Stop Trying to Pick Winners and Losers in the Economy, Mr. President

Posted on by Andrew B. Wilson

The recurring theme in President Barack Obama’s State of the Union address was “winning the future.” It’s a good theme — focusing attention on the need for U.S. workers and businesses to face the challenge of competing in world markets. We are no longer living in a world — as the president pointed out — where “your competition” in seeking a job is “pretty much limited to your neighbors.” Unfortunately, the president stood his “winning the future” theme on its head through a misplaced belief in the ability of government to do a better job of picking winners and losers than the free-enterprise system is able to do on its own.

Obama cited high-speed rail as one of the primary would-be winners, saying (emphasis added): “Within 25 years, our goal is to give 80 percent of all Americans access to high-speed rail. This could allow you to go places in half the time it takes to travel by car. For some trips, it will be faster than flying.”

Show-Me Institute scholars have conducted detailed cost-benefit studies of high-speed rail and found that it would be an egregious waste of money. It is not just that 200-mph bullet trains and the infrastructure needed to support them are extraordinarily expensive. There is also the fact that it may not be practical to run even 110-mph passenger trains on the same tracks as freight trains.

Other would-be winners identified by Obama included:

  • Construction: “Over the last two years, we’ve begun rebuilding for the 21st century, a project that has meant thousands of good jobs for the hard-hit construction industry. And tonight I’m proposing that we redouble those efforts.”
  • Wireless technology: “Within the next five years, we’ll make it possible for businesses to deploy the next generation of high-speed wireless coverage for 98 percent of all Americans.”
  • Clean energy (emphasis added): “Now, clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling. So tonight, I challenge you to join me in setting a new goal: By 2035, 80 percent of America’s electricity will come from clean energy sources.”

Let us leave aside the staggering pick-a-number-out-of-the-sky presumption of that last statement, which suggests that in two-plus decades our nation will reduce coal from more than 50 percent of total electricity generation to no more than 20 percent. It seems that the president is prepared to use a two-edged sword to make that happen: First, hitting up taxpayers in order to lavish billions of dollars in subsidies on wind, solar, and other producers of politically favored forms of alternate energy. Second, forcing utilities to buy at inflated prices from the same subsidized producers, which — by federal fiat — would be guaranteed the lion’s share of the power industry’s demand for energy. That, in turn, would force the utilities to jack up their rates on homeowners and businesses.

There is an overwhelming body of scholarly evidence, to which the Show-Me Institute has contributed, supporting the conclusion that whenever government intervenes in the marketplace in order to try to pick winners and losers, they almost always wind up picking losers and compounding failure. If, as the president suggests, there is a bright future for high-speed rail, high-speed wireless, or wind and solar energy, there is no reason to suppose that private companies would not support such enterprises, lured by the prospect of future growth and earnings.

Finally, Obama talks of giving Americans access to high-speed rail and other projects built at taxpayers’ expense. In doing so, he neglects to consider the deadening effect upon the economy as a whole that has come from ramping up public expenditures. Now or in the future, that can only mean higher taxes on individuals and businesses.

During the past two years, the federal government spending has increased from slightly more than 20 percent of GDP to nearly 25 percent. That is 4 percent of GDP that almost certainly would have been put to better use in the private sector. It is one reason that may be cited for the painfully slow pace of the economic recovery.

On Nov. 2, voters in Missouri and most other states indicated a strong desire for smaller and less intrusive government. Our president does not yet seem to have gotten the message.

Andrew Wilson is a senior editor and writer for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy. He contributes frequently to the American Spectator, the Weekly Standard, and other national publications. This commentary also appeared in the American Spectator.


A State of Arrogance

Posted on by John Payne

Rather than watch the State of the Union address on television, I opted to read President Barack Obama’s remarks, which is how Americans for most of our history learned of this annual message from the president. From the Thomas Jefferson administration until Woodrow Wilson’s first address in 1913 — and again from 1924 through 1932 — presidents sent their address to Congress as a written message. Even before Jefferson rejected the “speech from the throne,” as he called it, Washington refused to discuss any matters relating to “legislative matters” for fear that he might be seen as trying to influence another branch of government. These customs suggested a modest role for the president in the government and, moreover, a limited government role in the lives of Americans.

By contrast, the modern State of the Union address is carefully orchestrated both by politicians and the media to instill a feeling of awe in viewers. Like a well-rehearsed religious ceremony, participants rise and show their approval at predetermined breaks in the speech as the president releases a steady stream of policy proposals, like mystic prayers that he is confident will elevate his people. This spectacle places government — especially the president — at the center of our lives, but this is as backward as the medieval idea that the sun revolved around the earth.

Last night, Obama briefly acknowledged that America’s free-market system “sparks the creativity and imagination of our people,” but quickly moved on to extol government subsidies for, among other things, high-speed rail, broadband Internet access, and renewable energy sources. All these projects stifle individual creativity and imagination by attempting to direct innovation and economic growth from on high — they are a kinder, gentler central planning and reflect what Nobel Prize–winning economist F.A. Hayek called “the fatal conceit” that politicians know better than the dispersed knowledge of the people they rule.

In fact, it is everyday people using bits of knowledge in their particular areas of expertise who keep the economy functioning and drive it forward. Not only does the president not possess the knowledge necessary to understand and successfully redirect that multitude of choices to his preferred ends, it is impossible for him to possess it. Only an entrepreneur facing the discipline of profit and loss can discover which new energy source will prove popular. Only a rural resident weighing the costs and benefits of faster Internet access can decide whether it makes sense for him. Only a commuter running late for work can decide whether high-speed rail is more efficient than driving. The economy, Hayek explained, is the product of human action but not human design, so it must be steered by the choices of individuals free from government influence and coercion.

In The Theory of Moral Sentiments, Adam Smith wrote about the arrogance of the “man of system,” who “seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.” But, as Smith points out, we are not chess pieces; each of us has different hopes, goals, and dreams — and different ideas about how to achieve them. We naturally resist the hand of the man of system when it tries to move us away from our chosen paths and ruin all the grand designs of politicians and their planners. People will flourish most when an equitable set of rules is enforced, but they are otherwise left to move about life’s board as they see fit.

Political rhetoric like last night’s speech may sound exquisite and offer hope for great improvements in the human condition, but, almost without exception, the improvements we know of came about not from a government plan but from individuals going about their lives and pursuing their own goals. Presidents may flatter themselves with the idea that they are the center of the universe, but as King Solomon, who knew something about the arrogance of public officials, wrote in Ecclesiastes, “vanity of vanities; all is vanity.”

“Don’t Let Illinois Balance Its Budget on the Back of Your Business. Choose New Jersey – We Mean Business”

Posted on by Christine Harbin

Gov. Chris Christie of New Jersey launched an ad campaign intended to lure businesses from Illinois to New Jersey. He’s capitalizing on the fact that Illinois recently raised its top marginal income tax rate from 3 to 5 percent.

This shows that taxes influence people’s behavior. It typically occurs on states that share a border, such as Illinois and Missouri. I have previously highlighted examples of the use of tax rates in advertising on Show-Me Daily.

However, this can also happen between states that do not share a border. As David Stokes highlighted earlier this week, the recent Illinois tax hike caused Jimmy John’s to decide to move its headquarters from Illinois to Florida, which has no income tax.

Missouri’s own governor, Jay Nixon, would be wise to study Christie’s strategy. According to Christie’s advertisement, New Jersey levies lower tax rates that affect all businesses, without exemptions for favored groups. Nixon uses a different strategy to attract businesses to Missouri: He targets favored businesses and industries, giving them special exemptions, and leaves it to those who remain in the tax base to pick up the cost.

One last thought: The income tax is not the sole determining factor that influences a person’s behavior. Many people focus on the strict number of the top marginal income tax rate when considering the effects of tax policy, but they make a mistake when they fail to account for all the other wealth that the government takes from its tax base. Christie fails to consider this in his advertising campaign. For example, although Missouri assesses a higher top marginal income tax rate than Illinois, it has much lower rates on other measures. Specifically, Illinois has higher property taxes, worker comp payments, and excise taxes on selective products like cigarettes and alcoholic beverages.

Government: Getting in the Way of You and Your Lunch

Posted on by Christine Harbin

On Monday, the city and county government in Edwardsville, Ill., banned the Pi Truck from selling pizza in the city. Edwardsville isn’t the only place that has banned food trucks — the municipality of Clayton has, too.

This demonstrates how the government can get in the way of business. And, when it does, business owners and consumers both lose. The story of the Pi truck illustrates how regulation by local governments may quash entrepreneurism and innovation and reduce freedom of choice. Because of these local restrictions, many hungry consumers cannot enjoy a freshly baked pizza on their lunch break, despite being willing and able to pay. As an unintended negative consequence, individuals have to drive out of their way in order to enjoy the product. (It certainly defeats the purpose of a food truck that travels to the consumer, doesn’t it?)

What is the ostensible reason for this particular ban? Do existing restaurants in the region lobby their government to tilt the playing field to their favor? Instead of competing with food trucks, do they convince their government to kick out their competitors? Does the local government enforce a stricter land use and aesthetic regulation of the area? Do concerns about health safety exist? If yes, then why is it OK for vendors at the Taste of Clayton to serve food outside, but not OK for food trucks?

I am in the process of tracking down the regulations in Edwardsville and Clayton that restrict food trucks from selling products in the region.

Sure, the pizza truck can tweet, but can it make phone calls? If it can, I encourage it to call me at the Show-Me Institute, because I would love to highlight this story on a free-market field trip!

Missouri’s Attorney General Is Still Not Yet On Board Florida Lawsuit

Posted on by Christine Harbin

Missouri Attorney General Chris Koster has not yet signed onto the multistate lawsuit challenging the federal health care law. At least he is beginning to talk about the issue, however. From an article by Brian Hook at the Missouri Watchdog:

Acknowledging the will of the state legislature, a vote by the people, and his fiduciary duty, Missouri Attorney General Chris Koster inched closer to challenging the constitutionality of the federal health care law.

“We haven’t finally formulated what the plans are,” said Koster, following a question by Missouri Watchdog about his plans regarding the health care law during a press conference Tuesday in St. Louis.

Twenty-six states have already joined. Why hasn’t Missouri yet? What’s the delay?

Consumers Prefer Higher Economic Growth

Posted on by Joseph Haslag

Recently, I coauthored an essay with Grant Casteel that was published by the Show-Me Institute. In that paper, we specified a model of the state economy and conducted a simple experiment. Our ultimate goal was to compare two different tax structures. More succinctly, which tax structure would do the least harm while raising the same level of revenue? Our results are easily summarized: For most cases, the typical Missourian prefers a broad-based sales tax structure to the current structure that relies on income taxes and sales taxes. The reason is also pretty straightforward: In the absence of the income tax, the state’s economic growth rate increases. Our results indicate that the typical person is willing to forgo some consumption today for faster growth and higher consumption tomorrow, both for themselves and their children.

Our analysis compares the state economy under two different tax structures, holding revenue constant. Over time, the ratio of government revenue to state GDP is constant. The state government runs a balanced budget, so government spending is also a constant fraction of state GDP. It follows that future state government spending will be greater in correlation with a faster economic growth rate. Thus, for those who argue that Missouri needs to spend more on state goods and services, the answer is simple: Choose a tax structure that relies on a broad-based sales tax rather than one that combines an income tax and an exemption-filled sales tax.

In the model economy, in order to achieve revenue neutrality in the first year, the sales tax rate is computed to be 11.9 percent, a figure that several articles have cited. Taken in isolation, this may seem like a radical policy, but it’s important to remember that the people populating this model economy prefer the tax structure in which the broad-based sales tax structure is implemented, replacing the tax structure that combines both income taxes and sales taxes. As with most things, context is everything. In the context of the model economy, the sales tax rate is high — but, to be logically consistent, one must also cite the welfare comparisons. Our results indicate that there is a tradeoff between economic growth and the tax structure, and that the average person prefers a policy that increases the growth rate.

Just to answer the critics, let me explain why we calculated the sales tax rate at 11.9 percent in the baseline economy. In the model economy we created for our analysis, the typical person consumes only 48 percent of their income. In the real world, however, the average person consumes about 70 percent of their income — so, those people populating the model economy choose a tax base that does not match well with actual observations of real-world consumers. Because the tax base is so small in the model economy, the revenue-neutral sales tax rate is higher than it would be in our real economy. If, on the other hand, the person living in the model economy consumed the same fraction of their income that we observe in actual consumers, their revenue-neutral sales tax rate would be only 7.6 percent.

To summarize, then, the sales tax rate is higher in our simple model economy because the modeled savings rate is higher than what we observe in the real world. In this economy, and in various permutations, consumers as a group are better off without an income tax, with a higher sales tax instead, and with the resultant higher economic growth.

The Case for School Choice

Posted on by John Payne

In a conversation with Reason.TV, Professor Jay Greene of the University of Arkansas makes the short case for school choice including charter schools, magnet schools, vouchers, and education tax credits and explains why he is optimistic about the future of school choice in America:

This seems like as good a reason as any to remind everyone about the Show-Me Institute’s School Choice Week event tomorrow. The Show-Me Institute is sponsoring a showing of The Cartel at the Tivoli Theater (6350 Delmar) in Saint Louis on Thursday, Jan. 27, at 6:30 p.m. (registration starts at 6:00).

The documentary (you can watch the trailer at the film’s website) examines the failures of New Jersey’s public school system, which spends more per student than that of any other state but is still home to a frighteningly large number of failing schools. Director Bob Bowdon traces how money is frequently diverted from classrooms, and flows instead to administrators, union coffers, and political patronage positions. Although Bowdon focuses on New Jersey, the problems he uncovers are often the same as those we find here in Missouri and across America.

The special screening will be followed by a panel discussion featuring two Missouri state representatives at the forefront of the education issue in our state: Rep. Scott Dieckhaus (R), the chairman of the House Committee on Elementary and Secondary Education, and Rep. Tishaura Jones (D), assistant minority floor leader and also a member of the House Committee on Elementary and Secondary Education. They will share their views on the issues that come before this important committee, and on which of those may find their way into legislation during the 2011 session.

The event is free, but if you would like to come, please RSVP to our public relations representative, William Kay.

Flip Flopping on Film Tax Credits

Posted on by Christine Harbin

Gov. Jay Nixon recently approved $1 million in tax credits for a film to be made in Saint Louis.

Yes, this is the same policymaker who once said that he wanted to cut this particular program. It’s also the same governor who appointed a commission that recommended for this particular credit to be eliminated. He certainly delivers a mixed message.

Regular readers of Show-Me Daily will know that the Missouri film tax credit program is my favorite topic to discuss on the blog. Even though the state government spends less on this program than on other
targeted tax credit programs, the film tax credit program clearly demonstrates the negative effect of targeted tax credits in general. Missourians would be better off if it were eliminated.

From the article in the Saint Louis Business Journal:

“I told Paramount there may be an outside chance to get tax credits so we have to start making plans to look elsewhere,” [executive producer Michael] Beugg said.

In many states, waiting for approval for a film tax credit application usually takes one or two days, he said. But in Missouri, he’s been waiting two months for an answer.

If the wait for approval discourages a filmmaker from coming to the area, taxpayers have a reason to celebrate — it would mean that there’s one fewer film that they are forced to subsidize.

Best Proposal of the Legislative Session So Far

Posted on by David Stokes

Missouri has a ludicrous system of licensing movers. I am ashamed to admit I have not done more reporting on it. Luckily, other people have. Timothy Sandefur of the Pacific Legal Foundation is litigating the issue, and has written an op-ed about the absurdity of allowing present competitors to determine whether another company can enter the business.

I want to keep this post concise, so I’ll just point out that Sen. Bill Stouffer has introduced legislation, S.B. 58, to change Missouri’s system. It does a number of good things. Most importantly, it removes the insane provision that anybody who wants to be a mover in Missouri has to prove to the government that there is a need for the new service. That is a decision for markets, not governments, to make.

This proposal would be a victory for economic freedom in Missouri. The bill is still in the early stages. It will likely have some changes, and in the end it may not be perfect. But the perfect needn’t be the enemy of the good, and so far the proposal looks promising.

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