The Seven-Year Itch: a Tale of Tax and the City

Published in The Tennessean, Sunday, June 24, 2012 and Forbes with archives.

by Richard J. Grant

The mayor of a major Southeastern city recently asked for and got a substantial increase in property tax rates. The hoped-for revenue from the tax increase implies a transfer of $100 million from taxpayers to the local government. The mobilization of substantial public opposition to the tax increase tells us that many taxpayers felt that they could better use that money themselves and that the city government should make better use of the money that it already receives. But a majority of council members saw things differently.

None of this is unusual. Different people are guided by different standards, and they also perceive costs differently. In this case, the relevant costs were those perceived by the city officials. They responded to the incentives that they face. Their decisions suggest that they imagine the world, or at least the city, being made better by redistributing the use of funds from individual taxpayers to the collective purposes of the municipality. That is what councils do.

In the public pitch for the tax-rate increase, supporters repeatedly emphasized that it was “the first property-tax hike in seven years,” as if that was somehow important for other than merely historical interest. It seemed to imply that a tax increase was overdue.

But if, after seven years, a tax increase is overdue, does it follow that another tax-rate increase will be due within seven years, and so on? The assumption seems to be that government spending should grow faster than the tax base and is therefore naturally entitled to an increasing share of that tax base.

This is just a local example of the general confusion over the difference between tax revenues and tax rates when speaking of “tax increases.” In a world with price inflation, the cost of government can be expected to rise with the general price level. For a given tax rate, property-tax revenues can be expected to rise as the assessed values of local properties rise.

But there is no natural guarantee or even a likelihood that all prices will increase uniformly. A real-estate bubble would inflate not only current property-tax revenues but also expectations of future revenues. Any official plans made on the basis of those inflated expectations can be expected to lead to disappointment and, in turn, to calls for tax-rate increases.

As is true at all levels of government, those who expect to benefit disproportionately from government spending are more likely to favor the tax-rate increases that they believe will enable the spending increases. They are also more likely to lobby and work for the tax increase.

The $100 million given up by taxpayers will not be spent on private education, on private security, on private medical care, on private transportation or invested in private pensions. These are some of the costs borne by those taxpayers who protest against the tax increases. But mayors and council members, just like presidents, senators and representatives, often face a different calculus — a calculus backed by compulsion. Re-election has its own incentives.

Special interests often find common cause with ideological statists, both of which promote the expansion of government and the redistribution of resources toward their own purposes. One group does it by accident; the other does it on purpose.

This is why, in the absence of effective constitutional limits, governments tend to grow to test the economic limits and patience of their hosts.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012 

We Have Less of All These Things Because We Hoped for Too Much

Published in The Tennessean, Sunday, June 17, 2012 and Forbes with archives.

by Richard J. Grant

When unemployment rates are high, it is not difficult to find the real reasons. Once in a blue moon, we might have no other explanation than that it was a perfect storm of random events, such as technological breakthroughs or social transitions. But in a free society there is no enforced barrier to each person’s adaptation to changing circumstances. In the face of entrepreneurial innovation and energy, any such perfect storm would quickly disperse.

The key phrase here is “free society.” Societies with chronically high unemployment tend to be those with governmentally induced disincentives to work or hire. Only government has the systematic power to thwart our natural proclivity to adapt and improve. Only government can subject all industries simultaneously to the effects of its macro policies, such as rising or falling interest rates, the general burden of taxation, the moral hazard inherent in the promise of bailouts, and the uncertainty and perverse incentives of open-ended regulatory programs.

Our most recently reported unemployment rate, at 8.2 percent, is higher than historical data would lead us to expect this long after a recession. Real GDP growth has also been lower than expected at only 1.9 percent during the first quarter of 2012.

It is no help to describe the problem as “a lack of demand.” Individual businessmen could be forgiven for believing that it is. Certainly each of their business situations would be better if they had more buyers. But their immediate problem is not some general lack of “aggregate demand.” Product demand is not uniform across industries but rather reflects the changing priorities of consumers and investors. Some businesses are suddenly faced with the fact that fewer people want what they are selling at the price they are asking.

Recessions occur because companies’ production plans have diverged from the plans and expectations of their customers and investors. Somebody is going to have to adapt; that means changing the product or changing how it’s produced or changing its price. For some industries, it is just a matter of waiting — and the freer the market, the shorter the wait.

This time, we seem to be waiting longer. We have a fiscal and regulatory environment that has raised the cost and uncertainty of hiring workers while inhibiting productivity improvements. Many health and safety regulations increase costs and reduce flexibility without really improving health and safety. Increased minimum wages price the least-productive workers out of jobs. Increased and extended unemployment benefits reduce the cost of failing to find a new job. The arbitrary powers of the National Labor Relations Board serve to politicize industrial relations and to create antagonism where none need arise. This is a recipe for unemployment.

Without capital and the tools and technology that it supports, workers are not worth much. A tax and regulatory environment that punishes capital is an environment that makes workers less productive. Less-productive workers are lower-paid workers.

Investment capital comes from anyone who saves for the future. And if most capital is saved or deployed by “millionaires and billionaires” then raising tax rates on millionaires and billionaires is anti-labor just as surely as it is anti-capital.

However well-intended, the heavy hand of government has driven up the costs of medical care, education, energy, manufacturing, and employment. We have less of all of these things because we hoped for too much from government.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Will U.S. economic recovery require a change of direction?

Published in The Tennessean, Sunday, June 10, 2012 and Forbes with archives.

by Richard J. Grant

During much of the past four years, the conventional political narrative seemed to assume that Newton's First Law of Motion applies to the economy. The repeated insinuation was that, “An economy in recession will remain in recession unless acted upon by the outside force of government.”

Such a belief on the part of the electorate serves well a president who takes office near the end of a recession. Even if that new president does nothing and manages not to create too much uncertainty, economic activity will recover naturally. The new president would then be associated with the recovery. But to be sure that political credit redounds to the president, a few innocuous policy actions – call it “stimulus” – could be enacted.

That is what President Barack Obama threw away. Instead of doing as little harm as possible, or removing the already existing policies and regulations that hinder economic activity, he expanded the power of government to make demands on our economic lives. Taking advantage of Democratic Party majorities in both houses of Congress, he pushed through the incomprehensibly large health-care and financial policy reforms – neither of which will prove to be better than innocuous.

Both of these reforms have created regulatory entities that are self-replicating and open-ended. It is now far more difficult for businesses, let alone individuals, to plan for the future. Although uncertainty is a natural part of life, the size and scope of these new regulatory intrusions will drain resources into compliance efforts and raise the cost of both medical insurance and financial prudence.

We cannot even be sure what our tax rates will be next year. The recent health-care reform imposes new taxes as well as other possible fines and burdens, and the Obama administration is pressing for increases in at least some of our income-tax rates. This is what makes the uncertainty of the Obama era qualitatively different from that of better-performing previous administrations.

Professor Robert Barro of Harvard University and Stanford's Hoover Institution has compared recent economic growth rates to those of previous administrations since World War II. He notes that current growth rates are significantly below the long-term average of 3.1 percent and suggests that it is not unreasonable to expect above-average growth during a recovery. GDP growth has averaged only 2.4 percent during the last three years, and in the first quarter of 2012 was only 1.8 percent. Mr. Barro concludes that this low growth means that “the U.S. economy has actually been falling further and further behind the normal trend. Therefore, it is not a recovery at all.”

To Barro, the recent recession and financial crisis is no excuse. He notes that deeper recessions usually yield faster recoveries and, although real estate crashes are associated with slower recoveries, current growth rates are still well below what would be expected.

Barro believes that the Obama administration does not understand the importance of individual incentives and that its policies have served to raise the cost of work. Also, its Keynesian-style demand stimulus and attempts at industrial policy have failed. Instead, he suggests, the government should “get its fiscal house in order and make meaningful long-term reforms to entitlement programs and the tax structure.”

This translates into a lower tax burden, a lower regulatory burden, and greater clarity about future government policies. But the Obama administration persists in taking us in the opposite direction.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Are We Really Surprised When Private Companies Do Great Things?

Published in The Tennessean, Sunday, June 3, 2012 and Forbes with archives.

by Richard J. Grant
  
When things have been done a particular way for a long time, it is often difficult to imagine them being done any other way. This was evident in the apparent amazement that a private company might be capable of successfully launching a spacecraft capable of docking with the International Space Station.
   
The private company, Space Exploration Technologies Corporation (SpaceX), has now done just that. This is a great achievement for any organization, even for government agencies, which until now had an apparent monopoly on such missions. Clearly the founder and chief executive of SpaceX, Elon Musk, was able to imagine that things could be different. He also had the wherewithal and the will to succeed.

The United States government, now burdened by other political priorities and the debt that it has used to finance them, seems to have lost that will. By outsourcing its launch and delivery capability to SpaceX, NASA has found a way to cut costs and continue its missions while reducing its dependence on foreign systems.

Mr. Musk has compared these first steps toward commercialization of space travel to a similar transition of the Internet from its development in a US defense research agency (DARPA) to its now commercial ubiquity. Others, with big-government political agendas, have pointed to the beginnings of the Internet as if it proves that government investment is essential for such innovations.

Often the implication is that without government there might not be an Internet. But why stop there? The internet did not spring from nothing. Suppose there had been no Alexander Graham Bell. Although Bell exhibited creative genius, he was not the only one. Others had similar ideas and motivations, as well as the freedom to act.

The lives of Bell and Musk have parallels. Both came to North America via Canada. Musk made his fortune in the creation of Internet-based businesses and then moved into electric cars and space travel. Bell made his name in, and gave it to, the first telephone company. He later turned his attention to the invention of the photo-phone (which transmitted sound through a light beam rather than wires), experimented with metal detection and composting toilets, attempted to develop magnetic storage media, and speculated on the possibility of solar panels. Bell also worked directly in hydrofoil design and aircraft development, both of which attracted serious military interest.

Those of us who grew up with the Mercury and Gemini programs were able to recite the names of the private contractors that built and helped design the spacecraft. With the addition of SpaceX to that list, we come closer to the realization of what was always possible.

It is also worth noting in which country this occurred. Such innovations and development occur in countries where the people have not only the imagination and drive, but also the decency and self-restraint to allow their fellow citizens the freedom to live and let live.

Provision for the common defense led to the creation of both DARPA and the ostensibly civilian NASA. Concentration of resources in these agencies and regulatory restrictions on private-sector alternatives increased the probability that these would be the home of future inventions such as the Internet. Beyond that, randomness might be all we have to explain the specific inventions of DARPA and NASA. But it was not mere randomness that determined in which country these agencies could realize those achievements.

It was the land where people are the least surprised when private companies do great things.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012