While I was listening to The New Bazaar and enjoying an episode with Tim Harford, I was reminded that economists don’t just have the job of understanding the world. We have a responsibility to our fellow man of keeping fallacy and economic misunderstanding at bay (a Sisyphean task). That doesn’t mean that we just teach economic theory. We can and should advocate for good economic policy ideas and try to think up some policy alternatives that fit our political climate.
Here I was sitting, being grumpy at the US Federal deficit, when an idea came to me. I am full of ideas. Especially unpopular ones. So, I especially like ideas that make political sense to me given that the political parties care about their policy values and re-election. Asserting that people in congress actually care about policy apart from re-election is kind of a pie-in-the-sky assertion. But, here we go none the less.
Mancur Olson liked to emphasize the role of concentrated benefits and diffused costs in political decision making. Economists point to it and explain the billion-dollar federal subsidies that go to interest groups. A favorite example is Sugar subsidies. As of 2018 there were $4 billion in subsidies and sugar growers earned $200k on average. The typical family of four pays about $50 more in subsidies each year as a result. The additional tax burden of higher sugar prices is also relatively small. Therefore, says the economist, the few sugar beet and sugar cane farmers have a large incentive to ensure the subsidy’s survival while others pay a relatively small cost to maintain it. That small cost means that there is little money saved and little gain for any individual who might try to fight the applicable legislation.
That’s the standard story. But it’s so much worse than a story of concentrated benefits and diffused costs. The laity don’t know how the world works in two important ways. First, many people will simply say that they are happy to protect American producers for an additional $50 per year. That’s a small price to pay for ensuring the employment and production of our fellow Americans, they say. An economist might reply, in a manner that so automatic that it appears smug, that that $50 would instead go to producers of other goods and that our economy would be more productive if the sugar-producing resources were diverted elsewhere. This is Bastiat’s seen and unseen. Honestly, I suspect that neither economists nor non-economists can adopt the idea without a little bit of faith.
Secondly, people don’t know what causes a particular price to change. Hayek painted this characteristic as a feature of the price system. We are able to communicate information about value and scarcity without evaluating the values of others or the actual quantity of an available resource. However, lacking causal knowledge of prices makes for some bad policies. Say that the subsidies and protections subsided and the price of US sugar declined. The consumer would likely not know anything about the subsidies in the first place, much less that they were rescinded. Further, the world is a complicated place and people are apt to thank/blame irrelevant causes otherwise (corporate greed, anyone?).
When economists blame concentrated benefits and diffused costs, they often assume that there is perfect information. THERE ISN’T. People don’t know how the world works well enough to predict with confidence what will happen in an alternate version of reality without subsidies. Nor do they understand the particular determinants of prices in our current world. Half the battle is a lack of knowledge about the functioning of the world – not just that the costs and benefits fail to provide a strong enough incentive for legislative change.
Making the link between policy and prices clear is good insofar as it makes voters informed. Milton Friedman regretted payroll tax withholding because, while workers could still see the tax in their paychecks, they no longer had to pay the income tax from their current money balances each year.
My idea is to help reduce the national deficit by creating a link in people’s minds between deficit reduction and benefits. For every dollar of spending that is eliminated from the government’s expenditure, an equal number of dollars will be transferred to the citizens. So, if we were to cut federal spending on the Department of Defense by $1 billion, then Americans would receive a total of $1 billion in lump-sum transfers that year. Obviously, the first year would include no deficit or spending reduction. But the present value of savings would be substantial. The dry economist in me wants to call this the ‘Fiscal Dividend’ and for equal payments to be made to every single individual in the US, regardless of economic activity. The fiscal conservative in me wants to call it the ‘Freedom Dividend’.
However, remember, that this proposal has to ostensibly be politically feasible. Otherwise, this is all mere daydreaming (which it may be). The above idea would only work if congress members cared about the policies as such apart from re-election (it’s painfully clear that Republicans don’t care about the deficit apart from the electoral implication of saying that they care). There needs to be political pressure for this idea to pass.
Enter the left. The left says that it doesn’t like income inequality. So, let’s do some redistribution. Let’s make this lump-sum payment an entitlement only to households in the lower 60% of income earning households. That 60% is an important number. If the number is too low, then the policy would not have widespread support. If it’s too large, then it neither represents much redistribution nor does it amount to as large a payment per person.
According to the US Census, there were about 130 million households in the US (2015-2019). 60% would be almost 80 million households, each making no more than $85k annually, receiving payments from the government. Eliminating the $4 billion sugar subsidies would produce a one-time check to these households of about $50. Given that the US Federal government is on track to spend almost $30 trillion in 2021, there is plenty of room for cutting and plenty of checks for the IRS to cut. A qualifying household could easily receive a check for several hundred or thousand dollars. Without a pandemic, a thousand dollar check might feel like fantasy. But cutting the budget by 1% would yield a $3,750 check per household. Finally, because the left has a knack for naming things, let’s call this the ‘Justice Dividend’ because it represents transfers from corporate interests to the bottom percentile.
There you have it. My proposal would help to cut the budget and the deficit. It would tie that cutting to redistribution and therefore limit the amount of redistribution that could ultimately occur. It’s somewhat feasible politically. Finally, my proposal would make explicit in the minds of the public the diffuse costs of government largess whether they be large or small. All of this analysis ignores the efficiency gains that would be enjoyed by reducing the span of government command over resources.
The Justice dividend. I really like the sound of that.