Sunday, August 28, 2011

Tax a moving target?

Published in The Tennessean, Sunday, August 28, 2011

by Richard J. Grant

The pattern of migratory flows throughout history suggests that people move from situations that they perceive to be relatively unsatisfactory to destinations where the living conditions are expected to be better. In a big world there will always be someone traveling in the other direction, but the greater flows of people tend to be toward those areas perceived to be better-suited to their survival, prosperity, and sense of life.

Border controls are in place to manage the flow of people in both directions. But some borders are particularly geared to controlling traffic in one direction rather than another. That is why Hong Kong had to devote more resources to controlling inward-migration from Canton than did the People's Republic of China have to devote to controlling traffic coming the other direction. China's concern was with losing people, especially the most talented or productive.

The same was true at the Berlin Wall. People of similar culture, language, and history were separated and forced to live under two very different systems of government and economic organization. As long as those differences were enforced, the greatest migratory forces pushed toward the West. People knew that they could live more free and fulfilling lives in an environment where they were treated with individual dignity, and where their choices and productivity were respected.

We see similar migratory flows within the United States. There are no “pass laws” that control migration within the US, but it does matter which state you live in. Each state differs in its level and structure of taxes, the severity and type of regulations, and the types of spending projects it supports. This is why some states tend to be more prosperous or more resilient during recessions, and why they tend to attract people from other states.

Some states resort to gimmicks to attract companies that will supposedly “create jobs.” But the premature promotion of fad-industries, such as solar or wind energy, is based on wild assumptions and takes huge risks with taxpayers’ money. Narrow interest groups visibly benefit while the taxpayer vaguely perceives a net loss. In other words, such projects generally destroy wealth. When the subsidies stop, the wasted effort is revealed.

State governments that commit themselves to unsupportable spending plans often see as their only way out the expansion of the tax base and the increase of tax rates. In January, Illinois increased its income tax rates by about 67 percent and increased corporate tax rates as well. Perhaps the governor now wishes that he could put up a fence around his state much as East Germany had a fence along the entirety of its border with West Germany. Illinois is losing job creators and some of its most productive people.

Even if there were such a fence that could keep the people in, reducing people's disposable incomes is not a way to promote productivity. Taking resources from those who are the most productive stewards of those resources, especially when those resources are transferred to unproductive projects and less-productive people, is a recipe for reduced standards of living.

When the most productive people in a society depart or slow down, it is the least-productive who suffer the most. For they are the ones, whether they know it or not, who benefit the most from their association with those who are wiser or more productive.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011


Sunday, August 21, 2011

Berlin Walls, real and metaphorical, fail

Published in The Tennessean, Sunday, August 21, 2011

by Richard J. Grant

When I passed through Checkpoint Charlie for the first time, the Berlin Wall was already 19 years old and its final construction had just been completed. It was more than just a wall. Physically, the 12-foot-high concrete slabs that formed the Wall's face to the West were paralleled on the East side by smaller walls, fences, and buildings. In between was the 100-yard-wide “Death Strip,” with various obstacles and little cover for those daring enough to cross it without authorization. East German and Soviet troops patrolled the strip.

Looking beyond the physical, West Berlin was like an island of freedom surrounded by a prison. The Wall was designed to keep East Germans inside East Germany. Before the barriers went up, millions of East Germans had “voted with their feet” and crossed to the West through Berlin.

The contrast between East and West Berlin reminded one of the sudden change from black-and-white to color in the Wizard of Oz movie. The streets and buildings in the East wore a drabness that reflected the sense of life. Food stores offered mostly beets, potatoes, and shriveled apples. Soft drinks contained un-aesthetic sediment. Bookstores offered rows of Marx and Lenin before one found a few other selections at the back.

Passing a pair of soldiers on the street, it was hard not to return their cold stares. I was fresh out of the army and still looked it – a Westerner at that. Their uniforms bore, not coincidentally, an unmistakable resemblance to those that we saw in training films and to those on the pop-up targets that I once happily perforated.

Looking at life in East Berlin, even as a tourist, would make one wonder how it could possibly last. The contrast was too great, and the flow of information could be hampered but not stopped. In the East, the people were forced to live political correctness to its logical conclusions. They lived in a philosophical reign of terror that played out like Muzak in their lives and became the theme for the economic stagnation that eventually, and invariably, comes with it.

As it turned out, the Wall did fall nine years later. I couldn't know then that, 25 years later, I would have an office in the former Communist Party headquarters of a breakaway Soviet republic, and that my home would look across at a former Soviet army base, complete with an old MIG on a pedestal.

Had West Germany continued the price and product controls of the postwar military administration, its economic future might have differed little from the East's. But on the initiative of Ludwig Erhard, many of those controls were removed, clearing the way for the German “economic miracle.”

It was a miracle only to those who did not understand economics; but those were the people with whom one had to compromise. Thanks to Erhard, the “social market economy” that later emerged retained a respect for private property and free enterprise. That made all the difference.

Construction of the Berlin Wall began 50 years ago this month. It was knocked down 28 years later by a people no longer afraid of their Communist masters who were rendered impotent by decades of having their own socialist way.

The Berlin Walls that we face in daily life are not made of concrete. Let us recognize them for what they are.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011


Sunday, August 14, 2011

Brits arm themselves in face of PC government's failure

Published in The Tennessean, Sunday, August 14, 2011

by Richard J. Grant

If you manufacture aluminum baseball bats, you probably noticed an unusual increase in orders this past week.

Then you noticed the demand is coming from Britain, where one thinks first of cricket, not baseball. You might have wondered why, but were only too happy to increase production to meet this new demand. Markets work.

We often hear about “market failure.” What’s that? Just imagine something that is not provided in the marketplace but you feel should be. You can call that “market failure,” if you wish. The classic example was lighthouses. Surely they couldn’t be profitable, right? This was taught to an entire generation before someone decided to check history and discovered that lighthouses were, indeed, provided by private companies long before governments stepped in.

You don’t need to know what’s happening in Britain to be able to supply them with more bats. But it helps to know more about your customers, so you check the news and learn that violent riots have been breaking out nightly in cities across England. Shops have been trashed, looted and burned. People have been robbed, beaten and even killed.

Where are the police? They are overwhelmed by the volume and brazenness of the outbreaks. They are also constrained in their response by what appears on the surface to be modern Western restraint, but is in fact a symptom of the modern evasion of social realities that we lamely call “political correctness.” The British welfare system has bred personal responsibility out of the class that has become dependent on it; and the shortsighted immigration system has failed to integrate the foreign communities it has created within.

With seriously deficient police protection, victims see themselves at the mercy of the mobs. The victims are also unarmed. The average Brit sees this and exclaims, “That’s not cricket!”

It’s not baseball, either. It is government failure. A succession of left-drifting governments has failed to focus on a government’s primary duty to maintain law and order. They have been too busy protecting their public from all the imaginary market failures they can dream up, especially those that serve as an excuse to redistribute income to their favorite constituents.

Governments like to imagine they have a monopoly on the use of force. Not true. If the police are not there when you need them, it’s up to you. But Brits do not enjoy Second Amendment-type protections; and those who have used firearms in self-defense have sometimes found themselves in jail.

This explains why sales of baseball bats in the U.K. suddenly increased by over 6,000 percent last week. While government fails, the market provides.

Governments also imagine that they have a monopoly in the production of money. That is why gold sales are soaring and the price is reaching record highs. That is also why we suffer repeated booms and busts in all markets. We face unemployment, budget deficits, and over-regulated medical care.

Government has struck out.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011


Sunday, August 07, 2011

Anti-tax pledge is just good shorthand for voters

Published in The Tennessean, Sunday, August 7, 2011

by Richard J. Grant

Economists call it “rational ignorance.” We all do it; we economize on information. Not only that, we economize on knowledge and education. All these things cost us something and at some point we deem increasing them not to be worth the extra expenditure of time, effort, or money.

Things that are important or interesting to us get more of our attention. If we have a goal, whether it's earning income or helping a friend, we have a strong incentive to learn what is needed to succeed. But if the decision is unlikely to have any effect on our income or on our friend's welfare, then we have little incentive to put more effort into learning about it or even taking any action.

We are helped by anyone who can save us time and energy in learning what we need to know. Often we'll even pay these information-providers, just as we pay the producers of the technology that helps to deliver that information.

In life we can't master everything, so we seek out specialists and those we perceive to be offering useful services. The more complex the product we want to buy or the more complex the organization that we are trying to run, the more willing we are to purchase from, or to hire, those who supply a product or service that relieves us of some of that complexity.

This is easy to see in our private lives and in the private marketplace. But when we step into the realm of government and collective decision-making, our information problems and the corporate governance problem multiply drastically.

It is hard enough to figure out how big a mortgage, and what terms, you can afford. But at least you get to control one side of that transaction. When it comes to the national debt, few people have the ability or the time to understand it. Their vote gives them but a fly speck of influence over it. So, political decisions get less attention from individuals than would private decisions.

At the store, we get the product that we pay for. But when we go to the ballot box, we do not necessarily get the representative that we vote for. The payoff is less certain, the information we acquire is of less direct value than that acquired in our private affairs.

Grover Norquist, president of Americans for Tax Reform, has been both praised and vilified for providing a service that gives voters useful information about the future actions of their elected representatives. He has given these representatives the opportunity to sign a well-publicized “Taxpayer Protection Pledge” that reads as follows:

“I ... pledge to the taxpayers of [my state], and to the American people that I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”

This simple statement is a promise to taxpayers and voters. A breach would be publicized. It is information that helps us to monitor the important actions of our representatives.

In the recent negotiations to increase the debt ceiling, representatives on both sides of the argument knew that voters were watching to see who would keep their word. Good information makes a difference.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011