But I would be remiss if I didn’t mention how Indiana and Ohio joined the school choice wave this year by dramatically expanding their existing programs. In Indiana, families earning up to 400 percent of the federal poverty line (97 percent of families) are now eligible for the Indiana Choice Scholarship Program. The Ohio Legislature basically wiped out any income eligibility requirements for its EdChoice Scholarship, although the voucher amount tapers for families earning more than 450 percent of the federal poverty line. They also raised the voucher amount to over $6,100 for elementary and middle school students and over $8,400 for high school students.

Universal school choice—an idea proposed by Nobel Prize-winning economist Dr. Milton Friedman in 1955—is here. While Friedman clearly laid out the reasons why tax money should be used to pay for a system of schools, he questioned whether it is necessary for the government to run the schools. Rather, he suggested, couldn’t we funnel the money to parents and allow them to select a school from an education marketplace? We’ll soon be able to test his premise that a true marketplace will lead to higher outcomes at the system level. What we already know is that choice is what parents want. Generally, 65–85 percent of parents support school choice, depending on the type of program.

We’re not talking about Arizona or Florida here. We’re talking about our equally rural neighbors. Missouri is turning into an assigned-school-only island in a trust-parents-to-choose sea. The longer we hold out, the less attractive we will be to families with children.

The post Add the Buckeyes and the Hoosiers to the List appeared first on Show-Me Institute.

Jefferson City is awash in taxpayer cash. Missouri’s state government is slated to receive $2.7 billion in federal stimulus funds from the American Rescue Plan Act along with $9 billion from the “bipartisan” infrastructure bill. In addition, the state expects to bring in nearly $2 billion more in net revenues compared to just before the pandemic. What is disconcerting is how quickly some lawmakers—including self-proclaimed fiscal conservatives—have shed sound economic principles in their rush to find ways to spend the money, forgetting the wise words of Nobel Prize winning economist Milton Friedman that “there is no such thing as a free lunch.”

The simple, alluring, and false logic is as follows: either Jefferson City spends the money or the funds get sent back to the federal government to misspend on other boondoggles. But Missouri does not have to choose whether Jefferson City or the federal government gets the privilege of misspending taxpayer money. There is another way—one in which state lawmakers apply a strict cost–benefit test to all proposed spending and in which Missouri taxpayers are the beneficiaries of direct fiscal relief from any unused funds that fail to pass such a test.

To begin, it is crucial that lawmakers be aware that misspent money today—even if it has the false appearance of being “free”—can saddle Missouri with fiscal obligations, a weaker economy, or both, in the future. Because the funds are a one-time injection rather than a reliable stream of future revenue, Jefferson City must avoid engaging in spending that creates long-term future commitments (for example, in the form of unfunded maintenance). Lawmakers should also be wary of any government investment that crowds out private-sector investment. Infrastructure spending ought to enhance the private sector, not compete with it.

The other obstacle to sound cost–benefit analysis is the mistaken belief that the cost of the stimulus and infrastructure funds is zero because Washington, D.C., will both supply the money and reclaim any unspent funds. After all, the message to lawmakers has been that states cannot use the money to offset tax cuts. But this is an oversimplification of the options available to state officials. For starters, as long as state revenues stay above their inflation-adjusted 2019 level, the American Rescue Plan Act provides a safe harbor that deems states to be in compliance with the restriction against using stimulus funds for state tax cuts. That inflation-adjusted revenue threshold is likely to be around $10.8 billion in 2023, which is $600 million less than the $11.4 billion in revenues the state is projected to take in. Thus, state lawmakers immediately start out with a cushion of $600 million that they can provide in tax relief without risking stimulus funds.

Second, the American Rescue Plan Act only prohibits state governments—not local governments—from using stimulus funds to offset tax cuts. Moreover, it explicitly allows the state to transfer some of its funds to localities. Nothing in principle stops Jefferson City from distributing money to localities on the condition that they use the money to enact temporary local sales or property tax cuts. When using such transferred funds, localities must abide by any restrictions that apply to the state, but the American Rescue Plan Act does not impose any restrictions on local tax cuts. To create an even more secure legal hedge, Jefferson City could come to an agreement with localities that they use much of their own $1.2 billion in earmarked local stimulus funds for tax cuts, and the state could transfer some of its funds to localities to put toward sound public investments. This way the funds allocated originally to Jefferson City would be used on public investments, while localities would focus on tax relief.

Lastly, the American Rescue Plan Act allows state and local governments to apply stimulus funds toward mitigating the negative economic consequences of the pandemic, chief among which is the decades-high inflation that Americans are suffering through. Seven percent inflation in 2021 caused real wages to drop 2.3 percent, which amounts to an almost $900 “inflation tax” on the average worker. Jefferson City could simply opt to send direct fiscal relief to Missouri workers to offset this tax.

With coffers flush with cash, it is true that state lawmakers have a rare opportunity to make pivotal public investments to improve private-sector productivity. However, they would be wrong to view the money as “free” or the cost of spending the funds as zero. Instead, they should apply the same cost–benefit test that they would use for spending financed from state tax dollars with the knowledge that any unspent money need not go back to Washington, DC—it can end up directly in the pockets of struggling Missouri families.

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And when I say from scratch, I mean, from scratch.

He harvests the vegetables, he kills (fair warning, graphically) the chicken, and he even evaporates his own salt from the ocean! Really, what he did was a millennial-focused version of I, Pencil, the famous free market lesson popularized by Nobel-Prize winning economist Milton Friedman in his Free to Choose television series.

In both videos, the incredible organizing capacity of the free market is brought into stark relief. If we didn’t trade with each other or specialize in raising chickens or harvesting vegetables, most of the modern conveniences we take for granted would be completely impossible.

We often like to talk about the power of the free market in macro terms, using it to explain why Myanmar is rising while Venezuela is falling. But the benefits of the free market are much more prosaic. From the writing utensils we use to the food we eat, the mutual cooperation that the free market enables is on full display, if we choose to see it. 

The post This Sandwich Costs $1,500 and Takes 6 Months to Make appeared first on Show-Me Institute.

For a number of years now, we have partnered with the Friedman Foundation for Educational Choice to celebrate the life and work of Nobel Prize-winning economist Milton Friedman. In his 1955 piece, “The Role of Government in Education,” he introduced the modern concept of the school voucher. He wrote:

Governments could require a minimum level of education which they could finance by giving parents vouchers redeemable for specified maximum sum per child per year if spent on “approved” educational services.

Parents would then be free to spend this sum and any additional sum on purchasing educational services from an “approved” institution of their own choice. The educational services could be rendered by private enterprises operated for profit, or by non-profit institutions of various kinds.

Later in his life, he became an even stronger advocate for empowering parents through school choice.

This year, in honor of his efforts to expand school choice, we are hosting two Friedman Legacy Day events.

The first is at 8:30 a.m. in Saint Louis at De La Salle Middle School. Mike McShane, a fellow at the American Enterprise Institute, joins us for an interesting discussion about private schools closing and re-opening as charter schools.

The second event is at 6:30 p.m. at the Kansas City Central Library. Economist Mark Skousen will share stories of his long friendship and debates with Milton Friedman.

We hope you will join us for at least one of these events. For more information, please visit the events tab on the Show-Me Institute website.

The post If You Haven’t Registered For Our July 31 Friedman Legacy Day Events, What Are You Waiting For? appeared first on Show-Me Institute.

(As an aside, it was Mr. Krugman, writing in The New York Times in 2011 who stated that “the V.H.A. [Veterans’ Hospital Administration] is a huge success story, which offers important lessons for future health reform.”)

Mr. Krugman’s predictable protestations notwithstanding, there actually is a significant body of empirical evidence finding that, on average, states and countries with lower tax rates tend to grow faster. (See articles in this SMI study.) While economists, like any other group of scientists, debate their findings, there is real-world evidence to believe that reducing taxes can improve the economic lives of a state’s citizens.

Every principles of economics student, even those using Mr. Krugman’s textbook, learns that if you wish to reduce an activity, tax it. Since income taxes are derived from working, basic economic theory predicts that higher income taxes will reduce people’s incentive to work more hours. At the extreme, tax me 100 percent of my income and I’ll just stay home, thank you. So, lowering tax rates in income should reduce this disincentive to work.

Mr. Krugman does not seem to think that lowering taxes matters. The story that Walgreens is contemplating moving its headquarters to Switzerland to lower its tax burden belies that notion. Even if you find this proposed move disturbing, you cannot ignore the simple fact that Walgreen’s likely would not consider relocating if taxes were equal in the two countries. Tax rates really do matter in making economic decisions.

There is no denying the fact that since the Kansas legislature enacted the tax cut in 2012 (it became effective in 2013), the state’s economy has yet to achieve the economic take-off that some promised. Job growth is slower than the national average and, due partly to income shifting in response to the fiscal cliff, the drop in tax revenues in 2014 compared to 2013 has been larger than predicted.

Changes in the tax code cannot be expected to reverse years of weak economic performance overnight. Kansas, like many other states, is still recovering from the effects of the Great Recession. Like most medicines, changes in tax codes should not be expected to deliver immediate cures.

Before Mr. Krugman is anointed as the Cassandra of tax cuts, let’s give the experiment time to take hold. Time will tell, but basic intuition and existing evidence predicts that Kansas’ economic future is brighter today than it would have been without the tax cuts.

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Though I never met the man, I feel a debt of gratitude to Ronald Coase, the Nobel Prize-winning economist who died on Labor Day at age 102. Reading his “Nature of the Firm” – one of the most cited essays in all of economic literature – encouraged me to start my own business.

Two decades ago, I persuaded John McDonnell, the CEO of McDonnell Douglas, then the nation’s 23nd largest industrial company, to outsource the biggest part of my job (writing his speeches) back to me as an independent writer. I left the company with an annual contract that paid me no less money than I was making before and that allowed me to pursue other clients. But as I told John McDonnell, I also knew that I had to perform at a high level – being painfully aware of the fact that the company could cancel my contract at any time if I did less well as an independent contractor than I had as a “salary-man” (to use the Japanese expression) or employee.

Anyone familiar with Ronald Coase’s work will recognize that I had struck a classic “Coasian” bargain – finding an efficient free-market solution to a particular problem (my unhappiness with the corporate environment and desire for independence) that worked for both parties: The CEO accepted the notion that I would be a hyper-motivated non-employee, and I became my own boss.

Coase was the first to ask – and provide a plausible answer to – the question of why companies exist . . . and why a critical part of their success comes from getting large numbers of people to submit to a form of voluntary servitude – punching a time clock and giving employers the right to direct their performance in exchange for predetermined wages or salaries and protection from sudden or arbitrary dismissal.

His answer was that companies exist for the purpose of reducing “transactions costs” – meaning all the costs of trying to order economic activity through voluntary exchange. That includes the costs of searching out and evaluating other parties; negotiating contracts; maintaining communication; and policing and enforcing the terms of those contracts.

Imagine the extraordinary difficulty that a Henry Ford or a William Boeing would have faced in trying to contract out for every part and every task going into the assembly of a car or airplane. Hence the need for the visible hand of management in coordinating the allocation of resources.

At the same time, Coase fully appreciated the disciplines and rewards of free enterprise, and he was acutely aware of the tendency of corporate (or government) bureaucracies to stifle individual initiative and kill any sense of real ownership that people have over the quality of their own work. Within a large, publicly owned corporation, no one, including the CEO, is spending his own money.

Citing the picturesque words of another economist (D. H. Robertson), the British-born Coase, who spent most of his working life in the United States, described companies as “islands of conscious power” – or central planning – in an “ocean of unconscious (i.e., spontaneous free-market) cooperation . . . like lumps of butter in a pail of coagulating buttermilk.”

The “lump of butter” of which I was a part in the early 1990s was a shrinking rather than a growing mass: In just three years, the company shed more than 50,000 jobs, or 42 percent of the workforce. In the midst of all the downsizing, people were angry and confused – not knowing where the axe would fall next and bitterly resenting a sudden loss of the personal security that they had gained (and felt entitled to) through years of fealty to the same company. What they didn’t see was that a whole way of life was disappearing.

And now it is gone. Today, no one – not even someone graduating from a top business school – expects to spend his or her entire adult life with a single company. Everyone accepts that big companies really aren’t built to last. More like lumps of butter than castles of perpetual growth and stability, they may dissolve at any moment and disappear into the liquid churn.

One may think of the quarter of a century from 1955 (the first year of the Fortune 500) to 1980 as a golden age for big business in America. During that time, Fortune 500 companies ruled the roost – growing at about twice the rate of GDP growth and enjoying robust profitability from one year to the next – even during recessions. In 1975, the last year of the virulent recession touched off by the Arab oil embargo, only 15 Fortune 500 companies, or 3 percent of the total, reported losses, and all of the top 50 companies were solidly in the black.

Compare that to 1993 – which happened to be my last year as an employee at McDonnell Douglas. This was a brutal year for many big companies. Even though the 1990-91 recession was officially over, no fewer than 151 Fortune 500 companies – or just more than 30 percent – lost money in 1993, and that included 4 out of the top 10 (GM, Ford, IBM, and DuPont) and 22 out of the top 50 ranked by revenues.

To add just one more statistic gleaned from sifting through old issues of the Fortune annual survey, it is worth noting that Fortune 500 companies shed close to 3 million jobs in the 10-year period ending in 1993.

So what happened to bring the era of big business dominance to a close and set the stage for a new era of entrepreneurship and greater dispersal as opposed to centralization of economic activity?

We may turn to Ronald Coase for what I believe is the key insight. In his essay on the nature of the firm – published in 1937, when he was a young professor at the London School of Economics – he addressed the different ways in which technological advancements could affect the size of companies:

It should be noted that most inventions will change both the costs of organizing and the costs of using the price mechanism. In such cases, whether the invention tends to make firms larger or smaller will depend upon the relative effect on these two sets of costs. For instance, if the telephone reduces the costs of using the price mechanism more than it reduces the costs of organizing, then it will have the effect of reducing the size of the firm.

But of course, I thought, when I read those words for the first time. This was a year before John McDonnell and I struck our Coasian bargain. With his encouragement, I had agreed to take part in a research project by the Center for the Study of American Business at Washington University in St. Louis examining how U.S. firms (including McDonnell Douglas) were responding to the twin challenges of the information revolution and globalization . . . and to write sections of a book (The Dynamic American Firm) summarizing the findings.

Coase’s thinking loomed large in the book and in my own subsequent decision to go out on my own.

The mainframe computers that came into existence in the 1950s were so big and expensive that only the biggest companies could use them. With the help of these early computers in reducing the costs of organizing production and marketing, Fortune 500 companies became bigger and more prosperous throughout the sixties and seventies.

Then came the information revolution – which (even before the Internet) had the opposite effect of reducing the size of firms. It reduced the need for corporate bureaucracy. Still more, it caused many big companies to disassemble their carefully constructed vertical empires and to contract out for just about everything outside of their own core competencies. I knew that writing was not one McDonnell Douglas’s core competencies, and I reasoned that I should set a price for my work as an outside contractor that would be equal to the cost that the company would incur in having to hire a full-time speechwriter to replace me. Because the drafting of speeches and annual reports took maybe 50 percent of my time at McDonnell Douglas, I figured I would free up many hours that would go into serving other clients.

The Dynamic American Firm did not become a best-seller, but in re-reading some passages of the book, I can relive some of the excitement that I felt in pondering the next step in my own life:

Like “de-industrialization,” the rapid rise in business services and self-employment over the past several years has set alarm bells ringing in enlightened centers of thought. “In the future,” one displaced executive told Time magazine, “we are going to be moving from job to job in the same way that migrant workers move from crop to crop.”

Perhaps. But unlike the migrant worker, today’s corporate refugee, equipped with a personal computer, printer, copier and fax machine – all purchased for about $7,000 – can earn a good living toiling in the comfort of his, or her, home. That is so because the information revolution has greatly reduced transactions costs – for big firms and small contractors alike.

Coase may have done more to extend our understanding of business and commerce than any thinker since Adam Smith. But his influence did not stop there. He also had a profound influence in challenging the belief that government regulations, taxes, or subsidies were the best and, indeed, the only way of dealing with actions of business firms that have harmful effects on others, with a commonly cited example being the emission of sparks from a train that causes damage to a farmer’s crops along the railroad’s right-of-way.

In a “The Problem of Social Cost,” his second most famous essay, published in 1960, Coase argued that most disputes of this nature are best resolved by negotiation, rather than regulation or imposing strict penalties on the damaging party.

As Coase pointed out, both the railroad and the farmer would be better off if the latter agreed not to cultivate the vulnerable portion of his land in exchange for a payment that would equal or exceed the opportunity cost incurred in foregoing its cultivation. In other words, without regulation, the two sides could easily reach a mutually beneficial solution.

“The Problem of Social Cost” gave rise to a whole new body of literature in the field of “economics and the law.”

In awarding him the 1991 prize in economics, the Nobel committee observed that “Coase may be said to have identified a new set of ‘elementary particles’ in the economic systems.” Coase himself made no such claims, saying in a 2012 interview, “I’ve never done anything that wasn’t obvious and I didn’t know why other people didn’t do it.”

Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute, which promotes market solutions for public policy in Missouri.

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Although I could cite a host of Friedman literature on the subject of taxes, I’d like to just highlight one interview he did in 2003, at the age of 90, with John Hawkins. Asked whether “the Bush tax cuts” were the “right thing” to do, Friedman replied that he was “in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.“

The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, “How do you hold down government spending?” Government spending now amounts to close to 40% of national income not counting indirect spending through regulation and the like. If you include that, you get up to roughly half. The real danger we face is that number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes. [Emphasis mine.]

Creep, indeed. Ten years later in Missouri, supporters of Gov. Jay Nixon’s tax cut veto have delivered a parade of horribles about what will happen if the legislature overrides the governor’s veto and Missourians get tax relief. They claim (among other things) that the state will have to leave bills unpaid and cut education, its bond rating will decline, dogs and cats will live together… in short, mass hysteria. No, public education funding won’t be eviscerated by giving the People back their money, and as to the bonds, of course it wasn’t a tax cut that imperiled Missouri’s rating earlier this year. It was … the prospect of new government spending, specifically in the Medicaid program. That’s an inconvenient fact which, in all the bluster about credit ratings, veto/Obamacare supporters hope you forget.

That’s because it’s all interconnected. Missouri’s tax cut opponents don’t want taxes cut because less tax revenue would prevent them from maintaining and growing the size of state government — whether they say it explicitly or not. It was spending, not tax cutting, that imperiled our bond rating this winter. And if I might repeat Friedman’s words here, “The only effective way I think to hold [the government’s size] down, is to hold down the amount of income the government has. The way to do that is to cut taxes.”

Friedman was right. If you support smaller government, you support tax cuts. And in my view, if you support bigger government but don’t want to say so, you make excuses instead. I think Missourians are tired of excuses.

The post Opposing Tax Cuts, Supporting Bigger Government, And The Wisdom Of Milton Friedman appeared first on Show-Me Institute.

In 1955, Friedman introduced the concept that school choice via the use of vouchers could improve the quality of education. Yet, a quality education system was not his ultimate goal. Rather, he believed individual freedom was, or should be, the ultimate goal of a society. And by giving families the freedom to choose for themselves the best educational options for their children, Friedman theorized the market would respond with an improvement in the quality of education delivered.

The current body of research supports this theory. Random assignment experiments, which are the most rigorous type of research study, tend to find positive effects for students using vouchers, and none have found negative effects for voucher students. There is even some evidence that local public schools improve, and no evidence they are worse off, when they face voucher competition. The most promising evidence of voucher success, however, may be in terms of graduation rates. Students attending voucher schools tend to graduate at much higher rates than comparable students in nearby public schools. For example, students participating in the Washington, D.C., Opportunity Scholarship Program were 20 percent more likely to graduate from high school if they attended a voucher school. To rephrase a line Friedman often used, “the society that puts freedom before [educational] equality will end up with a great measure of both.”

Friedman believed the idea of a public education for all children did not necessitate that government be the sole provider of that education. He believed families should be free to choose from a variety of schools operated “by private enterprises operated for profit, nonprofit institutions established by private endowment, religious bodies, and some even by governmental units.” It has taken some time, but Friedman’s ideas of individual freedom through school choice are taking root in the American psyche. Indeed, the Wall Street Journal dubbed 2011 “The Year of School Choice.”

Though we have made progress in increasing school choice, Missouri has a long road to haul before families are able to enjoy the level of freedom that Friedman envisioned. We must continue to work until all families are free to choose the best educational options for their children. As Friedman said, “Freedom is not a natural state of mankind. It is a rare and wonderful achievement.”

James V. Shuls is an education policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.

The Institute is participating in Friedman Legacy for Freedom Day on July 31, an international event celebrating the late Milton Friedman.

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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.”

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I just returned from the Biltmore, America’s largest home. Built by George Vanderbilt between 1889 and 1895, the Biltmore is a symbol of how good the rich had it during the Gilded Age. I’m sure that most of the other visitors would answer “very good indeed.”

But how many would actually want to trade places with George? Despite his massive library, organ, and so on, I submit that any modern with a laptop and an internet connection has a vastly better book and music collection than he did. For all his riches, he didn’t have air conditioning; he had to suffer through the North Carolina summers just like the poorest of us. Vanderbilt did travel the world, but without the airplane, he had to do so at a snail’s pace.

Perhaps most shockingly, he suffered “sudden death from complications following an appendectomy” at the age of 51. (Here‘s the original NYT obituary). Whatever your precise story about the cause of rising lifespans, it’s safe to say that George’s Bane wouldn’t be fatal today.

I visited the Biltmore when I was in elementary school and remember being struck by the novelty and opulence of Vanderbilt’s private two-lane bowling alley. Vanderbilt no doubt spent a small fortune to build his alley and employ the servants necessary to run and maintain it, but I use far better equipment to bowl in my weekly league than Vanderbilt could ever imagine. The ball return at my alley is likely faster and more reliable, and the pins are reset far more quickly and exactly by a machine than a low-wage pin setter. Finally, whereas Vanderbilt had to keep score on his own — or pay a servant to do it — I have a friendly robot to count up my pinfall for me and give me advice on my next shot.

In many — if not most — ways, the average American lives a far better life than even the richest mustache-twisting robber barons of the Gilded Age, and it’s all thanks to steady economic growth. If two economies started at the same level and one grew by an extra 2 percent each year, it would be twice the size of its rival in a little more than 35 years. The Nobel Prize–winning economist Robert Lucas once remarked, when contemplating the differences in international economic growth rates, “The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else.” A similar idea is expressed more succinctly by a quote usually (but falsely, in all likelihood) attributed to Albert Einstein: “The most powerful force in the universe is compound interest.”

Rising living standards allow us to live longer, healthier, and, yes, even happier lives. (No, you cannot buy happiness with money, but as best we can measure these things, people on the average seem to get happier as they get wealthier.) Consequently, that means we should make high growth levels a priority in economic policy, and that requires us to keep taxes and government spending low.

The post The Gilded Age Comes to the Masses appeared first on Show-Me Institute.

If you care about sustainability, you should care about property rights.

Why do I bring this up? According to an article over at the Post-Dispatch, Jefferson City has been chosen as one of five state capitals to receive extensive attention from the Environmental Protection Agency (EPA), in the form of plans intending to make the city greener and more sustainable. The project is called “Greening America’s Capitals,” and calls for “a team of designers to produce illustrations on how targeted neighborhoods in chosen capitals can be improved,” with funding provided by taxpayers nationwide the EPA. The Show-Me Institute’s book club is currently reading a lot about public choice economics, and I could write an entire post about the dispersed costs and concentrated benefits of this particular scheme. Instead, I’ll focus on how everything that is proposed by this federal agency would be better handled by a reduction in hands-on government management.

First, the obvious (at least to me): Strong property rights lead to good stewardship. When the costs of harming things falls on those doing the harm, they tend to try to reduce the harm as much as possible. Namely, when something belongs to you alone, you tend to treat it with more care than if it belongs to someone else. Moreover, when the benefits of improving something accrue to those doing the improvement, more improvements happen. Namely, you’re more likely to work to improve your own things than someone else’s things. There are plenty of historical examples, including the dramatic improvement in crop yield and work participation among the early European settlers in America after switching from a communal system to one based on private property.

When I hear “sustainable” and “going green” I think “good environmental stewardship.” There are two components to this, the first of which is taking care to maintain or improve your own property. The second part involves externalities. For the unfamiliar, externalities are any cost or benefit that falls on someone not directly or willingly involved in an exchange. Maintaining a classic car provides a positive externality to those who enjoy seeing one driven around town but who don’t pay for its upkeep. Pollution is the classic example of a negative externality: harming people who had no say in the pollution’s production. This is a problem with no obvious solution, but (as public choice has clearly shown) a lot of bad possible solutions from the government. Ronald Coase is a Nobel Prize–winning economist who demonstrated that the problem of externalities is really a problem of transaction costs (such as the cost of information). Show me a government solution to an externality problem that doesn’t involve internalizing costs and I’ll show you the law of unintended consequences in action.

Greening America’s Capitals will not help the state of Missouri. It’s a fundamental waste that distracts from the real problems of insufficiently robust property rights and, especially, transaction costs. But these difficult technical problems will never be as broadly appealing as a visible, heart-in-the-right-place EPA program. This is not a new problem in politics.

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As is evident from the far-reaching historical backdrop of this case, government regulation of fishing has a very long history. The economics of fishing permits are fairly cut and dried: This is an application of the tragedy of the commons. When a number of individuals have a right to consume from a public region — i.e., fishing on a river or other waterway — each one of them is individually incentivized to get as much as possible as quickly as possible, especially when it is their livelihood rather than their recreation. On the other hand, in cases where there is only a single owner, there is much less reason to worry about others “getting theirs first,” and the owner can economize with an eye on maintaining the future value of the property. The problem with a single concern having access is the same as the problem with any monopoly: higher prices and less service, with none of the benefits of competition. One solution to the tragedy of the commons is some form of social arrangement, with social stigma or other punishment for “cheating.” These sorts of arrangements have been studied at length by Elinor Ostrom, and she recently won a Nobel Prize in economics for her work.

A far more common solution, though not necessarily more efficient or desirable, is a government regulation of “the commons,” such as by requiring fishing licenses. If regulators can accurately determine the impact of each additional fishermen extracting each additional fish, they can set a price on licenses such that the most efficient outcome will be reached. This level of prescience is less likely than what actually happens in practice: License fees are set too low, in which case you still get overfishing, or they are set too high, in which case not enough fish are extracted to maximize value over time. I don’t know which case is more likely, but I strongly suspect the former is more common.

For what it’s worth, the state of Missouri sells recreational fishing licenses in unlimited quantities, and they are quite affordable — a daily pass is cheaper than a movie. Although I’m sure it’s a nice revenue stream for the Missouri Department of Conservation, I seriously question whether this is a proper area for government involvement in people’s lives.

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In an editorial in Forbes, John V.C. Nye, professor of economics at George Mason University, explains how Ostrom and Williamson have contributed to the subject:

Both can be seen as pioneers in understanding how markets work in the real world where transactions costs are high, establishing smoothly functioning markets is costly, information is incomplete, and hiring and production options are limited. They show how firms, communities and organizations come to solve these problems absent government regulation and how the choices they make can be disrupted or worsened by bad state policy or sustained by good rules that promote stable property rights and reliable contracts.

Ostrom’s and Williamson’s works relate to the Show-Me Institute’s tenets of limited government, property rights, and informed state policy. Congratulations to them both.

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The state of Missouri, like other state governments, offers tax credits that can be applied against both corporate and individual tax bills. Presently, the Missouri legislature is considering a so-called “mega-project” tax credit worth, in present value, $550 million for Bombardier Aerospace, a large Canadian firm, to build a manufacturing plant in Kansas City.

Tax credits sound like a great idea for enticing businesses to expand, relocate, or build in Missouri. With the Bombardier project, though, it might be useful to consider the basic economics of tax credits.

Tax credits can be divided into two broad categories. Those that focus on social goals can be called “public good” credits. The Historic Preservation Tax Credit, for instance, subsidizes renovations for historic buildings. Another example, the Earned Income Tax Credit, is available to assist state residents who are employed but whose annual income is low.  Social goals may compete for preference, but show that Missouri recognizes the need to support public goods.

The second category targets economic development, or — as some would put it — “corporate welfare.” Such credits are designed to stimulate economic development. In practice, these credits reduce tax bills for businesses located within the boundaries of the credit. In exchange, the business typically must bring something to the equation, such as offering jobs that pay at or above the area average.

Regardless of whether tax credits are of the public good or economic development variety, they share one common feature: For recipients, tax credits lower their individual or corporate income tax bills, which in turn impacts the state budget.

Missouri’s discretionary budget consists of dollars paid into the General Revenue Fund. Individual income, corporate income, sales taxes, and use taxes are the largest contributors to this fund, and tax credits affect the dollar amount collected.

That impact is significant. For the state’s fiscal year that ended June 30, 2007, for example, the General Revenue Fund collected $7.7 billion. In that same fiscal year, Missouri redeemed $485.6 million in tax credits.

Less flow in the General Revenue Fund results in fewer dollars available for state programs and potential cuts to programs such as public schools, prisons, and health care. Alternatively, the General Assembly can seek to offset reductions by increasing taxes.

Tax credit proponents contend that no such tradeoffs exist, particularly for economic development credits. Their tenuous argument is built on the proposition that if a business locates in Missouri, the tax base naturally will increase, and any lost revenues from the tax credit will be offset by greater individual income and sales taxes, and through the “multiplier” process as corporate and private income expands.

Unfortunately, this almost certainly is wrong. Historically, the General Revenue Fund receives between three and four cents of every dollar of final goods and services produced within Missouri’s borders. Thus, for every dollar of tax credit, Missouri’s economy has to produce between $25 and $33 worth of final goods and services in order for the General Assembly Fund to break even.

This is akin to investing $1 and receiving a guaranteed $30 in return. While some projects may offer such robust yields, there are no guarantees. Indeed, in the last century, the average annual return from equities in the United States, after adjusting for inflation, is $1.07 for every dollar invested. To bank on higher future tax revenues flowing from today’s tax credits is simply folly.

The risk of long-lasting economic damage looms much larger with “mega-tax credits” of the Bombardier variety, which are unprecedented in Missouri. If large corporations such as Bombardier are given lower tax rates, the marginal tax rates for everyone else must become higher in order to raise the same amount of revenue. However, high marginal tax rates actually eliminate more jobs than are created through tax credit beneficiaries.

A much better economic development policy would be to keep a level playing field and lower marginal tax rates for all individuals and businesses. Better yet, get rid of the income tax altogether, as our neighbor Tennessee has done and whose growth has outstripped Missouri’s for the last decade.

Letting politicians and state bureaucrats guide private-sector investment is not an economic development policy. It’s an economic stagnation policy.

Rex Sinquefield received a bachelor’s degree in business from Saint Louis University and an MBA from the University of Chicago, where he studied under Nobel Prize–winning economist Merton Miller. In the 1970s, he coauthored a series of papers and books titled Stocks, Bonds, Bills and Inflation, providing the first seminal data on the performance of the financial market in the United States. Sinquefield, who pioneered many of the nation’s first index funds, retired in 2005 and co-founded the Show-Me Institute, the state’s only free-market think tank.

Joseph Haslag is a professor in the Economics Department at the University of Missouri–Columbia and executive vice president of the Show-Me Institute.

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