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The Washington Post busted open the big story about the raisin market, then opined about it, then Planet Money did an excellent story about it. For those without time to click through the genuinely fascinating links, the basics of the story is that raisins, somewhat uniquely, have their supply and demand managed centrally by a government committee, who essentially confiscates a share (sometimes a very large one) of raisin farmers’ output and with varying levels of compensation. This is probably bad public policy, and there’s no reason that this shouldn’t be done away with.
However, there is a sense in all these stories that there is something unusually unjust about the structure of this market. But I’m not sure that’s true. Let’s imagine, instead, that there was simply an additional sales tax on raisins, not unique to raisins at all. In that case, the price would rise, so demand would fall, so supply would contract and the price would rise and eventually we’d settle on an equilibrium where the overall raisin supply is lower and the price is higher and the government collects some revenue. You could even have the tax vary each year to target a price (as opposed to a tax that is a consistent percentage of the otherwise-market-determined price).
In this case, what we have instead is situation where the government targets the supply side rather than the demand side, but to pretty much a similar result, except the government collects its revenue not in money but in-kind. Now, the fluctuations in the crop portion taken for the reserve and the uncertainty of compensation definitely feels more unfair, but the biggest difference I can see in this scenario is that in the tax scenario you’d probably have fewer raisin farmers, whereas under the status quo there seem to be more raisin farmers than the eventual market price would otherwise produce.
That, to me, is the biggest curiosity – why don’t more farmers do what the one farmer in the Planet Money story does and switch out to a less-regulated crop like almonds? The answer is that if we were in an equilibrium where no raisins were being confiscated then the existing raisin farmers would probably be making substantial profits, thus attracting new entrants into the industry, each one individually having no impact on the market but collectively driving up supply to the point where confiscation would begin. That, along with emotional attachments and the transaction costs of switching crops, probably keeps an equilibrium where you’ll always have more raisin farmers producing more supply than the eventual raisin price would otherwise demand.
In some ways, this solution is more socially optimal – because you still have farmers incentivized to produce as many raisins as possible even as the government is driving up the price, when in the taxation scenario you’d probably have a lower raisin supply. This allows raisins to be donated to school lunch programs, for example, that otherwise wouldn’t exist. In the tax scenario, however, the government could give the money to schools to spend how they see best fit, and that way would probably be better.
Additionally, you could raise the overall sales tax a miniscule amount and deregulate raisins and that would really be socially optimal. Freedom!
That’s because there are relatively uncontroversial ways in which high levels of government debt can and do affect growth. Government borrowing can crowd out private investment, induce uncomfortably high levels of inflation, and create a need for distortionary taxation.
I’m going to go ahead and say – some of this is at least somewhat controversial! A bold stance, indeed.
Let’s say the government wants to spend some money. The government can choose to finance it in two ways:
1) It can raise taxes.
2) It can borrow.
Obviously. But what does that mean?
In the first scenario, the government identifies a place where there is some money and takes it. It’s good to be the king.
In the second scenario, the government makes an offer – anyone who wants to patriotically volunteer their money to the government will get a series of small reward payments for many years, followed by the eventual full refund of their nominal volunteered sum.
Either way, the government has withdrawn an equal amount of money from society. The primary difference, it seems to me, is two-fold:
1) The money comes from different places.
2) In the latter scenario the government has obligated itself to future payments.
Item 1) is what’s usually paraphrased as "crowding out investment" – the presumption that money borrowed would have been put to use in ways that engender long-term growth, whereas money taxes would have come from mere "consumption." Regular readers (if you exist, that is) know I am not a fan of the saving/consuming dichotomy, but I am willing to indulge the idea that resources withdrawn by the private economy by government borrowing are systematically different than those withdrawn by government taxation. Let’s come back to this.
Can government borrowing "induce uncomfortably high levels of inflation?" Not if the Fed says it can’t! And the Fed has been pretty good at keeping inflation limited since the Volcker era.
Can government borrowing "create a need for distortionary taxation?" Sure! But so does taxing the money in the first place. If the government spends money and funds it all through taxes, there will be a lot of deadweight loss. If it funds at least some of it through borrowing, there will be presumably less deadweight loss since the money was coughed up voluntarily.
But look – here’s the data
Here’s real federal debt held by the public v. real federal interest payments since 1970:
So, not a terribly correlated series.If you’re the naturally loggish type:
Which shows a more correlated series at least during the 70s and 80s but note that starting in 1985 while the debt begins to rise and rise the total interest payments mostly stall out.
So, given the large increase in public federal debt over the last 30 years, we have seen decreased inflation, stagnant real interest payments (which means shrinking real interest payments as a share of GDP) and…so where’s the "crowding out?"
Any discussion of these issues without talking about the financial system, the central bank, the status quo ante of the macroeconomy, etc, isn’t very useful.
So Ashok and I sparred a bit on Twitter re: the meaning and effect of taxation and spending (and probably pestered the heck out of James Pethokoukis and Joe Weisenthal in the process). I’m not sure how to embed Twitter conversations (if anyone knows how, I’m all ears), but the long-and-short of it is that the actualities of taxes and spending are weirdly different from the optics.
The trick is to remember that every policy change is a change from some baseline. So, from whatever the baseline currently is, there is no fundamental or economic difference between:
1) Cutting taxes by X on some activity, and
2) Spending X subsidizing that activity
assuming that they are both funded identically (though identical tax hikes, spending cuts, or debt incursions).
Now, in practice, there will be differences. Scott Sumner’s thought experiment about the society that taxes 100% of GDP by taxing 100% of income then writing welfare checks equal to taxed income demonstrates that, since we would expect that society really would look different than the one that taxed nothing at all (if only because such a program would have some overhead). But those differences would be based in behavioral economics, not classical or neoclassical economics.
And the same in real-world examples. There would definitely be differences between these two alternative scenarios:
1) A 2% payroll tax cut (debt-funded).
2) A check mailed to every American for the exact same amount (debt-funded).
But those differences would be instutional, not economics (the check-cashing industry, for example, would obviously prefer the second policy to the first). But there’s no reaosn to think they would "crowd out" (or for that matter, "crowd in") different activities.
The real point is, as Matt Yglesias says, the tax share of GDP is a very poor to think about the “size of government.”
Steve M. has a really great post totally eviscerating the right-wing trolling of the office and compensation of White House Calligrapher which ends, unfortunately, on a false note:
Oh, and that $277,050 salary expense? If you fired all the calligraphers and pocketed their salaries, that would give you approximately one one-millionth of the $28.7 billion in cuts this year to domestic discretionary programs from the sequester.
I don’t want to pick on Steve here because this is a common trope in the leftwards blogosphere, but I think it’s a really bad one, for a couple reasons. Firstly, eventually you can get a big cut from aggregating lots of little cuts. If you took all the little seemingly-goofy-sounding-but-actually-probably-valuable-and-useful things the government does and cut them all you probably would have a decent chunk of change when all is said and done.
But secondly I just think this is a weak talking point because waste is waste and value is value. Steve spends the whole poist making a great argument for the value and traditional nature of the program, then concludes by undercutting himself by saying "well even if we did cut it it wouldn’t save us much anyway." A program that brings a net benefit to society that oughtweighs the cost of funding it is a good program that we should keep! If deficits are a problem but all of our programs are valuable than we should raise taxes.
The reason right-wingers dig for these anecdota is that they perpetuate a story that goes "government spending is rife with waste so we should cut it deeply." If left-wingers respond to each individual instance of right-wing trolling with "and this would only cut 3.7 gazillionths of the deficit so it hardly matters" they will convince exactly nobody. Convince people that good government is worth spending money on. Is calligraphy absolutely vital to good governance? Probably not. Is it befitting the office of the President of the United States that formal invitations sent to the Prime Minister of India aren’t laser-printed on white letter paper from awful and goofy MS Word templates? Absolutely.
D.C. United’s leadership is “very hopeful” of striking a deal to build a soccer stadium in Washington and end the MLS club’s decade-long search for a new home in the area, Jason Levien, the team’s managing partner, told the Insider…
United has targeted Buzzard Point — a largely undeveloped area near Nationals Park in Southwest — for a complex that would accommodate between 20,000 and 24,000 spectators and replace 52-year-old RFK Stadium as the team’s home venue.
United would finance the project but require help from the city to cover infrastructure and land acquisition costs. Pepco, a local power company, and Akridge, a developer, control the majority of the land.
This is a double boondoggle; firstly, because public investment in sports facility is generally a terrible idea, and secondly, because, oh, hey, what’s this thing over here?
Why, it’s a massive stadium just outside Washington, DC! Maybe DC United should, you know, play there?
So, in no particular order:
· Matt’s point that the top tax bracket is 35%, not 39.6%, is correct.
· But that’s just the top tax bracket! Assuming he and his spouse are filing jointly, on income under $379,151 they would pay no more than 33%, which declines quickly to brackets of 28%, 25%, 15%, and 10%. So that top tax bracket is only applied to the 379n151st dollar of income and beyond.
· I would be very, very, very surprised to learn that Jamie Dimon and his spouse take claim no deductions, credits, or exemptions on their taxes. Very, very, very, very, very, very surprised.
· I would also be very, very, very, very, very surprised to learn that Dimon & spouse claim all their income as “income” and none of it as “capital gains” which can be taxed at a top rate as low as 15% depending on how it is claimed.
· Dimon is roughly correct about the top tax bracket in New York City – “add in another 12 percent in New York state and city taxes” – but again forgets that this rate is not applied to all his income, just that above the top bracket, which is $90,000 in NYC but a cool half-a-million for the state.
· He weirdly neglects to mention sales or property taxes in this, which would buttress his argument.
Anyway, the point of this is that unless Jamie Dimon has the world’s worst accountant or is patriotically donating to the US Treasury there is just no way he’s giving every other dollar he makes to the government. And his whiny stupidity about this certainly doesn’t strengthen the argument that people who can accumulate Dimon-esque levels of wealth are somehow especially gifted and therefore morally entitled to hoard wealth.