@garethmorgannz @geoffsimmonz the public choice illogic of the UBI

Things are pretty grim when your ideas for fixing child poverty by throwing a lot more money at the problem are easily outclassed by the Greens in terms of economic rationale, fiscal sense and political practicality.

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Source: Greens launch billion dollar plan to reduce child poverty | Green Party of Aotearoa New Zealand.

But that is the case for Gareth Morgan’s proposals for a universal basic income for New Zealand. His proposal for a universal basic income funded by comprehensive capital tax make much less sense than those of the Greens for giving the in work family tax credit for those do not work but are on a welfare benefit.

The Greens have a far superior proposal for reducing child poverty and a far better chance of getting it implemented in parliament. Their proposal is simply to introduce a parental tax credit and give the in work tax credit to those currently on the benefit to increase their incomes.

Gareth Morgan’s solution to child poverty is to give billions of dollars to adults not in poverty and leave those who are in poverty worse off under the universal basic income. It is obvious which of these is more likely to attract political support and provoke resistance from taxpayers and political parties willing to court those are opposed to great big new taxes.

One of the economic reforms in the 1980s and 1990s that saved the welfare state was more efficient taxes and more efficient government spending. The targeting of government social spending reduce  growth in the overall tax burden and therefore the political resistance it provoked.

Government spending grew in many countries in the 20th century because of demographic shifts, more efficient taxes, more efficient spending, a shift in the political power from those taxed to those subsidised, shifts in political power among taxed groups, and shifts in political power among subsidised groups. Sam Peltzman argues that:

governments grow where groups which share a common interest in that growth and can perceive and articulate that interest become more numerous.

The median voter in all countries was alive to the power of incentives and to not killing the goose that laid the golden egg. After 1980, the taxed, regulated and subsidised groups had an increased incentive to converge on new lower cost modes of redistribution.

More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden of taxes on the taxed groups. Most subsidised groups benefited as well because their needs were met in ways that provoked less political opposition.

Gary Becker and Casey Mulligan in Deadweight Costs and the Size of Government (NBER Working Paper Number No. 6789) concluded that flatter and broader taxes encourage bigger government. This is because taxpayers offer less resistance to increases in flat tax rates than to more onerous and less efficient forms of taxation. Any decline in the resistance of taxpayers to taxes leads to larger governments since an endless number of groups lobby to divide up the large revenue base.

An inefficient tax system or spending program  from the standpoint of optimal tax theory can improve taxpayer welfare this so-called inefficient system creates additional political pressure for suppressing the growth of government. Inefficient taxes do not raise much revenue and therefore do not support a large sized government.

A switch to more efficient taxes through tax reforms allows governments to raise the same amount or larger amount of revenue for the same level of political resistance from taxpayers. This is because less revenue and output is wasted by discouraging labour supply, investment, savings and investment in capital with high marginal rates of tax on narrower tax basis.

The rising deadweight losses of taxes, transfers and regulation all limit the political value of inefficient redistributive policies. Tax and regulatory policies that are found to significantly cut the total wealth available for redistribution by governments are avoided relative to the germane counter-factual, which are other even costlier modes of redistribution.

Everyone can gain from converging on more efficient modes redistribution. The tax burden is less than otherwise. Government spending is more than a wise because taxes are raised with less deadweight social costs.

An improvement in the efficiency of either taxes or spending reduces political pressure from taxed and regulated groups for suppressing the growth of government and thereby increases total tax revenue and spending because there is less political opposition. Improvements in the efficiency of taxes, regulation and in spending reduce political pressure from the taxed and regulated groups in society.

The post-1980 reforms of Thatcher, Reagan, Clinton, Hawke and Keating, Lange and Douglas and others saved the modern welfare state. Their moves towards more efficient taxes and better targeted social spending  did reduce growth in government spending but also prevented even larger cuts to  social spending since 1980 at the behest of the increasingly restive taxpayer.

Social spending growth did temper after 1980 but the level of spending was larger than otherwise because of the extra revenue raised through more efficient taxes – more efficient taxes which provoked less political opposition.

More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden on the taxed groups while still supporting extensive but more tempered social spending.

Governments everywhere hit a brick wall in terms of their ability to raise further tax revenues. Political parties of the Left and Right recognised this new reality. Gareth Morgan has not when he proposes a great big new tax to fund his universal basic income.

Billions of extra dollars in revenue must be raised and political resistance provoked to his proposed comprehensive capital tax to fund a universal basic income for those who are not poor. Child poverty is not reduced  by a universal basic income because single parents and the children receive no more income support from government than before.

Which has more political legs? The Greens’ proposal to raise taxes by $1 billion to fight child poverty or the proposal by Gareth Morgan to raise taxes by 10 times that and have less impact on child poverty?

The current and future governments of New Zealand have enough on their plate to work out how to fund  a universal old age pension and health spending without giving away billions of dollars to the non-poor through an universal basic income.

Here’s how Scandinavian countries pay for their spending

https://twitter.com/conradhackett/status/683884984772341760

Diogenes on what should governments do

How Scandinavian Countries Pay for Their Government Spending

Eurosclerosis illustrated in the labour market

Source: Linda Regber.

What’s the difference between embedded neoliberalism and Director’s Law of public expenditure?

I learnt a new word today off the back of Jane Kelsey winning a $600,000 Marsden grant to study embedded neoliberalism and her latest transnational conspiracy theory about trade agreements.

I’ve never heard of embedded liberalism before today despite a keen interest in popular and academic news. I don’t think I’m poorer for that ignorance but let’s push on. According to that source of all knowledge and truth Wikipedia, embedded neoliberalism’s been around for about 35 years:

Embedded liberalism is a term for the global economic system and the associated international political orientation as it existed from the end of World War II to the 1970s. The system was set up to support a combination of free trade with the freedom for states to enhance their provision of welfare and to regulate their economies to reduce unemployment. The term was first used by the American political scientist John Ruggie in 1982.[1]

Mainstream scholars generally describe embedded liberalism as involving a compromise between two desirable but partially conflicting objectives. The first objective was to revive free trade. BeforeWorld War I, international trade formed a large portion of global GDP, but the classical liberal order which supported it had been damaged by war and by the Great Depression of the 1930s. The second objective was to allow national governments the freedom to provide generous welfare programmes and to intervene in their economies to maintain full employment.[2] This second objective was considered to be incompatible with a full return to the free market system as it had existed in the late 19th century—mainly because with a free market in international capital, investors could easily withdraw money from nations that tried to implement interventionist and redistributive policies.[3]

The resulting compromise was embodied in the Bretton Woods system, which was launched at the end of World War II. The system was liberal[4] in that it aimed to set up an open system of international trade in goods and services, facilitated by semi fixed exchange rates. Yet it also aimed to “embed” market forces into a framework where they could be regulated by national governments, with states able to control international capital flows by means of capital controls. New global multilateral institutions were created to support the new framework, such as the World Bank and theInternational Monetary Fund.

Source: Embedded liberalism – Wikipedia, the free encyclopedia.

Decoding Marxist rhetoric is never easy, but I think what these academic Marxists are trying to do is describe the rise of the mixed economy and the welfare state over the course of the early and middle parts of 20th century.

The welfare state was never an easy thing for your card-carrying Marxist looking forward to the immiserisation of the proletariat as the trigger for the proletarian revolution.

Embedded neoliberalism mostly all about what Aaron Director in the 1950s explained as the reasons for the growth of government in the 20th century. He put forward what George Stigler label for him Director’s Law of Public Expenditure. George Stigler published an article on this law because Aaron Director published next to nothing for reasons no one understands. Director founded law and economics through teaching law classes at the University of Chicago law school.

Sam Peltzman pointed out that most of modern public spending is supported by the median voter –  the ‘swinging’ voter. He observed that governments at the start of the 20th century were a post office and a military; at the end of the 20th century, governments are a post office, a larger military and a very large welfare state.

Studies starting from Peltzman in 1980 showed that governments grew in line with the growth in the size and homogeneity of the middle class that was organised and politically articulate enough to implement a version of Director’s Law.

Director’s Law of public expenditure is that public expenditure is used primary for the benefit of the middle class, and is financed with taxes which are borne in considerable part by the poor and the rich. Based on the size of its population and its aggregate wealth, the middle class will always be the dominant voting bloc in a modern democracy. Growth in the size of governments across the developed world took off in the mid-20th century as the middle class blossomed. Peltzman maintained that:

“The levelling of income differences across a large part of the population … has in fact been a major source of the growth of government in the developed world over the last fifty years” because the levelling created “a broadening of the political base that stood to gain from redistribution generally and thus provided a fertile source of political support for expansion of specific programs. At the same time, these groups became more able to perceive and articulate that interest … [and] this simultaneous growth of ‘ability’ served to catalyse politically the spreading economic interest in redistribution.”

After the 1970s economic stagnation, the taxed, regulated and subsidised groups had an increasing incentive to converge on new, lower cost modes of income redistribution.

  • economic reforms ensued, led by parties on the left and right, with some members of existing political and special interest groupings benefiting from joining new coalitions.
  • More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden on the taxed groups.
  • Most of the subsidised groups benefited as well because their needs were met in ways that provoked less political opposition from the taxpaying groups.

Sweden, Norway and Denmark could be examples of Gary Becker’s idea that political systems converge on the more efficient modes of both regulation and income redistribution as their deadweight losses grew in the 1970s and 1980s and after. Unlike some of their brethren abroad, more of the Nordic Left and, more importantly, the Nordic median voter were cognizant of the power of incentives and to not killing the goose that laid the golden egg. Taxes on income from capital are low in Scandinavia.

The rising deadweight losses of taxes, transfers and regulation all limit the political value of inefficient redistributive policies. Tax and regulatory policies that are found to significantly cut the total wealth available for redistribution by governments are avoided relative to the germane counter-factual, which are other even costlier modes of redistribution.

An improvement in the efficiency of either taxes or spending reduces political pressure from taxed and regulated groups for suppressing the growth of government and thereby increases total tax revenue and spending because there is less political opposition. Efficient taxes lead to higher taxes.

Improvements in the efficiency of taxes, regulation and in spending reduce political pressure from the taxed and regulated groups in society. This suppressed the growth of government and thus increased or prevented cuts to both total tax revenue and spending since 1980. Economic regulation lessened after 1980 and there were privatisations, but social and environmental regulation grew unabated. Certainly in New Zealand the post-1984 economic reforms followed a good 10 years of economic stagnation and regular economic crises:

In the early 1980s, New Zealand’s economy was in trouble. The country had lost its guaranteed export market when Britain joined the European Economic Union in 1973. The oil crisis that year had also taken a toll.

The post-1980 reforms of Thatcher, Reagan, Clinton, Hawke and Keating, Lange and Douglas and others saved the modern welfare state for the middle class. Most income transfer programmes in modern welfare states disproportionately benefit older people. With an aging society, that trend can only continue. That is why these reforming policies survived political competition, election after election. The political parties on the left and right that delivered efficient increments and streamlined the size of government were elected, and in turn, got thrown out from time to time because they became tired and flabby.

The rest of embedded neoliberalism is trying to explain widespread economic deregulation and liberalisation of international trade along with the continual growth of social regulation. This is something that Gary Becker, George Stigler and Sam Peltzman have written on previously.

The continued growth of social regulation is best explained by the median voter theorem. Both Bryan Caplan and Sam Peltzman pointed out that it’s hard to think of any major government program or regulation that does not enjoy widespread popular support.

As for the public been duped by neoliberal economists, George Stigler argued that ideas about economic reform need to wait for a market. As Stigler noted, when their day comes, economists seem to be the leaders of public opinion but when the views of economists are not so congenial to the current requirements of special interest groups and voting public, these economists are left to be the writers of letters to the editor in provincial newspapers. These days they would run an angry blog.

UK state spending (and tax haul) adjusted for inflation

What is Little England

US federal revenue has always hovered around 17% of GDP.

The current sizes of government

Tax revenues as a percentage of GDP, selected OECD member countries

The Rahn curve explained

Maggie Thatcher on the Greek crisis

The average worker doesn’t pay much in income taxes in New Zealand. Then who does?

via A Comparison of the Tax Burden on Labor in the OECD | Tax Foundation.

The growth of federal taxes in America in the 20th century

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