10 Questions and Answers about Health Care

1.    Is health care different from other goods & services?  If so, how?

a.    Is health care a public good?  Definitely not, since

                   i.     It is excludable; non-payers can be excluded.

                 ii.     It is not jointly consumed; all of us do not consume all that is produced.

               iii.     It is exhaustible; units of health care consumed by Ben cannot be consumed by Betty.

                iv.     It does not have zero marginal cost in consumption; adding another consumer requires additional production, and therefore, additional cost.

                  v.    And yet, health care does generate a positive externality in consumption, because most people are unwilling to ignore suffering of others; therefore, we all gain value from the consumption of health care by others; most people are willing to pay something for the health care of people who unable to pay for their own health care.

b.    Is health care scarce?  Definitely yes;

                   i.     The quantity of health care available is insufficient for everyone to have all they want without sacrificing something else they also want.

                 ii.     Production of health care requires the use of valuable land, labor, and capital, just like other valuable goods. The owners of the land, labor, and capital used must be paid the opportunity cost of their valuable resources, which makes the supply curve of health care upward sloping.

               iii.     Because it is scarce, health care must be rationed somehow; if not by willingness and ability to pay money, then what?

c.    Do people "need" health care?   

                   i.     Health care is not a single, homogeneous economic good; health care ranges from a band aid and an aspirin to heart replacement surgery.

                 ii.     If some quantity of health care is needed, how much? People do not need any particular quantity and quality of health care.

               iii.     Substitutes for professional health care include watching and waiting (human bodies have incredible recuperative abilities), home remedies, and self care (although the possibilities for self care are substantially limited by law).

                iv.     Different people want different amounts and qualities of health care; people seek to maximize their own net benefit from consuming health care, which means they attempt to find the quantity and quality for which MPB=MPC.

                  v.    Equal consumption of health care by everyone isn't possible, and if it were possible, few if any would say equal consumption by all would be fair.

d.    Is health care a basic human right, regardless of ability to pay? 

                   i.     If so, who has the responsibility to provide health care, since a right for one always implies a responsibility for someone else? Do not say "society" has the responsibility, because "society" is not a person, it is a collective noun.

                 ii.     If so, how much health care and what quality of health care does everyone have a right to? Do not say "enough to stay alive," or "enough to be well," because neither is definable or quantifiable.

e.    Which economic good is health care more like:  cars or food?

                   i.     Health care is more like food, so why don’t we have all the same public policy issues with food that we have with health care?

                 ii.     Why don’t employers typically provide a "food benefit” as part of their compensation to employees?

               iii.     Consider the cost of food per typical person for a year compared to the cost of health care per typical person for a year. Why is health care so expensive, compared to food?

                iv.     Why do we not eliminate restrictions on the supply side for health care?

                  v.    Is asymmetrical information a serious problem with health care? Not really; asymmetrical information is far more serious with automobiles.

2.    What are justifications for government intervention and obstruction of voluntary exchange in health care? Do the conventional justifications offered by economists apply to health care?

a.  Not market power; nothing besides government laws and regulations keeps health care from being highly competitive.

b. Not externalities; even though most people are sympathetic and willing to help others who are suffering, we have no evidence whatsoever that not enough health care will produced without government intervention. We have ample evidence to the contrary.

c.  Not the public good argument; health care has none of the characteristics of a public good.

d. Not the incomplete or asymmetric information problem; consumers know more about health care than they do about their cars.

e.  Certainly not economic stabilization.

f.   What about equity, fairness, and justice?  (is there an efficiency-equity trade off with production or consumption of health care?)  No more so than for any other economic good.

3.    Does health care fit the insurance model?

a.  Yes, for catastrophic illness, we do have low probability of high cost events, which are insurable events, but not for routine health care.

b. Health care insurance generates moral hazard, as does any insurance.

                   i.     May influence eating choices (obesity, junk food), if individuals do not have to bear the full cost of their choices.

                 ii.     May influence life-style choices (lack of exercise, smoking, speeding, riding motorcycles), if people do not have to bear the full cost their choices.

4.    Why are employers involved in health care insurance; they aren't involved in home insurance or car insurance?

a.  There is no philosophical or economic reason.

b. Employer involvement is an historical artifact of wage-price controls during WWII, which kept employers from competing for employees using wages.

5.    Is asymmetric information a serious problem with health care?

a.  No; in which economic good is information more asymmetric:  car repair or health care?

b. Are health care providers better judges of the marginal benefit of health care than patients, and therefore better positioned to decide the quantity and quality of health care someone should consume?

c.  For most goods and services, consumers can and do use price as a principal source of information about value, cost, and relative scarcity; but not for health care, because unit prices for health care services are generally nonexistent; health care providers do not compete on price, and prices generated by voluntary exchange in unfettered markets do not exist, due to government intervention.                                            

d. If we don’t use prices (willingness and ability to pay) to ration health care, then we also cannot use prices to give us information about relative value and cost of health care compared to other goods and services.

e.  If we don’t use voluntary exchange guided by relative prices to ration health care, how can we expect that MSC will equal MSB? We cannot.

6.    What's wrong with third-party payments for health care?

a.  Third-party payments are payments made to producers of healthcare by someone other than the consumer of health care.

b. For most insurable risks, insurance is not a third-party payment system, since consumers generally pay for insurance they purchase (e.g., auto insurance, property and casualty insurance, home insurance, life insurance); but for health care, what is called "health care insurance" is typically paid for by an employer or by tax payers.

c.  What economic outcomes can we expect from 3^rd party payment for health care?

                   i.     Excess demand for health care services.

                 ii.     Shortage of suppliers of health care services.

               iii.     Rising cost of producing health care.

                iv.     Rationing of health care using some criteria other than price, e.g.,

·      Waiting in the doctors' offices and emergency rooms,

·      Denial of insurance claims,

·      Burdensome, bureaucratic procedures to get insurance claims accepted,

·      Doctors who refuse Medicare and Medicaid patients,

·      Denial of medical procedures by review boards, and

·      Limitations on eligible suppliers of health care services (HMO, PPO).

7.    What behaviors from employees can we expect, due to employers using health care benefits to compensate employees?

a.  Employees will demand more health care benefits, due to obfuscation of who is bearing the cost.

b. Low-wage employees typically won't be compensated with health care benefits (e.g., employees of McDonalds), because.

                   i.     Health care is expensive as a percentage of low-income workers’ wages

                 ii.     Low-income workers don’t tend to stay with the same employer as long as high-income workers

               iii.     Low-income workers need money, not health care benefits, since they don’t get much income to pay for food and other goods and services they want; in other words, low-income employees typically don’t want part of their pay in the form of health care benefits.

c.  Money wages of employees will not rise as fast as they otherwise would.

d. Employees will consume health care services beyond the point of MPB=MPC

e.  Employees may be less mobile, remaining in current jobs to avoid loss of health care benefits

f.   Employees may delay retirement to avoid loss of health care benefits

8.    Can government somehow achieve greater economic efficiency and equity by intervening in voluntary exchange markets? In a word, no. In fact, the opposite is true.

9.    What does economic logic tell us is the most efficient remedy, if we find someone who has little ability to pay for health care, but we’ve decided that the person deserves some minimum level of health care? Give the person some money or a health care voucher.

10.Can the U.S. health care “system” be “reformed" from where we are now? Probably not.

a.  We have no reason whatsoever to believe that government operatives will bring us greater efficiency or equity in health care, compared to voluntary exchange.

b. There is no “system” that suspends human nature and the laws of supply and demand, both of which apply to health care, just as they do for car care and food care.

c.  Voluntary exchange in competitive markets gives us as much efficiency and equity as possible, provided we make provision for the rather small number of people who are unable to pay for even modest health care services.

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The 545

Here is a link to an excellent article written years ago by Charley Reese. Every voting citizen of the United States should give this article a read and ponder its message carefully.

Redistributing Income

As you may have noticed, one of the two major political parties in the United States is all about redistributing income.  According to supporters of that particular political party, the distribution of income that results before redistribution is not equal enough and is not fair.  Consequently, much of the legislation supported by this political party is designed to take income away from Peter (who evidently has more income than would be fair) and give it to Paul (who evidently has less income than would be fair).

Members of this political party also complain that the top 1% of income earners in the United States earn way, way too much more than 1% of total income, and the lowest 20% of income earners earn way, way too much less than 20%.  Some people agree with the claims of this political party; some people do not. 

The word "fair" has no clear, settled meaning.  Yet, we all use the word as if we all know exactly what it means.  In my judgment, the word "fair" cannot be used in any logical way in talking about the distribution of income. 

Some people say that "fair" means "equal."  But it's hard to see how equal income for engineers and restaurant servers could be thought fair by anyone.  Moreover, I've never met anyone who thought engineers and restaurant servers should earn equal income.  Some people say that "fair" means "deserved."  Perhaps, but if so, what will we want to say "deserved" means?  Does Tiger Woods deserve his enormous income, just because he possesses athletic abilities particularly suited to hitting golf balls into small holes?  Does Bill Gates deserve his enormous income, just because his mind is so structured that DOS made sense to him for a computer operating system?  Don't we all "deserve" prosperity?

The distribution of income in the United States is unequal because the capabilities of people are unequal and because all people do not want the same goods and services.  Equal income cannot and will not come about in a society of people who have different capabilities and who have different wants. 

Attempts to redistribute income in the United States, which have been ongoing on a major scale since the "War on Poverty" initiated by President Lyndon Johnson in the early 1970s, have scarcely changed the real distribution of income in the United States.  Today, through a variety of transfer payment programs, government transfers about $1 trillion per year from someone who earned the income to someone who did not.  The simple truth is that if somehow overnight, income were distributed exactly equally among the nation's 125 million households, within just a few weeks, income would once again be distributed unequally.  Until people all have the same capabilities and the same economic wants, the distribution of income will remain unequal.

Human prosperity is not the same thing as the distribution of income.  As an observable matter of fact, human prosperity around the world has been rising dramatically over the past 250 years. Perhaps people would benefit by focusing more on the causes of human prosperity and less on the distribution of income.  But try telling that to the political party that favors redistribution of income.

P.S.  I am personally not a member of a political party.  I am not a partisan, so please don't disparage my simple observation of obvious truth for political argument.

Capital and Money Are Not The Same Thing

The word "capital" is bandied about as if the word had a concrete, common, well understood meaning. But does it?

For economists, capital is the third fundamental category of scarce resources --- as in land, labor, and capital --- categories that every faithful student of ECON 101 no doubt memorized. On this account, capital includes factories, equipment, and tools. On another account also used by economists, people are said to be investing in and building "human capital" when they go to college or invest time and money to learn new skills. On both accounts, capital is said to be the fundamental source of rising productivity of labor, without which, rising labor income is not possible.

In financial contexts, the word capital most often seems to mean simply "money." On this account, capital is said to "flow" to its highest valued use, if markets are free, to flow between countries, if unrestricted by governments and their central banks, and to be the life blood and wellspring of economic growth and prosperity. Businesses are sometimes said to be "capital constrained" or "under capitalized." Countries are sometimes said to restrict capital outflows (e.g., China), or to attract capital inflows (e.g., America).

Researching the etymology of the word, we find that an early meaning of the word "capital" is from the medieval Latin capitale, meaning a "stock" of something. On this account, one could have capital in the form of grain, cattle, gold or just about anything of value --- including a stock of money.

But on all accounts, the word "capital" really means something beyond simply money. To accumulate a stock of anything requires saving, as opposed to consuming or using up the thing. Hence, money can be capital, but not all money is capital. How so?  Income that is saved in the form of money is capital. But newly created money --- which is to say money created from "thin air" by commercial banks and the Fed --- is not capital.

The world is awash in money these days. But the world is not awash in capital. Is it mere coincidence that the substantial slowdown in growth of GDP in America over the most recent eight years correlates substantially with rapid growth in newly created money, much of which now resides in reserve accounts of commercial banks? Or is it a slowdown in accumulation of real capital --- which requires saving --- that better explains the slowdown in economic growth?

A second early meaning of the word "capital," also from medieval Latin, is capitalis pars, which designated the principal sum of a money loan. In medieval days the principal sum of a loan of money pretty much had to come from money saved. In those days, it was easy to understood that one could not borrow money that had not first been saved. Consequently, if one borrowed, one would typically be borrowing capital.

Not so in today's world of commercial banking, central banks, and money created from nothing. So called "quantitative easing" does not create capital; it just creates new money. In the United States, the Fed purchased Treasury bonds with that money, enabling the federal government to continue increasing its spending.

If some of that spending finds its way to you, you probably don't mind. And since none of that increased spending requires reduced spending by someone else, no worry, right? It's rather like a free lunch, right? Except, there ain't no such thing.

Yes, here I am, beating an old dead horse once again. You can't borrow that which has not first been produced and saved, an idea I've written about before, here.  But you can borrow newly created money, which amounts to a kind of counterfeiting. Here's how it works.

You deposit $1 in your bank account, say a dollar of income you earned by working. By law, the bank is allowed to lend 90 cents of your dollar to Tim. The bank must hold only about 10 cents in its reserve account with the Fed. Now you have $1 that you can spend, and Tim has 90 cents that he can spend. Where did the 90 cents of purchasing power come from? Thin air, as they say.

You created your $1 dollar claim over goods and services by providing a service called labor. But Tim created no goods or services in return for his newly created command over goods and services. Does Tim's new claim on goods and services somehow seem bogus?  You decide.

When Tim spends the 90 cents, that 90 cents shows up in another bank pretty quickly. The second bank is allowed by the Fed to lend 81 cents to Bob. If you like math, you can see where this is going. If the banking system as a whole does all the lending its allowed to do, retaining only 10 percent of deposits in reserve, your original $1 deposit into the banking system can result in up to $10 additional money created from thin air.

The federal government would consider it a grievous crime if Tim were to counterfeit 90 cents on his own and spend it, but it's somehow not a crime if the commercial banking system does what amounts to the same thing.  To add insult to injury, the banking system earns interest on its loans of your dollar to Tim, Bob, and so on. If you have an interest bearing account with your bank, the bank pays a small fraction of that interest to you and keeps a larger fraction for the bank's owners.

Through the magic of fractional reserve banking, people are able to borrow money that has not been saved by its owner. It's a kind of alchemy, seemingly generating something from nothing.

Some folks worry that money creation from thin air will ultimately lead to price inflation. If it does, then the counterfeiting we call fractional reserve banking turns into outright theft, since price inflation robs you, the original owner of the $1, of purchasing power. If you had saved a dollar in 1913, the year the Fed was created, today that dollar would purchase perhaps 9 cents worth of goods and services at today's prices. You might be forgiven if that loss of purchasing power seems to you a little like theft of 91 cents of your saved dollar.

When it is the federal government that borrows your $1, we get an even more insidious outcome. The federal government doesn't repay its debt, since it just creates additional debt to pay you back plus interest. Worse still, government acquires purchasing power over goods and services without taxing.  If government is building roads and protecting us from foreign despots, that's okay by me. But of course, federal spending isn't limited to road building and national defense.

Central banks around the world, especially the Fed, are making sure that the world is awash in money. But that money is not capital. It's just newly created claims over goods and services generated as if by magic from thin air.  Some believe that central banks around the world have built a house of cards. Let us hope that the wind does not blow too hard in the coming months.

The FairTax Is No Fantasy

The editorial below was published originally in The Roanoke Times, April 10, 2006. With all the presidential candidates laying out their ideas for tax reform, one wonders why none of them are proposing the FairTax.

The FairTax Is No Fantasy

By David L. Kendall

Kendall is professor of economics and finance at the University of Virginia's College at Wise.

Some critics of the FairTax, HR 25, such as Christian Trejbal in his March 22 column, "FairTaxers pitch a fiscal fantasy," call it a fantasy and a crackpot idea. But benefits of the FairTax are no fantasy.

If enacted as written, HR 25 would eliminate all federal income taxes for individuals and corporations. It would eliminate oppressively regressive payroll withholding taxes, now the cruelest burden on the working poor. The FairTax would replace all federal income and payroll taxes with a simple, progressive and efficient national retail sales tax.

Because the FairTax would eliminate all individual tax returns, April 15 would be just another pleasant spring day. HR 25 would eliminate the Internal Revenue Service and its annual abuse of our Fourth and 14th Amendment rights. A small federal agency would be needed to administer the FairTax, but the IRS as we know it would be abolished.

The FairTax would collect federal sales tax from every retail consumer in the country, including foreign visitors and even underground criminals, greatly enlarging the federal tax base. With a larger base, the average tax rate paid would go down, while the U.S. Treasury Department collects the same federal revenue.

The monthly prebate paid to all households under the FairTax would not be a new entitlement program. The prebate would simply keep income in the hands of the people who earned it. The HR 25 prebate is to the FairTax what the personal exemption is to the income tax, just sooner and fairer.

Recent studies estimate that the underground economy is about $1 trillion per year, all of it untaxed. That's tax evasion on a scale that simply could not happen with the FairTax. Significant evasion of the FairTax would require retailers like Wal-Mart, Kroger and your local dentist to help consumers avoid the sales tax; very unlikely. Potential tax evasion with the FairTax pales compared to the massive income tax evasion already happening.

The FairTax would bring greater accountability and visibility to federal tax collection. All Americans would understand clearly how much federal taxes they pay. People could even plan for taxes they would pay in the future, removing the mystery we face now.

With the FairTax, Congress would be compelled to be up front about tax increases. That's not the case now. When Congress changes tax law now, it takes years to sort out who won, who lost and how tax revenues changed.

The FairTax offers still more. Eliminating the federal income tax would attract more foreign investment to the United States. It would also give U.S. firms incentives to keep new manufacturing capacity in the United States. That means more jobs and faster economic growth.

Our federal tax code gives corporations enormous incentives to export jobs, money and manufacturing off shore. Studies suggest that replacing the federal income tax with a national retail sales tax could cause as much as $10 trillion to flow back into our economy from abroad to finance new plant and equipment. The long-run economic benefits for our children are obvious.

Businesses and other organizations spend more than 6 billion hours each year complying with the federal tax code. That's time and expense wasted. Economists estimate that compliance costs top $250 billion annually. Although out of sight and mind, those costs are real, and consumers are paying them now.

Through competition, the FairTax would compel businesses to lower retail prices. For corporations, taxes and compliance costs are like any other cost of doing business; they must be recovered in prices. With the FairTax, consumers would see retail prices drop by 20 percent to 25 percent.

So, if the national sales tax were 30 percent, the retail cost of the $100 iPod shuffle plus tax would not be $130. Instead, it would be more like $80 plus a $24 sales tax. Because consumers would have their whole paycheck to spend, instead of their "after withholding" paycheck, the $104 iPod, including tax, looks pretty reasonable.

The current federal income tax code is widely regarded by just about everyone as unfair, wasteful and mind-numbingly complex. It's time for dramatic, real change. It's time we demand that Congress pass HR 25.

The Law Means Nothing in 21st Century America

Here, Michael F. Cannon, an expert on the economics of health care and the provisions of the Patient Protection and Affordable Care Act (PPACA), remarks briefly on the June 25th, 2015 decision of the Supreme Court to allow the IRS and the Obama administration to ignore the law.

Here, you may read a few succinct words from the dissent of Justice Antonin Scalia, who along with Justices Clarence Thomas and Samuel A. Alito Jr., voted to uphold the law, as written by Congress. Six justices, Sotomayor, Kagan, Ginsburg, Breyer, and Kennedy, and Chief Justice John Roberts, voted to ignore the words Congress specifically wrote into the Obamacare Act.

Given the completely clear language of the Act, and given the well-known, express intention of Congress to deny Obamacare subsidies for citizens of states that chose not to establish their own exchanges (a provision of the PPACA that Congress fully intended to entice states to establish their own exchanges), today's Supreme Court decision in King v. Burwell makes a complete and absolute mockery of the rule of law and the Constitution of the United States.

How can Americans be anything but ashamed of our President and the six members of the Supreme Court responsible for today's ruling?

It's now completely clear that Americans live by the rule of a few privileged and powerful men instead of the rule of law, men who are able to ignore completely---evidently with impunity---the Congress of the United States and the laws it passes.  Forget about the Constitution; it means nothing.  Forget about laws passed by Congress and signed by the President; they mean nothing.  Forget about liberty; forget about the principles of law and justice that once made America great.

What now can this President and future presidents not do?  What principles now limit the power of  American presidents?  What law cannot be broken, if the President chooses to break it? Evidently, the President of the United States can do whatever he wishes to do.  Today is a very dark day in American history.

Public Choice Economics

Principles of the Economics of Public Choice

• Public choice applies the methods of economics to the theory and practice
of politics and government. The economics of public choice gives us useful
insights into the nature of political decision-making.
• Just as self interest motivates the choices people make, self interest also
motivates the decisions people make in a social context. The Fundamental
Hypothesis of Economics (FHE) applies.

• Decision making in a social context (the so-called "public sector") is
necessary for every society. But the fact that voluntary exchange markets
may sometimes fail to yield efficient outcomes — or outcomes that someone
considers fair — does not mean that government operatives will do a better
job. Governments fail, too. Political decision making is not a dispassionate
pursuit of the "public interest," if for no other reason, because nothing is in
the interest of everyone.

• What is in the "public interest" cannot be defined in a meaningful way,
because we live in a world of multiple values. Different people have
different values and different interests. We also live in a world of conflicting
values. For example, which do you prefer; greater safety or greater freedom
and opportunity? Arguments that depend on the notion of "public interest"
are fundamentally flawed.

• In the struggle between different interests, small groups with narrowly
focused interests — what we often call special interest groups — have more
influence in decision making than much larger groups such as consumers
and taxpayers. Because enormous benefits can be won using the political
process and the force of government, it is rational for special interest groups
to spend large sums of money on lobbying for special privileges — an
activity that economists call "rent seeking." Concentrated benefits paid for
by widely dispersed costs give special interest groups outsized influence in
political decision making.

• The political institution of representative government (a.k.a., a republic)
creates a political market for votes, in which legislators engage in what is
called "logrolling" on behalf of the special interest groups that support
politicians with money. Logrolling is politician A agreeing to vote for
politician B's favored bill, in return for politician B agreeing to vote for
politician A's favored bill, when in fact, neither politician likes the other's
bill. With logrolling, special interest groups that want A's and B's bills
benefit handsomely, while consumers and taxpayers absorb the cost.

• In direct democracy, using mechanisms such as referenda, the majority
voting rule that is commonly adopted allows a 51 percent majority of the
voters to overrule 49 percent of the voters, and overrule up to 100 percent of
the citizens who don't vote. In representative democracies, even smaller
fractions of the population have greatly outsized influence, due to lobbying
and the outcome of concentrated benefits received by special interest groups
at the expense of widely dispersed costs levied across all taxpayers and
slightly higher prices paid by consumers for goods and services.

• Many economists and political scientists who study public choice agree
that political decision making must be constrained by overarching
constitutional rules. But as the American experience demonstrates, even a
government that is supposed to be tightly constrained by constitutional rules
and limited powers soon enough becomes a government that ignores
constitutional rules. The power of concentrated benefits to the few, with
costs widely dispersed across the many, is evidently difficult to impossible
to impede. Regardless of written laws, we always have a government of
men, not a government constrained by laws.

Who Bears the Burden of the Income Tax on Corporations?

Who Bears the Burden of the Corporate Income Tax?

No other question in the arena of public finance is as controversial as “who bears the burden of the corporate income tax.  Economists who specialize in public finance simply don’t know.  So, if you encounter an economist who says he does know, you will know you have found an economist who says more than he knows!

The first fact to get on the table right at the beginning is that only people pay taxes.  Corporations remit taxes, of course, based on income that they earn (a.k.a., net income or profits), but that does not mean that corporations (which are not persons) bear the burden of taxation of corporate income.  By now in this course, we are familiar with the difference between tax incidence and tax liability. 

Whoever it is that bears the burden of taxation of corporate income, those persons will get to spend (or save) less each year than they otherwise would, if the United States did not tax income earned (a.k.a., earnings or profits) by businesses registered with the IRS as C corps.   Only persons from three broad categories could possibly bear the burden.  They are (1) shareholders of a corporation (owners of the corporation), (2) owners of the factors of production (land, labor, and capital), which the corporation pays to use, (3) persons who buy goods or services from the corporation (consumers).  Consequently, I am absolutely certain that I do not bear any burden of the income tax paid by GM, since I am not a shareholder, I do not sell GM factor services that I own, and I do not buy GM products. 

Students of public finance will recall that people who have few options to avoid a taxed activity (such as earning income or buying cigarettes or buying insulin) will end up bearing all or part of the burden of any tax, regardless of who actually has legal liability to collect and remit the tax.   Economists say that such persons have “inelastic” demand (or supply) curves for the activity.  Perfectly inelastic demand or supply curves result in complete bearing of the burden of a taxed activity in which one engages.  

So, if I must work to live, and if the politicians tax wage income, then I will bear nearly all the burden of a tax on my wages.  On the other hand, if I am independently wealthy, and the politicians tax wage income, I can avoid bearing part of the burden of a tax on wage income by reducing the hours I work for pay, up to and including not working for wages at all!

I am really confident that shareholders bear the immediate burden of a new or a raised tax on corporate income in the economic short run.  They do so because the corporation will remit money to the government that would otherwise have gone directly to shareholders equity (retained earnings) or would otherwise have been paid directly to the shareholders as dividends.  Following the imposition of a new or a raised tax, corporations will not have time to raise the price of their products to shift the tax forward to consumers, nor will they be able to shift the tax backward to employees by reducing their wages and salaries, nor will they be able to shift the tax backward to owners of land they are renting by negotiating a lower rent, nor will they be able to reduce what they are paying for any other factor of production.

But in the economic long run (after people make all the adjustments to a new tax they care to make), I think that consumers of goods and services sold by corporations bear most of the burden of taxation of corporate earnings.  I cannot be sure, though, because the lived world does not allow economic researchers to conduct an experiment that can appropriately hold everything else constant while we impose a new tax and measure everyone’s income before and after the new tax, after an appropriate amount of time has passed to allow everyone to make all the adjustments they care to make.

 But we can be sure that given enough time, shareholders (who are supplying capital to finance activities of corporations) will reduce the quantity of money (capital) they supply, if the rate of return to holding shares of corporations is lower than the rate of return such savers (a.k.a., investors) can earn through some other activity.  Alternatives to holding shares of stock in a corporation abound.  One can buy gold, paintings by Monet, farm land in the Midwest, corporate bonds, silent partnerships in non-corporate forms of business, etc.  Investors (a.k.a., savers) do not have to buy shares of stock in  C corporations in the United States.  Capital always flows to the highest bidder (of equal risk), given enough time, just like water seeks the lowest level.  So, owners of capital have options for avoiding the corporate income tax.  It’s hard to imagine how shareholders will end up bearing the burden in the economic long run.

What about employees of corporations?  Can owners of a corporation (shareholders) push the burden of the corporate income tax backward to its employees, by reducing their pay (or by withholding future raises as inflation occurs)?  Or, can employees just work somewhere else, should owners of the corporation try to shift the tax?  Do employees have options to avoid the backward pushing? 

At this point, I want to point something out.  Shareholders do not meet somewhere and vote whether or not to try to shift the income tax levied against their corporation.  Moreover, employees have no way of knowing whether their wages and salaries are not rising fast enough to avoid getting some of the burden pushed back to them.  The very language that economists use to talk about shifting tax incidence is actually a little silly, since any tax shifting that occurs is completely hidden from view and takes an unknown amount of time to occur, if it does occur.

What about consumers who purchase the products of corporations?  In the economic long run, can corporations simply raise their prices to shift the burden of their income tax forward to consumers?  I think that corporations can and do just that.  After all, businesses must be able to recover all the costs of production, plus a competitive profit to compensate owners of the business, in the economic long run.  Businesses that cannot cover all the costs of production will quit producing, in the economic long run.

From the point of view of a business owner, paying taxes is just like paying the electric bill.  Taxes can be thought of as a slip of paper that says “you paid your taxes,” which slip of paper is required to produce and sell, and which is just another cost of doing business.  Consequently, I think that in the economic long run, prices of goods and services produced by corporations adjust upward to include the complete burden of the corporate income tax, thereby shifting the burden of the tax to people who buy those products. 

But, I will conclude by repeating that I cannot know for sure, nor can any other economist.         

What Is the Burden of Federal Debt?

"We owe it to ourselves" was the common refrain that I heard from my professors as an undergraduate and graduate student about federal debt. Here are some questions that might help clear up whether growing federal debt is a serious problem.

1. Does outstanding federal debt ever have to be repaid?
2. If federal debt were repaid, who would do the paying, and who would receive the payment?
3. If federal debt does not have to be repaid, the U.S. Treasury still has to pay interest to whoever holds Treasury bills and bonds.  What are the economic implications of interest on the debt?  Who bears the burden of paying the interest and who benefits from receiving those interest payments?

So far, federal debt has not been repaid.  In fact, federal debt has been growing for decades.  You and I could not continuously expand our debt, but the U.S. Treasury is different.  Because Congress can tax and because the Fed can create new money, the U.S. Treasury has a much larger capacity to repay debt (if it had to) and to pay interest on outstanding debt (which it must do to avoid default).  As long as the real economy continues to grow, federal debt does not have to be repaid, and it seems quite unlikely at present that all federal debt will ever be retired by repayment of principal.

If federal debt were repaid, repayment could come from only two possible sources: (1) taxes collected in excess of federal spending and (2) money creation.  If taxes in excess of federal spending were the case (a federal budget surplus), tax payers would be the payers and holders of maturing Treasury bonds would be the recipients.  I pay taxes, but I don’t own much in the way of Treasury bonds, so I guess I would be a payer, not a receiver.  How about you?

If federal debt does not have to be repaid, the Treasury still has to pay interest on outstanding debt.  Interest on outstanding debt can be paid from one of three sources: (1) taxes collected in excess of federal spending, (2) money creation, and (3) additional debt.  Obviously, people who own Treasury bonds are the beneficiaries of interest payments.  It isn’t obvious at all who bears the burden of making those interest payments.

Tax payers are not currently bearing a burden to pay interest on outstanding federal debt, because federal spending continues to exceed tax collections.  That fact means that interest is paid through money creation (when the Fed buys U.S. Treasuries) and by issuing additional debt, which expands outstanding debt, of course. 

The real burden of federal debt is the value forgone by using scarce resources in ways they would not have been used, aside from the government’s borrowing.  If government’s use of those scarce resources also creates value, then what we are getting is a transfer of value from Bobby to Annie, with maybe a net loss and maybe a net gain.  Transfers of value from one person to another cannot be objectively measured to see if we got a net gain.

If government’s use of scarce resources did not create value for anyone, but nonetheless caused a loss of value for someone, we end up with inefficiency and a net loss.  But most government spending benefits someone, somehow, and once again, because interpersonal comparisons of value are not really possible, we are hard pressed to say much more.

If government control of scarce resources diverts resources away from production of capital goods that would otherwise have occurred, it is possible that growth of the real economy could be retarded.  If growth of the real economy is retarded, that reduces future consumption opportunities below what they otherwise could have been.  Economists who study this phenomenon have been unable to reach what everyone takes to be conclusive, persuasive evidence about this issue.  In other words, no one has been able to persuade lots of economists one way or the other about whether government control of scarce resources has retarded growth of the economy, although any number of economists make statements about it one way or the other.

The expression “we owe it to ourselves” is pretty silly, really.  Some part of federal debt (about 40%) is debt held by private citizens of America.  Interest payments on that internal net debt amounts to a transfer of purchasing power to the owners of that debt.  Although the payers of that interest are Americans, as are the recipients of those interest payments, “we” are not “ourselves.”  In other words, growing federal debt means growing transfer of purchasing power over goods and services to people who lend to the federal government.  So, even internally held federal debt may pose some issues about which people will have normative opinions. 

For that part of federal debt that is held externally (by Japanese citizens in large measure, and by other citizens of the rest of the world), interest payments on U.S. federal debt enlarge their consumption opportunities.  But it is far from clear that those interest payments reduce the consumption opportunities of Americans.  The evidence so far is that the standard of living of nearly all Americans continues to rise.

So, should we worry about growing federal debt?  Yes, if the real rate of growth of our economy is retarded, and no, if it is not.  I am persuaded that we do not really know, but nearly everyone has a normative opinion about the wisdom or stupidity (whichever it is) about growing federal debt.   

Whither the Welfare State?

Here, George Will provides an accurate and succinct description of the growth of the welfare state in America over the past three or four decades.  As usual, Mr. Will gets it right and offers entirely thoughtful comments.

Unless I misread his intent, Mr. Will is less than happy about the growth of transfer payments now received evermore broadly by Americans who would not be considered "needy."  Although I rarely find myself at odds with the ideas of George Will, I will offer a different perspective for explaining continuing growth in the welfare state in America and in other developed countries of the world.

The American economy continues to grow at a modest pace (about 2% per year over the long haul), which is far more impressive than pundits seem to think.  Our GDP weighs in at about $17 trillion per year, which is really a huge economy.  China is second at about $9 trillion per year.  Japan is third these days at about $5 trillion per year.

Even a small rate of growth for something as large as the American economy generates impressive gains in income per household.  Two percent of $17 trillion is about $340 billion.  If that $340 billion were divided equally among the approximately 118 million households in America, just 2% growth in GDP per year would bring an additional $2,800 per year to each household.  Or, examined on a 10-year period (which government types are fond of doing), a $31,500 increase in household income over the 10-year period, accounting for compound growth.

Of course, annual gains in GDP are not earned equally across all 118 million American households.  The widening gap between annual income of the top quartile and the bottom quartile of households in America is frequently the topic for hand wringing by those who call themselves progressives.

Mr. Will writes in his essay,

"America’s national character will have to be changed if progressives are going to implement their agenda. So, changing social norms is the progressive agenda."  

He is correct, of course.  But I propose that we all might as well get used to a sea change in America's national character and its social norms.  Let me explain.

In a word, "technology."  The widening income gap between the top and bottom of the statistical income distribution in the United States (and in other developed countries) is pretty much a direct result of advances in technology, in my judgment.

People who own income streams generated by creating technological advances (e.g., Bill Gates), or by owning income streams generated by astute use of technology (e.g., many IT employees across the nation), enjoy high and rising income.  People who own only their labor, made evermore obsolete by advancing technology, suffer from low and falling income.  Hence, the expanding income gap between those who benefit from advancing technology and those who don't.

Tyler Cowan has written a book Average is Over: Powering America Beyond the Age of the Great Stagnation   that explores many implications of the truth that advancing technology is making common labor obsolete for production of goods and services in our economy.  But people who own nothing other than common labor services must somehow keep body and soul together.

The answer is not "work harder," as any number of pundits on the right are wont to expound.  Nor is the answer "get more education," as any number of politicians and academicians have advised.  The simple truth is that an ever-rising number of people are not now capable of and will not become capable of inventing advanced technology, or becoming astute users of advanced technology.

Advancing technology makes it ever more possible to produce greater quantities and better qualities of goods and services with less human labor.  In the United States, our creation and use of advancing technology has already enabled us to transfer about 14% of annual GDP from people who earn it to people who did not earn it each year.  Although many lament such expansive transfer payments, the amazing thing is that it is possible to make such transfers while the standard of living for the payers of those transfers continues to rise!

Think for a minute of all the people who have jobs that literally could be done without.  I can easily think of tens of people I know whose job falls into that category.  Even what I do, which is teach economics and finance to college students, is quick on its way to falling into that category!  Yes, even college teachers will be replaced in the fullness of time with advanced technology.

On the one hand, advancing technology that permits a rising standard of living for everyone on the planet is a good thing.  On the other hand, most of us will not be inventors of that technology, nor will we be astute users of it, which means that most of us will have declining work-based claims on goods and services as technology continues to advance.  Yet, we will still want to eat, be clothed, be sheltered, and enjoy life.

Yes indeed, America's national character and social norms will definitely have to change.  They have been changing for decades, and they will continue to change.  The challenge we and other developed countries around the globe face is how to live in a world of abundance --- a world in which advancing technology makes it possible for an ever-growing percentage of GDP to be transferred from those whose current job generated it to those who either have no job or who have a job that is unnecessary for generating goods and services.

In my own insignificant corner of the world, I continue to add value by what I do because I have been an early adopter of computer technology throughout my teaching career.  I became certified in online teaching, for example.  I am a fairly astute user of technology.  But, still, I am not safe.  I can foresee the day when what I do will be unnecessary, due to a combination of clever computing and clever computer programming.  Call it a fairly meager advance toward artificial intelligence, which I think is not far off.

In a world of abundance --- a world in which scarcity of resources has been greatly attenuated --- we face a disconnect between work, income, and wealth.  I grew up in an era when hard work and education led to higher income.  I grew up in an era when social norms required attention to being a productive member of society.  I grew up in an era when national character and social norms dictated that those who would not work hard and obtain an education should not earn much income.

But what is one to do when what one can do has little productive value?  Which of you reading this essay is capable of inventing advanced technology?  Which of you is capable of even using advanced technology astutely?  And what of technology that is literally just around the corner that we cannot yet even imagine.  If you doubt that advancing technology is likely to be the rule, all you need to do is think about the technological advances that have occurred in just the most recent 50 years. David Hume was right in noting that the future is under no obligation to repeat the past.  Still, I think the future of advancing technology will be very much like its recent past.

Technology is advancing at an advancing rate.  It's not even linear; it's exponential.  Advancing technology is not a bad thing; it is a good thing.  But we humans will have to figure out a way for the fruits of advancing technology to benefit all of humanity, not just the inventors and the astute users.

I will close this essay with an analogy, one that some readers may find offensive, although no offense is intended.  My dogs have limited intellectual capacity,  even though they appear to have unlimited willingness to please.  No amount of hard work or eduction will enable my dogs to learn algebra.  If the material well-being of my dogs somehow depended on their learning algebra, they would be toast.

I submit that George Will and any number of others who lament rising transfer payments in America and around the world may as well get used to a continuing rise.  How else will the masses keep body and soul together?  How else will most of us enjoy the rising abundance of real goods and services available to humanity?

I confess that I have no good answers to the questions I just posed.  But I think they are questions we must grapple with out in the open, because I absolutely believe that technology will continue to mitigate the ravages of scarce resources.  I invite economists around the world to quit talking about scarcity and get on to the challenging business of creating economic theories that embrace abundance and the problems of income distribution in the face of rising abundance --- abundance that is the result of a very small number of persons, compared to the population of earth.

I am a confirmed classical liberal, as readers of EconoBlast have surely noticed. I believe fervently in individual liberty.  My recently published book, Morality and Capitalism, is a testament to that fact. When I note that transfer payments in the United States will be an ever-rising proportion of GDP, it is not because I favor the progressive policies of the current federal administration.  I have not lost my way, but the path is getting harder to see.