top definition of “rebate” from Dictionary.com, based on Random House, is “a return of part of the original payment for some service or merchandise; partial refund.” For example, if you buy a computer from a store, and then the computer’s manufacturer sends you a check for a fraction of the original payment, that’s a rebate.

That’s not what we’re talking about here. We’re talking about Colorado politicians forcibly taking money from some people in Colorado in order to give the money to other people who probably aren’t even from Colorado. They’re probably from California. So, basically, the proposal would forcibly transfer wealth from Coloradans to Californians — and, indirectly, to some other Coloradans. (Does anyone wish to check which Colorado lobbyists support the bill?) To return to the computer example, it would be as though you purchased a computer from Joe, and then Fred forced Judy to pay you some money. Such a practice may accurately be described as a lot of things, but “rebate” is not among them.

The Hollywood welfare scheme is a bad idea for at least three reasons. Before turning to the fundamental moral argument, I’ll deal with the two economic points.

Kelley writes:

Proponents of boosting the rebate fund to $10 million point to the recent 12-day shoot of the Paramount Pictures film NowhereLand, starring Eddie Murphy. In that short time, the production spent $3.25 million here, booking rooms at the Brown Palace and hiring 12,000 extras and 65 crew members.

“If we had better incentives, they probably would have shot more of the movie here,” said Rep. Cheri Jahn, D- Wheat Ridge, a co-sponsor of the legislation.

As Jayne might say, I’m smelling a lot of “if” coming off of this plan. The fact is, we’ll never know whether somebody filmed a movie here specifically to get the welfare transfer, or whether they planned to film the movie here anyway, and then decided to cash in on the Hollywood welfare. However, we can be assured that politicians will point to all of the spending of all of the movies that get a subsidy and pretend that the inflated figure is somehow relevant.

Kelley points out that New Mexico also offers Hollywood welfare. This points to the second problem with the Colorado scheme. If Colorado increases its Hollywood welfare, this will only encourage other regions to increase theirs as well. Long term, this is a great deal for Hollywood but a lousy deal for the suckers paying the subsidies.

However, the moral point is more important. It is wrong to force Coloradans to subsidize movies against their wishes. People have the right to control their own income. Moreover, Hollywood welfare is a violation of free speech. The right of free speech entails the right not to speak and not to financially support the propagation of ideas that one finds offensive. Movies, by their nature, deal with ideas. Inevitably, a subsidy will go to a movie that at least some Coloradans find objectionable. A peripheral implication is that Hollywood welfare forces Coloradans of poor and average financial means to subsidize quite wealthy people, such as Eddie Murphy and Hollywood producers. If we take seriously a recent article from The Denver Post, Colorado’s taxes are already regressive. Forcing Colorado’s poor to subsidize wealthy Hollywood movie makers (or even wealthy Colorado hotel owners) would add insult to injury.

Hollywood welfare violates the rights of Coloradans and is therefore morally wrong.

On January 20 I criticized Bush’s so-called “stimulus” proposal:

There are two obvious problems with Bush’s proposal. First, it includes no commitment to offsetting the welfare transfers and tax rebates with reductions in federal spending. Second, it seems to promise more federal spending to cover the additional welfare transfers. In other words, spending will go up even more, while tax revenues will go down. This will be achieved through the magic of deficit spending, which necessarily takes real wealth out of the private economy by reducing investments, and/or more inflation. And, to address the problem of unemployment, Bush will pay people more not to work.

Finally some professional economists are chiming in.

Walter Williams writes:

There are three ways government can get the money for a stimulus package. It can tax, borrow or inflate the currency by printing money. If government taxes to hand out money, one person is stimulated at the expense of another who pays the tax, who is unstimulated and has less money to spend. If government borrows the money, it’s the same story. This time the unstimulated person is the lender who has less money to spend. If government prints money, creditors, and then everyone else, are unstimulated.

John Lott, Jr. writes for Fox News (January 28):

The notion that sending people $300 to $600 checks will increase spending is based on an old Keynesian notion. The reason why this won’t work is that the money has to come from someplace. Two options are open: either the government raises taxes or borrows. Everyone understands how taxes merely redistributes the money. But borrowing is no different. Borrowing takes money from those who otherwise would have used it to do everything from investing to buying houses or cars. …

All the “stimulus package” will do is take wealth from some people and give it to others. It will not increase total expenditures. …

The Democrats… know that extending unemployment benefits will increase the unemployment rate, thus making it easier for Democrats to use the economy as an election issue.

Dozens of economic research papers indicate that when you extend or increase unemployment benefits, you lengthen unemployment, because recipients wait until their benefits have been exhausted to take their next job. Even the economists who advise the Democrats know this. Larry Katz, the chief economist at the Labor Department during the Clinton administration, co-authored a study that found that workers are almost three times more successful in finding jobs when benefits are just about to run out.

Lott suggests that the right approach is to “cut marginal tax rates on individuals and companies.” I quite agree, provided that federal spending is reduced comparably.

However, Yaron Brook of the Ayn Rand Institute argued on January 16 that we need more substantive economic reforms to achieve a more prosperous economy:

We don’t need the government to ‘stimulate’ the economy with some new intervention; we need it to liberate us from all its destructive economic intervention that put us in this situation.

We need liberation from environmentalist restrictions on oil drilling and energy production. We need liberation from Sarbanes-Oxley, which treats businessmen as guilty until proven innocent and increases the cost of doing business for every publicly traded corporation. We need liberation from the government’s pervasive regulation and semi-socialization of the health-care market, which have artificially driven up the costs of health care. We need liberation from the intervention of the Federal Reserve, which is destroying our savings by inflating the currency. And we need liberation from countless other forms of government spending; if spending does not decrease, then any ‘stimulus’ tax cuts are simply tax increases for the future.

We should not regard Uncle Sam as an economic Doctor Sam, whom we need to stimulate the heart of the economy with his defibrillator. When the government violates our right to produce and trade freely, it is an economic cancer that needs to be removed from the economy.

Hear, hear.

Americans don’t save very much. According to a 2006 article, “The number-crunching folks at the U.S. Commerce Department’s Bureau of Economic Analysis dished out some discouraging news recently, saying that Americans spent more than they earned in 2005 — a negative savings rate of 0.5 percent for the year. That’s the first time that’s happened since the Great Depression.”

Hmm… Why might that be? Could it possibly have something to do with the fact that the federal government lops off 15 percent of every single paycheck? And that’s before income tax, property tax, and state and local taxes. I once saw a documentary about African tribes that keep cattle, not for the milk or the beef, but for the blood. They stick bamboo shoots into the cows’ neck arteries for a warm drink. The payroll and other taxes are the bamboo shoots in the necks of American workers. My wife and I are “saving,” but only in the sense that we’re climbing our way out of debt. We would have had a positive net worth years ago but for the fact that our life’s blood — our labor — is siphoned off to feed the welfare state. And the only reason we’ve been able to make progress is that we’ve put off having children, purchased a tiny condo rather than a house, and kept our spending low. It’s hard to save when so much of our labor is lost to taxation.

Our society punishes the responsible in order to reward the irresponsible, taxes productive effort in order to subsidize vice. What’s the point of saving when your welfare check is proportional to your irresponsibility? If you earn less, save less, learn less, waste more, and have more children you can’t afford, you get more welfare. And what’s the point of saving for old age when the federal government promises to continually transfer ever more wealth from workers to the retired?

Hillary Clinton’s answer to the deep social pathologies generated by the welfare state is, of course, to expand the welfare state. An October 9 article from The New York Times reports:

Senator Hillary Rodham Clinton of New York unveiled the second biggest domestic policy idea of her Democratic presidential campaign today, proposing to spend $20 billion to $25 billion a year to create 401(k)-style retirement accounts for all Americans and provide federal matching money of up to $1,000 to middle-income people.

Under the plan, the government would give a dollar-to-dollar match for the first $1,000 saved by Americans who earn up to $60,000 annually. For those who earn $60,000 to $100,000, the government would provide a 50 percent match, or $500 for the first $1,000 saved.

Mrs. Clinton said she would pay for the program by freezing the estate tax at its 2009 level of $7 million per couple. A campaign analysis of the plan said that the freeze would affect about 10,000 of “the wealthiest estates” in the United States and provide a new retirement savings systems for an estimated tens of millions of families. …

As with her biggest policy plan for universal health insurance, Mrs. Clinton cast her savings proposal in terms of choice…

Reduce the payroll tax on working Americans? Not a chance. Instead, Hillary wants to forcibly take more wealth away from the people who earned it in order to give it to others who did not earn it. But this is not just a straight subsidy: it is meant to “encourage” people to do what federal politicians know is best for them. It is social engineering.

Where might Hillary have picked up such an outlandish, unjust, and anti-American idea?

Donald Lambro complains for the conservative TownHall.com: “The lure of a refundable federal tax credit from general revenues is a government subsidy, pure and simple. The worker who receives it doesn’t have to work for that matching money in order to save it.”

Yet Lambro continues: “President Bush offered a bipartisan plan to provide private-investment accounts that would let workers invest a small percentage of their payroll taxes in stocks and bonds and build wealth.” Never mind the fact that this does nothing to address the spending side, at least for several decades.

When did we get to the point when the alleged opponents of subsidies for savings are talking about the federal government “letting” workers invest their own money? You’re going to “let” my wife and me save some small portion of the money that we earned? Gee, thanks.

The simple fact is that Republicans, conservatives, and the Cato Institute are the ones who long advocated the idea of using federal force to socially engineer more “private” (read, government-controlled) investment. Hillary’s plan is merely a variation of the conservative plan.

Thankfully, at least some people are actually talking about restoring economic liberty by reducing the payroll tax. Yaron Brook said in a recent press release from the Ayn Rand Institute:

The basic principle behind Social Security is that individuals have a right to unearned retirement income. To pay for these unearned benefits, the government seizes money from workers and transfers it to the elderly. This is a perverse injustice. Why should a twenty year old who is struggling to make ends meet have to finance someone else’s retirement? Why is it parasitical for a young person to live on the dole, but an inalienable right if he waits until he’s 65? Why should those who conscientiously save for retirement be forced to sacrifice a chunk of their income to support those who were not as responsible?

There is no such thing as a ‘right’ to someone else’s labor or money. The ‘needs’ of the elderly do not justify turning the young into part-time slaves. Instead of looking for ways to save Social Security, we should be designing a plan to phase it out entirely.

Some claim that without Social Security the streets would be lined with senior citizens unable to pay for their homes or their food. But this fantasy ignores the fact that, before Social Security, there was no epidemic of starving old people. Individuals planned and saved for their own retirement. Those few who genuinely couldn’t support themselves relied on their families and on private charity — they did not demand the government reach into other people’s pockets to provide them with goodies.

We don’t need the federal government to “encourage,” subsidize, force, or micromanage our investments. We need the federal government to leave us the hell alone so that we can invest our own money as we see fit.

Here is yet another example of how advocates of individual rights and free markets must fight both “liberals” and “conservatives.”

Diane Carman writes for the October 16 Denver Post:

For conservatives, the belief that private industry does everything better and at less cost than the evil government is the sacred 11th commandment of politics.

And, the debacle with Blackwater USA notwithstanding, there’s no question that some jobs are done best by private contractors.

On that everyone can agree.

Trouble is, a whole back-slapping system of financial rewards has evolved to corrupt the process. …

Here in Colorado, private firms supply everything, even bus drivers and prisons. Former Gov. Bill Owens was a believer in the 11th commandment, so contracts for public services during his terms exploded.

One result was a $300 million computer system that never worked, Carman notes.

In Carman’s world, then, you can either work directly for the government or indirectly for the government. If you work indirectly for the government, then that’s “private” enterprise.

What’s missing from this picture? Hmm… I know it’s a toughie! How about the possibility of not working for the government at all?

Let’s take the example of bus drivers. Is it true that bus drivers either have to work for the government directly or work for companies that contract with the government? Obviously not. The alternative is to get government out of the business of running busses and allow bussing companies to operate independently, with the ability to set their own rates and routes and compete on a free market.

Carman actually knows that it’s possible not to work for the government — after all, she works for The Denver Post — yet she packages government contracting together with real free enterprise as “private.” But a company that’s paid by the government — i.e., by tax dollars taken forcibly from citizens — is not really “private” at all. A truly private enterprise earns its revenues from willing customers.

I’ll take another example to drive home the point. Currently, book publishers decide which books to publish and then sell the books to readers who buy them. That’s private enterprise. But what if the government published books? (In fact, the government publishes government reports already.) If the government pays a contractor to print and distribute books, is that “private” in the same sense? To take an extreme example, if the government taxed everyone at a rate of 100 percent, then hired contractors for every job, then, by Carman’s reasoning, that would be an entirely “private” economy.

So it is rather important to maintain the distinction between a real free market — actual private enterprise — and government contracting, which relies on the forcible transfer of wealth.

Is there a legitimate role for government contracting? Yes — but only for tasks essential for the government to fulfill its job of protecting individual rights (which need not involve coercive taxation). For example, the government may properly hire contractors to build military equipment. However, when it comes to prisons, I think employees should work directly for the government, not for contractors, because of the perverse incentives created by indirect financing.

Carman makes another crucial mistake. She presumes that one must hold one of two views: either the government should finance bus drivers and all sorts of other occupations, or the government is “evil.” What this leaves out is the view that government plays a crucial and essential role in protecting individual rights, but that government should be restricted to that role. The fact that government is not evil does not imply that government should restrict, compete with, or push out (actually) private enterprise.

Unfortunately, Carman draws her errors directly from the conservative movement. Conservatives often fail to distinguish between the proper and essential role of government and the misuse of governmental power. Conservatives usually endorse the forcible transfer of wealth, though for “conservative” aims. Conservatives also pretend that government contracting means the same thing as “private” enterprise.

Here’s a recent example. A Colorado Republican release from October 16 states:

Leadership and members of House and Senate Republican caucuses gathered on the west steps of the Capitol today to unveil a comprehensive education package…

Among the GOP proposals addressing those priorities: a uniform, statewide curriculum standard to graduate high school; a general proficiency exam before any student could graduate; a requirement to display English proficiency before a student could graduate, and a plan to reward and retain the best teachers through performance bonuses. …

Assistant Senate Republican Leader Nancy Spence… the ranking GOP member of the Senate Education Committee, showcased two of her education-reform bills at the conference. One of the bills would offer parents tuition assistance for special-needs children, and the other offered performance incentives to teachers.

She said that students with special needs are particularly vulnerable when their educational options are limited and that their parents ought to be able to choose a program, private or public, that addresses the unique challenges their children face.

There’s that word “private” again, this time used by Republicans to mean government-financed schools for “students with special needs.”

But what does a real “private” or free-market school look like? It does not accept any tax dollars. It earns its revenues from willing customers. It sets rates of tuition, perhaps including sliding scales to accommodate the poor, in cooperation with its customers. It might accept charitable donations or even (actually) private vouchers, meaning vouchers funded voluntarily, rather than through tax dollars.

But, with a few rare and quiet exceptions, conservatives will not endorse free markets in education. Government-run education is conservative orthodoxy. True, some conservatives want the government to control education via tax-funded vouchers, and they pretend that this is the same thing as “private” education, but this is merely a minor variation on the theme of government force.

Indeed, Colorado Republicans have proudly assumed the role of central planners. They want to micromanage every government-run school in the state. And why do government-run schools require such micromanagement? Because of the perverse incentives created by tax financing. Government-run schools face little incentive to serve their “customers.” These Republicans have no problem with government-run schools; they just want the government to run the schools their way.

Here is another example. This evening, the El Pomar Foundation is hosting a talk with Thomas Krannawitter of Hillsdale College. Here’s what Krannawitter has to say about government-run education:

In Ohio, as in the rest of America, taxpayers for years have poured billions of dollars into failing public schools. Dissatisfied with dismal results, the citizens of Cleveland decided to try something different. Parents would be given a voucher — tax dollars, that is — they could use to send their children to any school of their choice, public or private. By making choice available to more parents, schools would compete to attract students, providing a powerful incentive for all schools to strive for educational excellence. …

Contrary to the ACLU, the men who framed and ratified the Constitution and Bill of Rights rightly believed political freedom and good government require moral citizens capable of governing themselves. And they thought religion a powerful means of moral education that ought to be promoted by government.

Krannawitter confuses government-financed schools with “private” schools, thereby helping to obliterate the very idea of an actually “private,” free-market school. He enthusiastically endorses tax-financed education. And he suggests that government should also spend tax dollars to promote religion.

The broader critique is that Krannawitter conflates religion and morality, when actually objective morality can only be derived independently of religion. Religion undermines morality. But that debate is too broad for this post. For now, I need merely point out that Krannawitter does not advocate the right to control one’s own resources with respect to education or even religion; he believes the government should be in control.

The modern contest between “liberals” and “conservatives” is merely one to seize government control over our lives.