Government Should Not Be in the Business of Preventing Price Gouging

Posted on by Christine Harbin

There was an engaging discussion on the appropriateness of government intervention in price regulation in the comments section of a recent post of mine. Commenter D. Amiri wrote:

In the example of gasoline, which I do believe is unique, the demand could be high due to events not directly related to the price of gas, such as 9/11. Many bought gasoline on that day or the day after for fear that prices would rise in the future. What happened, however, is that some gas stations took advantage of the increased demand and jacked up their prices. […]

But gasoline is unique for many reasons: (a) demand is usually very high and relatively constant/predictable (b) practically speaking, one can only buy so much gasoline at one time (c) gasoline is a dangerous substance (d) gasoline is absolutely vital to the national economy (e) gasoline is product derived from an internationally traded commodity at which level prices already reflect speculation of higher/lower demand and supply.

None of these reasons is call for government intervention in gasoline markets. When the government intervenes in the market for a good by controlling the price, it causes artificial shortages and surpluses, and it also obstructs resources from being put to their highest use. Overall welfare is maximized when prices are allowed to represent relative values accurately.

  1. If the level of demand is high and constant already, then why should the government focus on protecting it from volatility? Price “gouging” is simply a misleading term for supply and demand. By increasing their prices in response to higher demand, gas station owners are simply capturing excess consumer surplus.

  2. All resources are scarce and finite. This is not an attribute that is unique to gasoline.

  3. The role of government doesn’t entail protecting individuals from products that they consume voluntarily. Practically every activity or product can be potentially harmful — smoking cigarettes, consuming raw milk, crossing the street — and individuals weigh the risks against their associated benefits. There is a risk that the gas station will ignite when I am filling my car with gas, but if I don’t fill it up, I can’t easily get places.

  4. Gasoline may be an important source of energy in the status quo, but substitutes exist (e.g., electricity, ethanol, geothermal, etc.). If the price of gasoline increases in the future, this will provide an incentive for entrepreneurs to seek other substitutes and to improve relevant processes.

  5. This is another attribute that is not unique to gasoline. A considerable percentage of the goods and services that people consume are internationally traded. Should the federal government protect the price of bananas or wine from volatility? It would not be feasible for the federal government to regulate prices in all of these markets.

Prices coordinate individual action efficiently by communicating relative scarcities and preferences, as I have discussed previously. However, government officials knock the price system out of equilibrium whenever they decide to subsidize or restrict an economic activity. When the government knocks the price of a good or service out of equilibrium, it results in a misallocation of resources. In other words, resources no longer go toward their highest use.

Changes in price are important for allocating scarce resources. This is why the price for plywood increases during hurricanes — individuals living in disaster-ridden areas have a higher demand for plywood than, say, a person building a treehouse elsewhere in the country. Because the former individual has a more critical need for the resource, he or she is willing to pay more for it. Those who think that the price has grown too high will refrain from buying the product, which leaves more available to be purchased by those with a higher willingness to buy. In the absence of externalities, a sudden rise in price levels does not represent market failure, so even theoretical economic rationales for government intervention don’t apply.

Implementing Pro-Growth Tax Policy Requires Rigorous Analysis

Posted on by Audrey Spalding

When the legislature reconvenes in January, the contentious issue of whether Missouri should repeal the state income tax will surely arise. At stake is not lost tax revenue, because proposals for repealing the state income tax also entail increasing the state sales tax in order to keep state tax revenues at the same level. Rather, the issue at hand is whether Missouri would be more prosperous with a more broadly based sales tax instead of the combination of state sales and income taxes that we have today.

Show-Me Institute scholars have researched this issue extensively. Most recently, the institute’s chief economist, Joseph Haslag, who is also an economics professor at the University of Missouri–Columbia, cowrote an essay with Washington University economics doctoral student Grant Casteel. The essay, available online at showmeinstitute.org, shows that the Missouri economy would grow more quickly if the income tax were repealed and the state sales tax were increased instead.

Taxation is an added cost, so it tends to discourage any taxed activity. In labor markets, an income tax increases the cost of employees working and employers hiring. Because workers subjected to an income tax receive lower wages than they otherwise would, the income tax discourages some employees from working as many hours as they might otherwise. Additionally, an income tax increases the price of hiring a worker — an employer will have to pay more for the same quality worker under an income tax system than he would otherwise.

By contrast, a sales tax discourages consumption. So the question becomes, will an economy grow faster if the state, through its tax policy, tends to discourage employment or if it tends to discourage consumption?

In their essay, Haslag and Casteel test several economic models of the Missouri economy to show that, in the long-run, Missouri would be better off with a higher sales tax. The additional tax on consumption would encourage Missourians to save more than they do now, and the lack of a state income tax would provide fewer disincentives to work. Combined, those effects would result in a substantial economic growth windfall.

Previously, Haslag has estimated that if the income tax were repealed, Missouri would see $438.6 billion more in real GDP growth over a 25-year period. This would result in more jobs and a higher standard of living for all Missourians, a tangible benefit that should not be ignored.

The essay by Haslag and Casteel, along with the estimate of increased economic growth, together affirm the findings of prominent economist Arthur Laffer: States with income taxes have slower-growing economies than states without income taxes. Additionally, Laffer has found that the 11 states that adopted personal income taxes in the past 50 years have seen their economies deteriorate. In some cases, Laffer found, the results have been catastrophic.

At the Show-Me Institute, we strive to be as forthcoming as possible about our research methods. Those who may question Haslag and Casteel’s findings can examine their methodology in their essay. In fact, Haslag and Casteel go to great lengths to explain the economic models and assumptions on which their findings are built. We encourage others, especially those who argue that an income tax is somehow better for Missouri, to do the same.

Economic policy is too important for state officials to implement it without rigorous analysis. We cannot let passionate rhetoric substitute for sound research when the economic health of Missouri is at stake. When it comes time for the General Assembly to consider changing Missouri’s tax structure, we hope that legislators will pay close attention to the analytic evidence presented, and disregard strong statements made without any supporting quantitative research.

Legislators should take note of the proven deleterious effect of income taxes in other states and the substantial economic growth that could occur if the income tax were repealed. It is time to consider changing the state’s tax structure so that Missouri’s economy does not continue to fall behind.

Audrey Spalding is a policy analyst for the Show-Me Institute, a Missouri-based think tank.


 

Missouri’s Public Pension Plans Need to Be Reformed to Maintain Solvency

Posted on by John Payne

Public pension systems across the country are falling apart before our eyes. The California Public Employees Retirement Security System (CalPERS), the largest pension system in the country, lost 20 percent of its value during three particularly bad months in 2008. That same year, the city of Vallejo declared bankruptcy after spending 75 percent of its annual budget on pensions for its employees. It might be comforting to think of these problems as limited to California, but that is far from the truth. Citing an analysis from PricewaterhouseCoopers, a late 2009 Washington Post article reported that within 15 years, the average public pension will not possess even half the money required to pay the benefits that they owe. If these systems go bankrupt, either public employees will see dramatic cuts to their retirement benefits — which is a remote possibility, given the strength of public employee unions — or taxpayers will be forced to make up the shortfall.

Although Missouri does not have nearly the range of problems that fiscal basket cases like California have, our state is far from immune to pension woes. The Columbia Daily Tribune reports that its city’s pensions for police and firefighters are underfunded to the tune of $55 million. Earlier this year, budget pressures forced the legislature to enact reforms to Missouri’s pension system, including raising the retirement age to 67 and forcing workers to contribute to their pensions for the first time starting in January. These reforms are positive steps, but we must consider fundamental changes to our system if we want to avoid similar problems down the road.

According to a new Show-Me Institute study written by University of Missouri–Columbia finance professor John Howe, shifting public pensions from defined benefit plans to defined contribution plans could generate higher returns for pensioners while limiting the risk to the public when pensions do not perform well. Defined benefit systems pay out a guaranteed amount of money to pensioners based on a formula that typically uses criteria like years of service and annual salary. On the other hand, defined contribution plans, like the 401(k) and Roth IRA, focus on the amount of money that employees pay in over the course of their careers and give employees more control over how that money is invested.

During the last 20 years, private companies have shifted towards defined contribution plans, but public pensions are still dominated by the defined benefit model. Missouri’s new reforms make the public pension system into a hybrid of defined benefit and defined contribution plans, which is an improvement over a pure defined benefit plan, but still subject to paying more in benefits than it receives in contributions.

The primary benefit to society of a greater reliance on defined contribution plans is that individuals would be more directly responsible for their own retirement funds, as opposed to relying on taxpayers for support. Furthermore, although it is difficult to make direct comparisons between the returns of defined contribution and defined benefit plans, because there are numerous variations of each, Howe cites evidence that defined contribution plans typically outperform defined benefit plans. This can be attributed to the fact that individual employees are generally willing to take on a somewhat higher level of risk than most companies or government agencies.

The downside to this risk is that a few people using defined contribution plans end up with less money for their retirement than they might otherwise have had. However, a system in which a relatively small percentage of pensioners becomes dependent on a social safety net is better than a system in which almost every beneficiary collects more than he contributes — with the difference made up by tax dollars.

All pension systems run the danger of failing to meet employee expectations, but we are less likely to encounter a complete systemic failure if we give greater control of pensions to the people who must live off of them in the future. Public employees are as capable as the rest of the working public to provide for their retirements.

John Payne is a research assistant for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

 

Striking Correlations Between Income Taxes and Congressional Reapportionment

Posted on by David Stokes

Only seven states levy absolutely no income tax. According to the U.S. Census data released today, only eight states will see increased congressional representation, which means they have been growing faster than the national average. Four states (Texas, Florida, Washington, and Nevada) are included in both of those lists.

The other three states — as well as New Hampshire and Tennessee, which tax only interest and dividend income — all stayed at the same number of seats. That means their growth was average, or near average.

All 10 states that lost representation have a state income tax.

According to the Tax Foundation, the eight states gaining seats in congress have an average total tax burden — including taxes on income, sales, and property — ranking of 28.3, on a scale where 1 is the state with the highest tax burden and 50 has the lowest. The 10 states losing seats have an average ranking of 20. If you remove Louisiana from the equation, because of its low tax burden and the fact that that state lost a number of residents after Hurricane Katrina, the remaining nine states have a more striking ranking of 16.7.

Another interesting note is that Washington, which gained a seat, has a high total tax burden but no income tax — and only a month ago, that state’s voters soundly defeated a proposal that would have instituted one.

I don’t claim to have demonstrated causation with this brief review of Census data for a blog post. But the noted examples show a striking correlation between lower taxes overall, and especially the lack of income taxation, for population growth. And when populations grow, economies often grow with them.

To read further Show-Me Institute research about to these topics, please visit the taxation section of our main website.

“But It’s the Thought That Counts, Right?”

Posted on by Christine Harbin

Last week, Freakonomics radio interviewed Steven Dubner about avoiding unwanted gifts and deadweight loss. He contends that when individuals give gifts just for the sake of giving gifts, they tend to destroy wealth and aggregate utility in the economy. Individuals are often focused more on the fact that they bought something (anything) for somebody else, and less on whether the gift will generate any real utility for the recipient. I bring this up because it’s a topic that we’ve previously discussed on Show-Me Daily. From the interview:

RYSSDAL: So anyway, it’s called “deadweight loss.” It’s that thing where my wife’s great-grandma buys me a sweater at $85 and to me it’s worth like $1.50. Because I don’t like it.

Most people enjoy finding gifts for others. I suspect that this negates a nonzero amount of dead-weight loss. However, this only occurs when the gift is well-fitted to the preferences of the recipient. Value is not added when you give your friend something that she hates. Additionally, she may have to endure the costs of storing and loathing the gift.

The act of searching for presents takes a lot of time and energy, and this increases their cost because individuals could be spending their time engaged in other activities. I’m one of those “clickers and gifters” described in the interview. Although I still experience high search costs, I find efficiency gains elsewhere (e.g., avoiding the mall).

Our staff recently did a Secret Santa exchange, and we instituted a $10 cap. I gave Jim a $10 bill. I find utility in the fact that I didn’t destroy any wealth in that transaction. I suspect that Jim finds utility in the fact that he may buy something that he actually wants.

Medical Licensing in Missouri

Posted on by David Stokes

The Post-Dispatch is currently publishing a thorough series about how the Missouri state medical board disciplines doctors for medical errors or other crimes in Missouri. I commend the Post for the detail that the series includes. I, like a lot of people, think that long-form investigative journalism is the type of content that will keep newspapers a part of our lives going forward. You can’t just replace a series like this with bloggers.

There is a lot of good information in the series, and there are some solid recommendations for improvement in medical care. There are also some suggestions that make no sense at all, and the articles take some harsh and inaccurate shots on people I have known for a long time. For example, I don’t think there is anything wrong with a lawyer who represents doctors in civil cases serving on the medical licensing board. However, should the board itself have more than one public member? That is another question, but a good one raised by this series. I think the answer is that it should, which is similar to what I recommended a while back for judicial appointment boards.

This is the first time that I have blogged about a story in which my own dad is quoted, although the quote itself is not germane to this post.

The heart of the story is that Missouri’s medical licensing system is not strict enough. There are some frightening stories here about how doctors who have harmed people can continue to practice, leading to greater harms. Closely related are stories about doctors who have committed crimes unrelated to practicing medicine, who also continue to practice.

Not surprisingly, the series has led to calls for the licensing board to toughen up the penalties for doctors. That is different and more defensible than calls to toughen up the licensing of doctors in the first place. However, I think that the best improvements are the ones that involve making more information about doctors available to the public so that patients — and hospitals who hire doctors — have better data available all along. As Sen. Bill Stouffer said, in a quote with which I entirely agree:

State Sen. Bill Stouffer, R-Napton, said changes to the state laws should start with making the letters of concern a public record and allowing patients to compare doctors’ performance.

“I think transparency would cure a lot of our problems in health care,” Stouffer said. “It’s amazing what the light of day cleans up.”

We do have a system in which doctors who harm patients can be held accountable. It is our very robust civil court system. I supported tort reform back in 2005, but even with those needed changes, doctors that irresponsibly treat patients can still be readily held accountable. Is that enough, though? Do we need tighter changes to state criminal penalties and licensing restrictions in order to monitor medical care?

If those changes involve improving the information available to everyone, then I support them, although I understand that concerns of doctors who would fear that some members of the public would not be able to tell the difference between a bogus malpractice suit and a legitimate claim.

If the changes involve restricting the license to practice medicine for those convicted of a crime related to medical care (i.e., sexual abuse of patients, or Medicare fraud), then I can also support that. If the changes involve restricting the license to practice for those convicted of a crime unrelated to medical care, then I have to question the benefit of stripping their license. If they commit a crime, they should receive the proper punishment for that crime. I fail to see why, after they have served the punishment for that crime, they should not be allowed to earn a living in their profession. A person who does not pay taxes on their rental property at the Lake of the Ozarks should be properly punished for that, but not prevented from filling my cavities or diagnosing the debilitating case of globophobia I currently suffer from.

So, don’t come after me and ask whether I think a child rapist should be allowed to practice medicine, because child rapists should receive prison terms long enough to make the practice of medicine moot.

Surprise! Freely Given Away Taxpayer Money Attracts Criminals

Posted on by Audrey Spalding

As my colleague Christine Harbin mentioned yesterday, the Associated Press reported on Friday that the president of Hometown Innovation Team, a Cape Girardeau development company and recipient of $2 million in state tax money, pleaded guilty to passing bad checks about three years ago worth more than $90,000.

Of course, this news came out after the state awarded the company $2 million in state tax credits and other subsidies and after Gov. Jay Nixon traveled to Cape Girardeau to promote the project.

From the AP:

Nixon spokesman Sam Murphey said Friday that the governor’s office was unaware of Dickerson’s criminal probation before Nixon traveled to Cape Girardeau last week for the news conference with Dickerson and other local officials to announce the state aid. At the time, Nixon, a Democrat, described the project as “wonderful news for Cape Girardeau’s downtown and the overall economy of this region.”

I hope the governor isn’t surprised. Former felons are surprisingly frequently awarded state credits. And in Missouri, the state Department of Economic Development is known for mis-recording numbers provided by tax credit recipients (those mistakes result in an overstatement of a tax credit program’s success).

Even better for dishonest (or careless) individuals and companies, the department will correct a tax credit application (even working during the holidays) if you happen to substantially overstate the amount of money the state should pay you. After all, there’s no state law that specifically prohibits fraud in tax credit applications, right?

This lack of oversight will tend to attract individuals excited by the prospect of money that can be obtained by making promises — with little to no obligation to deliver on those promises.

This is the problem of government subsidy for “economic development.” Not only are such tax credits and other subsidies generally awarded to the least successful businesses, and not only are these subsidies usually extraordinarily bad at producing tangible benefits remotely worth the taxpayer cost, but if government officials aren’t even bothering to do the basic legwork it takes to discover whether an applicant has a record of fraud, how can tax credit programs be anything other than an excuse for press conferences to announce “jobs” that likely will never materialize?

From the Southeast Missourian:

Mayor Harry Rediger said he was not aware of Dickerson’s criminal past until earlier this week and that Dickerson had been upfront with city officials, telling them he had personal financial problems in the past.

“We knew earlier on that he had a previous bankruptcy. We did not know about a probation,” Rediger said Friday.

He had a bankruptcy? That wasn’t enough to spend a little more time and care reviewing the tax credit application? Is that type of past really the kind that should be glossed over when awarding state money?

Rediger continues:

“We are not really concerned about his past record. What we are concerned about is that he and his entity meet the state standards required to receive this funding.”

Of course. With such stalwart watchdogs over taxpayer money, who needs theft, waste, or corruption? I know I am not the only Missouri taxpayer upset that the state spends money so carelessly. When the legislature reconvenes in January, I hope that legislators consider the bad track record of state credits in general and the recent failings of Missouri’s administering of tax credits specifically.

I’m Tempted to Spend My Day on Missouri Case Net to See What Else Can Be Uncovered

Posted on by Christine Harbin

The subsidized health care cooperative in Cape Girardeau that I recently discussed is back in the news. From an article at the Missouri Watchdog:

It turns out that the project is led by a man who is currently on probation after pleading guilty in 2007 to passing more than $90,000 in bad checks, according to court records obtained by The Associated Press, which reported the story Friday.

This is not an isolated case — Michigan has also had problems with issuing tax credits to convicted embezzlers, and Iowa has had particular difficulty with its film tax credit program, as I have discussed previously. A negative consequence of targeted tax credit programs is that they sometimes encourage crimes.

Perhaps this is an indication that the state is issuing targeted tax credits too quickly to keep track of them.

Because they are dealing with taxpayer monies, government officials in Missouri should take steps to ensure that the state’s resources are put toward their highest uses, and also that they are going toward their intended use.

A Market Failure in Outdoor Advertising?

Posted on by Thomas Duda

The Land Reutilization Authority (LRA) Commission held its final meeting of 2010 on Wednesday morning. One of the commissioners sported a festive, illuminated vest, but his shiny allusion to the holiday season was the only curiosity of note — the only curiosity, that is, until the commission started voting.

In one of its final actions of 2010, the LRA Commission voted — with two of its three members present — to approve a lease agreement with CBS Outdoor that will permit the LRA to capture revenue from billboards that recently entered the public corporation’s land holdings.

That’s right. In St. Louis city, government owns billboards.

Perhaps I’m old-fashioned, but I see no rationale for government ownership of billboards. Does a market failure really exist for outdoor advertising in St. Louis city?

Although the LRA nominally purports to represent the interests of the St. Louis mayor, comptroller, and Board of Education, little of the public corporation’s revenue ever seems to reach city taxing districts. Furthermore, billboard revenues are not the panacea for the city’s long-term fiscal problems.

Oddly enough, the LRA Commission’s action in 2010 directly contravenes the actions of the LRA Commission in 2001. During the April 25, 2001, meeting of the commission, a commissioner “asked that staff investigate the location and condition of [the LRA’s] billboards, so they can determine how the LRA can get out of the billboard business, in a reasonable amount of time.”

This is not the first case of “mission creep” for the LRA, and I doubt that it will be the last.

My hope for the new year is that the LRA will do right by the taxpayers of St. Louis city by selling its assets. Privatization broadens the tax base, which should lower marginal tax rates.

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